<PAGE> 1
\
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 1999
REGISTRATION FROM NO. 333-[ ]
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE FINOVA GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6153 86-0695381
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1850 NORTH CENTRAL AVENUE
P.O. BOX 2209
PHOENIX, ARIZONA 85002-2009
(602) 207-6900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SAMUEL L. EICHENFIELD
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE FINOVA GROUP INC.
1850 NORTH CENTRAL AVENUE
P.O. BOX 2209
PHOENIX, ARIZONA 85002-2209
(602) 207-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
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RICHARD LIEBERMAN N. JEFFREY KLAUDER, ESQ. BOB THOMPSON, ESQ.
VICE PRESIDENT-ASSOCIATE GENERAL MORGAN, LEWIS & BOCKIUS LLP BASS, BERRY & SIMS PLC
COUNSEL 1701 MARKET STREET 2700 FIRST AMERICAN CENTER
THE FINOVA GROUP INC. PHILADELPHIA, PA 01963 NASHVILLE, TENNESSEE 37238
1850 NORTH CENTRAL AVENUE (215) 963-5000 (615) 742-6262
P.O. BOX 2209
PHOENIX, ARIZONA 85002-2209
(602) 207-6900
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the Merger, pursuant to the Merger Agreement described herein,
have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
the General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the effective registration statement for the
same offering. [ ]
---------------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) AGGREGATE OFFERING PRICE REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share.................... 6,083,251 Not Applicable Not Applicable $74,065.15
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Registration Statement relates to securities of the Registrant issuable
to holders of common stock of Sirrom Capital Corporation, a Tennessee
corporation ("Sirrom"), in the proposed merger of Sirrom into a wholly-owned
subsidiary of Registrant.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
the market value of the Sirrom common stock to be exchanged in the merger
computed in accordance with Rule 457(f)(1) and (2) on the basis of the
average market price of the Sirrom common stock as of February 26, 1999. On
February 26, 1999, the average of the high and low prices of Sirrom common
stock was $7.15625 per share. On that date, there were 37,229,196 shares of
Sirrom common stock outstanding. Based on FINOVA's closing share price on
February 26, 1999, the aggregate market value of the securities to be
received by the Registrant in the merger would have been $309 million.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SIRROM CAPITAL CORPORATION
500 CHURCH STREET, SUITE 200
NASHVILLE, TENNESSEE 37219
(615) 256-0701
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 22, 1999
-------------------------
NOTICE IS HEREBY GIVEN that the special meeting of shareholders of Sirrom
Capital Corporation, a Tennessee corporation, will be held on March 22, 1999, at
8:00 a.m., local time, at The Westin Hermitage Hotel, 231 6th Avenue, Nashville,
Tennessee, for the following purposes:
- To consider and vote upon a proposal to approve and adopt the agreement
and plan of merger dated January 6, 1999, between Sirrom, The FINOVA
Group Inc., a Delaware corporation, and FINOVA Newco Inc., a Delaware
corporation and a wholly owned subsidiary of FINOVA, and to approve the
related withdrawal of Sirrom's election to be treated as a "business
development company" under the Investment Company Act of 1940, as
amended. Pursuant to the merger agreement, among other things, (i) FINOVA
Newco will be merged with and into Sirrom, with Sirrom becoming a wholly
owned subsidiary of FINOVA, and (ii) each outstanding share of Sirrom
common stock, no par value per share, will be converted into 0.1634
shares of FINOVA common stock, par value $.01 per share, subject to
possible increases, with cash being paid in lieu of fractional shares.
- To transact any other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
The Board of Directors has fixed the close of business on March 1, 1999 as
the record date for determining the shareholders entitled to vote at the special
meeting and any adjournment or postponement of the meeting. Accordingly, only
shareholders of record on that date are entitled to notice of, and to vote at,
the special meeting and any adjournments or postponements of the meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of Sirrom common stock is necessary to approve and adopt the merger agreement,
the merger and the related withdrawal of Sirrom's election to be treated as a
business development company.
An abstention from voting or a broker non-vote will have the same effect as
a vote against approval and adoption of the merger agreement, merger, and the
related withdrawal of Sirrom's election to be treated as a business development
company. Holders of Sirrom common stock are not entitled to dissenters' rights
on the proposal to be voted on at the special meeting.
<PAGE> 3
The Board of Directors has unanimously approved the merger agreement,
merger and the related withdrawal of Sirrom's election to be treated as a
business development company. The Board of Directors has also declared that
these matters are advisable and determined that the merger is fair to, and in
the best interests of, Sirrom and its shareholders. Accordingly, the Board of
Directors unanimously recommends that Sirrom's shareholders vote "FOR" approval
and adoption of the merger agreement, merger and the related withdrawal of
Sirrom's election to be treated as a business development company.
By Order of the Board of Directors
Maria-Lisa Caldwell
Secretary
March 1, 1999
Nashville, Tennessee
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING, WHETHER
OR NOT YOU PLAN TO ATTEND IN PERSON. ACCORDINGLY, PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU
MAY VOTE SHARES REGISTERED IN YOUR NAME (AND, IF YOU HAVE A PROPER POWER OF
ATTORNEY, REGISTERED IN A NOMINEE'S NAME) IN PERSON IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE> 4
PROXY STATEMENT/PROSPECTUS
MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
Sirrom Capital Corporation has agreed to a merger transaction with The
FINOVA Group Inc. in which Sirrom will become a subsidiary of FINOVA and the
holders of Sirrom common stock will receive shares of FINOVA common stock.
If the merger is completed, Sirrom shareholders will receive 0.1634 shares
of FINOVA common stock for each share of Sirrom common stock that they own,
subject to possible increases. If the merger had been completed on February 26,
1999, FINOVA would have issued approximately 6,083,000 shares, in the aggregate,
to the holders of Sirrom common stock. The closing price of FINOVA's common
stock on that date was $50.8125 per share, therefore Sirrom shareholders would
have received consideration equal to approximately $8.30 per share of Sirrom
common stock and $309 million in the aggregate. FINOVA common stock is listed on
the New York Stock Exchange.
The merger cannot be completed unless it, together with the related
withdrawal of Sirrom's election to be treated as a business development company
under the Investment Company Act of 1940, as amended, are approved by you, the
Sirrom shareholders. We have scheduled a special meeting for the shareholders to
vote on the merger. Your vote is very important.
This proxy statement/prospectus provides you with detailed information
about the proposed merger and Sirrom. In addition, you may obtain information
about FINOVA and Sirrom from documents that we have filed with the Securities
and Exchange Commission. We encourage you to read this entire document
carefully. ALSO, PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 19 OF THE PROXY
STATEMENT/PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISKS ASSOCIATED WITH THE
MERGER PROPOSAL.
The date, time and place of the Sirrom special meeting are as follows:
The Westin Hermitage Hotel
231 6th Avenue
Nashville, Tennessee
March 22, 1999, 8:00 a.m., local time
Please take the time to vote by completing the enclosed proxy card and
mailing it as soon as possible, even if you plan to attend the meeting. If you
sign, date and mail your proxy card without indicating how you want to vote,
your proxy will be counted as a vote in favor of the merger and the related
withdrawal of Sirrom's election to be treated as a business development company,
unless your shares are held for you by a broker. If you fail to return your
proxy card, the effect will be a vote against the merger and the related
withdrawal of Sirrom's election to be treated as a business development company.
Sirrom's board of directors recommends that you vote "FOR" this proposal.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
March 3, 1999.
Anticipated Mailing Date to Shareowners: March 3, 1999
<PAGE> 5
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<CAPTION>
TABLE OF CONTENTS
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<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... iv
WHERE YOU CAN FIND MORE INFORMATION......................... v
QUESTIONS AND ANSWERS ABOUT THE FINOVA/SIRROM MERGER........ 1
SUMMARY..................................................... 3
The Companies............................................. 3
The Special Meeting....................................... 3
Risk Factors.............................................. 3
Reasons for the Merger; Possible Disadvantages............ 4
Recommendation to Sirrom Shareholders..................... 4
Record Date; Vote Required................................ 4
The Merger................................................ 4
Interests of Sirrom's Executive Officers and Directors in
the Merger............................................. 5
The Merger Agreement...................................... 5
Comparative Per Share Market Price Information............ 7
Regulatory Approvals Required for the Merger.............. 7
Listing of FINOVA Common Stock............................ 8
MARKET PRICE AND DIVIDEND INFORMATION....................... 9
Dividend Information...................................... 9
Recent Closing Prices..................................... 10
Number of Shareholders.................................... 10
THE FINOVA GROUP INC.
SELECTED CONSOLIDATED FINANCIAL DATA........................ 11
SIRROM CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA........................ 12
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMBINED COMPANY........................ 14
COMPARATIVE PER SHARE DATA.................................. 18
RISK FACTORS................................................ 19
Risks Associated with the Merger.......................... 19
Risks Associated with Sirrom.............................. 20
THE SIRROM SPECIAL MEETING.................................. 24
General; Dates, Times and Places.......................... 24
Purpose of the Sirrom Special Meeting..................... 24
Revocation of Proxies..................................... 24
Record Date; Vote Required................................ 24
Quorum.................................................... 25
Expenses of Solicitation.................................. 25
Accounting Representative................................. 26
Recommendation of Sirrom Board of Directors............... 26
Miscellaneous............................................. 26
PROPOSAL 1: THE MERGER AND RELATED WITHDRAWAL OF SIRROM'S
ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT COMPANY.... 27
General................................................... 27
Background of the Merger.................................. 28
FINOVA's Reasons for the Merger........................... 30
</TABLE>
i
<PAGE> 6
<TABLE>
Sirrom's Reasons for the Merger; Recommendation of the Sirrom Board of Directors. 31
<S> <C>
Opinions of Sirrom's Financial Advisors............................. 32
Federal Income Tax Consequences of the Merger....................... 41
Required Regulatory Filings and Approvals........................... 42
Resale of FINOVA Common Stock; Restrictions on Sirrom Affiliates.... 43
Management and Operations Following the Merger...................... 43
No Appraisal Rights................................................. 43
Accounting Treatment................................................ 44
Public Trading Markets.............................................. 44
Voting Agreement.................................................... 44
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER........... 45
Confidentiality, Non-Competition and Non-Solicitation Agreements and Severance
Compensation and Consulting Agreements........................... 45
Sirrom Stock Options................................................ 46
Employment Agreements with Harris Williams Employees................ 47
Employment Agreements with Sirrom Employees......................... 48
Indemnification of Directors and Officers........................... 49
Voting Agreement.................................................... 49
THE MERGER AGREEMENT.................................................. 50
The Merger -- Effective Time........................................ 50
Conversion of Shares................................................ 50
Representations and Warranties...................................... 50
Certain Covenants................................................... 51
Conditions to Obligations to Effect the Merger...................... 55
Termination......................................................... 57
Expenses and Termination Fees....................................... 58
Amendment and Waiver................................................ 59
Exchange of Stock Certificates...................................... 59
Withdrawal of Election to be Treated as a Business Development Company... 60
INFORMATION CONCERNING OPTION REPRICING............................... 61
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS........ 62
INFORMATION REGARDING FINOVA.......................................... 67
Business Groups..................................................... 67
BUSINESS OF SIRROM.................................................... 70
Business............................................................ 70
Selection of Loan and Investment Opportunities...................... 71
Loan Repayment; Valuation and Realization of Equity Investments..... 72
Temporary Investments............................................... 73
Operations.......................................................... 73
Delinquency and Collections......................................... 76
Custodial Services.................................................. 76
Legal Proceedings................................................... 76
Competition......................................................... 78
Employees........................................................... 78
Sirrom's Operations as a Business Development Company............... 78
</TABLE>
ii
<PAGE> 7
<TABLE>
REGULATION OF SIRROM. 80
<S> <C>
Federal Regulation........................................ 80
State Regulation.......................................... 82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 83
Overview.................................................. 83
Results of Operations..................................... 83
Financial Condition, Liquidity and Capital Resources...... 92
Portfolio Turnover and Credit Quality..................... 94
Year 2000 Compliance...................................... 95
Interest Rates, Equity Prices and Foreign Currency
Exchange Rates......................................... 97
Impact of Inflation....................................... 98
DESCRIPTION OF FINOVA CAPITAL STOCK......................... 98
FINOVA Common Stock....................................... 98
Preferred Stock........................................... 99
Shareholder Rights Plan................................... 99
Certain Other Provisions of the Certificate of
Incorporation, the Bylaws and Delaware Law............. 100
COMPARISON OF RIGHTS OF SIRROM SHAREHOLDERS
AND FINOVA SHAREHOLDERS..................................... 105
Authorized Stock.......................................... 106
Required Vote for Authorization of Certain Actions........ 106
Board of Directors........................................ 107
Limitation of Liability of Directors and Officers......... 108
Indemnification of Directors and Officers................. 109
Amendments to Charter/Certificate of Incorporation and
Bylaws................................................. 111
Special Meetings of Shareholders; Action Without a
Meeting................................................ 112
Dividends and Other Distributions......................... 112
Appraisal Rights of Dissenting Shareholders............... 113
Preemptive Rights......................................... 114
Shareholder Rights Plans.................................. 114
Business Combination Statute.............................. 114
Control Share Acquisition Act............................. 115
Investor Protection Act................................... 116
LEGAL MATTERS............................................... 117
EXPERTS..................................................... 117
FUTURE SHAREHOLDER PROPOSALS................................ 117
INDEX OF DEFINED TERMS...................................... 118
</TABLE>
<TABLE>
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APPENDIX A -- MERGER AGREEMENT
APPENDIX B -- FAIRNESS OPINION OF GOLDMAN, SACHS & CO. DATED JANUARY 6,
1999
APPENDIX C -- FAIRNESS OPINION OF THE ROBINSON-HUMPHREY COMPANY, LLC DATED
JANUARY 5, 1999
APPENDIX D -- ANNUAL REPORT ON FORM 10-K OF THE FINOVA GROUP INC. FOR THE
YEAR ENDED DECEMBER 31, 1998.
APPENDIX E -- ADDITIONAL INFORMATION REGARDING FINOVA'S DIRECTORS AND
EXECUTIVE OFFICERS.
</TABLE>
iii
<PAGE> 8
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this proxy statement/prospectus 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 those made in documents incorporated in this
document by reference.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause 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 our efforts to implement our business strategy. Failure to
fully implement our 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 our borrowers.
Economic conditions in general or in particular market segments could
impact the ability of our 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 our competitors and our ability to respond to those actions.
We seek 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. We may not be successful in maintaining and
continuing asset growth at historic levels.
- The cost of our capital. That cost depends on many factors, some of which
are beyond our control, such as our 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 our
financing products.
- Costs or difficulties related to the integration of FINOVA and Sirrom.
- Necessary technological changes (including those addressing "Year 2000"
data systems issues) may be more difficult, expensive or time consuming
than anticipated.
- Other risks detailed in our other Securities and Exchange Commission
("SEC") reports or filings.
We do not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements. You should avoid relying too heavily on forward-looking statements
in light of the many factors that could cause them to be inaccurate.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS. NO ONE ELSE HAS BEEN AUTHORIZED TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOTED
ON THE COVER PAGE. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE
PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE.
NEITHER THE MAILING OF THE PROXY STATEMENT/PROSPECTUS TO SIRROM SHAREHOLDERS NOR
THE ISSUANCE OF FINOVA COMMON STOCK IN THE MERGER CREATES ANY IMPLICATION TO THE
CONTRARY.
iv
<PAGE> 9
WHERE YOU CAN FIND MORE INFORMATION
FINOVA has filed with the SEC a Registration Statement under the Securities
Act of 1933, as amended, that registers the FINOVA common stock to be issued in
connection with the merger. The Registration Statement, including the attached
exhibits and schedules, contains additional relevant information about FINOVA
and its common stock. SEC rules allow FINOVA to omit from this proxy
statement/prospectus some of the information in the Registration Statement.
In addition, FINOVA and Sirrom file reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934, as amended.
You may read and copy this information at the following location of the SEC:
Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
You may also obtain copies of the information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. Further information on the operation of the
SEC's Public Reference Room in Washington, D.C. can be obtained by calling the
SEC at 800-SEC-0330.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like FINOVA and
Sirrom, who file electronically with the SEC. The address of that site is
http://www.sec.gov.
You can also inspect reports, proxy statements and other information about
FINOVA and Sirrom at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The SEC allows FINOVA to "incorporate by reference" information in this
proxy statement/prospectus, which means that FINOVA can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
proxy statement/prospectus, except for any information superseded by information
in this proxy statement/prospectus.
FINOVA incorporates by reference additional documents that it may file with
the SEC between the date of this proxy statement/prospectus and the date the
merger is consummated. These documents include periodic reports, like Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, proxy statements and other filings. Later information filed with the SEC
updates and supersedes this proxy statement/prospectus.
FINOVA has supplied all information relating to FINOVA, and Sirrom has
supplied all information relating to Sirrom.
YOU MAY OBTAIN ANY OF THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
DOCUMENT FROM FINOVA OR FROM THE SEC THROUGH THE SEC'S WEB SITE AT THE ABOVE
ADDRESS. DOCUMENTS INCORPORATED BY REFERENCE ARE AVAILABLE FROM FINOVA WITHOUT
CHARGE. YOU CAN OBTAIN DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS BY REQUESTING THEM IN WRITING OR BY TELEPHONE FROM FINOVA
AT THE FOLLOWING ADDRESS:
THE FINOVA GROUP INC.
1850 NORTH CENTRAL AVENUE
P.O. BOX 2209
PHOENIX, ARIZONA 85002-2209
TELEPHONE: (800) 734-6682
v
<PAGE> 10
IN ADDITION, YOU MAY OBTAIN INFORMATION REGARDING FINOVA AT FINOVA'S WEB
SITE AT http://www.finova.com.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM FINOVA, PLEASE DO SO BY MARCH
15, 1999 TO RECEIVE THEM BEFORE THE SIRROM SPECIAL MEETING, ALTHOUGH WE WILL
ATTEMPT TO HONOR REQUESTS RECEIVED AFTER THAT DATE.
vi
<PAGE> 11
QUESTIONS AND ANSWERS ABOUT THE FINOVA/SIRROM MERGER
SET FORTH BELOW ARE FREQUENTLY ASKED QUESTIONS ABOUT THE PROPOSED MERGER,
AND ANSWERS TO THOSE QUESTIONS. THESE QUESTIONS AND ANSWERS DO NOT ADDRESS ALL
QUESTIONS THAT SIRROM SHAREHOLDERS MAY HAVE ABOUT THE MERGER. YOU SHOULD
CAREFULLY READ THIS ENTIRE DOCUMENT, AS WELL AS ALL APPENDIXES AND DOCUMENTS
INCORPORATED BY REFERENCE INTO THIS DOCUMENT.
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: FINOVA is a leading financial services holding company that provides
financing and capital market products to midsize companies in various
industries. Sirrom is a specialty finance company that makes loans to small
businesses. FINOVA and Sirrom believe that by combining, a stronger company
will be created. We anticipate that Sirrom will help expand FINOVA's product
line, while FINOVA will bring the strength and diversity of a 44-year old
company with over $10 billion in assets.
Q: WHAT HAPPENS TO MY SHARES OF SIRROM COMMON STOCK IN THE MERGER?
A: You will receive 0.1634 shares of FINOVA common stock for each share of
Sirrom common stock you own, subject to slight increase in three
circumstances. You will receive cash instead of any fractional shares.
For example, a holder of 50 shares of Sirrom common stock will receive 8
shares of FINOVA common stock, plus a cash payment in exchange for the 0.17
fractional share of FINOVA common stock.
Q: WHAT SITUATIONS COULD RESULT IN POSSIBLE INCREASES IN THE NUMBER OF SHARES OF
FINOVA I WILL RECEIVE?
There are three possible adjustments to the number of shares of FINOVA common
stock (0.1634 shares) to be received for each share of Sirrom common stock.
If the merger is completed on or after June 1, 1999, the exchange ratio will
increase to .1639 shares. An additional upward adjustment is also possible if
a settlement is reached in class action securities litigation against Sirrom.
The third adjustment will occur if the average market price of FINOVA's
common stock falls below $40.68 and certain other conditions occur.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this proxy statement/prospectus, you should
mail your signed and completed proxy card in the enclosed return envelope as
soon as possible, to ensure that your shares will be represented and voted at
the special meeting. The board of directors of Sirrom recommends voting in
favor of the proposed merger and the related withdrawal of Sirrom's election
to be treated as a business development company.
Q: SHOULD I SEND IN MY SIRROM STOCK CERTIFICATES NOW?
A: No. After the merger is completed, you will receive instructions that explain
how to exchange your Sirrom common stock for FINOVA common stock. If your
address on this proxy was not correct, however, please advise Sirrom's
transfer agent at (800) 829-8432 to assure that you receive those future
materials.
Q: WHEN WILL THE MERGER BE COMPLETED?
A: The merger is expected to be completed as quickly as possible after the
conditions to the merger, including Sirrom shareholder approval and certain
regulatory approvals, have been satisfied. The merger is expected to be
completed in the first half of 1999.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will not vote your shares on the merger and the related
withdrawal of Sirrom's election to be treated as a business development
company unless you provide instructions on how to vote. Since holders of a
majority of the outstanding shares of Sirrom common stock must approve the
merger and the related withdrawal of Sirrom's election to be treated as a
business development company, it is very
1
<PAGE> 12
important that you return your signed proxy card.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: Generally, Sirrom shareholders will not recognize gain or loss for United
States federal income tax purposes by exchanging Sirrom common stock for
FINOVA common stock in the merger. Sirrom shareholders will, however,
recognize gain or loss related to cash received in lieu of fractional shares
of FINOVA common stock. The holding period for the FINOVA common stock
received in the merger generally will include the holding period for the
Sirrom common stock exchanged in the merger. That period determines how any
gain or loss should be treated for United States federal income tax purposes
upon future sales of FINOVA common stock.
Q: WHERE CAN I FIND ADDITIONAL INFORMATION ABOUT THE MERGER?
A: This document, the appendixes and the documents incorporated by reference in
this document contain additional information about the merger. Also, see
"Where You Can Find More Information."
2
<PAGE> 13
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. You are urged to
carefully read this entire document and the other documents to which this
document refers to fully understand the merger and the other matters on which
you are being asked to vote. See "Where You Can Find More Information." Each
item in this summary includes a page reference directing you to a more complete
description of that item in this document.
THE COMPANIES
THE FINOVA GROUP INC. (PAGE 67)
1850 N. Central Avenue
P.O. Box 2209
Phoenix, Arizona 85002-2209
(800) 734-6682
FINOVA is a financial services holding company that, through its principal
subsidiary, FINOVA Capital Corporation, provides a broad range of financing and
capital market products to midsize businesses. FINOVA extends revolving credit
facilities, term loans, and equipment and real estate financing primarily to
midsize businesses. Those financings generally involve between $500,000 and $35
million. As of December 31, 1998, FINOVA's total assets were approximately $10
billion. FINOVA Newco Inc. is a wholly owned subsidiary of FINOVA.
FINOVA's executive offices are in Phoenix, Arizona at the address noted above,
and it has business development offices throughout the United States and in
London, U.K. and Toronto, Canada.
SIRROM CAPITAL CORPORATION (PAGE 70)
500 Church Street, Suite 200
Nashville, Tennessee 37219
(615) 256-0701
Sirrom is a specialty finance company that primarily makes loans to small
businesses, which loans generally range from $500,000 to $5 million. Sirrom also
provides merger and acquisition advisory services through its wholly owned
subsidiary Harris Williams & Co. As of December 31, 1998, Sirrom's total assets
were approximately $581.8 million.
Sirrom's executive offices are in Nashville, Tennessee at the address noted
above, and it has an office in San Francisco, California.
THE SPECIAL MEETING (PAGE 24)
The Sirrom special meeting will be held on March 22, 1999 at 8:00 a.m., local
time, at The Westin Hermitage Hotel, 231 6th Avenue, in Nashville, Tennessee. At
the Sirrom special meeting, you will be asked to:
- approve and adopt the merger agreement and the merger of FINOVA Newco
with and into Sirrom, making Sirrom a wholly owned subsidiary of FINOVA,
and the related withdrawal of Sirrom's election to be treated as a
business development company under the Investment Company Act of 1940, as
amended; and
- act on any other matters that may be submitted to a vote at the Sirrom
special meeting.
RISK FACTORS (PAGE 19)
The following are some of the risks associated with the merger:
- the exchange ratio is fixed and will not change with changes in the
market value of FINOVA or Sirrom common stock;
- certain directors and officers of Sirrom will receive payments and other
benefits which may have influenced their recommendations;
- Sirrom must, under some circumstances, pay FINOVA a termination fee if
the merger is not completed, which may discourage other companies from
entering into a business combination with Sirrom;
- the voting agreement under which some shareholders, including all of the
directors of Sirrom, are required to vote in favor of the merger may dis-
3
<PAGE> 14
courage other companies from acquiring Sirrom;
- Sirrom is unable to solicit transactions with parties other than FINOVA;
- FINOVA's projected revenue enhancements may not be achieved if it is
unable to integrate Sirrom's operations effectively or manage Sirrom's
mezzanine finance portfolio;
- Sirrom shareholders will receive a lower percentage of dividends than
they have historically received; and
- Sirrom may lose customers as a result of the merger.
REASONS FOR THE MERGER; POSSIBLE DISADVANTAGES (PAGE 30)
The Sirrom board determined to recommend approval and adoption of the merger
agreement and the merger based on a number of factors, including the following:
- Sirrom's review of the current business, financial condition, earnings
and prospects of Sirrom and FINOVA, and general market conditions;
- Sirrom's evaluation of the financial terms of the merger;
- the risks associated with Sirrom continuing as an independent entity;
- the complementary nature of Sirrom's and FINOVA's businesses;
- enhanced liquidity for Sirrom shareholders;
- the opinions of Goldman, Sachs & Co. and Robinson-Humphrey regarding the
merger consideration; and
- the opportunity for Sirrom shareholders to participate in a larger and
more diversified company.
The Sirrom board also considered possible disadvantages of the merger,
including:
- the Sirrom shareholders' inability to fully recognize Sirrom's portfolio
performance in the marketplace after the merger; and
- Sirrom's shareholders will be subject to the risks of FINOVA's other
businesses after the merger.
RECOMMENDATION TO SIRROM SHAREHOLDERS (PAGE 26)
The Sirrom board believes that the merger is fair to Sirrom and to you as a
Sirrom shareholder, and that the merger is in your best interests. The Sirrom
board unanimously recommends that you vote "FOR" the proposal to approve and
adopt the merger agreement, merger and the related withdrawal of Sirrom's
election to be treated as a business development company.
RECORD DATE; VOTE REQUIRED (PAGE 24)
You may vote at the Sirrom special meeting if you owned Sirrom common stock at
the close of business on March 1, 1999. On that date, there were 37,229,196
shares of Sirrom common stock outstanding and entitled to vote. You are entitled
to cast one vote for each share of common stock you owned on that date.
Approval by the holders of a majority of the shares of Sirrom common stock
outstanding on March 1, 1999 is required to approve the merger agreement, merger
and the related withdrawal of Sirrom's election to be treated as a business
development company.
Sirrom Partners, L.P. and the directors of Sirrom have agreed, through a voting
agreement with FINOVA, to vote the shares of Sirrom common stock beneficially
owned by them, representing 5,421,958 shares, or 14.6% of Sirrom's outstanding
common stock (not including options), in favor of the merger agreement and the
merger.
THE MERGER
GENERAL (PAGE 27)
In the merger, FINOVA Newco will merge with and into Sirrom, and Sirrom will
become a wholly owned subsidiary of FINOVA. After the merger, Sirrom
shareholders will be shareholders of FINOVA.
4
<PAGE> 15
MERGER CONSIDERATION THAT YOU WILL RECEIVE (PAGE 50)
As merger consideration, you will receive 0.1634 shares of FINOVA common stock
for each share of Sirrom common stock that you own. This number is referred to
as the "exchange ratio." The exchange ratio is subject to upward adjustment in
three circumstances: if the merger occurs after June 1, 1999; if outstanding
class action securities lawsuits are settled before the merger at a cost to
Sirrom of less than $10 million; and if FINOVA elects to increase it if Sirrom
seeks to terminate the merger agreement due to a significant decline in FINOVA's
stock price.
You will not receive fractional shares and will be paid cash instead of
receiving fractional shares based on the market value of the FINOVA common stock
on the day after the merger is effective. For a discussion of risks associated
with the exchange ratio, see "Risk Factors -- Risks Associated With the Merger."
NO APPRAISAL RIGHTS FOR DISSENTING SHAREHOLDERS (PAGE 43)
Under Tennessee law, dissenting shareholders in the merger do not have appraisal
rights.
OPINIONS OF SIRROM'S FINANCIAL ADVISORS (PAGE 32)
Sirrom has received opinions of Goldman, Sachs & Co. and The Robinson-Humphrey
Company, LLC that the merger consideration of 0.1634 shares of FINOVA common
stock for each share of Sirrom common stock is fair from a financial point of
view to the Sirrom shareholders. You are urged to read these opinions in their
entirety, as they contain important information regarding the scope of the
review undertaken and similar matters. These opinions are attached to this
document as Appendixes B and C.
VOTING AGREEMENT (PAGE 44)
At the same time that FINOVA and Sirrom entered into the merger agreement,
Sirrom Partners, L.P., a significant shareholder of Sirrom common stock, and the
directors of Sirrom entered into a voting agreement with FINOVA. They agreed to
vote their Sirrom common stock "FOR" the merger.
INTERESTS OF SIRROM'S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER (PAGE 45)
In considering the recommendation of Sirrom's board of directors that you vote
in favor of the merger, you should be aware that certain directors and officers
of Sirrom have entered into agreements that provide them with interests in the
merger that are different from, or in addition to, yours. Three executive
officers of Sirrom have entered into confidentiality, non-competition and
non-solicitation agreements and two of these executive officers have entered
into severance compensation and consulting agreements. The officers will receive
cash payments from Sirrom as consideration for entering these agreements. All
options to purchase Sirrom common stock, including those held by officers and
directors, will become exercisable at the effective time of the merger. Five
officers of Harris Williams & Co., a wholly owned subsidiary of Sirrom, and
seven officers of Sirrom entered into employment agreements with Sirrom as the
surviving corporation of the merger. These agreements provide for the payment of
salaries and bonuses. FINOVA has agreed to cause Sirrom to indemnify its
officers and directors to the maximum extent permitted by law and to maintain in
effect existing directors and officers insurance policies.
THE MERGER AGREEMENT (PAGE 50)
The merger agreement is attached to this document as Appendix A. Please read the
merger agreement carefully, as it is the legal document that governs the merger.
EFFECTIVE TIME (PAGE 50)
The merger will occur shortly after satisfaction of the conditions to completion
of the merger. The merger is anticipated to be completed in the first half of
1999.
5
<PAGE> 16
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 55)
The completion of the merger depends on a number of conditions being satisfied,
including the following:
- approval of the merger and the related withdrawal of Sirrom's election to
be treated as a business development company by the holders of a majority
of Sirrom's outstanding common stock;
- there shall have been no restraining order, injunction or court order
blocking the merger, or any proceeding by a government body blocking the
merger or making the merger illegal;
- absence of litigation which, in FINOVA's reasonable discretion, could
prevent FINOVA from realizing in all material respects the economic
benefits of the merger;
- expiration of any waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended;
- receipt of all material regulatory and non-regulatory consents that are
required to complete the merger;
- receipt by each of Sirrom and FINOVA of legal opinions that the United
States federal income tax treatment of the merger on FINOVA, Sirrom and
the Sirrom shareholders will be as described in this document; and
- execution and delivery of confidentiality, non-competition and
non-solicitation agreements, severance compensation and consulting
agreements and employment agreements by some of Sirrom's officers.
SIRROM STOCK OPTIONS (PAGE 46)
Upon completion of the merger, each unexercised option to buy Sirrom common
stock will become an option to buy FINOVA common stock. The number of shares of
FINOVA common stock subject to each option, as well as the exercise price of
each new option, will be adjusted to reflect the exchange ratio and the
applicable terms of the merger. All outstanding options to buy Sirrom common
stock will become exercisable on the effective date. Also, all repriced options
became subject to a one-year sale restriction from the date of grant when they
were repriced by Sirrom in October 1998. This sale restriction will be
eliminated at the time of the merger.
Caution: If an option holder exercised incentive stock options and sold the
underlying shares sooner than two years from the original grant date or one year
from the exercise date, incentive stock options would lose their beneficial tax
status for the holder.
ACCOUNTING TREATMENT (PAGE 44)
FINOVA will account for the merger as a purchase, meaning that FINOVA will
allocate the purchase price of Sirrom to the assets acquired and liabilities
assumed based on their estimated fair values. Any excess purchase consideration
will be allocated to goodwill.
TERMINATION OF MERGER AGREEMENT (PAGE 57)
Sirrom and FINOVA may agree in writing at any time to terminate the merger
agreement without completing the merger, even after the Sirrom shareholders have
approved it. In addition, the merger agreement may be terminated in the
following circumstances:
- by FINOVA or Sirrom if the merger has not been completed by July 15,
1999, unless the failure to complete the merger by that date is due to a
violation of the merger agreement by the party that wants to terminate
the agreement;
- by FINOVA or Sirrom if a governmental authority issues a final,
non-appealable order prohibiting the merger;
- by FINOVA or Sirrom if the other party materially breaches the agreement,
fails to cure that breach, and that breach has a material adverse effect
on the breaching party;
- by FINOVA if Sirrom has breached its representation regarding its
securities litigation, settled any litigation (not in the ordinary
course) if the settlement
6
<PAGE> 17
exceeds $10 million or changed its business practices or made financial
adjustments without FINOVA's consent, failed to make certain financial
adjustments required by GAAP or if Sirrom's directors and officers
insurance program is revoked and Sirrom has not obtained an equivalent
substitute program;
- by FINOVA or Sirrom if an event has occurred that materially adversely
affects the other party;
- by FINOVA if the Sirrom board of directors withdraws, adversely modifies
or fails to reconfirm its recommendation that the merger be approved, or
approves or recommends a competing business combination or similar
transaction with a third party, or resolves to take any of those actions;
and
- by FINOVA or Sirrom if Sirrom's shareholders do not approve the merger.
In addition, the merger agreement may be terminated by Sirrom if the average
closing price for FINOVA common stock for the fifteenth through the fifth
trading day before the date the conditions to completing the merger have been
satisfied is below $40.6875 and the decline in average closing price exceeds by
more than 10% the percentage decline in the Standard & Poor's Financial Index.
If Sirrom elects to terminate the merger agreement for this reason, however,
FINOVA may increase the exchange ratio and the merger agreement will remain in
force.
TERMINATION FEES (PAGE 59)
If Sirrom or FINOVA terminate the merger agreement due to a willful and material
breach by the other party, then the breaching party must pay the non-breaching
party's expenses related to the merger agreement, up to $3 million. Sirrom has
also agreed to pay FINOVA a fee of $13.8 million, less expenses paid, if the
merger agreement is terminated under some circumstances involving a third party
business combination.
AMENDMENT AND WAIVER (PAGE 59)
FINOVA and Sirrom may amend the merger agreement before the merger is completed.
The merger agreement may not, however, be amended in any manner that would
materially adversely affect Sirrom's shareholders, including altering the
consideration to be received by Sirrom's shareholders, unless approved by
Sirrom's shareholders. FINOVA and Sirrom may also waive their respective rights
to require the other party to adhere to the terms of the merger agreement, to
the extent legally permissible.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 18)
FINOVA and Sirrom common stock are listed on the New York Stock Exchange under
the symbols "FNV" and "SIR," respectively. On January 6, 1999, the last trading
day before announcement of the merger, FINOVA common stock closed at $56.9375
per share, and Sirrom common stock closed at $6.00 per share. On February 26,
1999, FINOVA common stock closed at $50.8125 and Sirrom common stock closed at
$7.125.
REGULATORY APPROVALS REQUIRED FOR THE MERGER (PAGE 42)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and its
regulations, the merger cannot be completed unless certain filings with the
Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade
Commission are made and related waiting periods expire. On February 5, 1999,
Sirrom and FINOVA submitted the required filings to the Antitrust Division of
the U.S. Department of Justice and the U.S. Federal Trade Commission. The
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, expired on February 18, 1999.
It is a condition to completion of the merger that Sirrom withdraw its election
to be treated as a business development company under the Investment Company Act
of 1940, as amended. It is also a condition to completion of the merger that
Sirrom receive an order from the Securities and Exchange Commission declaring
that two of its wholly owned
7
<PAGE> 18
subsidiaries, Sirrom Investments, Inc. and Sirrom Funding Corporation, will
cease to be investment companies upon completion of the merger. In addition, if
the Sirrom shareholders approve the merger, merger agreement and the related
withdrawal of Sirrom's election to be treated as a business development company,
Sirrom will make a filing with the Securities and Exchange Commission regarding
the related withdrawal of its election to be treated as a business development
company. This related withdrawal will be effective upon filing.
Because Sirrom's wholly owned subsidiary, Sirrom Investments, Inc., is a
licensed small business investment company, Sirrom must also obtain the consent
of the U.S. Small Business Administration before completion of the merger. An
informal request for approval has been made. We expect to file for formal
approval during the first week of March 1999.
Sirrom is licensed as a business and industrial development company by the
Tennessee Department of Financial Institutions and must obtain approval of the
merger from the Tennessee Commissioner of Financial Institutions before
completion of the merger. A formal filing was made on January 28, 1999.
LISTING OF FINOVA COMMON STOCK (PAGE 44)
FINOVA has agreed to list the shares of FINOVA common stock to be issued in
connection with the merger on the New York Stock Exchange.
8
<PAGE> 19
MARKET PRICE AND DIVIDEND INFORMATION
FINOVA's common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "FNV." Sirrom's common stock is listed on the NYSE under the
symbol "SIR." The table below sets forth, for the calendar quarters indicated,
the high and low sales prices per share of FINOVA and Sirrom common stock, as
reported on the NYSE Composite Tape, and the dividends per share declared on
FINOVA and Sirrom common stock. All prices are adjusted for applicable stock
splits.
<TABLE>
<CAPTION>
FINOVA SIRROM
COMMON STOCK COMMON STOCK
------------------------------ ---------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND(1)
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997:
First Quarter.......... $ 39.50 $ 31.875 $.12 $ 21.625 $17.3125 $.20
Second Quarter......... 38.875 32.0625 .12 20.125 13.375 .21
Third Quarter.......... 48.25 37.875 .14 26.625 16.75 .24
Fourth Quarter......... 50.00 40.25 .14 28.875 20.625 .43(2)
1998:
First Quarter.......... 60.25 45.50 .14 31.1397 21.8041 .25
Second Quarter......... 63.50 53.3125 .14 32.7412 20.5983 .27
Third Quarter.......... 65.125 41.0625 .16 25.149 3.375 --
Fourth Quarter......... 56.375 35.5625 .16 6.4375 2.375 --
1999:
First Quarter
(through February 26,
1999)............... 62.4375 49.8125 .16 8.375 4.875 --
</TABLE>
- -------------------------
(1) Dividends shown were typically paid in subsequent quarter.
(2) Includes $.18 per share annual capital gain dividend declared in December
1997.
DIVIDEND INFORMATION
FINOVA historically has paid dividends on the first business day of each
calendar quarter. FINOVA anticipates that it will continue to pay regular
quarterly dividends on the first business day of January, April, July and
October. In February 1999, the FINOVA board declared a dividend of $0.16 per
share, payable April 1, 1999, for shareholders of record on February 26, 1999.
The declaration of dividends and their amounts are at the discretion of the
FINOVA board, and there can be no assurance that additional dividends will be
declared. The exchange ratio will be increased to 0.1639 shares of FINOVA common
stock if the merger is not completed by June 1, 1999, which is the anticipated
record date for FINOVA's second quarter dividend.
Historically, Sirrom has distributed at least 90% of its net operating
income and net realized short-term capital gains, if any, on a quarterly basis
to its shareholders. However, Sirrom has agreed in the merger agreement that for
1999 it will not elect to be treated as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). This means that Sirrom will no longer be required to
distribute 90% of its earnings to shareholders, and Sirrom presently intends not
to pay any dividends.
9
<PAGE> 20
As a result of the closing, it is anticipated that distributions to you
also will be less than distributions historically made by Sirrom, since FINOVA
is not required to distribute 90% of its earnings to shareholders.
RECENT CLOSING PRICES
The following table sets forth the closing sales prices per share of FINOVA
common stock and Sirrom common stock on the NYSE on January 6, 1999, the last
trading day before announcement of the proposed merger and on February 26, 1999,
the most recent practicable date before the date of this proxy
statement/prospectus.
<TABLE>
<CAPTION>
FINOVA SIRROM
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
January 6, 1999............................. $56.9375 $ 6.00
February 26, 1999........................... $50.8125 $7.125
</TABLE>
BECAUSE THE MARKET PRICE OF FINOVA COMMON STOCK IS SUBJECT TO FLUCTUATION,
THE MARKET VALUE OF THE SHARES OF FINOVA COMMON STOCK THAT SIRROM SHAREHOLDERS
WILL RECEIVE IN THE MERGER MAY CHANGE BEFORE AND AFTER THE MERGER. YOU ARE URGED
TO OBTAIN CURRENT MARKET QUOTATIONS FOR EACH COMPANY. NO ASSURANCE CAN BE GIVEN
AS TO THE FUTURE PRICES OR MARKETS FOR FINOVA OR SIRROM COMMON STOCK.
NUMBER OF SHAREHOLDERS
As of February 26, 1999, Sirrom had approximately 230 shareholders of
record.
As of February 26, 1999, FINOVA had approximately 22,200 shareholders of
record.
10
<PAGE> 21
THE FINOVA GROUP INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected financial data of FINOVA, derived
from the audited consolidated financial statements of FINOVA as of and for the
five years ended December 31, 1998. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of the consolidated financial statements
and the notes included in FINOVA's Form 10-K for the year ended December 31,
1998. See Appendixes D and E of this proxy statement/prospectus. Certain
reclassifications have been made to the prior years' financial data to conform
to the 1998 presentation.
<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(1).................. 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(1).............................. 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
RATIOS:
Reserve for credit losses/managed
assets(2)(3)........................... 2.0% 2.0% 2.0% 2.0% 2.1%
Nonaccruing assets/managed assets(2)..... 2.0% 2.1% 2.0% 2.2% 2.8%
Total debt to equity(4).................. 6.5x 5.6x 5.6x 6.8x 5.9x
Return on average common equity(5)....... 14.9% 14.3% 13.3% 11.8% 11.1%
Return on average funds employed(5)(6)... 1.9% 1.8% 1.8% 1.7% 1.8%
Equity to assets(4)...................... 12.3% 13.8% 13.8% 11.7% 13.2%
</TABLE>
- -------------------------
NOTES:
(1) Adjusted to reflect a two-for-one stock split on October 1, 1997.
(2) Excludes participations.
(3) Excludes financing contracts held for sale.
(4) Equity in 1998, 1997 and 1996 includes the TOPrS noted above.
(5) Return represents income from continuing operations.
(6) Average funds employed excludes deferred taxes applicable to leveraged
leases.
11
<PAGE> 22
SIRROM CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial data of
Sirrom, which should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with Sirrom's
financial statements and accompanying notes included elsewhere in this proxy
statement/prospectus. The selected consolidated financial data set forth below
as of and for each of the five years in the period ended December 31, 1998, have
been derived, in part, from the financial statements of Sirrom that have been
audited by Arthur Andersen LLP, independent public accountants, whose report for
each of the three years in the period ended December 31, 1998, is included
elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating income:
Interest on investments..................... $ 63,478 $ 41,297 $ 24,395 $ 13,452 $ 7,337
Loan processing and other fees.............. 7,200 6,989 3,166 1,900 901
Other income................................ 34 61 119 223 --
---------- ---------- ---------- ---------- ----------
Total operating income.................... 70,712 48,347 27,680 15,575 8,238
Operating expenses:
Interest expense............................ 17,295 9,797 8,342 4,771 3,124
Salaries and benefits....................... 8,446 5,001 2,994 1,082 --
Management fees............................. -- -- -- -- 1,073
Other operating expenses.................... 6,201 3,349 1,942 1,412 122
State income tax on interest................ -- -- -- 109 457
Amortization expense........................ 1,196 865 543 208 118
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 33,138 19,012 13,821 7,582 4,894
---------- ---------- ---------- ---------- ----------
Pretax income of unconsolidated subsidiary.... 3,831 3,699 3,264 812 553
---------- ---------- ---------- ---------- ----------
Net operating income.......................... 41,405 33,034 17,123 8,805 3,897
Realized (loss) gain on investments......... (61,434) 10,722 9,463 1,759 (538)
Change in unrealized (depreciation)
appreciation of investments................. (55,336) (1,612) 2,580 4,693 3,356
Provision for income taxes.................. 1,132 (838) (4,270) (1,020) --
---------- ---------- ---------- ---------- ----------
Net (decrease) increase in partners' capital
and shareholders' equity resulting from
operations.................................. (76,497) 41,306 24,896 14,237 6,715
========== ========== ========== ========== ==========
Per share:
Pretax operating income (1)................... $ 1.10(2) $ 1.04 $ .74 $ .55 $ .42
Net (decrease) increase in partners' capital
and shareholders' equity resulting from
operations(1)
Basic....................................... (2.12) 1.37 1.11 .90 .64
Diluted..................................... (2.12) 1.30 1.08 .89 .64
Dividends(1).................................. 0.52(3) 1.08(3) .59(3) .44(3) --
Diluted weighted average shares
outstanding(1).............................. 36,057,000 31,658,000 23,110,000 15,979,000 10,444,000
OPERATING STATISTICS:
Number of portfolio companies with loans
outstanding at period end................... 233 195 122 91 57
Number of new portfolio companies............. 88 102 48 44 25
Principal amount of loans originated.......... $ 301,765 $ 282,352 $ 131,962 $ 101,505 $ 40,785
Principal amount of loan repayments........... $ 94,931 $ 67,743 $ 32,63 $ 14,414 $ 7,585
Loan portfolio at period end.................. $ 477,064 $ 412,005 $ 221,487 $ 144,855 $ 72,336
Net interest spread at period end(4).......... 4.9% 5.6% 5.9% 5.8% 5.5%
</TABLE>
12
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 2,416 $ 3,025 $ 4,612 $ 195 $ 137
Loans....................................... 477,064 412,005 221,487 144,855 72,336
Equity interests............................ 43,160 55,211 34,966 15,912 7,577
Warrants.................................... 39,648 24,543 15,894 11,513 7,549
Total assets................................ 581,774 509,236 288,013 177,870 91,804
Revolving credit facilities................. 149,023 124,250 30,858 13,200 6,389
Debentures payable to SBA................... 101,000 90,000 90,000 73,260 51,000
Total shareholders' equity.................. 324,999 281,969 158,621 89,186 33,218
</TABLE>
- -------------------------
(1) On January 5, 1998, Sirrom announced a two-for-one stock split effective
January 30, 1998. All information contained herein reflects that stock
split.
(2) The computation of pre-tax operating income per share for 1998 was based on
diluted weighted average outstanding shares of 37,750,000, while the
computation of net decrease in shareholders' equity from operations per
share-diluted for 1998 was based on diluted weighted average outstanding
shares of 36,057,000. The effect of 1,693,000 options was not included in
the computation of net decrease in shareholders' equity from operations per
share-diluted because the effect would be anti-dilutive.
(3) For the year ended December 31, 1995, includes $.13 per share in dividends
declared and paid in the first quarter of 1996 related to 1995 earnings and,
for the year ended December 31, 1996, includes $.18 in dividends declared
and paid in the first quarter of 1997 related to 1996 earnings and excludes
the $.13 per share in dividends paid in the first quarter of 1996 related to
1995 earnings. For the year ended December 31, 1997, includes $.43 per share
in dividends paid or to be paid in the first quarter of 1998 related to 1997
earnings and excludes the $.18 per share in dividends paid in the first
quarter of 1997 related to 1996 earnings. For the year ended December 31,
1998, excludes $.43 per share in dividends paid in the first quarter of 1998
related to 1997 earnings.
(4) Net interest spread represents the weighted average gross yield on Sirrom's
interest bearing investments less the weighted average cost of borrowed
funds at the end of the respective periods shown.
13
<PAGE> 24
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMBINED COMPANY
The merger is expected to be accounted for using the purchase method of
accounting with FINOVA as the acquiror for financial accounting purposes. The
unaudited pro forma condensed consolidated balance sheet gives effect to the
merger as if it had occurred on December 31, 1998 and combines the historical
consolidated balance sheet of FINOVA and Sirrom as of that date. The unaudited
pro forma condensed consolidated statement of income gives effect to the merger
as if it had occurred on January 1, 1998 and combines the historical
consolidated statement of income for FINOVA and Sirrom for the year ended
December 31, 1998.
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of the results that actually would have occurred had the
merger been consummated on those dates or that may be obtained in the future.
The assumptions used to prepare the unaudited pro forma condensed consolidated
financial statements are presented in the notes to those financial statements.
Pro forma adjustments are based on preliminary estimates, available information
and certain assumptions that management of FINOVA and Sirrom deem appropriate.
Final adjustments and actual results may differ from the pro forma adjustments
presented herein.
The unaudited pro forma financial information does not give effect to
potential cost savings and other synergies that may result from the merger.
Neither do they account for the possible cash-out of existing stock options held
by employees of Sirrom that become fully vested by reason of the adoption of the
merger agreement by Sirrom shareholders.
The following pro forma financial statements should be read in conjunction
with the historical consolidated financial statements and pro forma financial
data of FINOVA and Sirrom, including their related notes and the other
information relating to the merger appearing in this proxy statement/prospectus.
14
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ACCOUNTING PURCHASE PRO FORMA
FINOVA SIRROM ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- -------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents....... $ 49,518 $ 2,416 $ 51,934 $ 51,934
Investment in financing
transactions................... 10,011,536 566,948 46,465(2) 10,623,331 10,623,331
(1,618)(1)
Less reserve for credit
losses......................... (207,618) (98,422)(2) (306,040) (306,040)
----------- -------- -------- ----------- -------- -----------
9,803,918 566,948 (53,575) 10,317,291 10,317,291
Goodwill and other assets....... 596,878 12,410 609,288 54,927(6) 657,198
(7,017)(7)
----------- -------- -------- ----------- -------- -----------
$10,450,314 $581,774 $(53,575) $10,978,513 $ 47,910 $11,026,423
=========== ======== ======== =========== ======== ===========
LIABILITIES AND SHAREOWNERS'
EQUITY:
Accounts payable and accrued
expenses....................... $ 148,588 $ 4,385 $ 152,973 $ 54,528(6) $ 207,501
Due to clients.................. 205,655 205,655 205,655
Interest payable................ 65,225 1,950 67,175 (3,581)(8) 63,594
Debt............................ 8,394,578 250,023 8,644,601 8,644,601
Deferred income taxes........... 347,373 417 (9,144)(3) 302,806 (17,332)(6) 284,332
(35,840)(4) (1,142)(9)
----------- -------- -------- ----------- -------- -----------
9,161,419 256,775 (44,984) 9,373,210 32,473 9,405,683
----------- -------- -------- ----------- -------- -----------
Convertible preferred stock..... 111,550 111,550 111,550
Shareowners' equity............. 1,177,345 324,999 36,026(2) 1,493,753 17,731(6) 1,509,190
(44,617)(5) (2,294)(10)
----------- -------- -------- ----------- -------- -----------
1,177,345 324,999 (8,591) 1,493,753 15,437 1,509,190
----------- -------- -------- ----------- -------- -----------
$10,450,314 $581,774 $(53,575) $10,978,513 $ 47,910 $11,026,423
=========== ======== ======== =========== ======== ===========
</TABLE>
15
<PAGE> 26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------- ACCOUNTING PURCHASE PRO FORMA
FINOVA SIRROM ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest, fees and other
income.................... $ 811,395 $ 74,543 $ (1,618)(1) $ 884,320 $ 884,320
Financing lease income...... 94,380 94,380 94,380
Operating lease income...... 116,202 116,202 116,202
---------- ---------- --------- ---------- ----------- ----------
Income earned from financing
transactions.............. 1,021,977 74,543 (1,618) 1,094,902 1,094,902
Interest expense............ 479,360 17,295 496,655 $ (3,581)(8) 493,074
Operating lease
depreciation.............. 70,081 70,081 70,081
---------- ---------- --------- ---------- ----------- ----------
Interest margins earned..... 472,536 57,248 (1,618) 528,166 3,581 531,747
Volume-based fees........... 77,723 77,723 77,723
---------- ---------- --------- ---------- ----------- ----------
Operating margin............ 550,259 57,248 (1,618) 605,889 3,581 609,470
Provision for credit
losses.................... 82,200 155,510(2) 237,710 237,710
---------- ---------- --------- ---------- ----------- ----------
Net interest margins
earned.................... 468,059 57,248 (157,128) 368,179 3,581 371,760
Gains (losses) on disposal
of assets................. 55,024 (61,434) 67,527(2) 61,117 61,117
---------- ---------- --------- ---------- ----------- ----------
523,083 (4,186) (89,601) 429,296 3,581 432,877
Operating expenses.......... 241,074 15,843 256,917 7,017(7) 263,934
---------- ---------- --------- ---------- ----------- ----------
Income before income taxes.. 282,009 (20,029) (89,601) 172,379 (3,436) 168,943
Income taxes................ 108,490 1,132 (9,144)(3) 64,638 (1,142)(9) 63,496
(35,840)(4)
---------- ---------- --------- ---------- ----------- ----------
Income before preferred
dividends................. 173,519 (21,161) (44,617) 107,741 (2,294) 105,447
Preferred dividends, net of
tax....................... 3,782 3,782 3,782
---------- ---------- --------- ---------- ----------- ----------
Income before change in
unrealized investments.... 169,737 (21,161) (44,617) 103,959 (2,294) 101,665
Change in unrealized
appreciation
(depreciation) of
investments............... (55,336) 55,336(2)
---------- ---------- --------- ---------- ----------- ----------
NET INCOME $ 169,737 $ (76,497) $ 10,719 $ 103,959 $ (2,294) $ 101,665
========== ========== ========= ========== =========== ==========
Basic earnings per share.... $ 3.03 $ (2.12) $ 1.63
========== ========== ==========
Basic adjusted weighted
average shares
outstanding............... 55,946,000 36,057,000 92,003,000 (29,749,000)(11) 62,254,000
========== ========== ========== ===========
Diluted earnings per
share..................... $ 2.86 $ (2.12) $ 1.57
========== ========== ==========
Diluted adjusted weighted
average shares
outstanding............... 60,705,000 36,057,000 96,762,000 (29,749,000)(11) 67,013,000
========== ========== ========== =========== ==========
</TABLE>
16
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The following explanations describe the assumptions used in determining the
accounting and pro forma purchase adjustments necessary to present the pro forma
financial position and results of operations of the combined company after
giving effect to the merger as of and for the year ended December 31, 1998.
The following accounting adjustments represent necessary adjustments to
convert the Sirrom financial statements, which have been prepared in accordance
with generally accepted accounting principles ("GAAP") appropriate for
investment companies as enumerated in the American Institute of Certified Public
Accountants' Audit and Accounting Guide on Audits of Investment Companies, to
the accounting policies utilized by FINOVA in the preparation of their financial
statements in accordance with GAAP.
ACCOUNTING ADJUSTMENTS:
(1) Represents the net effects of reversing Sirrom's processing fees for
financing transactions recognized on a cash basis and amortizing the
fees over the estimated life of those transactions.
(2) Represents the reversal of Sirrom's unrealized depreciation of
investments previously recorded under GAAP appropriate for investment
companies and the recording of the net effects of the transactions in
compliance with FINOVA's accounting policies under GAAP.
(3) Represents the tax effects of converting Sirrom from a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, which generally taxed Sirrom as a pass through entity, to a
taxable entity using a blended statutory rate of 40%.
(4) Represents the income tax effect on the income of the combined
company resulting from the accounting adjustments, using a blended
statutory rate of 40%.
(5) Represents the net equity effect of the statement of income related
after-tax accounting adjustments.
PRO FORMA PURCHASE ADJUSTMENTS:
(6) Records the merger, which results in an excess of the purchase price
over the historical net assets acquired. The excess is allocated to
the net assets acquired and liabilities assumed, as follows:
<TABLE>
<S> <C>
Purchase price......................................... $ 342,730
Elimination of historical stockholders' equity of
Sirrom............................................... (324,999)
---------
Estimated excess purchase price........................ $ 17,731
=========
Allocation of excess:
Elimination of unamortized debt costs................ (4,809)
Deferred income taxes................................ 17,332
Assumed liabilities.................................. (54,528)
Goodwill............................................. 59,736
---------
$ 17,731
=========
</TABLE>
(7) Represents amortization of goodwill over twenty-five years and
amortization of the covenant not to compete over three years
($6,435 - tax deductible and $582 - nondeductible).
17
<PAGE> 28
(8) Represents the estimated interest savings arising from FINOVA
maintaining a lower aggregate cost of funds.
(9) Represents the income tax effect on the income of the combined
company resulting from the merger and the purchase accounting
adjustments, excluding nondeductible goodwill amortization, using a
blended statutory rate of 40%.
(10) Represents the net equity effect of the statement of income related
after-tax
pro forma purchase accounting adjustments.
(11) Represents the exchange of each diluted share of Sirrom common stock
for 0.1634 share of FINOVA common stock.
COMPARATIVE PER SHARE DATA
The following table sets forth certain information regarding earnings,
dividends and book value per share for each of FINOVA and Sirrom common stock on
an historical basis and historical equivalent basis. All information has been
adjusted to reflect a two-for-one stock split for FINOVA effective October 1,
1997 and for Sirrom effective January 30, 1998. The information set forth below
should be read in conjunction with the historical consolidated financial
statements of FINOVA and Sirrom, including the accompanying notes, appearing
elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
FINOVA
Earnings per share -- basic............................... $ 3.03 $ 2.56
Earnings per share -- diluted............................. $ 2.86 $ 2.42
Cash dividends declared per share......................... $ 0.60 $ 0.52
Book value per share (unaudited).......................... $21.13 $19.37
SIRROM
Net (decrease) increase in shareholders' equity resulting
from operations per share -- basic..................... $(2.12) $ 1.37
Net (decrease) increase in shareholders' equity resulting
from operations per share -- diluted................... $(2.12) $ 1.30
Cash dividends declared per share......................... $ 0.52 $ 1.08
Book value per share (unaudited).......................... $ 8.73 $ 9.07
FINOVA PRO FORMA (unaudited)
Earnings per share -- basic............................... $ 1.63 $ 2.51
Earnings per share -- diluted............................. $ 1.57 $ 2.38
Cash dividends declared per share(1)...................... $ 0.60 $ 0.52
Book value per share...................................... $24.42 $21.65
SIRROM PRO FORMA EQUIVALENT (unaudited)(2)
Earnings per share -- basic............................... $ 0.27 $ 0.41
Earnings per share -- diluted............................. $ 0.26 $ 0.39
Cash dividends declared per share......................... $ 0.10 $ 0.09
Book value per share...................................... $ 3.99 $ 3.54
</TABLE>
- -------------------------
(1) Represents FINOVA's historical cash dividends per share.
(2) Represents FINOVA pro forma multiplied by the unadjusted exchange rate of
0.1634.
18
<PAGE> 29
RISK FACTORS
RISKS ASSOCIATED WITH THE MERGER
There are risks and uncertainties associated with the merger. These risks,
alone or together with others, could cause a decline in the market value of
FINOVA's or Sirrom's common stock. Some of these risks and uncertainties are
described below. You should read and consider them carefully in deciding whether
to approve the merger.
Fixed Exchange Ratio Does Not Reflect Changes in Stock Prices
As part of the merger, you will receive 0.1634 shares of FINOVA common
stock for each share of Sirrom common stock that you currently hold, subject to
a slight increase in three limited circumstances. Generally, that exchange ratio
will be fixed and will not fluctuate along with changes in the market value of
FINOVA or Sirrom common stock. Therefore, if there is a decline in the value of
the FINOVA common stock, the value of the FINOVA shares that you receive at the
time of the merger may be less than the value of those shares at the time you
cast your vote on the merger. Similarly, if there is an increase in the value of
the Sirrom common stock, the value of the Sirrom shares that you convert at the
time of the merger may be more than the value of those shares at the time you
cast your vote on the merger.
Benefits to Sirrom Executives and Employees as a Result of the Merger
As part of the merger, Sirrom's three senior executive officers, including
George M. Miller, II, Chief Executive Officer and a director, will execute
severance compensation and consulting agreements, confidentiality,
non-competition and non-solicitation agreements, or both. In exchange for
entering into these agreements, the three officers will receive payments from
Sirrom totaling approximately $10 million. Also, as a result of the merger, all
of the options held by employees and directors of Sirrom, including all of its
executive officers, will become fully exercisable. In addition, a one-year sale
restriction that applies to re-priced options will cease to be effective at the
effective time of the merger. Five officers of Harris Williams & Co., a Virginia
corporation, and wholly subsidiary of Sirrom ("Harris Williams"), including
Christopher H. Williams, an executive officer and director of Sirrom, and H.
Hiter Harris, III, an executive officer, have entered into employment agreements
that will become effective when the merger is completed. These employment
agreements provide for salary, a minimum bonus, and an interest in a retention
plan of $6.5 million to be shared by eligible Harris Williams employees. Seven
officers of Sirrom have entered into employment agreements with Sirrom as the
surviving corporation. The payments to the officers, the employment agreements
and the adjustments to the options held by the employees may have had an impact
on the directors' recommendation of the merger as beneficial to, and in the best
interests of, the Sirrom shareholders. These benefits may also have discouraged
the officers from pursuing other possible or potential transactions, including
transactions that might have otherwise been more favorable to Sirrom
shareholders.
Effect of the Termination Fee and the Voting Agreement
If the merger is not completed, Sirrom must, under certain circumstances,
pay FINOVA a termination fee of $13.8 million. In addition, as part of the
merger, FINOVA has entered into a voting agreement with some Sirrom
shareholders, including all of the directors of Sirrom, which, among other
things, requires them to vote in favor of the merger and against any acquisition
proposal competing with the merger. The termination fee and the voting agreement
are intended to have the effect of discouraging companies other than FINOVA from
entering into a business combination with Sirrom. They also help protect FINOVA
from having to pay a higher price for the Sirrom common stock than that which it
has already negotiated.
19
<PAGE> 30
Risk of No Solicitation Provision
The merger agreement contains a "no solicitation" provision that restricts
Sirrom's ability to solicit transactions with parties other than FINOVA. The
existence of this no solicitation provision will have the effect of limiting the
ability of the Sirrom board to seek competing proposals that could offer you
greater value for your Sirrom shares than that which FINOVA has agreed to pay.
Anticipated Profitability from Merger May Not Be Realized
FINOVA has decided to enter into the merger because it believes its
management can enhance Sirrom's operations, and therefore, increase FINOVA's
profitability. To realize these anticipated benefits from the merger, FINOVA
will have to integrate its operations with those of Sirrom efficiently and
manage Sirrom's mezzanine finance portfolio and investment advisory services
effectively. If FINOVA is unable to accomplish these objectives, there is a risk
that the projected profitability enhancements may not be achieved.
Retention of Customers
FINOVA anticipates that Sirrom and its affiliates will be able to retain
most of its customer base after the merger. However, it is possible that
customers of Sirrom will seek financing or investment advisory services from
other sources as a result of the merger. In addition, some of Sirrom's referral
sources may direct potential new business elsewhere as a result of the merger.
The loss of Sirrom customers could have a material adverse effect on the
financial condition of Sirrom and consequently, on the value of your FINOVA
shares after the merger.
Decrease in Dividends/Distributions
As an RIC, Sirrom is required to distribute 90% of its net income to its
shareholders to achieve tax benefits. Sirrom has done so, historically. If the
merger occurs, Sirrom will cease to be an RIC, and FINOVA will not be required
to make that level of distributions. FINOVA has traditionally paid a lower
portion of its net income in dividends. FINOVA does not expect a substantial
change in that practice. As a result, you should expect to receive a lower
percentage of dividends than you historically have received from Sirrom during
profitable periods.
RISKS ASSOCIATED WITH SIRROM
Many of the following risks apply to Sirrom and will continue to apply to
FINOVA after the merger.
Risks of Investing in Small, Privately Owned Companies
Sirrom's portfolio consists primarily of loans to and securities issued by
small, privately owned businesses. There are many risks associated with these
investments in small companies, including:
- lack of public information, meaning that Sirrom must rely on its
employees' diligence in obtaining information before lending to one of
these companies;
- the success of small businesses depends on the management talents of a
small number of people, and the death, disability or resignation of one
or more of these people could materially and adversely affect the
business;
- small businesses often have smaller product lines and market shares than
their competitors; and
- small businesses may be more vulnerable to economic downturns, may
experience substantial variations in operating results and often need
substantial additional capital to expand or compete.
20
<PAGE> 31
These risks can result in substantial losses. Sirrom's operating history is
relatively limited, and it has not operated in a recession. In a recession, the
operating results of small businesses, like those to which Sirrom has made
loans, often are adversely affected. While Sirrom generally seeks to make senior
loans that are secured by collateral, it often makes subordinated loans, which
are less likely to be collected. Senior loans often forbid borrowers from paying
interest to subordinated lenders if the senior loan is in default. This
increases the risk to Sirrom of non-payment of interest and principal. Sirrom
also may make loans that are not secured by collateral or may invest in equity
securities, both of which involve a higher degree of risk.
Risk of Performance of Portfolio Investments
In recent quarters, Sirrom has recorded significant unrealized depreciation
and realized losses against its loan portfolio due to a variety of factors,
including a weakening in the economy nationally and internationally, a
tightening of available capital from commercial lenders and equity markets and
the substantial growth of Sirrom's portfolio over the last two years coupled
with the fact that non-performance on new loans typically comes early in the
loan's life cycle. Although Sirrom is closely monitoring the recent upward trend
in these numbers and continues to redefine its operating model to seek to
improve overall asset quality, no assurance can be given that these trends will
not continue, particularly if overall economic conditions, nationally,
internationally or in the Southeastern United States continue to deteriorate. As
of December 31, 1998, Sirrom has identified 24.2% of its loan portfolio as grade
4, 5 or 6 in accordance with its loan grading system as discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These loans generally represent loans in the portfolio with the
greatest credit risk. There can be no assurance that this percentage will not
continue to increase based on current trends. Shareholders should also take into
account that during periods of significant market volatility, such as
experienced recently, the value of Sirrom's equity portfolio may vary
substantially on a quarter-to-quarter basis, with corresponding substantial
variations in unrealized appreciation or depreciation. In addition, the
conditions in the initial public offering market can change quickly, causing
significant variances in unrealized appreciation and realized gains on a
quarter-to-quarter basis.
Risk that Sirrom Will be Unable to Sell Portfolio Investments
If Sirrom is unable to sell a debt or equity security quickly at a price
that reflects its fair market value, then that security is illiquid. Sirrom's
investments primarily are securities acquired directly from small, privately
owned businesses. These securities usually have no established trading market or
are subject to restrictions on resale. The illiquidity of most of Sirrom's
portfolio securities may adversely affect Sirrom's ability to sell these
securities when Sirrom thinks a sale is necessary or advantageous. Without
readily available market values, the Sirrom board of directors values the
securities in its portfolio in good faith. The good faith estimates may be
different from the values that would have been used if a ready market for the
securities existed, and the differences could be material. Sirrom periodically
reviews and amends its valuation policy.
Risk of Payment Default
Sirrom generally makes nonamortizing loans with relatively high fixed
interest rates and five year terms to small businesses. These businesses often
have limited financial resources and cannot obtain loans from traditional
sources, like banks. Loans made to small businesses are generally secured by the
borrower's assets. A borrower may become unable to repay its loan for many
reasons, including its failure to meet its business plan, a downturn in its
industry or negative economic conditions. If a borrower's financial condition
worsens, then the value of any collateral that it has provided as security for
the loan will usually decline as well. Also, Sirrom will be less likely to
realize on any guarantees obtained from the borrower's management or controlling
shareholders. Although Sirrom seeks to be the senior, secured lender to a
borrower, it
21
<PAGE> 32
is not always the senior lender, and any collateral for a loan may be
subordinate to another lender's security interest. Sirrom can also make loans
that are not secured by collateral and invest in equity securities, each of
which is very risky.
Risk of Unavailability of Funds
As Sirrom grows, it has needed and will continuously need long-term capital
to finance its loans. Sirrom traditionally has met this need through borrowings
under Small Business Administration ("SBA") programs, from commercial banks and
through selling equity securities. As of December 31, 1998, Sirrom Investments,
Inc. ("SII") had outstanding borrowings of $101 million from the SBA. As of
December 31, 1998, Sirrom Funding Corporation ("SFC") had outstanding borrowings
of $132.2 million under its $200 million, five year revolving credit facility
(the "ING credit facility") with Holland Limited Securitization, Inc. a
multi-seller commercial paper conduit sponsored by ING Baring (U.S.) Capital
Markets Inc. (individually and collectively, "ING"). On December 31, 1998, SII
had $16.8 million outstanding under its $50 million credit facility with First
Union National Bank of Tennessee and a syndicate of other banks (the "First
Union credit facility"). However, on January 21, 1999, Sirrom repaid all amounts
outstanding and terminated the commitment extended under the First Union credit
facility. If Sirrom cannot acquire available funds on favorable terms from
commercial banks or other sources, then it could be materially and adversely
affected.
Under the ING credit facility, if any two of George Miller, David Resha and
Carl W. Stratton cease to be actively involved in managing Sirrom, then either
ING or a majority of the noteholders under the ING credit facility may declare
Sirrom in default under the ING credit facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources."
If the merger is completed, FINOVA anticipates repaying all outstanding
borrowings from the SBA and repaying all amounts outstanding under the ING
credit facility and terminating the commitment under that facility.
Risk of Loan Losses Exceeding Current Estimates
Typically, no public market exists for the debt or equity securities of
small, privately owned companies. As a result, the securities in Sirrom's
portfolio are valued by the Sirrom board in good faith. Unlike some lenders,
Sirrom does not establish reserves for loan losses, but revalues its portfolio
every quarter to reflect its estimate of the current fair value of the loans. At
December 31, 1998, Sirrom's loan portfolio was valued at $477.1 million, which
reflected $75.6 million in unrealized depreciation. Sirrom cannot assure that
this estimate reflects the amounts that ultimately will be realized on these
loans. See "Business of Sirrom -- Operations."
Litigation Risk
Sirrom and some of its officers and directors are defendants in shareholder
class action lawsuits that allege securities law violations generally related to
Sirrom's March 1998 offering of common stock and other public communications.
Sirrom believes that these actions are without merit and is vigorously defending
against them. If Sirrom were to lose this litigation, however, the liability
could be substantial and would likely have a material adverse effect on Sirrom's
business and financial condition.
Risk of Interest Rate Changes
Sirrom's income primarily depends on the interest rates at which it borrows
funds, and the interest rates at which it lends these funds. The difference in
these rates is referred to as the "interest spread." Sirrom expects to combine
long-term and short-term borrowings to finance the loans it makes. Sirrom also
uses certain techniques to manage its interest rates, including
22
<PAGE> 33
interest rate hedging activities. Sirrom's net interest spread has averaged 5.6%
(560 basis points) since inception. Sirrom cannot assure that it will maintain
this net interest spread. In addition, a significant change in market interest
rates may materially and adversely affect Sirrom's profitability.
Risks of Inability to Expand at Past Rates
Sirrom's small business lending activities have expanded substantially,
both in size and geographic scope. If the merger is completed, FINOVA seeks to
continue expanding Sirrom's traditional small business lending activities in the
United States and Canada. Sirrom cannot assure that its loan and investment
portfolio will continue to grow at past rates, or that it will be able to
develop sufficient lending and administrative personnel and management and
operating systems to manage any expansion effectively.
In August 1996, Sirrom acquired Harris Williams, a provider of merger and
acquisition financial advisory services to small and medium sized businesses.
Harris Williams earns its income from fees received for its financial advisory
engagements. These engagements usually provide for a monthly retainer and a
success fee that is paid only if the transaction is closed. Sirrom cannot assure
that Harris Williams' fee income will continue at or exceed historical levels.
See "Business of Sirrom -- Operations."
Leverage Risks
Sirrom, through SII, has borrowed funds from the SBA and through SFC, has
borrowed funds under the ING credit facility. Sirrom's assets are significantly
leveraged from this borrowing. Leverage increases potential gains and losses on
monies invested and, therefore, increases the risks associated with investing in
Sirrom's securities. Sirrom's creditors have claims on Sirrom's assets superior
to those of the Sirrom shareholders. ING, the lender under the ING credit
facility, may ask Sirrom to make deposits into a sinking fund account. Whether
these deposits are requested will depend on interest rate conditions. If these
deposits are requested, ING will use them to buy interest rate caps or to enter
into additional interest rate swaps. Sirrom would also be required to transfer
to SFC the interest rate cap payments payable to Sirrom. If Sirrom failed to
make requested deposits into the sinking fund, the ING credit facility would be
unavailable for future funding. Sirrom cannot estimate the size of these
deposits if they become necessary, and if prevailing interest rates
substantially differ from the borrowing rate under the ING credit facility,
these amounts could be material.
As of December 31, 1998, SII had borrowed $101 million from the SBA under
the SBA debenture program bearing an average annual interest rate of 6.9%. As of
December 31, 1998, SFC had $132.2 million outstanding under the ING credit
facility bearing an average annual interest rate of 8.0%. As of December 31,
1998, Sirrom's debt as a percentage of total liabilities and shareholders'
equity was 43.5%. In addition, Sirrom's ability to achieve its investment
objectives may partially depend on whether it can obtain leverage on favorable
terms. Sirrom cannot assure that debt can be obtained on favorable terms.
If the merger is completed, FINOVA anticipates repaying on or shortly
following the closing all outstanding borrowings from the SBA and all amounts
outstanding under the ING credit facility and terminating the commitment under
that facility.
Risks of Competition
Many entities and individuals compete to make the types of investments made
by Sirrom. Several of these competitors have greater financial resources than
Sirrom. This competition may prevent Sirrom from entering into attractive
transactions. Sirrom cannot assure that it will be able to identify and make
investments that satisfy its investment objectives or that it will be able to
invest all of its available capital.
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THE SIRROM SPECIAL MEETING
GENERAL; DATES, TIMES AND PLACES
We have mailed this proxy statement/prospectus to you, on or about March 3,
1999, and included with it the Notice of Special Meeting of Sirrom Shareholders.
We also have included a form of proxy that Sirrom's board of directors is
soliciting for use at the Sirrom special meeting to be held on March 22, 1999 at
8:00 a.m., local time, at The Westin Hermitage Hotel, 231 6th Avenue, Nashville,
Tennessee, and at any adjournments or postponements of the meeting. This proxy
statement/prospectus is also furnished to you as a prospectus in connection with
FINOVA's issuance of shares of FINOVA common stock pursuant to the merger
agreement.
PURPOSE OF THE SIRROM SPECIAL MEETING
At the Sirrom special meeting, Sirrom will ask you to consider and vote on
the following proposals:
- approval and adoption of the agreement and plan of merger, dated January
6, 1999, among Sirrom, FINOVA and FINOVA Newco, by which FINOVA Newco
will merge with and into Sirrom, approval of the merger of FINOVA Newco
with and into Sirrom, and approval of the related withdrawal of Sirrom's
election to be treated as a business development company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
- any other business properly brought at the Sirrom special meeting.
REVOCATION OF PROXIES
You have the unconditional right to revoke your proxy at any time before it
is voted by any of the following actions:
- notifying our Secretary in writing of your intent to revoke your proxy;
- executing a later proxy; or
- personally attending the special meeting and casting a vote contrary to
your proxy.
To be effective, we must receive notice of your revocation at or before the
special meeting.
RECORD DATE; VOTE REQUIRED
The record of shareholders entitled to vote at the Sirrom special meeting
was taken at the close of business on March 1, 1999, and on that date, Sirrom
had issued and outstanding 37,229,196 shares of Sirrom common stock. You are
only allowed to vote at the special meeting if you held shares of Sirrom common
stock on the record date. You are only allowed one vote for each share of Sirrom
common stock held by you on the record date.
Approval and adoption of the merger agreement, the merger and the related
withdrawal of Sirrom's election to be treated as a business development company
requires the affirmative vote of the holders of at least a majority of the
shares of Sirrom common stock outstanding as of the record date.
NYSE rules prohibit brokers and nominees from exercising discretionary
voting authority on the proposal presented for your consideration. You must
specifically inform your broker of your instructions with respect to the
proposal if you want your shares voted at the special meeting. Because the
affirmative vote of the holders of a majority of the shares of Sirrom common
stock outstanding as of the record date is required for approval and adoption of
the merger agreement, merger and related withdrawal of Sirrom's election to be
treated as a business development company, an abstention or a broker non-vote on
this matter will have the effect of a vote against it.
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ACCORDINGLY, WE URGE YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
To Sirrom's knowledge, Sirrom Partners, L.P. ("Sirrom Partners"), and
SAFECO Asset Management Company ("SAFECO") were the only persons who owned
greater than 5% of the Sirrom common stock as of February 26, 1999. As of
February 26, 1999, Sirrom Partners held 3,402,296 shares, or approximately 9.1%
of the outstanding shares of Sirrom common stock, and SAFECO held 6,611,300
shares, or approximately 17.8% of the outstanding shares of Sirrom common stock.
Under a voting agreement by and among FINOVA, Sirrom Partners and the directors
of Sirrom, FINOVA has the power to vote or restrict the disposition of 5,421,958
shares of Sirrom common stock beneficially owned by the parties to the voting
agreement (6,847,037 including options). As of February 26, 1999, the
outstanding shares of Sirrom common stock subject to the voting agreement
represented 14.6% of the outstanding shares of Sirrom common stock.
Based on the 37,229,196 shares of Sirrom common stock outstanding on
February 26, 1999, a total of 18,614,599 shares must be voted in favor of the
proposal for these matters to be approved by the Sirrom shareholders. As of
February 26, 1999, the directors and executive officers of Sirrom, as a group,
beneficially owned 6,064,501 outstanding shares of Sirrom common stock. In
connection with the merger, the Sirrom directors and Sirrom Partners signed a
voting agreement agreeing to vote their shares in favor of the merger.
Therefore, as of February 26, 1999 the directors and executive officers of
Sirrom and their affiliates, as a group beneficially owned 32.6% of the
18,614,599 shares required for approval of the merger agreement, the merger and
the withdrawal of Sirrom's election to be treated as a business development
company. Therefore, if the executive officers and the other parties to the
voting agreement vote in favor of the matter presented at the special meeting,
the vote of an additional 12,550,098 shares of Sirrom common stock representing
33.7% of outstanding shares of Sirrom common stock, assuming no exercise of
outstanding options, will be sufficient to approve the merger.
As of the date of this proxy statement/prospectus, Sirrom does not
beneficially own more than 5% of FINOVA common stock, the only class of voting
securities of FINOVA.
QUORUM
The Tennessee Business Corporation Act (the "TBCA"), the Sirrom amended and
restated charter (the "Sirrom Charter"), the Sirrom bylaws, as amended (the
"Sirrom Bylaws") and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), contain requirements governing your actions at the Sirrom
special meeting. The Sirrom Bylaws provide that the holders of a majority of
outstanding shares of Sirrom common stock must be present, either in person or
by proxy, at the Sirrom special meeting to constitute a quorum. Under Tennessee
law, your shares will be counted as present for purposes of determining the
existence of a quorum if your proxy card is marked with a non-vote. Shares
represented at the meeting by proxies containing instructions to withhold
authority to vote also will be counted as present for purposes of determining
whether a quorum exists.
EXPENSES OF SOLICITATION
We will pay for the cost of soliciting proxies on the accompanying form. In
addition to the use of mail, officers of Sirrom may solicit proxies by telephone
or telecopy. Upon request, Sirrom will reimburse brokers, dealers, banks and
trustees, or their nominees, for reasonable expenses incurred by them in
forwarding proxy material to beneficial owners of Sirrom common stock.
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ACCOUNTING REPRESENTATIVE
A representative of Arthur Andersen LLP is expected to be present at the
Sirrom special meeting with the opportunity to make a statement if he or she
desires, and will be available to respond to appropriate questions.
RECOMMENDATION OF SIRROM BOARD OF DIRECTORS
THE SIRROM BOARD UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND
THE RELATED WITHDRAWAL OF SIRROM'S ELECTION TO BE TREATED AS A BUSINESS
DEVELOPMENT COMPANY UNDER THE 1940 ACT. THE SIRROM BOARD ALSO DECLARED THAT THE
MERGER AGREEMENT, THE MERGER AND THE RELATED WITHDRAWAL OF SIRROM'S ELECTION TO
BE TREATED AS A BUSINESS DEVELOPMENT COMPANY ARE ADVISABLE, AND DETERMINED THAT
THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, SIRROM AND THE SIRROM
SHAREHOLDERS. ACCORDINGLY, THE SIRROM BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE MERGER AND THE RELATED
WITHDRAWAL OF SIRROM'S ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT COMPANY.
See "The Merger -- "Sirrom Reasons for the Merger; Recommendation of the Sirrom
Board of Directors."
MISCELLANEOUS
The Sirrom board is not aware of any matter to be presented for action at
the Sirrom special meeting other than the matter described in this document.
Only business within the purpose or purposes described in the meeting notice may
be conducted at a Sirrom special meeting. Should any other matter requiring your
vote arise, the proxies on the enclosed form give the holders of the proxy
discretionary authority to vote your shares in their best judgment in Sirrom's
interest.
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PROPOSAL 1: THE MERGER AND RELATED WITHDRAWAL OF SIRROM'S ELECTION TO BE
TREATED AS A BUSINESS DEVELOPMENT COMPANY
The discussion in this proxy statement/prospectus of the merger and the
principal terms of the merger agreement is subject to, and qualified in its
entirety by reference to, the merger agreement. Appendix A contains a copy of
the merger agreement.
GENERAL
At the Sirrom special meeting, you will be asked to vote upon a proposal to
approve and adopt the merger agreement, merger and related withdrawal of
Sirrom's election to be treated as a business development company under the 1940
Act.
The merger agreement provides, among other things, for a merger of FINOVA
Newco with and into Sirrom with Sirrom being the surviving corporation. In the
merger, each share of Sirrom common stock issued and outstanding immediately
before the effective time of the merger will be converted into, and become
exchangeable for 0.1634 shares of FINOVA common stock. This is more commonly
referred to as the exchange ratio. The exchange ratio used to determine the
number of shares of FINOVA common stock a Sirrom shareholder will receive in
exchange for his or her shares of Sirrom common stock is subject to a slight
increase in three instances. First, if the merger becomes effective after June
1, 1999, the exchange ratio will increase to 0.1639 shares. Second, if Sirrom
enters into a binding agreement to settle its securities class action lawsuits
for a cost of less than $10 million to Sirrom, the exchange ratio will increase
by a number of shares equal to (1) 0.00027 multiplied by (2) the quotient of:
the difference between that amount and $10 million, divided by $1 million.
Third, if FINOVA elects to increase it due to Sirrom's termination of the merger
agreement because FINOVA's stock price has declined below $40.6875.
Excluded shares, which are shares of Sirrom common stock owned by FINOVA,
FINOVA Newco or any other direct or indirect subsidiary of FINOVA, or shares of
Sirrom common stock owned by Sirrom or any direct or indirect subsidiary of
Sirrom, and in each case, not held on behalf of third parties, will not be
exchanged in the merger.
The merger will become effective upon the:
- the time when articles of merger are accepted for record by the Secretary
of State of the State of Tennessee under the relevant provisions of the
TBCA;
- the time when a certificate of merger has been duly filed with the
Secretary of State of the State of Delaware as provided in the relevant
provisions of the Delaware General Corporation Law (the "DGCL"); or
- any other time agreed to by Sirrom and FINOVA and established under the
Tennessee articles of merger and the Delaware certificate of merger.
We expect that the merger will become effective after the required
regulatory approvals are received and the other conditions to closing are met if
the merger, merger agreement and related withdrawal of Sirrom's election to be
treated as a business development company are approved by the Sirrom
shareholders.
If the merger had been completed on February 26, 1999, FINOVA would have
issued approximately 6,083,000 shares, in the aggregate, to the holders of
Sirrom common stock. The closing price of FINOVA's common stock on that date was
$50.8125 per share, therefore Sirrom shareholders would have received
consideration equal to approximately $8.30 per share of Sirrom common stock and
$309 million in the aggregate.
Because the market price of FINOVA common stock may change, the market
value of the shares of FINOVA common stock that you will receive in the merger
may increase or decrease
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following the merger. We urge you to obtain current market quotations for FINOVA
and Sirrom common stock. No assurance can be given as to the future prices or
markets for FINOVA or Sirrom common stock.
BACKGROUND OF THE MERGER
In April 1998, because of the continuing trends toward consolidation in the
financial services industry and the potential strategic benefits from additional
access to capital and increased leverage that might result from the acquisition
of Sirrom by a larger financial services company, the Sirrom board directed
management to begin exploring the possibility of a strategic combination. In May
1998, Sirrom engaged Goldman, Sachs & Co. ("Goldman Sachs") to act as its
financial advisor in connection with the sale or merger of Sirrom. Additionally,
Sirrom authorized The Robinson-Humphrey Company, LLC ("Robinson-Humphrey"),
which had previously had preliminary conversations with management officials at
FINOVA concerning a possible business combination with Sirrom, to act as a
financial advisor in any transaction between Sirrom and FINOVA. On May 20, 1998,
a mutual confidentiality agreement was signed by FINOVA and Sirrom and an
initial meeting was held in Nashville to discuss a possible strategic
combination. During May and June of 1998 Goldman Sachs contacted over 30 banks,
finance companies and insurance companies concerning a possible transaction with
Sirrom. Six companies expressed interest and conducted initial meetings with
Sirrom management over this period. Except for FINOVA, none of these companies
made an offer or acquisition proposal to Sirrom or Goldman Sachs. In late June,
senior management of FINOVA orally advised Robinson-Humphrey that, subject to
the results of a detailed due diligence investigation, FINOVA would be
interested in exploring an all stock business combination with Sirrom.
In early July 1998, Sirrom announced that it would take an $8.9 million
loan loss and record additional unrealized depreciation of $8 million on two
loans in its portfolio. On July 13, 1998, two class action lawsuits alleging
securities fraud were filed against Sirrom. As a result of these developments,
FINOVA and Sirrom determined to cease further discussions concerning a business
combination. In the weeks that followed, the stock market as a whole and
specialty finance companies' market values, in particular, declined, and the
initial public offering market slowed dramatically. Sirrom also believes that
commercial banks significantly reduced the availability of credit to small and
medium sized businesses. Sirrom continued to record additional unrealized
depreciation and realized losses, and these losses were not offset by
significant gains on its warrant or equity portfolios. These events caused the
market value of Sirrom common stock to decline dramatically by early September
1998.
In August and September 1998, Sirrom's management engaged in internal
planning and analysis of appropriate strategies for Sirrom in this changed
operating environment. In late September 1998, Sirrom's senior management and
the Sirrom board reviewed the events that had transpired during that summer and
the conclusions drawn from management's internal planning and analysis. In the
course of that review, the Sirrom board discussed with senior management various
alternatives, including strategic business combinations, a large private
placement of equity, sales of non-core business assets and issues associated
with remaining an independent public company. Sirrom determined to take steps
to:
- reduce certain costs by closing offices and reducing personnel;
- strengthen internal procedures to enhance credit quality;
- explore the sale of its non-core operations to increase the amount of
leveragable capital available to support loan origination growth; and
- reinstitute exploration of selling the entire company to a strategic or
financial buyer.
In early October 1998, Sirrom hired another investment bank as an advisor
in the private equity placement process. From October through early December
1998, Sirrom met with private
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equity groups regarding a possible significant private equity investment,
pursued the sale of certain non-core business assets in an effort to raise
capital to fund its operations through 1999 and authorized Goldman Sachs and
Robinson-Humphrey to follow up on the possibility of a strategic combination.
During this time frame, Sirrom executed a confidentiality agreement with a
regional financial institution. Although the parties conducted due diligence,
the regional financial institution determined not to make an acquisition
proposal. Another party expressed initial interest, but then indicated that it
was unwilling to proceed with a transaction so long as the class action
securities litigation was outstanding. This party, which later received
additional information after executing a confidentiality agreement, submitted
proposed transaction documentation to Sirrom's advisors in December. However, no
financial terms were proposed, or, according to that party, could be proposed
before the resolution of the securities litigation. Sirrom was advised by its
counsel that significant regulatory, and consequently timing, issues would be
associated with a transaction with this party. Sirrom also executed a
confidentiality agreement with another national financial institution that
expressed an interest in contributing a portfolio of mezzanine loans to Sirrom
in exchange for a significant minority investment. After further discussions
between Sirrom and this institution, Sirrom determined to pursue the sale of the
entire company and to defer further negotiations and detailed due diligence with
this party pending negotiations with FINOVA.
In November 1998, Sirrom pursued the sale of non-core assets, particularly
its Tandem Capital portfolio. On December 4, 1998, Sirrom signed a definitive
agreement to sell the Tandem Capital portfolio for $47.5 million. The agreement
provided Sirrom the ability to terminate the agreement by paying liquidated
damages of $1,000,000, plus expenses if paid on or prior to January 4, 1999 and
$1,500,000, plus expenses if paid after January 4, 1999. On January 6, 1999,
after execution of the merger agreement with FINOVA, Sirrom terminated the
agreement and paid the liquidated damages, plus expenses, due under the
agreement.
In early December 1998, FINOVA's financial advisors contacted
Robinson-Humphrey to indicate that FINOVA was interested in again exploring a
possible business combination. In the week that followed, preliminary
discussions took place that included an examination of the strategic
implications of such a business combination, a review of the securities
litigation, and a preliminary review of the cross-selling and other
opportunities this business combination would afford the combined companies and
their borrowers. On December 7, 1998, the Sirrom board met with Goldman Sachs,
Robinson-Humphrey and Sirrom's counsel to review and analyze a preliminary offer
made by FINOVA for the acquisition of Sirrom, the sale of non-core business
assets and other possible strategic alternatives. Management reviewed with the
Sirrom board their discussions with representatives of FINOVA, as well as other
third parties. Following a full discussion of the available strategic
alternatives with input from Goldman Sachs and Robinson-Humphrey and legal
counsel, the Sirrom board authorized the members of Sirrom's senior management
to move forward with the possible FINOVA combination and to keep them informed
of any developments.
On December 8, 1998, representatives of FINOVA and FINOVA's counsel began a
four day on-site due diligence review. Discussions regarding the terms of a
possible business combination continued during this period. On December 15-16,
1998, Sirrom conducted on-site due diligence of FINOVA's business and affairs at
FINOVA's offices. Beginning December 18, 1998 and continuing through the
execution of the merger agreement on January 6, 1999, Sirrom and FINOVA, and
their respective legal advisors, negotiated the terms of a definitive merger
agreement, voting agreement and other ancillary documents. During this period,
there was a series of discussions between the parties concerning, among other
matters, an appropriate exchange ratio for a possible business combination.
During this period, the parties and their legal and financial advisors also
continued their due diligence investigations.
On December 30, 1998, a special meeting of the Sirrom board was held at
which the FINOVA proposal was reviewed and the status of other potential
proposals was discussed. At
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this meeting, Sirrom's senior management, its financial advisors and its legal
advisors described in detail the terms of the FINOVA proposal and the status of
the negotiations and documentation. After discussing the proposal in detail and
considering the relevant legal issues involved, the Sirrom board directed senior
management to continue negotiations with FINOVA.
On January 3, 1999, a special meeting of the Sirrom board was held at which
management provided a summary of the negotiations with FINOVA and the various
rationales and contemplated benefits from the proposed transaction, as well as
an overview of the due diligence review concerning FINOVA. Goldman Sachs and
Robinson-Humphrey orally stated their views that, and described for the Sirrom
board the analysis conducted by each of them in reaching their conclusions that,
as of January 3, 1999, the exchange ratio was fair, from a financial point of
view, to the Sirrom shareholders. Sirrom's legal counsel reviewed the terms of
the merger agreement and advised the Sirrom board with respect to the legal
standards applicable to their consideration of the proposed transaction. The
Sirrom board asked questions of the senior management of Sirrom, and its legal
and financial advisors. Following further discussion, the Sirrom board
unanimously approved the merger agreement, merger and the related withdrawal of
Sirrom's election to be treated as a business development company, declared that
the merger agreement, merger and the related withdrawal of Sirrom's election to
be treated as a business development company were advisable and determined that
the merger was fair to, and in the best interests of, Sirrom and the Sirrom
shareholders.
On January 5, 1999, the merger agreement was approved by FINOVA's board of
directors, and on January 6, 1999, the merger agreement was executed by Sirrom
and FINOVA. The voting agreement was executed by FINOVA, Sirrom Partners and the
members of the Sirrom board and related employment, severance compensation and
consulting agreements and confidentiality, non-competition and non-solicitation
agreements, that were required by the merger agreement, were executed by the
parties to those agreements.
On January 7, 1999, the parties issued a joint press release announcing the
merger.
FINOVA'S REASONS FOR THE MERGER
Merging with Sirrom will provide FINOVA with two complementary product
offerings, a mezzanine lending product and a non-securities oriented mergers and
acquisitions advisory service, both of which could serve to strengthen FINOVA's
relationship with its clients.
FINOVA is often asked to provide mezzanine financing to its clients.
Likewise many of Sirrom's clients require financing products that FINOVA
provides, such as asset-based revolving lines of credit. With many of Sirrom's
clients using revolving credit facilities provided by lenders other than Sirrom
or FINOVA, the cross-selling opportunities between FINOVA and Sirrom look
promising.
The investment banking advisory services offered through Sirrom's
subsidiary, Harris Williams, could also provide FINOVA with promising
cross-selling opportunities. Occasionally some of FINOVA's clients desire to
sell their businesses, and some look to expand their businesses through mergers
and acquisitions. In either situation, Harris Williams could provide those
FINOVA clients with appropriate advisory services.
Sirrom's ability to serve the growing number of small and midsized
businesses seeking mezzanine financing and advisory services has been limited
due to leverage restrictions placed on business development companies, and by
its relatively higher cost of funds. Following the merger, the business
development company restrictions would no longer apply and the cost of funds
should fall, allowing the Sirrom business unit to grow with less concern for
capital constraints. FINOVA also anticipates that lowering Sirrom's cost of
capital should help improve its profitability and competitiveness.
THE FINOVA BOARD UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER.
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SIRROM'S REASONS FOR THE MERGER; RECOMMENDATION OF THE SIRROM BOARD OF DIRECTORS
In determining to recommend approval of the merger and related withdrawal
of Sirrom's election to be treated as a business development company under the
1940 Act, the Sirrom board consulted with Sirrom's management and its financial
advisors, Goldman Sachs and Robinson-Humphrey. The Sirrom board also considered
a number of factors, including the following:
- Sirrom's current business, operations, financial condition, earnings and
prospects, and current economic and market conditions, particularly in
the financial services industry.
- Its evaluation of the financial terms of the merger. The financial terms
include an exchange ratio of 0.1634 shares of FINOVA common stock for
each share of Sirrom common stock, which reflected an 81% premium for the
Sirrom shareholders based on the closing price of Sirrom common stock on
December 31, 1998, the last trading day before January 3, 1999, the day
the merger was approved by the Sirrom board.
- Its knowledge and review of the financial condition and prospects of
FINOVA, and its belief that the merger will provide Sirrom with access to
capital at a lower cost, because of FINOVA's investment grade credit
rating.
- The risks associated with Sirrom continuing as an independent entity,
including its need for additional equity capital for continued growth,
its dependence on a single lender for debt capital, the leverage
constraints of operating as a business development company, the
likelihood that it would be highly dependent on continued strong equity
market performance to recognize substantial gains on its equity
portfolio, and the risk that in an adverse economic environment the
credit quality of Sirrom's loan portfolio could deteriorate.
- The opportunity for Sirrom, if no longer a business development company,
to be able to increase its leverage and thereby fund the growth of its
loan portfolio at a greater rate than would be available if it continued
as a business development company.
- The likelihood that to fund its capital needs as an independent entity,
Sirrom would be required to discontinue its status as an RIC under the
Internal Revenue Code, and would therefore permanently discontinue
payment of dividends at historic levels if it remained independent.
- The complementary nature of Sirrom's and FINOVA's businesses, including a
similar target market of borrowers and similar growth objectives.
- FINOVA's substantially higher market capitalization should provide
enhanced liquidity for Sirrom shareholders.
- The expectation that the merger will result in synergies for the two
companies' operations. These synergies include giving Sirrom access to
FINOVA's distribution network and marketing processes, as well as
cross-selling between the two companies, which could enable Sirrom's
lending to grow beyond its current market.
- The nonfinancial terms of the merger, including that FINOVA intends to
operate Sirrom as a separate business unit within the FINOVA corporate
group.
- The presentations by Goldman Sachs and Robinson-Humphrey regarding the
merger, and the opinion of those firms that the exchange ratio is fair,
from a financial point of view, to the Sirrom shareholders. These
opinions are described below. See "-- Opinions of Sirrom's Financial
Advisors."
- The opportunity for Sirrom shareholders to participate, as holders of
FINOVA common stock, in a larger and more diversified company through the
merger, which is designed to be largely tax-free to the Sirrom
shareholders.
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The Sirrom board also considered possible disadvantages of the merger,
including:
- the Sirrom shareholders' inability to fully recognize Sirrom's portfolio
performance in the marketplace after the merger; and
- Sirrom's shareholders will be subject to the risks of FINOVA's other
businesses after the merger.
This list of factors contains some of the factors considered by the Sirrom
board. In view of the large variety of factors and amount of information that
the Sirrom board considered, the Sirrom board did not believe it practical to
assign relative weights to each factor. The Sirrom board determined to recommend
the merger, merger agreement and related withdrawal of Sirrom's election to be
treated as a business development company after considering all of the factors
as a whole. In addition, individual members of the Sirrom board may have given
different weights to different factors. For a discussion of the interests of
certain Sirrom officers and directors in the merger, see "Interests of Executive
Officers and Directors in the Merger."
THE SIRROM BOARD UNANIMOUSLY APPROVED THE MERGER, MERGER AGREEMENT AND
RELATED WITHDRAWAL OF SIRROM'S ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT
COMPANY UNDER THE 1940 ACT, DECLARED THAT THE MERGER, MERGER AGREEMENT AND
RELATED WITHDRAWAL OF SIRROM'S ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT
COMPANY ARE ADVISABLE AND DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, SIRROM AND THE SIRROM SHAREHOLDERS. ACCORDINGLY, THE SIRROM BOARD
UNANIMOUSLY RECOMMENDS THAT THE SIRROM SHAREHOLDERS VOTE "FOR" APPROVAL AND
ADOPTION OF THE MERGER, MERGER AGREEMENT AND RELATED WITHDRAWAL OF SIRROM'S
ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT COMPANY UNDER THE 1940 ACT.
OPINIONS OF SIRROM'S FINANCIAL ADVISORS
The Sirrom board selected Goldman Sachs as its financial advisor in
connection with the merger because of Goldman Sachs' expertise in the
acquisition of financial institutions, particularly finance companies. The
Sirrom board selected Robinson-Humphrey as its financial advisor because
Robinson-Humphrey has served as Sirrom's investment banker in the past, and has
participated in Sirrom's past equity offerings.
In connection with the merger, Salomon Smith Barney, an affiliate of
Robinson-Humphrey, will receive a fee of approximately $250,000.
Robinson-Humphrey has also acted as an underwriter in connection with Sirrom's
equity offerings and equity offerings in which Sirrom was a selling shareholder
made by some of Sirrom's portfolio companies in the last two years.
The amount of consideration to be paid to Sirrom shareholders in the merger
was determined by Sirrom and FINOVA, through their arms-length negotiations.
Goldman Sachs Opinion
Sirrom. On January 6, 1999, Goldman Sachs delivered its written opinion to
the Sirrom board that as of that date, the exchange ratio under the merger
agreement was fair from a financial point of view to the holders of Sirrom
common stock.
APPENDIX B CONTAINS THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS
DATED JANUARY 6, 1999, WHICH IS INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS AND WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION. GOLDMAN
SACHS HAS CONSENTED TO THE REFERENCES TO ITS OPINION IN THIS PROXY
STATEMENT/PROSPECTUS AND TO THE INCLUSION OF ITS OPINION IN APPENDIX B OF THIS
DOCUMENT. IN GIVING ITS CONSENT, GOLDMAN SACHS DOES NOT ADMIT THAT IT COMES
WITHIN THE CATEGORY OF PERSONS WHOSE CONSENT IS REQUIRED UNDER SECTION 7 OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE RELATED SEC
RULES AND REGULATIONS. THE OPINION WAS PROVIDED TO THE SIRROM BOARD FOR ITS
INFORMATION, IS DIRECTED ONLY
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TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO HOLDERS
OF SIRROM COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF
SIRROM COMMON STOCK AS TO HOW THAT SHAREHOLDER SHOULD VOTE AT THE SPECIAL
MEETING WITH RESPECT TO THE MERGER OR ANY OTHER MATTER RELATED TO THE MERGER.
THIS DESCRIPTION OF THE OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
APPENDIX B. SHAREHOLDERS OF SIRROM ARE URGED TO, AND SHOULD, READ THE OPINION IN
ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- the Annual Reports to Shareholders and Annual Reports on Form 10-K of
Sirrom and FINOVA for the three and four years ended December 31, 1997,
respectively;
- certain interim reports to shareholders and Quarterly Reports on Form
10-Q of Sirrom and FINOVA;
- other communications from Sirrom and FINOVA to their respective
shareholders; and
- internal financial analyses and forecasts for Sirrom prepared by its
management.
Goldman Sachs also held discussions with members of the senior management of
Sirrom and FINOVA regarding the strategic rationale for, and the potential
benefits of, the transactions contemplated by the merger agreement and the past
and current business operations, financial condition and future prospects of
their respective companies. In addition, Goldman Sachs reviewed the reported
price and trading activity for shares of Sirrom common stock and FINOVA common
stock, compared certain financial and stock market information for Sirrom and
FINOVA with similar information for other companies, the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the commercial finance industry specifically and in other
industries generally and performed other studies and analyses it considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy and
completeness for purposes of rendering its opinion. In that regard, Goldman
Sachs has assumed, with the consent of the Sirrom board, that the internal
financial forecasts prepared by the management of Sirrom have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of Sirrom. FINOVA did not make available in writing to Goldman Sachs
either financial statements dated after September 30, 1998, or projections or
forecasts of expected future performance. Accordingly, Goldman Sachs' review
with respect to such information was limited to discussions with senior
management of FINOVA of their estimates of financial performance for the fourth
quarter of 1998 and fiscal 1999 and 2000 and the estimates of research analysts
for those periods. Goldman Sachs is not an expert in the evaluation of loan
portfolios for purposes of assessing the adequacy of allowances for losses with
respect to loan portfolios and has assumed, with the consent of the Sirrom
board, that such allowances for FINOVA are in the aggregate adequate to cover
such losses. In addition, Goldman Sachs has not reviewed individual credit files
nor has it made an independent evaluation or appraisal of the assets and
liabilities of Sirrom or FINOVA or any of their subsidiaries, and Goldman Sachs
has not received any such evaluation or appraisal.
Goldman Sachs has provided its advisory services and its opinion for the
information and assistance of the Sirrom board in connection with its
consideration of the transaction contemplated by the merger agreement. The
opinion does not constitute a recommendation as to how any holder of Sirrom
common stock should vote on the transaction.
The following is a summary of the material financial analyses that Goldman
Sachs used to provide its written opinion to the Sirrom board on January 6,
1999.
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- Historical Stock Trading Analysis. Goldman Sachs reviewed the historical
trading prices and volumes for Sirrom common stock. Goldman Sachs also
analyzed the consideration that holders of Sirrom common stock would
receive under the merger agreement in relation to the market price of
Sirrom common stock as of December 31, 1998. This analysis indicated that
the price per share of Sirrom common stock to be paid pursuant to the
merger agreement represented a premium of 81% based on the market price
of $4.88 per share of Sirrom common stock.
- Selected Companies Analysis. Goldman Sachs reviewed and compared certain
financial information for Sirrom to corresponding financial information,
ratios and public market multiples for the following six large
capitalization, publicly traded, commercial financial companies:
- Associates First Capital Corporation;
- Newcourt Credit Group Inc.;
- The CIT Group, Inc.;
- Comdisco, Inc.;
- FINOVA; and
- Heller Financial, Inc.;
and the following seven middle-sized capitalization, publicly traded,
commercial financial companies:
- HealthCare Financial Partners, Inc.;
- UniCapital Corporation;
- Financial Federal Corporation;
- DVI, Inc.;
- First Sierra Financial, Inc.;
- T&W Financial Corporation; and
- LINC Capital, Inc.
These selected companies were chosen because they are publicly traded companies
with operations that may be considered similar to Sirrom for analysis purposes.
Goldman Sachs calculated and compared various financial multiples and ratios.
The multiples of Sirrom were calculated using a price based on an exchange ratio
of 0.1634 FINOVA shares per share of Sirrom common stock and $53.94 per share of
FINOVA common stock (the closing per share price of FINOVA common stock on the
NYSE on December 31, 1998). The multiples and ratios for Sirrom were based on
information provided by Sirrom's management. The multiples for each of the
selected companies were based on the most recent publicly available information.
For these selected companies, Goldman Sachs considered estimated calendar
year 1998 and 1999 price/earnings ratios, based on the latest median estimates
provided by the Institutional Brokers Estimate System ("IBES"). For calendar
year 1998, these estimated ratios ranged from 15.2x to 26.2x (with a median of
18.3x) for the first group of companies listed, and from 5.5x to 23.1x (with a
median of 13.1x) for the second group of companies listed. For calendar year
1999, these estimated ratios ranged from 13.2x to 20.7x (with a median of 15.8x)
for the first group of companies listed, and from 3.3x to 18.4x (with a median
of 10.3x) for the second group of companies listed. The comparable estimated
ratios for Sirrom were 7.5x for calendar 1998 and 8.2x for calendar 1999.
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Goldman Sachs also considered the price to stated book value ratios, which
ranged from 1.73x to 4.21x (with a median of 2.29x) for the first group of
companies listed and from 0.52x to 2.98x (with a median of 1.60x) for the second
group of companies listed, compared to 1.05x (assuming a post-tax projected
write-off) and 1.13x (assuming a pre-tax projected write-off) for Sirrom.
Additionally, the price to tangible book value ratios ranged from 1.83x to 5.87x
(with a median of 3.52x) for the first group of companies listed and from 1.30x
to 3.33x (with a median of 1.89x) for the second group of companies listed,
compared to 1.05x (assuming a post-tax projected write-off) and 1.13x (assuming
a pre-tax projected write-off) for Sirrom.
Goldman Sachs also considered the premium to managed accounts receivables,
which ranged from 9.3% to 49.5% (with a median of 21.2%) for the first group of
companies listed and from 10.0% to 67.9% (with a median of 31.7%) for the second
group of companies listed, compared to 2.5% (assuming a post-tax projected
write-off) and 6.6% (assuming a pre-tax projected write-off) for Sirrom.
- Sensitivity Analysis. Goldman Sachs performed a net present value
sensitivity analysis using Sirrom's management projections. Goldman Sachs
calculated Sirrom's terminal values in the year 2001 based on multiples
ranging from 4.0x to 20.0x. These terminal values were then discounted to
present value using discount rates from 10% to 20%. This analysis
produced implied values ranging from $2.12 to $13.76 per share of Sirrom
common stock.
- Selected Transactions Analysis. Goldman Sachs analyzed certain
information for selected transactions in the commercial finance industry
since 1993. This analysis indicated that, for the selected transactions,
the aggregate consideration as a multiple of (a) the latest twelve months
("LTM") net income of the target company ranged from 10.9x to 34.5x (with
a median of 14.3x) as compared to a negative LTM net income multiple for
the aggregate consideration to be paid in the merger and (b) common
equity of the target company ranged from 1.1x to 4.9x (with a median of
2.2x) as compared to 1.05x (assuming a post-tax projected write-off) and
1.13x (assuming a pre-tax projected write-off) for the aggregate
consideration to be paid in the merger. This analysis also indicated, for
the selected transactions, that the aggregate consideration represented a
premium to managed receivables ranging from 2% to 74% (with a median of
14%), as compared to 2.5% (assuming a post-tax projected write-off) and
6.6% (assuming a pre-tax projected write-off) for the merger.
- Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses of
the financial effect of the merger. Using earnings estimates for Sirrom
prepared by its management and for FINOVA based on certain limited
discussions, referred to above, with FINOVA management for the years 1999
and 2000, Goldman Sachs compared the earnings per share ("EPS") of
Sirrom, on a standalone basis, to the EPS of the combined company on a
pro forma basis. Goldman Sachs performed this analysis based on an
exchange ratio of 0.1634 FINOVA shares per share of Sirrom common stock
and $53.94 per share (the per share price of FINOVA common stock on
December 31, 1998) of FINOVA common stock under the following scenarios,
with each scenario using varying pre-tax synergy estimates of $0.0, $2.5
and $5 million:
- consideration to be paid 100% in stock, 0% in assumption of debt;
- consideration to be paid 75% in stock, 25% in assumption of debt; and
- consideration to be paid 50% in stock, 50% in assumption of debt.
Based on these analyses, the proposed transaction would be accretive to
FINOVA's shareholders on an EPS basis in all of the above scenarios in the
years 1999 and 2000. The accretion ranged from 1.1% to 4.2% for calendar
year 1999, and from 1.2% to 4.9% for calendar year 2000.
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- Contribution Analysis. Based on Sirrom management's consensus financial
forecasts for Sirrom and IBES estimates for FINOVA, Goldman Sachs
reviewed certain historical and estimated future operating and financial
information (including, among other things, net income, book value and
total assets) for Sirrom, FINOVA, and the pro forma combined company. The
analysis indicated that Sirrom shareholders would receive 9.9% of the
outstanding common equity of the pro forma combined company. The analysis
further indicated that Sirrom would contribute: 6.1% to the pro forma
combined assets, 5.4% to the pro forma combined net loans, 0.0% to the
pro forma combined reserves, 3.0% to the pro forma combined debt, 24.5%
to the pro forma combined equity, 12.3% to the pro forma combined 1999
estimated net income and 12.2% to the pro forma combined 2000 estimated
net income.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above, without considering the
analyses as a whole, could create an incomplete view of the processes underlying
Goldman Sachs' opinion. In arriving at its fairness determination, Goldman Sachs
considered the results of all those analyses. No company or transaction used in
the above analyses as a comparison is identical to Sirrom or FINOVA or the
contemplated transaction. The analyses were prepared solely for purposes of
Goldman Sachs' providing its opinion to the Sirrom board as to the fairness, as
of the date of the opinion, of the exchange ratio pursuant to the merger
agreement from a financial point of view to the holders of Sirrom common stock
and are not appraisals or necessarily reflective of the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by those analyses.
The analyses are inherently subject to uncertainty because they are based on
numerous factors or events beyond the control of the parties or their respective
advisors. Therefore, Sirrom, FINOVA, Goldman Sachs and any other person do not
assume responsibility if future results are materially different from those
forecast.
As described above, Goldman Sachs' opinion to the Sirrom board was one of
many factors considered by the Sirrom board in determining to approve the merger
agreement. The foregoing summary is not a complete description of the analyses
performed by Goldman Sachs and is qualified by reference to the written opinion
of Goldman Sachs set forth in Appendix B hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with Sirrom because it acted as its financial advisor in connection
with, and participated in certain of the negotiations leading to, the merger
agreement. Goldman Sachs has also provided certain investment banking services
to FINOVA and its subsidiaries from time to time, including recently acting as
lead manager of the $25 million medium term note offering in August 1998 and as
co-manager of the $300 million 6.250% note offering in October 1998. Goldman
Sachs may provide investment banking services to FINOVA in the future. Goldman
Sachs is a full service securities firm and may from time to time effect
transactions, for its own account or the account of customers, and hold
positions in securities or options on securities of Sirrom and FINOVA.
Under a letter agreement dated May 5, 1998, Sirrom engaged Goldman Sachs to
act as its financial advisor in connection with the contemplated transaction.
Sirrom paid an initial fee of $250,000 upon the execution of the letter
agreement. Under the terms of the letter agreement, Sirrom agreed that if at
least 50% of the outstanding shares of Sirrom common stock or the assets of
Sirrom (based on book value) are acquired in one or a series of transactions,
Sirrom will pay Goldman Sachs, upon consummation of each transaction, an
additional transaction fee determined by a formula set forth in the letter
agreement. Based upon the average of the last
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sales prices for FINOVA common stock on the five trading days ending March 1,
1999 of $51.4125, the additional transaction fee would be approximately $1.77
million. Sirrom has also agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorneys' fees, and to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.
Robinson-Humphrey Opinion
The Sirrom board retained Robinson-Humphrey to advise it with respect to
the fairness to the Sirrom shareholders, from a financial point of view, of the
exchange ratio. Robinson-Humphrey is a nationally recognized investment banking
firm and was selected by Sirrom's board based on Robinson-Humphrey's experience
and expertise. As part of its investment banking business, Robinson-Humphrey is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.
At the January 3, 1999, meeting of the Sirrom board, Robinson-Humphrey
delivered its oral opinion and subsequently on January 6, 1999, delivered its
written opinion that, based upon and subject to various considerations set forth
in that opinion, as of January 6, 1999, the exchange ratio agreed to in the
proposed transaction was fair to the Sirrom shareholders from a financial point
of view. No limitations were imposed by the Sirrom board upon Robinson-Humphrey
about the investigations made or the procedures followed by Robinson-Humphrey in
rendering its opinion. All references below to Robinson-Humphrey's opinion refer
to Robinson-Humphrey's written opinion dated January 6, 1999, unless otherwise
indicated.
The full text of the opinion of Robinson-Humphrey, which sets forth the
assumptions made, matters considered and limits on the review undertaken,
appears as Appendix C to this proxy statement/prospectus and is incorporated
into this document by reference. Sirrom shareholders are urged to read all of
that opinion carefully. Robinson-Humphrey's opinion describes only the fairness
of the proposed exchange ratio from a financial point of view, is intended
solely for the use and benefit of the Sirrom board and is not a recommendation
to any Sirrom shareholder as to how such shareholder should vote. The summary of
the opinion of Robinson-Humphrey set forth in this proxy statement/prospectus is
qualified in its entirety by references to the full text of such opinion.
In arriving at its opinion, Robinson-Humphrey reviewed and analyzed (1) the
merger agreement, (2) relevant publicly available information concerning Sirrom
and FINOVA, (3) financial and operating information of the business, operations
and prospects of Sirrom and FINOVA furnished by Sirrom and FINOVA, (4) trading
histories of Sirrom common stock and FINOVA common stock, (5) a comparison of
the historical financial results and present financial condition of Sirrom and
FINOVA with those of other companies which were deemed relevant, (6) publicly
available projected financial information on FINOVA and projected financial
information provided by Sirrom management with respect to Sirrom, (7) a
comparison of the financial terms of the merger with the terms of certain other
relevant recent transactions, and (8) historical data relating to percentage
premiums paid in acquisitions of publicly traded companies. In addition,
Robinson-Humphrey has had discussions with the management of Sirrom and FINOVA
about their businesses, operations, assets, present condition and future
prospects, and undertook such other studies, analyses and investigations, as
were deemed appropriate.
Robinson-Humphrey has assumed and relied upon the accuracy and completeness
of the financial and other information used in arriving at its opinion without
independent verification. With respect to the future financial performance of
FINOVA, Robinson-Humphrey was directed by Sirrom to rely on publicly available
estimates of research analysts and, with Sirrom's knowledge, Robinson-Humphrey
has assumed that such estimates are a reasonable basis upon which to
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evaluate the future financial performance of FINOVA, and that FINOVA will
perform substantially in accordance with such estimates. In arriving at its
opinion, Robinson-Humphrey has not conducted a physical inspection of the
properties and facilities of Sirrom or FINOVA and has not made nor obtained any
evaluations or appraisals of the assets or liabilities of Sirrom or FINOVA.
Sirrom has informed Robinson-Humphrey and Robinson-Humphrey has assumed
that the merger will be recorded using the purchase method of accounting.
Robinson-Humphrey's opinion was necessarily based upon market, economic and
other conditions as they may have existed and could be evaluated as of January
6, 1999. The financial markets in general and the markets for the securities of
Sirrom and FINOVA, in particular, are subject to volatility, and Robinson-
Humphrey's opinion did not address potential developments in the financial
markets or the markets for the securities of Sirrom or FINOVA after that date.
The opinion did not address the underlying business decision of Sirrom to effect
the proposed transaction. Robinson-Humphrey assumed that the proposed
transaction would be consummated on the terms described in the merger agreement,
without any waiver of any material terms or conditions by Sirrom or FINOVA.
In connection with the preparation of its fairness opinion,
Robinson-Humphrey performed certain financial and comparative analyses, the
material portions of which are summarized below. The summary set forth below
includes the financial analyses used by Robinson-Humphrey and deemed to be
material, but is not a complete description of the analyses performed by
Robinson-Humphrey in arriving at its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances. Therefore, such an opinion is not readily susceptible
to partial analysis or summary description. In addition, Robinson-Humphrey
believes that its analyses must be considered as an integrated whole, and
selecting portions of such analyses and the factors considered by it, without
considering all of such analyses and factors, could create a misleading or an
incomplete view of the process underlying its analyses set forth in the opinion.
In performing its analyses, Robinson-Humphrey made numerous assumptions about
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Sirrom or FINOVA. Any estimates
contained in such analyses are not necessarily indicative of actual past or
future results or values, which may be significantly more or less favorable than
as set forth in the analyses. Estimates of values of companies or parts of
companies are not appraisals or necessarily reflect the price at which such
companies or parts may actually be sold, and such estimates are inherently
subject to uncertainty. No public company used as a comparison is identical to
Sirrom or FINOVA. An analysis of the results of such a comparison is not
mathematical; rather, it involves complex considerations and judgements
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
values of companies to which Sirrom and FINOVA are being compared.
The following is a summary of certain analyses performed by
Robinson-Humphrey in connection with rendering its opinion.
- Comparable Public Company Analysis. Robinson-Humphrey compared certain
publicly available financial, operating and market valuation data for
selected public companies in the investment company industry to the
corresponding data for Sirrom. Robinson-Humphrey also compared certain
publicly available financial, operating and market valuation data for
Sirrom to the corresponding data for the proposed exchange ratio.
Robinson-Humphrey considered the following public investment company
firms:
- Allied Capital Corporation,
- American Capital Strategies, Ltd.,
- Bando McGlocklin Capital Corporation,
- DVI, Inc.,
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- Financial Federal Corporation,
- First Sierra Financial, Inc.,
- Linc Capital, Inc.,
- PMC Capital, Inc.,
- T & W Financial Corporation, and
- UniCapital Corporation.
Robinson-Humphrey calculated various financial ratios and valuation multiples
based upon the closing prices of the common stock of the comparable companies as
of December 31, 1998 and the most recent publicly available information for the
various companies. The following valuation ratios were used in determining
ranges of implied equity values of Sirrom:
- price per share to 1998 and 1999 EPS estimates as reported by industry
analysts,
- price per share to book value per share and
- 1999 price/earnings ratio to five-year anticipated growth rates as
reported by industry analysts.
Robinson-Humphrey applied these multiples to Sirrom's 1998 and 1999 net income
projections prepared by Robinson-Humphrey's research department and Sirrom's
management, to Sirrom's five-year anticipated growth rate as reported by
industry analysts and to Sirrom's book value as of September 30, 1998, and an
adjusted book value for Sirrom assuming certain loan write-downs. Using the
listed multiples, Robinson-Humphrey calculated implied equity values per fully-
diluted share ranging from $6.43 to $15.99. Robinson-Humphrey then calculated
the average implied equity values per fully-diluted share. The average implied
equity value per fully-diluted share was $10.18 using all the valuation methods
discussed above. The average implied equity value per fully-diluted share was
$6.99 using only the earnings multiples. Finally, the average implied equity
value per fully-diluted share was $6.62 using the future earnings multiples
only.
- Analysis of Selected Mergers and Acquisitions. Robinson-Humphrey
reviewed and compared the consideration paid in 13 selected mergers and
acquisitions in the specialty finance industry with transaction values
ranging from $100 million to $500 million since January 1995, including:
- Norwest Corp.'s acquisition of Foothill Group, Inc.,
- H&R Block's acquisition of Option One Mortgage Company,
- First Charter Corp.'s acquisition of HFNC Financial Corporation,
- AMRESCO, Inc.'s acquisition of Mortgage Investors Corporation and
various other acquisitions involving specialty finance targets.
Robinson-Humphrey compared transaction equity value to most recent book value
and LTM net income. Robinson-Humphrey then applied the resulting transaction
multiples to Sirrom's book value, adjusted book value assuming certain loan
write-downs and LTM net income as of September 30, 1998. Robinson-Humphrey
derived implied equity values per fully-diluted share using the average
multiples from mergers and acquisitions involving the selected targets.
Robinson-Humphrey computed implied equity values per fully-diluted share ranging
from $9.95 to $17.15 using these specialty finance multiples. Robinson-Humphrey
then calculated average implied equity values per fully-diluted share. The
average implied equity value per fully-diluted share was $13.94.
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- Acquisition Premiums Analysis. Robinson-Humphrey analyzed the premiums
paid for 13 recent mergers and acquisitions of specialty finance
companies with transaction values in the range of $100 million to $500
million that were announced between January 1, 1995 and December 22,
1998. The average premiums paid over the targets' stock prices four weeks
before the announcement date, one week before the announcement date and
one day before the announcement date were 32.8%, 18.6% and 21.5%,
respectively. Robinson-Humphrey applied the premium to Sirrom's stock
price as of November 25, 1998 (four weeks before the originally proposed
announcement date of December 23, 1998), December 16, 1998 (one week
before the proposed announcement date) and December 22, 1998 (one day
before the proposed announcement date). The implied per share values
based on the average percent premium paid compared to four weeks, one
week and one day before the announcement date applied to Sirrom's stock
price on the corresponding dates listed above were $6.57, $5.53 and
$4.98, respectively.
- Net Present Value Analysis. Robinson-Humphrey performed a net present
value calculation using Sirrom management's financial projections to
estimate the net present value of Sirrom's common stock.
Robinson-Humphrey calculated a range of net present values of Sirrom's
share price as of December 31, 2001 using discount rates ranging from 15%
to 20% and multiples ranging from 10x to 12x projected net income for
2001. Using these methodologies, Robinson-Humphrey arrived at an
indicated range of net present value per share of Sirrom common stock
from $5.48 to $7.47 with an average of $6.42.
- Pro Forma Merger Analysis. Robinson-Humphrey reviewed certain pro forma
financial effects on FINOVA resulting from the proposed transaction for
the projected fiscal years ending December 31, 1999 and 2000. At Sirrom's
direction, Robinson-Humphrey performed this analysis using projections
for 1999 and 2000 provided by a consensus of Wall Street analysts and
Sirrom management for FINOVA and Sirrom. This analysis was based upon
certain assumptions, including that the projections provided to
Robinson-Humphrey by the management of Sirrom and the estimates for
FINOVA were reasonably accurate. Robinson-Humphrey assumed $4 million in
pre-tax synergies resulting from the transaction in 1999 and $10 million
in pre-tax synergies resulting from the transaction in 2000. Sirrom's
management agreed on these synergies estimates. Using both the analysts'
projections for FINOVA and the managements' projections for Sirrom, in
each of the years analyzed, the proposed transaction would be accretive
to FINOVA's projected earnings per share. Robinson-Humphrey assumed that
the proposed transaction would be accounted for under the purchase method
of accounting.
- Information Concerning Sirrom Services' Financial Advisor. In the past,
Robinson-Humphrey has been engaged by Sirrom as an underwriter, private
placement agent and financial advisor and has received customary fees for
its services. In the ordinary course of Robinson-Humphrey's business,
Robinson-Humphrey and its affiliates actively trade in Sirrom's common
stock for their own accounts and for the accounts of their customers and,
accordingly, may at any time hold a long or a short position in such
securities.
Pursuant to a letter agreement dated December 4, 1998, Sirrom engaged
Robinson-Humphrey to provide investment banking advice and services to Sirrom in
connection with Sirrom's review and analysis of a potential business combination
involving Sirrom and FINOVA. If the purchase of more than 50% of the outstanding
common stock or the assets, based on the book value, of Sirrom was accomplished
by FINOVA in one or a series of transactions, including, but not limited to,
private or open market purchases of stock, a tender offer, a merger or a sale by
Sirrom of its stock or assets, Sirrom agreed to pay Robinson-Humphrey a fee of:
- 0.47% of the aggregate consideration paid in such transaction or
transactions of the amount of aggregate consideration which is less than
or equal to $11.00 times the number of outstanding shares of Sirrom's
common stock on a fully-diluted basis, plus
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- 0.60% of the amount by which the aggregate consideration exceeds $11.00
times those outstanding shares, but is less than or equal to $13.00 times
those outstanding shares, plus
- 1.25% of the amount by which the aggregate consideration paid exceeds
$13.00 times those outstanding shares.
Robinson-Humphrey also agreed to undertake as part of the services rendered
under this letter agreement, a study to enable Robinson-Humphrey to render an
opinion as to the fairness of the financial consideration to be received by the
Sirrom shareholders or Sirrom, as the case may be, in connection with the sale
of more than 50% of the outstanding common stock of Sirrom. Pursuant to the
letter agreement, Sirrom has agreed to reimburse Robinson-Humphrey for
reasonable expenses incurred by Robinson-Humphrey, including fees and
disbursements of counsel, and to indemnify Robinson-Humphrey against certain
liabilities in connection with its engagement.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary discloses some of the federal income tax consequences
of the merger. The summary is based upon the Internal Revenue Code, applicable
Treasury regulations and administrative rulings and judicial authority as of the
date of this document. All of the foregoing are subject to change, possibly with
retroactive effect, and the change could affect the continuing validity of the
discussion. The discussion assumes that Sirrom shareholders hold their shares as
capital assets. Further, the discussion does not address the tax consequences
that may be relevant to a particular Sirrom shareholder subject to special
treatment under federal income tax laws, like dealers in securities, traders in
securities that elect to use a mark-to-market method of accounting, non-United
States persons, tax-exempt organizations, Sirrom shareholders who acquired
shares of Sirrom common stock through the exercise of options, grants of
performance shares under Sirrom's equity-based compensation plans or otherwise
as compensation or through a tax-qualified retirement plan, or shareholders that
hold Sirrom common stock as part of a straddle or conversion transaction. The
discussion does not address any consequences arising under the laws of any
state, locality or foreign jurisdiction.
Bass, Berry & Sims PLC, tax counsel to Sirrom, will deliver an opinion to
Sirrom dated the closing date to the effect that the merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. Morgan, Lewis & Bockius, LLP, tax counsel
for FINOVA, will deliver an opinion to FINOVA dated the closing date to the
effect that the merger will be treated for United States federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
The opinions of Bass, Berry & Sims PLC and Morgan, Lewis & Bockius LLP are based
on various assumptions and on certain factual representations of FINOVA, Sirrom
and FINOVA Newco and are not binding on the IRS or on any court. Accordingly, no
assurance can be given that the IRS will not challenge the opinions of Bass,
Berry & Sims PLC or Morgan, Lewis & Bockius, LLP or that any such challenge
would not be successful.
Tax Consequences to Sirrom Shareholders
Sirrom shareholders will not recognize income, gain or loss upon the
receipt of FINOVA common stock in exchange for their shares of Sirrom common
stock pursuant to the merger. The aggregate tax basis of the shares of FINOVA
common stock received by Sirrom shareholders, including any fractional share of
FINOVA common stock for which cash is received, will be the same as the tax
basis of the shares of Sirrom common stock exchanged for the FINOVA common
stock. The holding period of the shares of FINOVA common stock received by
Sirrom shareholders will include the holding period of Sirrom common stock
exchanged for the FINOVA common stock. Cash received by a shareholder of Sirrom
in lieu of a fractional share of FINOVA
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common stock will be treated as received in exchange for the fractional
interest, and gain or loss will be recognized in an amount equal to the
difference between the amount of cash received and the portion of the
shareholder's adjusted tax basis in the shares of Sirrom common stock allocated
to such fractional share. This gain or loss generally will be treated as capital
gain or loss if the shareholder holds its Sirrom common stock as a capital asset
at the effective time.
Because FINOVA is not an RIC under subchapter M of the Internal Revenue
Code, Sirrom shareholders should not anticipate receiving a dividend each year
of investment company taxable income as has been the case with Sirrom common
stock. Instead, see the discussion of dividends on page 9.
Tax Consequences to Sirrom, FINOVA and FINOVA Newco
No income, gain or loss will be recognized by any of Sirrom, FINOVA and
FINOVA Newco in connection with the merger. Under the merger agreement, from
January 1, 1999 until the effective time, Sirrom will operate as if it were not
an RIC for federal income tax purposes, except to the extent necessary to
maintain its status as an RIC for the year ended December 31, 1998 and to avoid
federal excise tax for any period ending on or before December 31, 1998. Sirrom
shareholders should not anticipate receiving a dividend in 1999 of investment
company taxable income. Furthermore, because Sirrom will no longer be an RIC for
tax periods beginning after the effective time, Sirrom will become subject to
federal income tax on its corporate level income as a C corporation.
THE DISCUSSION ABOVE DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, YOU ARE
URGED TO CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
YOU OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE
APPLICABILITY AND THE EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX
LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
REQUIRED REGULATORY FILINGS AND APPROVALS
Antitrust
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
and its related rules, (the "HSR Act"), the merger cannot be completed until the
Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") have received notifications and
required information and specified waiting periods have expired. FINOVA and
Sirrom filed notification and report forms under the HSR Act with the FTC and
the Antitrust Division on February 5, 1999, and the waiting period under the HSR
Act expired on February 18, 1999.
At any time before or after completion of the merger, the Antitrust
Division or the FTC or any state could take any action under the antitrust laws
as it deems necessary or desirable in the public interest. The actions could
include seeking to enjoin the completion of the merger or seeking divestiture of
substantial assets of FINOVA or Sirrom. These actions also could include seeking
to enjoin the completion of the merger or seeking divestiture of Sirrom or
businesses of FINOVA or Sirrom by FINOVA. Private parties may also seek to take
legal action under the antitrust laws under certain circumstances.
Filings Required Under the 1940 Act
Under the 1940 Act and the related rules, Sirrom will file a withdrawal of
its election to be regulated as a business development company. The withdrawal
of this election requires prior approval by the Sirrom shareholders and is
effective upon filing. In addition, SII and SFC will file with the Securities
and Exchange Commission ("SEC") an application pursuant to the 1940 Act
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requesting an SEC order declaring that each entity has ceased to be an
investment company under the 1940 Act. Receipt of this order is a condition to
the merger.
Small Business Administration
SII is licensed as a small business investment company by the SBA. Under
the Small Business Investment Act of 1958, as amended (the "SBIA"), and the
rules and regulations under the SBIA (the "SBA Regulations"), SII must obtain
the SBA's approval before consummating the merger. An informal request for
approval has been made. We expect to file for formal approval during the first
week of March 1999.
BIDCO
Sirrom is licensed as a business and industrial development company by the
Tennessee Department of Financial Institutions. Under the Tennessee BIDCO Act,
as amended, and the related rules, Sirrom must obtain the approval of the
Tennessee Commissioner of Financial Institutions before completing the merger.
The commissioner will approve the merger if he finds that:
- the merger will be on a sound financial basis for FINOVA;
- it is reasonable to believe that FINOVA will comply with the Tennessee
BIDCO Act when the merger is completed; and
- the merger will not have a detrimental impact on competition in providing
financing assistance to business firms.
A formal request for this approval was made on January 28, 1999.
RESALE OF FINOVA COMMON STOCK; RESTRICTIONS ON SIRROM AFFILIATES
FINOVA common stock received in the merger will be freely transferrable,
except for shares of FINOVA common stock received by any "affiliate" of Sirrom
prior to the merger under SEC Rule 145. Affiliate shares will not be
transferrable except in compliance with the Securities Act. The term "affiliate"
is defined in the Securities Act and generally includes directors, certain
executive officers and beneficial owners of 10% or more of a class of capital
stock. This proxy statement/prospectus does not cover sales of FINOVA common
stock by any person deemed an affiliate.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
When the merger becomes effective, Sirrom will operate as a wholly owned
subsidiary of FINOVA, and will continue its corporate existence under the laws
of the State of Tennessee. The FINOVA board and the FINOVA officers will remain
unchanged after the merger. The Sirrom shareholders will become shareholders of
FINOVA, and their rights as shareholders will be governed by the FINOVA
certificate of incorporation (the "FINOVA Certificate"), the FINOVA bylaws (the
"FINOVA Bylaws") and the laws of the State of Delaware. See "Comparison of
Rights of Sirrom Shareholders and FINOVA Shareholders."
After the merger, FINOVA may cause Sirrom to be merged with and into FINOVA
Capital or cause Sirrom to be a wholly owned subsidiary of FINOVA Capital. If
either event occurs, Sirrom would become part of FINOVA Capital.
NO APPRAISAL RIGHTS
Sirrom shareholders are not entitled to any appraisal rights under the TBCA
because Sirrom common stock is listed on the NYSE.
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ACCOUNTING TREATMENT
FINOVA will account for the merger under the purchase method of accounting
under GAAP. Under the purchase method of accounting, the purchase price for
Sirrom will be allocated to the assets acquired and liabilities assumed based
upon their estimated fair values. The excess purchase consideration, if any,
will be allocated to goodwill.
PUBLIC TRADING MARKETS
Sirrom common stock is currently listed on the NYSE under the symbol "SIR."
Upon completion of the merger, Sirrom common stock will be delisted from the
NYSE and deregistered under the Exchange Act. FINOVA common stock currently is
listed on the NYSE under the symbol "FNV." FINOVA will apply to list the shares
of FINOVA common stock to be issued in the merger on the NYSE. The authorization
for listing on the NYSE upon official notice of issuance of the shares of FINOVA
common stock issuable to Sirrom shareholders under the merger agreement is a
condition to the completion of the merger. See "The Merger Agreement --
Conditions of the Merger."
VOTING AGREEMENT
Voting and Proxies
As an inducement and condition to the willingness of FINOVA to enter into
the merger, each of the directors of Sirrom, in their capacity as shareholders,
and Sirrom Partners, entered into a voting agreement with FINOVA. Under the
voting agreement, each shareholder agreed to vote all of his or its shares of
Sirrom common stock in favor of:
- the adoption of the merger agreement and the approval of the merger; and
- the approval of any other transactions contemplated by the merger
agreement.
and against
- any other merger agreement or merger, consolidation, combination, sale of
substantial assets, reorganization, recapitalization, dissolution,
liquidation or winding up of or by Sirrom;
- any other acquisition proposal made by a third party; and
- any amendment to the Sirrom Charter or Sirrom Bylaws or any other
transaction or proposal that would in any way impede, frustrate, prevent
or nullify the merger agreement with FINOVA or any other transaction
contemplated by the merger agreement.
Each signing shareholder also granted certain officers of FINOVA an irrevocable
proxy coupled with an interest to vote his or its shares for and against these
same proposals.
On January 6, 1999, the date of the voting agreement, these shareholders
collectively held 5,421,958 shares, representing approximately 14.6% of the
combined voting power of the outstanding capital stock of Sirrom (6,847,037
shares, or 17.71%, including vested and unvested options). Together, these
shareholders are able to significantly influence the vote on the approval and
adoption of the merger agreement and the transactions contemplated thereby.
Prohibited Actions
Pursuant to the voting agreement, each signing shareholder agreed not to
initiate or solicit any inquiries or the making of any proposal that would
constitute or could lead to an acquisition proposal or participate in any
discussions or negotiations regarding an acquisition proposal. The voting
agreement does not prohibit a signing shareholder from soliciting, facilitating
or
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participating in any discussions in his capacity as an officer or director of
Sirrom as permitted by the merger agreement.
Each signing shareholder also agreed not to:
- sell, assign, transfer, pledge or otherwise dispose of any of his or its
shares, except to any sibling or immediate family member if the sibling
or family member agrees to be bound by the voting agreement;
- enter into any contract, option or other arrangement to sell, transfer,
pledge or otherwise dispose of his or its shares;
- enter into any other voting arrangement whether by proxy, agreement or
trust; or
- take any other action that would restrict, limit or interfere with his or
its obligation under the voting agreement.
Termination
The voting agreement will terminate upon the earliest to occur of the
closing of the merger or termination of the merger agreement. However, if the
merger agreement is terminated by FINOVA because (1) Sirrom breaches any of its
representations, warranties or covenants under the merger agreement, (2)
Sirrom's board withdraws or modifies its recommendation of the merger agreement
or (3) Sirrom's shareholders fail to approve the merger and an acquisition
proposal by a third party has been made prior to the termination, then the
voting agreement will terminate upon the earliest of four months following the
termination or the date on which FINOVA receives the termination fee.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the Sirrom board to vote in favor of
the merger, merger agreement and the related withdrawal of Sirrom's election to
be treated as a business development company, you should be aware that certain
officers of Sirrom, including some officers who are also directors, have
interests in the merger that are different from, or in addition to, your
interests generally. Two executive officers of Sirrom, George M. Miller, II, and
Christopher H. Williams, were also members of the Sirrom board when the Sirrom
board approved the merger.
CONFIDENTIALITY, NON-COMPETITION AND NON-SOLICITATION AGREEMENTS AND SEVERANCE
COMPENSATION AND CONSULTING AGREEMENTS
As a condition to FINOVA's and FINOVA Newco's obligations to effect the
merger, three executive officers of Sirrom, George M. Miller, II, David M.
Traversi and Carl W. Stratton have entered into Confidentiality, Non-Competition
and Non-Solicitation Agreements, more commonly referred to as the
non-competition agreements. Two of the officers, Messrs. Traversi and Stratton,
also entered into Severance Compensation and Consulting Agreements, more
commonly referred to as the severance agreements.
Under the non-competition agreements, each officer will be restricted, for
a term of three years from the effective time of the merger, from any
involvement with a business that primarily provides loans, convertible debt and
equity linked debt and other financing of a type commonly referred to as
mezzanine loans ranging from $500,000 to $10,000,000. Each officer may, however,
be involved with entities whose primary business does not involve making
mezzanine loans, so long as the officer refrains from involvement in the
entity's mezzanine loan business. The terms of the non-competition agreements
also require that each officer refrain, for a period of three years from the
effective time of the merger, from soliciting any entity that had been a
portfolio company of Sirrom at the effective time, or two years before the
effective time, or
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whose identity as a potential customer of Sirrom was known by the officer at the
effective time. Each officer is also required under the non-competition
agreements to retain in confidence any and all confidential, non-public
information pertaining to Sirrom and its business. Finally, each officer agreed
that for a period of three years from the effective time of the merger, he would
not attempt to hire or offer employment, or induce any other person to hire or
offer employment, to any Sirrom employee who is employed by FINOVA after the
effective time. In consideration for the non-competition agreements Messrs.
Miller, Traversi and Stratton will receive payments from Sirrom at the effective
time in the amounts of $4.5 million, $2.475 million and $2.3 million,
respectively.
Messrs. Traversi and Stratton have also entered into severance agreements
with Sirrom under which the executives' employment with Sirrom will be
terminated at the effective time. Notwithstanding the executives' termination,
each executive agreed to assist FINOVA and Sirrom in the transition associated
with the merger. Mr. Stratton also agreed to provide consulting services to
Sirrom for a period of three months following the effective time of the merger
in consideration for a consulting fee of $300,000.
In consideration for entering into the severance agreements, Messrs.
Traversi and Stratton will receive payments from Sirrom at the effective time in
the amounts of $275,000 and $300,000, respectively. For 1998, Sirrom paid salary
and bonus to Messrs. Traversi and Stratton of $475,000 and $300,399,
respectively. The severance agreements also provide that any excise tax payable
by each officer under Section 4999 of the Internal Revenue Code and all excise
taxes and federal, state and local income taxes related to the payment of the
excise tax will be paid by FINOVA.
SIRROM STOCK OPTIONS
The merger agreement provides that, at the effective time, each outstanding
and unexercised option to purchase Sirrom common stock will be assumed by FINOVA
and converted into an option to purchase shares of FINOVA common stock on the
same terms as are in effect for the original option, adjusted as follows. FINOVA
will issue options to purchase shares of FINOVA common stock equal to the
original number of options to purchase shares of Sirrom common stock multiplied
by the exchange ratio. The exercise price per share subject to each option will
be the original exercise price divided by the exchange ratio.
Under the existing terms of all of the Sirrom stock option plans, each
option to purchase Sirrom common stock will become fully vested and exercisable
at the effective time. Any option not exercised will be assumed and converted
into an immediately exercisable option to purchase FINOVA common stock on the
terms described above. In addition, the one-year sale restriction from the date
of grant that applies to repriced options will cease to apply when the merger is
completed.
Caution: If an option holder exercised incentive stock options and sold the
underlying shares sooner than two years from the original grant date or one year
from the exercise date, incentive stock options would lose their beneficial tax
status for the holder.
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The following table sets forth information on the number of vested options
and the acceleration of exercisability of options for each of the executive
officers of Sirrom and all executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF VALUE AT
NUMBER OF UNVESTED WEIGHTED FEBRUARY 26, 1999
VESTED SIRROM OPTIONS AT AVERAGE OF ALL SIRROM
SIRROM FEBRUARY 26, 1999 EXERCISE PRICE PER OPTIONS
OPTIONS AT WHICH BECOME SHARE OF VESTED EXERCISABLE
FEBRUARY 26, EXERCISABLE AT THE AND UNVESTED AT EFFECTIVE
1999 EFFECTIVE TIME SIRROM OPTIONS TIME(1)
------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
George M. Miller, II...... 424,528 800,152 $3.5625 $4,362,921
David M. Traversi......... 155,000 227,500 3.5625 1,362,656
David M. Resha............ 140,000 75,000 3.5625 765,938
Carl W. Stratton.......... 118,000 77,500 3.5625 696,469
Christopher H. Williams... -- -- -- --
H. Hiter Harris, III...... -- -- -- --
All executive officers as
a Group (6 persons)..... 837,528 1,180,152 $3.5625 $7,187,984
</TABLE>
- -------------------------
(1) Value is based upon the closing sale price for Sirrom common stock on the
NYSE on February 26, 1999, less the weighted average exercise price per
share of vested and unvested Sirrom stock options. For a more recent quote
of the closing sale price of Sirrom common stock, see "Market Price and
Dividend Information."
Each director of Sirrom was granted options to purchase Sirrom common stock
in June 1998 with an exercise price of $23.625 per share. As a result of the
merger, the vesting of these options will accelerate.
EMPLOYMENT AGREEMENTS WITH HARRIS WILLIAMS EMPLOYEES
As a condition to FINOVA's and FINOVA Newco's obligations to effect the
merger, five officers, the "executives," of Harris Williams have entered into
three year employment agreements with Sirrom, as the surviving corporation in
the merger, and Harris Williams. One of the Harris Williams executives,
Christopher H. Williams, is an executive officer and director of Sirrom. Another
Harris Williams executive, H. Hiter Harris, III, is an executive officer of
Sirrom. The employment agreements become effective at the effective time of the
merger. The obligations of Sirrom and Harris Williams under the employment
agreements have been guaranteed by FINOVA. The Harris Williams employment
agreements provide for payment of a base salary, a bonus payment based on annual
revenues, subject to a minimum, certain benefits as may generally be offered to
other employees with similar responsibilities and performance, and options to
purchase shares of FINOVA common stock. The merger agreement and the employment
agreements contain certain understandings among FINOVA, Sirrom and Harris
Williams about the conduct of Harris Williams' business after the merger.
The Harris Williams employment agreements restrict each executive from
competing with Harris Williams during the term of the agreement and for a period
of one year after termination of employment. The executives are also restricted
from soliciting any employees or current or actively solicited customers of
Harris Williams for a period ending on the later of one year after consummation
of the merger or one year after termination of the executive's employment with
Harris Williams. Additionally, the employment agreements restrict the executive
from disclosing any non-public confidential information regarding FINOVA or any
of its subsidiaries or their businesses. The executive's non-competition
obligation for a period of one year after termination
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of employment is conditioned upon the payment of a specified non-competition
payment for the one year term. The Harris Williams employment agreements also
provide for the implementation of a retention plan in the amount of
approximately $6.5 million, which will be paid to and divided among certain
Harris Williams employees, including the executives, in three consecutive annual
installments beginning with the first anniversary of the consummation of the
merger.
The term of each employment agreement will commence on the date of the
effective time of the merger and continue until the earliest of:
- three years from that date;
- the date of termination of the employee's employment due to a default by
Harris Williams or Sirrom or termination of the executive's employment
without cause;
- termination by Harris Williams for cause;
- resignation by the executive; or
- the executive's death or disability.
If the executive's employment is terminated due to a default by Harris
Williams or Sirrom or termination of the executive's employment without cause,
then the executive generally is entitled to receive payment in an amount equal
to the base salary and minimum bonus the executive would have received over the
full three year period of the employment agreement and all amounts to which the
executive would have been entitled under the retention plan. If the executive's
employment is terminated due to the executive's resignation, the executive
generally is entitled to be paid his or her salary and pro rated bonus to the
date of termination and any vested amounts the executive is entitled to receive
under the retention plan. If the executive's employment is terminated due to his
or her death or disability, the executive generally will be paid an amount equal
to one year's aggregate annual compensation, including base salary and minimum
bonus, and all amounts to which the executive would have been entitled under the
retention plan. Under the terms of each of Mr. Williams' and Mr. Harris'
employment agreements, Mr. Williams and Mr. Harris will each receive a minimum
base salary of $325,000, a minimum annual bonus of $325,000, a non-competition
payment of $325,000 upon termination of his employment and a total of $750,000
under the retention plan.
EMPLOYMENT AGREEMENTS WITH SIRROM EMPLOYEES
As a condition to FINOVA's and FINOVA Newco's obligations to effect the
merger, seven officers of Sirrom, including David M. Resha, an executive officer
of Sirrom, entered into employment agreements with Sirrom, as the surviving
corporation, that become effective at the effective time of the merger. The
employment agreements provide for payment of a base salary, a bonus payment
equal to or greater than the bonus earned by the employee in 1998, certain
benefits as may generally be offered to other employees with similar
responsibilities and performance, and options to purchase 500 shares of FINOVA
common stock to be granted by the end of the first quarter following the
effective time of the merger, and annually during the term of the agreement in
the amounts as determined by FINOVA's board committee administering the option
plans.
The employment agreements restrict each employee from competing with
Sirrom. The employees are also restricted from soliciting any employees or
customers of Sirrom for a period ending on the later of one year following
completion of the merger or 18 months following termination of the employee's
employment with Sirrom. The employees are also restricted from disclosing any
non-public confidential information about FINOVA or its subsidiaries or their
businesses.
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The term of each employment agreement will commence at the effective time
and continue until the earliest of:
- one year from that date or, in the case of David M. Resha, two years from
that date;
- the date of termination of the employee's employment due to a default by
Sirrom or termination by Sirrom for cause;
- resignation or retirement by the employee; or
- the employee's death.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the merger agreement, for a period of four years after the effective
time, FINOVA has agreed to, and has agreed to cause Sirrom, as the surviving
corporation, to maintain in effect the current or similar provisions regarding
officer and director indemnification contained in the Sirrom Charter and Sirrom
Bylaws. FINOVA has also agreed to cause Sirrom to indemnify Sirrom's directors
and officers to the maximum extent to which Sirrom is permitted to indemnify
those persons under the Sirrom Charter and Sirrom Bylaws and applicable law.
Additionally, FINOVA has agreed, as of the effective time, to guarantee Sirrom's
indemnification obligations. In addition, if a claim is asserted or made within
the four year period, the foregoing agreement regarding indemnification will be
extended until the final disposition of the claim.
During the period of time that FINOVA is subject to these indemnification
obligations, FINOVA will cause Sirrom, as the surviving corporation in the
merger, to maintain in effect Sirrom's existing directors and officers insurance
policies, or substitute policies that are no less favorable to the directors and
officers than Sirrom's existing policies. FINOVA is not obligated to provide
this insurance coverage to the extent that the cost of the coverage exceeds 150%
of the current cost of the coverage.
At present, there are class action lawsuits against Sirrom alleging various
violations of the federal and state securities laws. In addition to Sirrom, the
following directors and officers are named as defendants: David M. Resha,
Christopher H. Williams, H. Hiter Harris, III, John A. Morris, Jr., M.D., George
M. Miller, II, and Carl W. Stratton. These directors and officers will continue
to benefit from Sirrom's existing director's and officer's insurance policy
which FINOVA has agreed to maintain in accordance with the preceding paragraph.
These directors and officers also will be protected under FINOVA's commitment to
indemnify the directors and officers for a period of four years after the
effective time.
VOTING AGREEMENT
As an inducement and condition to the willingness of FINOVA to enter into
the merger, each of the directors of Sirrom, in their capacity as shareholders,
and Sirrom Partners, entered into a voting agreement with FINOVA. Under this
agreement, the Sirrom directors and Sirrom Partners agreed to vote their Sirrom
common stock for the merger and the related withdrawal of Sirrom's election to
be treated as a business development company under the 1940 Act. See "Proposal
1: The Merger and Related Withdrawal of Sirrom's Election to be Treated as a
Business Development Company -- Voting Agreement" for more information about
this agreement.
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THE MERGER AGREEMENT
The following summarizes the material terms of the merger agreement,
attached as Appendix A. This summary is qualified in its entirety by the merger
agreement. You are urged to read the merger agreement in its entirety for a more
complete description of the terms and conditions of the merger.
THE MERGER -- EFFECTIVE TIME
Following the approval of the merger by the shareholders of Sirrom and the
satisfaction of the other conditions to the merger, Sirrom will become a wholly
owned subsidiary of FINOVA.
If the merger agreement is approved by the Sirrom shareholders, the merger
closing will take place on the first business day after the last of the
conditions is satisfied. Within two business days of the closing, FINOVA and
Sirrom will file a Delaware certificate of merger and Tennessee articles of
merger. The merger will be effective on the date the Delaware certificate of
merger and the Tennessee articles of merger are filed, or on any other date that
is specified in those filings or set by the parties.
CONVERSION OF SHARES
If the merger is closed:
- each share of Sirrom common stock outstanding immediately before the
merger is completed will be converted into 0.1634 shares of FINOVA common
stock, and
- each fractional share of FINOVA common stock will be converted into the
right to receive cash, without interest. The closing price of FINOVA
common stock on the NYSE one business day after the closing date will
determine the amount of cash paid by FINOVA.
The exchange ratio may be slightly increased in three instances. First, if
the effective time is after June 1, 1999. Second, if Sirrom's securities class
action lawsuits are settled for less than $10 million to Sirrom. Third, if
FINOVA elects to increase it due to Sirrom's termination of the merger agreement
because FINOVA's stock price has declined significantly. For a more detailed
discussion of these adjustments, see "Proposal 1: The Merger and Related
Withdrawal of Sirrom's Election to be Treated as a Business Development
Company -- General."
Based on the number of shares of common stock of Sirrom and FINOVA
outstanding on the record date for the shareholders meeting and the exchange
ratio described above, FINOVA will issue approximately 6,083,251 shares of
FINOVA common stock in the merger and Sirrom's existing shareholders will own
approximately 9.79% of FINOVA common stock outstanding after the merger.
REPRESENTATIONS AND WARRANTIES
Mutual Representations and Warranties
To induce the other party to enter into the merger agreement, Sirrom and
FINOVA each made representations to the other regarding the accuracy and
completeness of reports filed with the SEC, financial statements and other
information exchanged during the diligence process. In addition, Sirrom and
FINOVA each made other representations to the other party, which included
representations regarding the following:
- each entity's corporate organization, capital structure, good standing,
powers and authorities;
- each entity having all requisite corporate power and authority to execute
and deliver the merger agreement and consummate the transactions
contemplated by the merger agreement, and the enforceability of the
merger agreement against it;
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- that the merger did not conflict with that entity's governing documents,
cause a breach or default under any of their contracts, and that the
consummation of the merger only required those consents, approvals, and
authorizations specified in the merger agreement;
- that all information to be provided in the Registration Statement filed
on Form S-4 in conjunction with the merger, including this proxy
statement/prospectus would be materially complete and accurate; and
- that each entity has filed and will file prior to the closing all reports
required by the SEC.
Additional Representations and Warranties of Sirrom
Sirrom has made additional representations relating to Sirrom's compliance
with applicable laws, and its business and operations, assets, liabilities and
financial condition. Sirrom has also made representations relating to:
- the level of Sirrom's compliance with Year 2000 issues;
- the validity and enforceability of Sirrom's financing transactions and
financing documents;
- the termination of the Portfolio Purchase Agreement, dated December 4,
1998 between Sirrom and Tandem Capital LLC ("Tandem Capital") to purchase
the Tandem Capital division;
- litigation, including the securities litigation described in a schedule
to the merger agreement; and
- the Sirrom board's unanimous approval and recommendation of the merger
and their receipt of opinions from its financial advisors regarding the
fairness of the merger to the Sirrom shareholders.
CERTAIN COVENANTS
Conduct of Sirrom's Business Before the Merger
Sirrom has agreed that until the merger occurs, unless FINOVA otherwise
consents in writing and except as otherwise expressly contemplated by the merger
agreement or as disclosed in the schedule to the merger agreement provided by
Sirrom, that Sirrom and its subsidiaries will conduct their businesses only in
the ordinary course consistent with past practice and that, among other things:
- Sirrom and its subsidiaries will use their commercially reasonable
efforts to keep their business organizations intact, to keep the services
of their present officers, employees and consultants available and to
preserve their relationships with customers, suppliers, and others with
whom they have significant business relations;
- Sirrom will not amend or propose to amend the Sirrom Charter or Sirrom
Bylaws, or modify its capital structure or affect the number or rights of
any securities outstanding, except under its stock option plan;
- Sirrom will not declare or pay any dividend;
- Sirrom and its subsidiaries will not incur any debt other than under its
current credit facilities;
- Sirrom and its subsidiaries will not make any capital expenditures in
excess of $100,000, in the aggregate, except as may be involved in
ordinary repairs, maintenance or replacement;
- Sirrom and its subsidiaries will not merge with or acquire any other
business;
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<PAGE> 62
- Sirrom and its subsidiaries will not issue, sell or securitize its assets
except under Sirrom's current credit facilities;
- Sirrom and its subsidiaries will not settle any litigation, which would
cost Sirrom more than $10 million, in the aggregate, except in the
ordinary course of business;
- Sirrom and its subsidiaries will not enter into or modify any of their
material contracts or terminate or relinquish any of their material
rights or claims, except in the ordinary course of business or under any
insurance polices;
- Sirrom and its subsidiaries will not restructure or materially change its
investment security portfolios or the way the portfolios are classified
or reported, except in the ordinary course of business;
- Sirrom and its subsidiaries will not purchase any security or create any
loans in the Tandem Capital division or purchase any securities or create
any loans for more than $65 million per quarter in the aggregate or $5
million for any single borrower;
- Sirrom and its subsidiaries will not initiate any litigation or
arbitration proceeding except in the ordinary course of business; revalue
its assets, other than in the ordinary course of business or as required
by GAAP; make any material change to its accounting methods, principles
or practices; or settle any tax liability or file any tax return
inconsistent with past practice or take any tax position or make any
election that is inconsistent with past practice;
- Sirrom and its subsidiaries will not modify their compensation
structures, benefit plans or severance policies, other than to increase
employee salaries in the ordinary course of business;
- Sirrom will use its best efforts to cause the persons listed on its
schedule to the merger agreement to enter into employment/consulting
agreements before the closing date;
- Sirrom will not take or omit to take any action that is likely to result
in a breach of any obligation of Sirrom if the breach would have a
material adverse effect on Sirrom's business;
- Sirrom and its subsidiaries will not take any action that would cause any
of its representations or warranties to become untrue or incorrect;
- Sirrom will not take any action that could reasonably be expected to
adversely affect or delay any governmental or regulatory approvals
required for the merger;
- Sirrom and its subsidiaries will not take any action that would prevent
Sirrom from performing its obligations in the merger agreement, or any
actions that would cause the merger not to be treated as a reorganization
under Section 368(a) of the Internal Revenue Code;
- Sirrom will make sufficient distributions to qualify as an RIC for the
year ended December 31, 1998 and to avoid federal excise taxes for the
years ended October 31, 1998 for capital gain income and December 31,
1998 for ordinary income; and from January 1, 1999 until the closing date
of the merger date, except as necessary to maintain its status as an RIC
for the year ended December 31, 1998 and to avoid federal excise tax,
Sirrom shall operate its affairs as if it were a C corporation for
federal income tax purposes; and
- Sirrom will use its best efforts to cause its accountants to perform the
same activities in connection with the preparation and review of Sirrom's
interim financial statements as they have performed in the past.
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<PAGE> 63
Agreement Not to Solicit Other Offers
Sirrom has agreed that it will not, and it will not authorize or permit any
of its related parties to, initiate, solicit, or encourage or knowingly
facilitate any inquiries or the making of any proposal for a tender or exchange
offer, merger, consolidation or other business combination involving Sirrom and
any of its subsidiaries. Any proposal or offer described in the foregoing
sentence will be referred to as an acquisition proposal. Sirrom also agreed that
it will not, and it will not permit any of its related parties to engage in any
discussion or negotiations concerning an acquisition proposal. Sirrom may,
however, at any time before the Sirrom shareholders have voted to approve the
merger agreement, engage in discussions or negotiations with a third party who
makes an unsolicited bona fide written acquisition proposal, if and only to the
extent that the acquisition proposal is financially superior for the Sirrom
shareholders than the transactions contemplated by the merger agreement and the
third party has demonstrated that the funds necessary for the acquisition
proposal are reasonably likely to be available. Also, the Sirrom board must
conclude in good faith that the action is necessary for it to avoid breaching
its fiduciary duties to the Sirrom shareholders. Before furnishing the
information or entering into discussions or negotiations, Sirrom must receive
from that person an executed confidentiality agreement.
Shareholder's Meeting
Sirrom will call a meeting of its shareholders to be held as promptly as
practicable to vote on the merger and the related withdrawal of Sirrom's
election to be treated as a business development company. Subject to the
discussion above under "-- Agreement Not to Solicit Other Offers," Sirrom has
agreed to:
- recommend to its shareholders adoption and approval of the merger, and
- use all reasonable efforts to solicit from its shareholders proxies in
favor of the merger, subject to the fiduciary duties of the Sirrom board.
Access
Sirrom has agreed to give FINOVA and its authorized representatives access
to its facilities, books and records before the merger is completed. Sirrom and
FINOVA will furnish the other party with all financial and operating data and
other information as the other party may reasonably request.
Indemnification of Directors and Officers
For four years after the merger is completed, FINOVA has agreed to
indemnify the directors and officers of Sirrom to the maximum extent permitted
by the Sirrom Charter, the Sirrom Bylaws and applicable law. FINOVA also has
agreed that the surviving corporation will maintain in effect a policy of
directors' and officers' liability insurance coverage that is not less
advantageous than Sirrom's current policy, subject to FINOVA's right to consent
to increased coverage. Notwithstanding the previous sentence, FINOVA will not be
required to provide coverage if the cost of this coverage exceeds 150% of the
amount of Sirrom's current premiums.
Employees
From and after the closing date of the merger, FINOVA will cause the
surviving corporation to provide benefits to continuing employees of the
surviving corporation and its subsidiaries that in the aggregate are as
favorable as the benefits the employees were entitled to immediately before the
effective time of the merger. Notwithstanding the previous sentence, FINOVA will
not be required to continue any benefit plan or to continue to employ any
continuing employee. Generally, with respect to any welfare benefit plans of
FINOVA in which the continuing
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<PAGE> 64
employees participate after the closing date, FINOVA will waive any limitations
to pre-existing conditions, exclusions and waiting periods, provide each
continuing employee with credit for any co-payments or deductibles paid under
any welfare benefit plans before the closing date and recognize all service of
continuing employees with Sirrom for all welfare benefit purposes, except under
limited circumstances.
Certain Other Covenants
The merger agreement also contains other agreements relating to the conduct
of the parties before the effective time, including those requiring the parties
to use commercially reasonable efforts to:
- take all appropriate actions to consummate these transactions;
- prepare and file any filings required by federal or state securities
laws;
- supply information for this proxy statement/prospectus that is true and
correct in all material respects;
- provide all information necessary for presentations to rating agencies;
- consult with each other before issuing any press releases or making any
public statements about the merger, except for filings required by
governmental entities;
- comply with all legal requirements of the merger and obtain all necessary
consents and approvals;
- use their best efforts to cause the merger to qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code;
- take actions necessary to consummate the transactions contemplated by the
merger agreement if any takeover statute shall apply;
- consult with each other regarding modifications to Sirrom's practices or
policies as may be mutually agreed on and approved by the parties; and
- consult with each other regarding restructuring charges and financial
adjustments to be taken by Sirrom in accordance with GAAP.
Stock Plans
At the effective time of the merger, each outstanding option to purchase
Sirrom common stock will become an option to acquire FINOVA common stock. The
terms and conditions of each new FINOVA option will generally be the same as the
pre-existing Sirrom option which it replaces. The option will be for the same
number of shares of FINOVA common stock as the option holder would have been
entitled to receive in the merger if the holder had exercised the option
immediately before the merger. The exercise price per share of each new FINOVA
option will be the original exercise price divided by the exchange ratio.
As of the record date for the shareholders meeting, options to acquire
5,353,934 shares of Sirrom common stock were outstanding.
Shortly after the merger closes, FINOVA will deliver to the participants in
the Sirrom stock plans notices of the participants' rights under the stock
plans. The grants under those stock plans will continue under the same terms and
conditions.
FINOVA will reserve for issuance a sufficient number of shares of FINOVA
common stock for delivery under the Sirrom stock option plans. Shortly after the
merger closes, FINOVA will file a registration statement on Form S-8 with
respect to the shares of FINOVA common stock subject
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<PAGE> 65
to the options and will use reasonable efforts to maintain the effectiveness of
that registration statement for as long as the options remain outstanding.
CONDITIONS TO OBLIGATIONS TO EFFECT THE MERGER
Sirrom and FINOVA are not required to complete the merger until the
following conditions have been satisfied or waived:
- Approval of the merger by the Sirrom shareholders;
- No restraining order, injunction or other order issued by any court, or
other legal or regulatory restraint or prohibition shall have been issued
and be in effect:
(1) restraining or prohibiting the consummation of the merger;
(2) prohibiting or limiting the ownership, operation or control by
Sirrom, FINOVA or any of their subsidiaries of any portion of the
business or assets of Sirrom, FINOVA or any of their subsidiaries; or
(3) compelling Sirrom, FINOVA or any of their subsidiaries to dispose of,
grant rights in respect of, or hold separate any portion of the
business or assets of Sirrom, FINOVA or any of their subsidiaries.
In addition, no governmental entity will have taken any action which is
in effect and either makes the merger illegal or prohibits the
consummation of the merger;
- No litigation or other proceeding, other than the litigation disclosed in
the merger agreement may be pending or threatened against Sirrom or any
of its subsidiaries that, in the reasonable opinion of FINOVA, would
restrain, invalidate or delay the merger, would impair the ability of
either party to perform its obligations under the merger agreement, or
would prevent FINOVA from realizing, in all material respects, the
economic benefits of the merger agreement that FINOVA currently
anticipates receiving;
- Expiration or termination of any applicable HSR Act waiting period;
- Effectiveness of the Registration Statement; and
- The shares of FINOVA common stock to be issued in the merger will have
been approved for listing on the NYSE.
Sirrom is not required to complete the merger until the following
conditions have been satisfied or waived:
- The representations and warranties of FINOVA set forth in the merger
agreement must be true and correct, in all material respects, as of the
date of the merger agreement and as of the closing of the merger, and
Sirrom must have received a certificate signed on behalf of FINOVA to
that effect;
- FINOVA must have materially performed all obligations required to be
performed by it under the merger agreement at or prior to the closing of
the merger, and Sirrom must have received a certificate signed on behalf
of FINOVA to that effect;
- Sirrom must have received the opinion of Bass, Berry & Sims PLC that the
merger constitutes a reorganization under Section 368(a) of the Internal
Revenue Code, that Sirrom, FINOVA and FINOVA Newco will each be a party
to that reorganization within the meaning of Section 368(b) of the
Internal Revenue Code, and that Sirrom, FINOVA and FINOVA Newco will not
recognize any gain or loss for U.S. federal income tax purposes as a
result of the merger and Sirrom shareholders will not recognize any gain
or loss for U.S. Federal income tax purposes on their exchange of the
Sirrom common stock solely
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for FINOVA common stock pursuant to the merger, except with respect to
cash received in lieu of fractional shares; and
- From the date of the merger agreement through the closing of the merger,
there shall not have occurred a material adverse effect on the business
of FINOVA.
FINOVA is not required to complete the merger until the following
conditions have been satisfied or waived:
- The representations and warranties of Sirrom set forth in the merger
agreement must be true and correct, in all material respects, as of the
date of the merger agreement and as of the closing of the merger, and
FINOVA must have received a certificate signed on behalf of Sirrom to
that effect;
- Sirrom must have materially performed all obligations required to be
performed by it under the merger agreement at or prior to the closing of
the merger, and FINOVA must have received a certificate signed on behalf
of Sirrom to that effect;
- FINOVA must have received the opinion of Morgan, Lewis & Bockius LLP,
counsel to FINOVA, that the merger constitutes a reorganization under
Section 368(a) of the Internal Revenue Code, that Sirrom, FINOVA and
FINOVA Newco will each be a party to that reorganization within the
meaning of Section 368(b) of the Internal Revenue Code, and that Sirrom,
FINOVA and FINOVA Newco will not recognize any gain or loss for U.S.
federal income tax purposes as a result of the merger;
- From the date of the merger agreement through the closing of the merger
there must not have occurred a material adverse effect on the business of
Sirrom;
- There must not be any securities of Sirrom outstanding which, after
consummation of the merger, would be convertible into or exercisable for
securities of the surviving corporation and FINOVA must be satisfied that
all outstanding options and warrants of Sirrom will become options or
warrants solely with respect to FINOVA common stock;
- All material authorizations and approvals or declarations of filings
with, and all expirations of waiting periods imposed by any governmental
body necessary for the consummation of the transactions contemplated by
the merger agreement must have been filed, have occurred or have been
obtained, and all approvals shall be in full force and effect, except for
those that if not obtained, will not materially and adversely affect the
consummation of the merger and the business of Sirrom;
- Sirrom must have obtained the consent or approval of all persons whose
consent or approval is required under any agreement or instrument to
which Sirrom is bound or to which Sirrom's assets or business are subject
or affected to consummate the merger, except those the failure of which
to obtain would not have a material adverse effect on the business of
Sirrom, provided that FINOVA must have received the right to use, and
ownership of, the name Harris Williams;
- FINOVA must have obtained the consent or approval of all persons whose
consent or approval is required under any agreement or instrument to
which FINOVA is bound or to which FINOVA's assets or business are subject
or affected to consummate the merger, except those the failure of which
to obtain would not have a material adverse effect on the business of
FINOVA provided that FINOVA must have obtained the necessary consents
declaring that the merger agreement is not considered a "change of
control" under the employment agreements between Sirrom and Christopher
H. Williams and H. Hiter Harris, III;
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<PAGE> 67
- Employment agreements, severance agreements and confidentiality,
non-competition and non-solicitation agreements must be entered into with
each person listed on the schedule to the merger agreement provided by
Sirrom; and
- Sirrom and Harris Williams must have taken all appropriate action
necessary to terminate their 401(k) retirement and profit sharing plans
and provided for distribution of the assets to the participants of those
plans.
TERMINATION
The merger agreement may be terminated at any time before the closing of
the merger. This termination may occur before or after approval of the merger by
the Sirrom shareholders in the following manner:
- Mutual written consent of both Sirrom and FINOVA;
- By either Sirrom or FINOVA if:
(1) the merger has not been consummated on or before July 15, 1999 (the
right to terminate under this clause is not available to a party
whose failure to fulfill an obligation under the merger agreement is
the cause of the failure of the merger to occur);
(2) an arbitrator or governmental entity has issued a nonappealable final
order or taken any other nonappealable final action permanently
restraining or prohibiting any transaction contemplated by the merger
agreement;
(3) the other party has breached, or failed to comply with, in any
material respect any of its obligations under the merger agreement or
any representation or warranty made by the other party shall have
been incorrect in any material respect when made or shall have since
ceased to be true and correct in any material respect, and such
breach, failure or misrepresentation is not cured within 30 days
after notice of it has been given and these breaches, failures or
misrepresentations, individually or in the aggregate, result or would
reasonably be expected to result in a material adverse effect;
(4) there has been a material adverse effect on the business of the other
party; or
(5) the Sirrom shareholders have not approved the merger as required.
- By FINOVA, if:
(1) Sirrom has breached its representation and warranty regarding the
securities litigation described in a schedule to the merger agreement
provided by Sirrom or has settled or consented to the settlement of
any litigation, if such settlement would cost Sirrom or any of its
subsidiaries, more than $10,000,000, and the settlement was not made
in the ordinary course of business;
(2) Sirrom has failed to consult with FINOVA regarding any financial and
accounting adjustments or FINOVA determines, in its sole discretion,
that Sirrom has failed to make the financial and accounting
adjustments required to be made by Sirrom in accordance with GAAP
prior to the closing date under the merger agreement;
(3) Sirrom's available directors and officers insurance policy, is
revoked, in whole or in part, prior to the effective time and Sirrom
has not procured equivalent substitute insurance satisfactory to
FINOVA;
(4) the Sirrom board has withdrawn or modified in any adverse manner its
recommendation of the merger;
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(5) after Sirrom receives from an outside party a proposal for a merger
or similar transaction and such acquisition proposal has not been
rejected by the Sirrom board or withdrawn, FINOVA requests in writing
that the Sirrom board reconfirm its recommendation of the merger to
the Sirrom shareholders and the Sirrom board fails to do so within 15
business days after it receives FINOVA's request;
(6) the Sirrom board approves or recommends to the Sirrom shareholders
any acquisition of a material portion of its assets or any tender
offer for shares of its capital stock by another entity;
(7) any third party commences a tender offer or exchange offer or a
registration statement is filed for any of the outstanding shares of
Sirrom common stock and the Sirrom board recommends that the Sirrom
shareholders tender their shares in that tender or exchange offer, or
publicly announces its intention to take no position with respect to
that tender or exchange offer; or
(8) the Sirrom board resolves to take any of the above actions.
- By Sirrom at any time during the five day period beginning on the fifth
trading day on the NYSE prior to the date the conditions to completing
the merger have been satisfied if:
(1) the average of the last reported sales prices of FINOVA common stock
on the NYSE for the fifteenth through the fifth trading day before
the date the conditions to completing the merger have been satisfied,
is less than $40.6875; and
(2) the percentage decrease in the closing price of FINOVA common stock
between the date of the merger agreement and the date the average
closing price is determined, is greater than 10% higher than the
decrease in the closing price of the Standard & Poors Financial Index
on the fifth trading day before the date the conditions to completing
the merger have been satisfied, as compared to the date of the merger
agreement.
However, if Sirrom elects to terminate the merger agreement for this
reason, it must give written notice of the election to FINOVA, at which point
FINOVA may elect to increase the exchange ratio. If FINOVA elects to increase
the exchange ratio, the merger agreement will not be terminated and the exchange
ratio will be increased to equal 0.1634 multiplied by the lesser of:
(1) $40.6875, divided by the average of the last reported sales price of
FINOVA common stock on the NYSE for the fifteenth through fifth trading
days before the date the conditions to completing the merger have been
satisfied; or
(2) the percentage decrease in the closing price of the Standard & Poors
Financial Index, plus 10%, divided by the percentage decrease in the
closing price of FINOVA common stock.
EXPENSES AND TERMINATION FEES
Except as described below, all costs and expenses incurred in connection
with the transactions contemplated by the merger agreement will be paid by the
party incurring the expenses, except that FINOVA and Sirrom will share equally
(1) the registration fees payable for the filing of the Registration Statement,
and (2) the printing and mailing expenses incurred for the proxy
statement/prospectus.
If the merger agreement is terminated by either FINOVA or Sirrom due to a
willful breach by the other party, the non-breaching party will be entitled to
liquidated damages equal to all expenses incurred by it in connection with the
negotiation, execution and performance of the
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merger agreement and the transactions contemplated by the merger agreement, not
to exceed $3,000,000.
Sirrom also agreed to pay FINOVA a termination fee of $13.8 million, less
any liquidated damages previously paid, if any of the following occurs:
(1) the merger agreement is terminated by either FINOVA or Sirrom because
the Sirrom shareholders have failed to approve the merger, or by FINOVA
because Sirrom has breached one of its representations, warranties or
covenants and (x) at the time of the termination or before the Sirrom
special meeting an acquisition proposal by another party had been made
and (y) within one year after termination of the merger agreement
Sirrom enters into an agreement for, or consummates, an acquisition
proposal;
(2) FINOVA terminates the merger agreement due to a willful breach by
Sirrom of any of its obligations, representations, or warranties under
the merger agreement and either (x) or (y) above has occurred; or
(3) FINOVA terminates the merger agreement due to the Sirrom board
modifying or amending its recommendation in a manner adverse to FINOVA
or taking any other similar action that would give FINOVA the right to
terminate the merger agreement.
Sirrom's payment of the termination fee or liquidated damages will be the
sole remedy of FINOVA against Sirrom and its related parties for the occurrences
giving rise to that payment. FINOVA's payment of liquidated damages will be the
sole remedy of Sirrom against FINOVA and its related parties for the occurrences
giving rise to that payment.
AMENDMENT AND WAIVER
The merger agreement may be amended at any time before the effective time
by means of a written agreement. After approval by the Sirrom shareholders,
however, no amendment may change the consideration they are to receive or
adversely affect the Sirrom shareholders. The conditions to each of the parties'
obligations to consummate the merger are for the sole benefit of that party and
may be waived by that party in whole or in part to the extent permitted by law.
EXCHANGE OF STOCK CERTIFICATES
Shortly after the effective time, an exchange agent will mail to you a
letter of transmittal and instructions for exchanging your Sirrom common stock
for shares of FINOVA common stock (plus cash in lieu of any fractional shares).
On surrender of a Sirrom stock certificate, if your shares are certificated, to
the exchange agent, together with the executed letter of transmittal, you will
be entitled to receive shares of FINOVA common stock and any cash payable in
lieu of fractional shares of FINOVA. The surrendered Sirrom stock certificates
will promptly be canceled.
No Further Ownership Rights in Sirrom Common Stock
On the closing of the merger, the stock transfer books of Sirrom will be
closed and no further transfers of the shares of Sirrom common stock that were
outstanding prior to the closing of the merger will be made. If shares of Sirrom
common stock are presented to Sirrom after the merger, the certificates will be
canceled and exchanged for shares of FINOVA common stock.
Failure to Exchange
If you do not exchange your shares of Sirrom common stock certificates
within 180 days after the closing of the merger, you will have to contact FINOVA
to exchange your shares of Sirrom common stock for FINOVA common stock and cash
in lieu of fractional shares. Any dividends payable on FINOVA common stock
declared or made after the effective time of the
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merger will also have to be claimed from FINOVA if you exchange your shares of
Sirrom common stock more than 180 days from the effective time of the merger.
No Liability
Sirrom, FINOVA and the exchange agent will not be liable to any shareholder
of Sirrom common stock for any shares of FINOVA common stock (or cash in lieu of
fractional shares) delivered to a public official pursuant to abandoned
property, escheat or similar laws.
Dividends and Distributions
FINOVA will not pay any dividends it has declared or any cash payable in
lieu of fractional shares until the shareholder to which the dividend or cash
payable is due has exchanged the Sirrom shares for shares of FINOVA. Following
surrender of any Sirrom certificate, FINOVA will pay to the shareholder, without
interest, the amount of any dividends declared by FINOVA to which the
shareholder is entitled and any cash payable in lieu of fractional shares of
FINOVA common stock.
Lost Certificates
If your stock certificates of Sirrom are lost, stolen, or destroyed prior
to the closing of the merger, you must make an affidavit of that fact. Also, if
required by FINOVA, you must post a bond in a reasonable amount as determined by
FINOVA, as indemnity against any potential claim regarding the lost
certificates. In exchange for lost, stolen or destroyed stock certificates,
after you have made the affidavit and posted the bond, the exchange agent will
issue to you shares of FINOVA common stock and any cash in lieu of fractional
shares due. The exchange agent will also pay any unpaid dividends and
distributions on shares of FINOVA common stock that are deliverable on the
FINOVA common stock.
YOU SHOULD NOT SEND YOUR SHARE CERTIFICATES UNTIL YOU RECEIVE A TRANSMITTAL
FORM FROM THE EXCHANGE AGENT.
WITHDRAWAL OF ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT COMPANY
Sirrom is a closed-end, non-diversified investment company that elected to
be treated as a business development company under the 1940 Act at the time it
made its initial public offering in February 1995. As a business development
company, Sirrom is subject to some, but not all, of the provisions of the 1940
Act. After the merger, Sirrom will have only one shareholder that is not an
investment company and will no longer be required to register under, or be
subject to the provisions of, the 1940 Act. Therefore, Sirrom will file a notice
with the SEC withdrawing its election to be treated as a business development
company, which will become effective upon filing. Sirrom intends to file the
notice of withdrawal only after shareholder approval has been received and the
merger has been completed.
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INFORMATION CONCERNING OPTION REPRICING
In late September, the Sirrom board addressed the issue of the need to
reprice employee options in an attempt to retain its employees through the
critical transition period that had begun that summer. Most of Sirrom's
employees receive a significant portion of their compensation through the
issuance of stock options. In late September, all outstanding options were
significantly under water, meaning that the fair market value of Sirrom common
stock was significantly less than the exercise price. As a result, the options
offered these employees no economic incentive to continue their employment. In
addition, none of these employees were subject to employment or non-compete
agreements to ensure that they would remain with Sirrom. After reviewing these
issues in detail and conferring with outside compensation consultants, the board
approved the repricing of all employee options. The exercise price of the new
options was set at the higher of the closing price on September 25, 1998, the
date of Sirrom's press release, and October 5, 1998. These options required the
employee to forfeit 15% of the shares granted under the previously issued
options and are restricted from being exercised and sold, absent a change of
control, for a period of one year from issuance. If the merger is completed, it
will constitute a change in control, thereby terminating this one year sale
restriction.
The following table sets forth certain information regarding the repricing
of options to purchase Sirrom common stock held by Sirrom's executive officers.
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
OPTION
NUMBER OF MARKET PRICE TERM
SECURITIES OF STOCK EXERCISE PRICE REMAINING
UNDERLYING AT TIME AT TIME AT DATE OF
OPTIONS OF REPRICING OF REPRICING NEW REPRICING
REPRICED OR OR OR EXERCISE OR
NAME DATE AMENDED (#) AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT
---- --------------- ----------- ------------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
George M. Miller, II... October 1, 1998 180,000 $3.43750 $ 5.50000 $3.56250 77 mos.
George M. Miller, II... October 1, 1998 74,056 3.43750 9.25000 3.56250 86 mos.
George M. Miller, II... October 1, 1998 31,572 3.43750 9.31250 3.56250 89 mos.
George M. Miller, II... October 1, 1998 48,056 3.43750 9.31250 3.56250 89 mos.
George M. Miller, II... October 1, 1998 380,996 3.43750 15.00000 3.56250 96 mos.
George M. Miller, II... October 1, 1998 510,000 3.43750 23.87500 3.56250 108 mos.
David M. Traversi...... October 1, 1998 85,000 3.43750 13.96875 3.56250 103 mos.
David M. Traversi...... October 1, 1998 297,500 3.43750 13.96875 3.56250 103 mos.
David M. Resha......... October 1, 1998 172,500 3.43750 6.75000 3.56250 82 mos.
David M. Resha......... October 1, 1998 42,500 3.43750 17.00000 3.56250 107 mos.
Carl W. Stratton....... October 1, 1998 85,000 3.43750 11.62500 3.56250 91 mos.
Carl W. Stratton....... October 1, 1998 42,500 3.43750 15.87500 3.56250 96 mos.
Carl W. Stratton....... October 1, 1998 25,500 3.43750 13.96875 3.56250 103 mos.
Carl W. Stratton....... October 1, 1998 42,500 3.43750 18.75000 3.56250 108 mos.
</TABLE>
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<PAGE> 72
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
SIRROM
Of the 75,000,000 shares of Sirrom common stock authorized, there are
37,229,196 shares of Sirrom common stock outstanding and approximately 230
holders of record as of February 26, 1999. Sirrom has no other class of
securities outstanding. The following table sets forth certain ownership
information as of February 26, 1999 if the Sirrom common stock for each current
director, the five most highly compensated officers, the executive officers and
directors as a group and those persons who directly or indirectly own, control
or hold with the power to vote, 5% or more of the outstanding Sirrom common
stock. Unless otherwise indicated, all shares are owned beneficially and of
record by each shareholder.
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF PERCENTAGE OF
SIRROM PERCENTAGE OF FINOVA OUTSTANDING
COMMON OUTSTANDING COMMON SHARES OF
STOCK OWNED SHARES OF SIRROM STOCK OWNED FINOVA
BEFORE THE COMMON STOCK AFTER THE COMMON STOCK
NAME AND ADDRESS MERGER(1) BEFORE THE MERGER MERGER(2) AFTER THE MERGER
---------------- ------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
The FINOVA Group Inc. ....... 5,421,958(3) 14.6% N/A N/A%
1850 North Central Avenue
P.O. Box 2209
Phoenix, AZ 85002-2209
John A. Morris, Jr., M.D. ... 4,118,408(4) 11.1 672,948 1.1
243 Medical Center South
2100 Pierce Avenue
Nashville, TN 37212
SAFECO Asset Management
Company.................... 6,611,300(5) 17.8 1,080,286 1.7
SAFECO Place
Seattle, WA 98185
Sirrom Partners, L.P. ....... 3,402,296 9.1 555,935 *
500 Church Street Suite 200
Nashville, TN 37219
E. Townes Duncan............. 4,400 * 719 *
William D. Eberle............ 27,000 * 4,412 *
H. Hiter Harris, III......... 602,958 1.6 98,523 *
Edward J. Mathias............ 152,660(6) * 24,945 *
Robert A. McCabe, Jr......... 12,600 * 2,059 *
George M. Miller, II......... 1,630,829(7) 4.2 266,477 *
Raymond H. Pirtle, Jr........ 73,456 * 12,003 *
David M. Resha............... 215,200(8) * 35,164 *
Carl W. Stratton............. 199,885(9) * 32,661 *
Keith M. Thompson............ 51,000(10) * 8,333 *
David M. Traversi............ 417,500(11) 1.1 68,220 *
Christopher H. Williams...... 609,358 1.6 99,569 *
</TABLE>
62
<PAGE> 73
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF PERCENTAGE OF
SIRROM PERCENTAGE OF FINOVA OUTSTANDING
COMMON OUTSTANDING COMMON SHARES OF
STOCK OWNED SHARES OF SIRROM STOCK OWNED FINOVA
BEFORE THE COMMON STOCK AFTER THE COMMON STOCK
NAME AND ADDRESS MERGER(1) BEFORE THE MERGER MERGER(2) AFTER THE MERGER
---------------- ------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
L. Edward Wilson, P.E........ 143,327(12) * 23,420 *
Executive officers and
directors, as a group (13
persons)................... 8,258,581(13) 20.9 1,349,452 2.2
</TABLE>
- -------------------------
* Less than one percent.
(1) Pursuant to the rules of the SEC, shares of Sirrom common stock subject to
options held by directors and executive officers of Sirrom that are
exercisable within 60 days of February 26, 1999 are deemed outstanding for
the purposes of computing the director's or executive officer's beneficial
ownership and the beneficial ownership of all executive officers and
directors as a group.
(2) Assumes an unadjusted exchange ratio of 0.1634.
(3) Under the voting agreement by and among FINOVA and the Sirrom shareholders
listed below, FINOVA has the power to vote or restrict the disposition of
6,847,037 shares of Sirrom common stock, or 17.71%, of which 5,421,958 are
beneficially owned, not including vested options. The Sirrom shareholders
who are parties to the voting agreement include: E. Townes Duncan, William
D. Eberle, Edward J. Mathias, Robert A. McCabe, Jr., George M. Miller, II,
John A. Morris, Jr., M.D., Sirrom Partners, Raymond H. Pirtle, Jr., Keith
M. Thompson, Christopher H. Williams, and L. Edward Wilson. This
information is based on information included in a Schedule 13D filed with
the SEC on January 19, 1999.
(4) Includes 3,402,296 shares owned of record by Sirrom Partners, L.P., a
limited partnership owned by Dr. Morris and his family, and 716,112 shares
owned of record by Sirrom, Ltd., a limited partnership whose general
partner is All Scarlet, Inc., a corporation owned 50% by Dr. Morris and 50%
by Alfred H. Morris, the brother of Dr. Morris. Dr. Morris has shared
voting power and shared investment power for all of these shares.
(5) SAFECO Asset Management Company is an advisor to registered investment
companies, including SAFECO Common Stock Trust, that owns 5,184,100 of the
shares listed above. SAFECO Asset Management Company has shared voting
power and dipositive power over these shares and disclaims beneficial
ownership. This information is based on the information included in a
Schedule 13G/A filed with the SEC on February 10, 1999.
(6) Includes 66,330 shares owned by Mr. Mathias' spouse and 2,000 shares owned
by his daughter.
(7) Includes 1,224,680 shares issuable pursuant to certain stock options
granted to Mr. Miller. An option for the purchase of 510,000 shares is
exercisable as to 102,000 shares and to an additional 102,000 shares on
October 10, 1999 and each October 10th thereafter. An option for the
purchase of 380,996 shares is exercisable as to 179,292 shares and to an
additional 67,235 shares on October 1, 1999 and each October 1st
thereafter. An option for the purchase of 48,056 shares is exercisable as
to 14,787 shares and to an additional 11,090 shares on February 1, 1999 and
each February 1st thereafter. An option for the purchase of 31,572 shares
is exercisable as to 13,572 shares and to an additional 6,000 shares on
February 1, 1999 and each February 1st thereafter. An option for the
purchase of 74,056 shares is exercisable as to 39,877 shares and to an
additional 17,090 shares on December 15, 1999 and each December 15th
thereafter. An option for the purchase of 180,000 shares is exercisable as
to 75,000 shares and to an additional 105,000 shares on August 1, 1999.
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<PAGE> 74
(8) Includes 215,000 shares issuable pursuant to certain stock options granted
to Mr. Resha. An option for the purchase of 172,500 shares is exercisable
as to 110,000 shares and to an additional 31,250 shares on July 5, 1999 and
each July 5th thereafter. An option for the purchase of 42,500 shares is
exercisable as to 30,000 shares and to an additional 6,250 shares on July
5, 1999 and each July 5th thereafter.
(9) Includes 195,500 shares issuable pursuant to certain stock options granted
to Mr. Stratton. An option for the purchase of 25,500 shares is exercisable
as to 18,000 shares and to an additional 3,750 shares on October 1, 1999
and each October 1st thereafter. An option for the purchase of 42,500
shares is exercisable as to 30,000 shares and to an additional 6,250 shares
on October 1, 1999 and each October 1st thereafter. Another option for the
purchase of 42,500 shares is exercisable as to 30,000 shares and to an
additional 6,250 shares on October 1, 1999 and each October 1st thereafter.
An option for the purchase of 85,000 shares is exercisable as to 40,000
shares and to an additional 15,000 shares on April 8, 1999 and each April
8th thereafter.
(10) Includes 28,000 shares owned by Mr. Thompson's wife, as to which Mr.
Thompson disclaims beneficial ownership.
(11) Includes 382,500 shares issuable pursuant to certain stock options granted
to Mr. Traversi. An option for the purchase of 297,500 shares is
exercisable as to 70,000 shares and to an additional 56,875 shares on April
1, 1999 and each April 1st thereafter. An option for the purchase of 85,000
shares is fully exercisable.
(12) Includes 78,328 shares owned by the L.E. and Mary Lou Wilson Revocable
Living Trust, of which Mr. Wilson is a trustee, 3,600 shares owned by Mr.
Wilson's wife, and 10,400 shares owned by the L.E. Wilson, Sr. Unified
Trust of which Mr. Wilson is the trustee. This amount does not include
4,500 shares owned by the Estate of L.E. Wilson, Sr., of which Mr. Wilson
is the attorney-in-fact, and Mr. Wilson disclaims beneficial ownership of
such shares.
(13) Includes the shares issuable pursuant to the options described in footnotes
(7), (8), (9) and (11).
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<PAGE> 75
FINOVA
Of the 100,000,000 shares of FINOVA common stock authorized, there were
approximately 56,045,000 shares of FINOVA common stock outstanding and
approximately 22,200 holders of record as of February 26, 1999. FINOVA has no
other class of securities outstanding. The following table sets forth certain
ownership information as of February 26, 1999 of the FINOVA common stock for
each current director and named executive officer, the executive officers and
directors as a group and those persons who directly or indirectly own, control
or hold with the power to vote, 5% or more of the outstanding FINOVA common
stock. Unless otherwise indicated, all shares are owned beneficially and of
record by each shareholder.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF OUTSTANDING
AMOUNT AND FINOVA SHARES OF
NATURE OF PERCENTAGE COMMON STOCK FINOVA
BENEFICIAL OF OWNED AFTER COMMON
OWNERSHIP OUTSTANDING THE MERGER STOCK AFTER
NAME AND ADDRESS POSITION(S) (3)(4)(5) SHARES (3)(4)(5) THE MERGER
---------------- --------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Iridian Asset Management LLC
and affiliates............... 3,842,000(1) 6.88% 3,842,000 6.18%
276 Post Road West
Westport, CT 06880-4704
Putnam Investments, Inc. and
affiliates................... 3,260,603(1) 5.83% 3,260,603 5.25%
One Post Office Square
Boston, MA 02109
American Express............... 2,815,000(1) 5.03% 2,815,000 4.53%
IDS Tower 10
Minneapolis, MN 55440
Robert H. Clark, Jr............ Director 39,636(2) * 39,636 *
Constance R. Curran............ Director 4,000 * 4,000 *
G. Robert Durham............... Director 28,588 * 28,588 *
Samuel L. Eichenfield.......... Chairman, 919,415 1.64% 919,415 1.48%
President and
Chief Executive
Officer
James L. Johnson............... Director 22,000 * 22,000 *
Kenneth R. Smith............... Director 31,088 * 31,088 *
Shoshana B. Tancer............. Director 21,685 * 21,685 *
John W. Teets.................. Director 130,867 * 130,867 *
William J. Hallinan............ Senior Vice 146,265 * 146,265 *
President --
General Counsel
and Secretary
Jack Fields III................ Executive Vice 88,680 * 88,680 *
President --
FINOVA Capital
Corporation
</TABLE>
65
<PAGE> 76
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF OUTSTANDING
AMOUNT AND FINOVA SHARES OF
NATURE OF PERCENTAGE COMMON STOCK FINOVA
BENEFICIAL OF OWNED AFTER COMMON
OWNERSHIP OUTSTANDING THE MERGER STOCK AFTER
NAME AND ADDRESS POSITION(S) (3)(4)(5) SHARES (3)(4)(5) THE MERGER
---------------- --------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Matthew M. Breyne.............. Executive Vice 71,915 * 71,915 *
President --
FINOVA Capital
Corporation
John J. Bonano................. Executive Vice 56,842 * 56,842 *
President --
FINOVA Capital
Corporation
Directors and Executive
Officers, as a group......... 1,964,810 3.51% 1,964,810 3.16%
</TABLE>
- -------------------------
* Less than one percent.
(1) The information is based on reported ownership on the date of SEC filings.
The owners report they hold the shares for themselves and their affiliates,
advisory clients and investors. The entities may disclaim that they
constitute a "group" for purposes of owning these shares.
(2) Includes shares owned by Case Pomeroy & Company, Inc., of which Mr. Clark is
President and Chief Executive Officer, a director and, with members of his
family, a principal shareholder.
(3) Includes shares the director has a right to acquire within 60 days through
the exercise of options: Mr. Clark -- 11,636 shares, Ms. Curran -- 4,000
shares, Mr. Durham -- 18,588 shares, Mr. Johnson -- 3,000 shares, Mr.
Smith -- 24,588 shares, Ms. Tancer -- 19,552 shares, and Mr. Teets -- 22,000
shares.
(4) Includes options to purchase shares that can be exercised within 60 days of
497,714 shares for Mr. Eichenfield, 72,920 shares for Mr. Hallinan, 44,544
shares for Mr. Fields, 28,264 shares for Mr. Breyne, 25,824 shares for Mr.
Bonano, and 917,970 shares for all directors and executive officers as a
group.
(5) Includes performance-based restricted shares owned by those persons, for
which they have voting power but do not yet have dispostive power, in the
amounts of 55,920 shares for Mr. Eichenfield, 9,484 shares for Mr. Hallinan,
11,520 shares for Mr. Fields, 9,984 shares for Mr. Breyne, and 12,984 shares
for Mr. Bonano. The number of shares to be awarded under the PBRS grants may
vary based on FINOVA's stock performance. Reported amounts include all
vested awards and target awards for future vestings. Reported amounts also
include holdings in FINOVA's Savings and Employee Stock Ownership Plans as
of January 31, 1998, according to reports of the plan administrators.
66
<PAGE> 77
INFORMATION REGARDING FINOVA
FINOVA is a financial services holding company. Through its principal
subsidiary, FINOVA Capital, FINOVA provides a broad range of financing and
capital market products. FINOVA concentrates on lending to midsize 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 it 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. FINOVA diversifies its
lending activities geographically and among a range of industries, customers and
loan products.
Due to the diversity of its portfolio, FINOVA 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, fee 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 its 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.
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.
- 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 and inventory
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
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<PAGE> 78
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. Typical transaction
sizes 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. health care industry. Typical
transaction sizes 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.
- 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.
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<PAGE> 79
- 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.
Both FINOVA and FINOVA Capital are Delaware corporations. FINOVA 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. FINOVA believes that it ranks among the largest independent commercial
finance companies in the U.S., based on total assets. FINOVA's common stock is
traded on the NYSE under the symbol "FNV."
FINOVA Capital was incorporated in 1965 and is the successor to a
California corporation that was formed in 1954. All of FINOVA Capital's capital
stock is owned by FINOVA.
FINOVA's principal executive offices are located at 1850 North Central
Avenue, P.O. Box 2209, Phoenix, Arizona 85002-2209. FINOVA's telephone number is
(602) 207-6900. FINOVA also has business development offices throughout the U.S.
and in London, U.K. and Toronto, Canada.
Appendix D contains additional information about FINOVA and its business,
property, management, securities, legal proceedings, financial condition,
operations and other matters. Appendix E contains additional information about
FINOVA's directors and executive officers.
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<PAGE> 80
BUSINESS OF SIRROM
Sirrom was incorporated in Tennessee in November 1994 and is a
non-diversified, closed-end investment company that has elected to be treated as
a business development company under the 1940 Act. Sirrom's principal executive
offices are located at 500 Church Street, Suite 200, Nashville, Tennessee 37219,
and its telephone number is (615) 256-0701. Sirrom's predecessor was organized
in 1991.
BUSINESS
Sirrom is a specialty finance company that primarily makes loans to small
businesses. Sirrom believes the market for small commercial loans is underserved
by traditional lending sources and that competitors generally are burdened with
an overhead and administrative structure that keeps them from effectively
competing in this market. At December 31, 1998, Sirrom had loans outstanding
with a fair value of $477.1 million to 233 companies in a variety of industries
located in 34 states, Washington, D.C., and Canada. The average rate of interest
on these loans was 13.25%. The fair values of Sirrom's loan portfolio at
December 31, 1995, 1996 and 1997 were $144.9 million, $221.5 million and $412
million, respectively. Sirrom's strategic objective is to provide financial and
other services to small and medium sized growth businesses. Sirrom traditionally
has focused and will continue to focus on making loans with equity features to
borrowers that Sirrom believes have the following characteristics: the potential
for growth and a viable exit strategy, experienced management with their net
worth at stake, a favorable industry outlook, adequate liquidity or
sophisticated outside equity investors, sufficient enterprise value and
profitable operations. To develop new lending opportunities, Sirrom markets to a
large referral network comprised of venture capitalists, investment bankers,
attorneys, accountants, other debt providers and business brokers.
Generally, Sirrom's investments are structured as loans that initially
range from $500,000 to $5 million in size. These loans are accompanied by
warrants to acquire equity securities of the borrower. The warrants usually have
a nominal exercise price, for example, $.01 per share. Typically, the borrowers
secure the loan with substantially all their assets. The loans also are
generally senior to the investments of sophisticated equity investors in the
borrowers. The personal guaranty of the borrower's major shareholder or other
collateral support may also be required. The debt securities issued to evidence
Sirrom's loans usually have a fixed interest rate and a five year maturity. In
most cases, the loans are structured to require the payment of interest only on
a monthly basis, with a single payment of principal, at maturity. Sirrom
typically charges borrowers a processing fee of approximately 2.0% to 3.0% of
the amount of each loan. Unlike most lenders, Sirrom does not impose prepayment
penalties on borrowers that repay loans before maturity. Instead, Sirrom's
warrants typically contain a "ratchet" provision that increases Sirrom's equity
position by one to three percentage points per year until all of the loan is
repaid. Although Sirrom's loans provide for a five-year maturity, the warrant
"ratchet" may encourage borrowers to repay loans as soon as possible. Sirrom
benefits from the repayments because of the direct relationship that exists
between Sirrom's ability to generate asset turnover (i.e., redeployment of
capital) and return on equity to shareholders.
To complement its United States operations, Sirrom entered into a joint
venture agreement to make secured loans with warrants to small private companies
located in Canada with The Toronto-Dominion Bank ("TD"). Sirrom has committed to
make up to $100 million Canadian dollars of loans to Canadian companies, and TD
has committed to make $150 million Canadian dollars of loans. The parties have
created a Canadian corporation, SCC Canada Inc. ("SCC Canada"), 60% of which is
owned by TD and 40% of which is owned by Sirrom. SCC Canada, located in Toronto,
Canada, serves as the originator and servicer of loans. In its capacity as
originator, SCC Canada identifies potential loan investments and collects a
processing fee when the loan is funded. SCC Canada also services each loan and
collects a servicing fee from TD and Sirrom. SCC Canada does not have the
ability to contractually bind Sirrom or TD and does not
70
<PAGE> 81
fund the loans with its own capital. The loans themselves are funded directly to
the borrowers from TD and Sirrom, and Sirrom and TD individually approve their
respective loans to each borrower identified by SCC Canada. SCC Canada targets
borrowers that have characteristics similar to Sirrom's U.S. borrowers.
Until October 1998, Sirrom also made debt and preferred stock investments
in public companies under the name Tandem Capital. The target market for these
investments was micro-cap companies with revenues typically ranging from $20
million to $100 million. The typical investment ranged from $3 million to $10
million and was structured to provide a current yield, as well as an equity
component, for example, a loan with warrants, convertible debt, or convertible
preferred stock. The typical investment also was not secured by collateral and
subordinate to existing lenders. Sirrom marketed this product in part through
its existing referral network under the name Tandem Capital, although the
investments were funded by Sirrom. Sirrom did not leverage Tandem's investments
because the relative youth of the portfolio and lack of diversification made it
difficult to obtain debt financing on acceptable terms. Given the capital
constraints experienced by Sirrom at the end of the third quarter of 1998 and
its inability to leverage these assets, in October 1998 Sirrom discontinued
further Tandem Capital originations.
In August 1996, Sirrom acquired Harris Williams. Harris Williams is a
merger and acquisition advisory firm that currently focuses exclusively on
providing advisory services to small and medium sized companies throughout the
United States that are similar in size to Sirrom's portfolio companies. Harris
Williams' clients have included divisions of large companies, portfolio
companies of professional investor groups, and privately owned businesses. The
typical Harris Williams engagement includes a monthly retainer and a success fee
paid only if the transaction closes. The firm has consistently grown since
inception with pre-tax income increasing from $207,000 for the year ended
December 31, 1993 to $3.8 million for the year ended December 31, 1998. The
number of professionals has also increased from two to 30 at the present time.
SELECTION OF LOAN AND INVESTMENT OPPORTUNITIES
Since inception, Sirrom has identified common characteristics of borrowers
that it believes will create a strong small business portfolio. During the
second half of 1998, Sirrom redefined its operating model and its underwriting
criteria in an effort to strengthen its portfolio. Although the criteria listed
below may not be applied in every instance and their importance may vary
depending on the relevant circumstances, these criteria generally are applied in
Sirrom's investment decisions.
Viable Exit Strategy With Adequate Internal Rate of Return
Before making an investment, Sirrom analyzes the potential for the borrower
to repay its loan and experience a liquidity event that would allow Sirrom to
realize a gain on its equity position. Liquidity events include:
- an initial public offering;
- a sale of the borrower;
- a repurchase by the borrower of Sirrom's equity position from cash flow;
or
- a refinancing by a bank or asset-based lender.
Sirrom typically targets at least a 20% internal rate of return on its
investments. Sirrom seeks to achieve this rate of return through a combination
of interest, processing fees and a return on the warrants.
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<PAGE> 82
Professional Management With Net Worth at Stake
Sirrom seeks to identify potential borrowers with experienced management
teams that have a significant ownership interest in the borrower. These
management teams should include a chief executive officer and chief financial
officer who Sirrom believes demonstrate the ability to accomplish the objectives
set forth in the borrower's business plan.
Favorable Industry Outlook
Sirrom focuses on companies in industries which it believes have a
favorable outlook and a relatively high degree of resistance to economic
downturns.
Adequate Liquidity or Sophisticated Equity Investors
Sirrom seeks to invest in companies with sufficient liquidity for the
foreseeable future. In the absence of that, Sirrom requires sophisticated equity
investors whose equity positions are subordinate to the debt securities of
Sirrom. Sirrom believes these investors allow Sirrom to maximize its resources
because they enhance Sirrom's due diligence process and the borrower's financial
sophistication, and typically provide increased controls and a source of
potential additional follow-on capital. The interest and support of
sophisticated equity investors tends to increase Sirrom's confidence in the
borrower, its management team and the potential long-term value of the
borrower's business.
Sufficient Value to Cover Loan
The liquidation value of the borrower, as well as assets securing the
loans, are also typically important components in Sirrom's credit decision.
Valuations include:
- hard assets, like accounts receivable, inventory and property, plant and
equipment;
- intangibles, like customer lists, networks, databases and recurring
revenue streams; and
- enterprise value.
Profitable Operations
Sirrom focuses on portfolio companies with positive earnings from
operations before interest, depreciation and amortization. Sirrom does not
typically lend to start-up companies.
LOAN REPAYMENT; VALUATION AND REALIZATION OF EQUITY INVESTMENTS
When making investments in small businesses, Sirrom intends for the loans
to be repaid within five years and the equity portion of the investments to be
liquidated for cash within five to ten years. If an investment is successful,
the loan has been repaid with interest, and Sirrom may be able to realize a gain
on the corresponding equity security. Although Sirrom expects to dispose of an
equity investment after a certain time, it may hold equity securities for a
longer period. From Sirrom's inception through December 31, 1998, $901 million
of loans have been originated and $220.2 million, or 24.4%, have been repaid.
Each loan Sirrom makes generally has a related five-year warrant to buy
some of the borrower's common stock. These warrants are exercisable at a nominal
price, usually $.01 per share, and typically represent 3% to 15% of a borrower's
common stock outstanding on a fully diluted basis. The warrants are generally
structured to provide both registration rights that entitle Sirrom to sell the
borrower's equity securities in a public offering, and a put option that
requires the borrower to repurchase the warrant after five years at the fair
market value of the shares issuable. As of December 31, 1998, Sirrom had stock
positions in 11 publicly traded companies that had a market value of $3.8
million on that date. Under Sirrom's valuation policy, the securities were
carried at a fair value of $3.4 million at December 31, 1998. In addition, at
that
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date, Sirrom owned common stock and preferred stock investments in 22 non-public
companies and owned non-traded equity interests in 7 public companies with a
fair value of $39.8 million. Sirrom has also converted many equity positions to
cash since inception with gains approximating $64.7 million. At December 31,
1998, Sirrom held warrant positions in 23 public companies that it carried on
its books at a fair value of $4.4 million and warrants in approximately 220
private companies that it carried at a fair value of $35.2 million. The fair
value of Sirrom's loans and investments is determined in good faith by the
Sirrom board under Sirrom's valuation policy. See note 2 of the notes to the
consolidated financial statements attached to this proxy statement/prospectus.
TEMPORARY INVESTMENTS
If any of Sirrom's cash is not invested in the types of securities
described above, Sirrom will invest in one or a combination of the following:
- federal government or agency issued or guaranteed securities that mature
in 15 months or less;
- repurchase agreements with banks whose deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC"), an "insured bank,"
with maturities of seven days or less, the underlying instruments of
which are securities issued or guaranteed by the federal government;
- certificates of deposit in an insured bank with maturities of one year or
less, up to the amount of the deposit insurance;
- deposit accounts in an insured bank subject to related withdrawal
restrictions of one year or less, up to the amount of deposit insurance;
- certificates of deposit or deposit accounts in an insured bank in amounts
in excess of the insured amount if the insured bank is deemed
"well-capitalized" by the FDIC; and
- high quality debt securities maturing in one year or less from the time
of investment in the high quality debt securities.
OPERATIONS
Background
In October 1998, Sirrom implemented its redefined operating model to
increase the human resources allocated to each investment and separate the
origination function from the credit function. Under the revised model,
newly-titled "investment managers" focus primarily on origination, while
portfolio managers focus primarily on underwriting and monitoring of the
portfolio. Investment managers report to a Regional Manager, while portfolio
managers report to the Senior Portfolio Manager. Two Regional Managers and the
Senior Portfolio Manager report to the Chief Operating Officer. Prior to October
1998, a portfolio manager was responsible for the origination, underwriting,
business due diligence, closing and servicing of an investment. All portfolio
managers reported to a Regional Manager who, in turn, reported to the Chief
Operating Officer. Credit decisions were made within that single reporting line
and, depending on the size or nature of the investment, the Loan Approval
Committee or Special Investment Committee.
Marketing
Sirrom is headquartered in Nashville, Tennessee, from which 14 of its 19
investment managers and portfolio managers operate. Sirrom also has a West Coast
office located in San Francisco, California, from which 5 of its investment
managers and portfolio managers operate.
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To originate loans, the investment managers use an extensive referral
network of investment bankers, venture capitalists, attorneys, accountants,
other debt providers and business brokers. An investment manager typically
receives at least ten financing requests per month from these sources.
Loan Approval Process
Sirrom's investment managers identify potential borrowers by reviewing
financing requests and informational packages. After identifying applicants
meeting Sirrom's investment criteria, the investment manager, in conjunction
with a portfolio manager, selects applicants that merit additional
consideration. See "-- Selection of Loan and Investment Opportunities." If after
preliminary investigation and analysis, the investment manager and portfolio
manager conclude that an investment would be attractive, they submit a
non-binding, preliminary term sheet to the prospective borrower. When Sirrom and
the prospective borrower agree on terms, the prospective borrower pays Sirrom a
portion, typically one-half, of Sirrom's processing fee. The investment manager
and portfolio manager then conduct a more thorough investigation and analysis,
referred to as "due diligence," of the applicant. The due diligence process
usually includes on-site visits, review of historical and prospective financial
information, interviews with management, employees, customers and vendors of the
applicant, background checks and research on the applicant's product, service or
particular industry.
When due diligence is finished, the portfolio manager completes a standard
borrower profile that summarizes the borrower's historical financial statements,
its industry and management team, and its conformity to Sirrom's investment
criteria. The portfolio manager and investment manager then present the profile,
along with his or her due diligence findings, to the Regional Manager and Senior
Portfolio Manager. The Regional Manager and Senior Portfolio Manager have the
joint authority to approve new loans and investments aggregating up to $2
million. The loans are then ratified by a Loan Approval Committee presently
comprised of the Chief Operating Officer, Chief Financial Officer and Senior
Portfolio Manager. New loans and investments aggregating between $2 million and
up to and including $3 million must be approved by the Regional Manager, Senior
Portfolio Manager and the Chief Operating Officer, and ratified by the Loan
Approval Committee. New loans and investments aggregating in excess of $3
million must be approved, in advance, by the Loan Approval Committee.
Special Investment Committee
As part of its operating model changes, Sirrom established the Special
Investment Committee in August 1998. This committee separately approves all
additional investments in, and maturity extensions of loans to, existing
portfolio companies. It also reviews valuations and risk ratings of all loans
risk rated 4, 5 or 6 on a monthly basis. The Special Investment Committee is
comprised of the Chief Operating Officer, Chief Financial Officer, Senior
Portfolio Manager and the Senior Special Assets Officer.
Loan Grading
Sirrom has implemented a system to grade all loans on a scale of 1 to 6.
This system is intended to reflect the performance of the borrower's business,
the collateral coverage of the loans and other factors considered relevant.
Loans graded 1 involve the least amount of risk in Sirrom's portfolio, while
loans graded 6 involve an unacceptable level of risk with substantial
probability of loss. For more information regarding Sirrom's loan grading
practices see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Portfolio Turnover and Credit Quality."
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Loan Portfolio
During the year ended December 31, 1998, Sirrom originated loans to 178
companies, including 88 new borrowers, in the aggregate principal amount of
approximately $301.8 million, in various industries. During the same period,
Sirrom realized $5.5 million in net equity gains and realized approximately
$66.9 million in loan and other losses. The following table sets forth the
amount of Sirrom's loans originated and repaid for the periods indicated, as
well as realized gains and realized losses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans originated................. $40,785 $101,505 $131,962 $282,352 $301,765
Loans repaid..................... 7,585 14,414 32,630 67,743 94,931
Loans converted to equity
(net).......................... 2,450 3,806 8,695 7,076(1) 9,027
Realized losses on loans and
other investments.............. 1,155 1,500 2,048 12,771 66,918
Net realized gains on equity
investments.................... 617 3,220 11,511 23,493 5,484
</TABLE>
- -------------------------
(1) Loans converted to equity in 1997 includes $2.1 million of loans converted
into publicly traded securities upon the sale of two portfolio companies to
public companies.
The table below sets forth, as of December 31, 1998, the 34 states and
other locations in which Sirrom's borrowers maintain their principal place of
business, the number of borrowers and the percent of total loan principal
balance outstanding to borrowers located in those states.
<TABLE>
<CAPTION>
% OF TOTAL
LOAN PRINCIPAL BALANCE
STATE OUTSTANDING NUMBER OF BORROWERS
----- ---------------------- -------------------
<S> <C> <C>
Alabama......................................... 0.8% 3
California...................................... 15.7 29
Colorado........................................ 1.8 4
Connecticut..................................... 0.8 2
Florida......................................... 9.2 21
Georgia......................................... 6.6 17
Illinois........................................ 3.1 7
Indiana......................................... 0.8 2
Kansas.......................................... 0.9 2
Kentucky........................................ 3.8 7
Maryland........................................ 2.9 6
Massachusetts................................... 2.5 6
Minnesota....................................... 1.9 3
Missouri........................................ 1.8 2
North Carolina.................................. 4.3 11
New Jersey...................................... 1.1 4
New York........................................ 2.1 5
Ohio............................................ 2.6 8
</TABLE>
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<TABLE>
<CAPTION>
% OF TOTAL
LOAN PRINCIPAL BALANCE
STATE OUTSTANDING NUMBER OF BORROWERS
----- ---------------------- -------------------
<S> <C> <C>
Oklahoma........................................ 1.4 2
Pennsylvania.................................... 2.7 5
Tennessee....................................... 5.8 13
Texas........................................... 12.2 27
Virginia........................................ 4.2 7
Washington...................................... 1.4 3
Wisconsin....................................... 1.0 2
*Other locations................................ 8.6 35
----- ---
TOTAL................................. 100.0% 233
===== ===
</TABLE>
- -------------------------
* The other states in which Sirrom has only a single borrower are Arizona,
Delaware, Hawaii, Idaho, Iowa, Maine, Michigan, South Carolina and Utah.
Sirrom also has 1 borrower in Washington, D.C. and 25 borrowers in Canada
representing 0.9% and 3.9%, respectively, of the total loan principal balance
outstanding.
DELINQUENCY AND COLLECTIONS
When a borrower fails to make a required payment by the tenth of the month,
Sirrom's Treasurer notifies the borrower by telephone and discusses with the
borrower the expected timing of the payment. If the payment is delinquent more
than 30 days, the Chief Operating Officer and responsible portfolio manager
jointly determine an appropriate course of action on the account, which could
include transferring responsibility for the loan to Sirrom's workout area. When
a loan reaches 60 days past due, Sirrom normally stops accruing interest. All
loans over 60 days past due become the responsibility of Sirrom's workout group.
Management determines the most appropriate approach under the circumstances for
protecting its interest in a defaulted loan, which may involve, among other
things, the sale of the borrower or foreclosure proceedings.
At December 31, 1998, Sirrom had loans to 31 companies with an aggregate
principal balance of $69.2 million that were graded a 5 or 6 and that were not
accruing interest. Based on the particular circumstances involved, the Sirrom
board estimated the aggregate fair value of these loans to be $18.9 million.
Therefore, Sirrom provided for unrealized depreciation from original cost of
$49.3 million on these loans after accounting for the original issue discount on
these loans of $1.1 million.
CUSTODIAL SERVICES
Pursuant to a Custodial Services Agreement, First American National Bank
(Trust Department) acts as the custodian of all of Sirrom's and SII's portfolio
assets under the 1940 Act and, for SII's portfolio assets, under SBA
Regulations. FINOVA anticipates obtaining release of those assets through
restructuring the debt with the SBA or through prepayment of the debt.
LEGAL PROCEEDINGS
On July 13, 1998, a purported class action lawsuit was filed in U.S.
District Court for the Middle District of Tennessee against Sirrom and certain
officers, directors and affiliates. This lawsuit is captioned Trinity Holdings
Corporation v. Sirrom Capital Corporation, John A. Morris, Jr., George M.
Miller, II, Carl W. Stratton, H. Hiter Harris, III and Christopher H. Williams,
Case No. 3-98-0643, United States District Court for the Middle District of
Tennessee, Nashville
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(the "Trinity Holdings Lawsuit). The Trinity Holdings Lawsuit alleges violations
of federal securities laws related to a secondary offering of securities that
was made under a registration statement that was declared effective on March 5,
1998, certain press releases and oral communications with analysts. The
plaintiff purports to sue on its own behalf and on behalf of all persons who
acquired Sirrom common stock between March 5, 1998 and July 9, 1998, including
all persons who purchased Sirrom common stock in connection with the March 5,
1998 secondary offering. The plaintiff seeks unspecified monetary damages as
well as reasonable costs and expenses.
On September 4, 1998 and September 9, 1998, two additional purported class
actions were filed in the U.S. District Court for the Middle District of
Tennessee against Sirrom and certain officers, directors and affiliates. These
lawsuits are captioned John Brown v. Sirrom Capital Corporation, David Resha,
Christopher H. Williams, H. Hiter Harris, III, John A. Morris, Jr., George M.
Miller II, and Sirrom Partners, L.P., Case No. 3-98-0826, United States District
Court for the Middle District of Tennessee, Nashville (the " Brown Lawsuit"),
and James Hirsch v. Sirrom Capital Corporation, John A. Morris, Jr., George M.
Miller, II, Carl W. Stratton, H. Hiter Harris, III, and Christopher H. Williams,
Case No. 3-98-0833, United States District Court for the Middle District of
Tennessee, Nashville (the "Hirsch Lawsuit"), respectively. The allegations made
in the Brown Lawsuit and the Hirsch Lawsuit are substantially similar to those
made in the Trinity Holdings Lawsuit, with the exception that the plaintiff in
the Brown Lawsuit purports to sue on behalf of all persons who acquired Sirrom
common stock between January 20, 1998 and July 10, 1998. The plaintiffs seek
monetary damages.
The District Court has ordered that the Trinity Holdings Lawsuit, the Brown
Lawsuit and the Hirsch Lawsuit be consolidated and proceed as one case. Before
the order, Sirrom and the individual defendants had moved to dismiss the Trinity
Holdings Lawsuit for, among other reasons, the plaintiff's failure to state a
claim. Pursuant to the Court's consolidation order, on December 14, 1998, the
Plaintiffs filed a single, Consolidated Amended Class Action Complaint. In this
amended complaint, Plaintiffs allege generally the same violations of federal
securities laws as alleged in the original Trinity Holdings, Brown and Hirsch
complaints. The amended complaint, however, also contains the additional
allegation that Sirrom's accounting for its loans violates GAAP, and asserts a
class action on behalf of all persons who acquired Sirrom's stock between
January 20, 1998 and July 10, 1998. Pursuant to the Court's consolidation order,
Sirrom filed a motion to dismiss the amended complaint on February 8, 1999.
A separate purported class action was filed on the same date as the Trinity
Holdings Lawsuit by Scott Orrock in the Chancery Court for Davidson County,
Tennessee against Sirrom and certain officers, directors and affiliates. This
lawsuit is captioned Scott Orrock v. Sirrom Capital Corporation, David Resha,
Christopher H. Williams, H. Hiter Harris, III, John A. Morris, Jr., George M.
Miller, II and Sirrom Partners, L.P., Docket No. 98-2103, 111, Chancery Court,
Davidson County, Tennessee (the "Orrock Lawsuit"). The Orrock Lawsuit alleges
violations of state securities laws in connection with the March 5, 1998
secondary offering, certain periodic reports filed with the SEC, certain press
releases and oral communications with analysts. The plaintiff purports to sue on
his own behalf and on behalf of all persons who purchased Sirrom common stock
between January 20, 1998 and July 10, 1998. The plaintiff, who has been joined
by another intervening plaintiff, seeks unspecified monetary damages with
interest, reasonable costs and expenses, and equitable relief. Sirrom and the
individual defendants have filed a motion to dismiss the Orrock Lawsuit. That
motion has not yet been set for a hearing before the Chancellor.
Sirrom believes that these actions are without merit, and it will continue
to vigorously defend the claims brought against it and the individual
defendants. Sirrom is unable, however, to predict the outcome of these lawsuits
or the costs to be incurred in defending them. Sirrom does not believe that
these actions will have a material adverse effect on the operations of Sirrom.
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COMPETITION
Sirrom's principal competitors include financial institutions, venture
capital firms and other nontraditional lenders. Many of these entities have
greater financial and managerial resources than Sirrom. Sirrom believes that the
quality of its service, its reputation and the timely credit analysis and
decision-making processes it follows allow it to compete effectively with these
entities. To a significantly lesser degree, Sirrom believes that the interest
rates, maturities and payment schedules it offers on the loans to borrowers
further allow it to compete effectively.
EMPLOYEES
Sirrom currently has 101 employees, including 37 employees of Harris
Williams. Sirrom believes its relations with its employees are excellent. Sirrom
believes that its maintenance of low overhead as a percentage of assets results
from contracting for services not directly related to the marketing,
underwriting and workout of small business loans or the executive management of
Sirrom.
SIRROM'S OPERATIONS AS A BUSINESS DEVELOPMENT COMPANY
As a business development company, Sirrom may not acquire any asset other
than qualifying assets (as described below) unless, at the time of the
acquisition, qualifying assets represent at least 70% of the value of Sirrom's
total assets. The principal categories of qualifying assets relevant to Sirrom's
business are the following:
- Securities purchased from an issuer that is an eligible portfolio company
in transactions not involving any public offering. An eligible portfolio
company is defined as any issuer that (1) is organized and has its
principal place of business in the United States, (2) is not an
investment company other than a SBIC wholly owned by the business
development company and (3) does not have any class of publicly traded
securities for which a broker may extend margin credit.
- Securities received in exchange for or distributed for securities
described above, or pursuant to the exercise of options, warrants or
rights relating to those securities.
- Cash, cash items, government securities, or high quality debt securities
maturing in one year or less from the time of investment.
Sirrom may not change the nature of its business so as to cease to be, or
withdraw its election as, a business development company unless authorized by
vote of a majority of the outstanding shares of Sirrom common stock. Since
Sirrom made its business development company election, it has not made any
substantial change in its structure or in the nature of its business. In
connection with the merger, Sirrom will, by definition, no longer be required to
be registered as an investment company or business development company under the
1940 Act. Sirrom is therefore seeking the approval of the Sirrom shareholders to
withdraw its election to be treated as a business development company. If this
approval together with approval of the merger and the merger agreement is
obtained at the Sirrom special meeting, then Sirrom will withdraw its election
to be treated as a business development company at the effective time.
Sirrom is permitted, under specified conditions, to issue multiple classes
of indebtedness and one class of stock senior to the Sirrom common stock if its
asset coverage of any senior security (as defined in the 1940 Act) is at least
200% immediately after each issuance. Asset coverage means the ratio that the
value of Sirrom's total assets, less all liabilities and indebtedness not
represented by senior securities, bears to the total amount of senior securities
representing indebtedness of Sirrom plus the total involuntary liquidation
preference of any of these senior securities which are stock. Debt securities
issued to the SBA are not subject to this asset coverage test. In connection
with the transfer of its SBIC operations to SII and the formation of SFC, Sirrom
obtained exemptive relief from the SEC from some provisions of the 1940 Act.
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Accordingly, Sirrom, SII and SFC may each incur indebtedness so long as after
incurring indebtedness Sirrom, individually, and Sirrom and each of its
investment company subsidiaries on a consolidated basis, meets the 200% asset
coverage test. In addition, while senior securities are outstanding, provisions
must be made to prohibit any distribution to shareholders or the repurchase of
the senior securities or shares unless Sirrom meets the applicable asset
coverage ratios at the time of the distribution or repurchase. Sirrom may also
borrow amounts up to 5% of the value of its total assets for temporary or
emergency purposes. If Sirrom receives the shareholder approvals sought in this
proxy statement/prospectus it will withdraw its election to be treated as a
business development company and request an order from the SEC declaring that
SII and SFC have ceased to be investment companies. Upon the filing of the
election and the receipt of the order, Sirrom, SII and SFC shall no longer be
subject to the regulations described in this section.
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REGULATION OF SIRROM
FEDERAL REGULATION
Sirrom is presently a business development company and therefore is
regulated under the 1940 Act. SII is presently a "small business investment
company" and therefore is regulated by the SBIA and is subject to the SBA
Regulations. SII and SFC are also registered investment companies and,
therefore, subject to the provisions of the 1940 Act as modified by certain
exemptive orders received by Sirrom from the SEC.
It is a condition to completion of the merger that Sirrom withdraw its
election to be treated as a business development company under the 1940 Act. It
is also a condition to completion of the merger that Sirrom receive an order
from the SEC declaring that SII and SFC will cease to be investment companies
upon completion of the merger.
As a small business investment company, SII may only make loans to or
investments in "small business concerns," as defined by the SBIA and the SBA
Regulations. A "small business concern," as defined in the SBIA and the SBA
Regulations is a business concern that is independently owned and operated and
is not dominant in its field of operation. A small business concern must either:
- have a net worth, together with any affiliates, of $18 million or less
and an average net income after federal income taxes for the preceding
two years of $6 million or less, computing average net income without
benefit of any carryover loss; or
- satisfy alternative criteria under the SBA Regulations that focus on the
industry in which the business is engaged and the number of persons
employed by the business or its gross revenues.
In addition, at the end of each fiscal year, 20% of the total amount of
investments made since April 8, 1994 must be made to concerns that:
- have a net worth of not more than $6 million and not more than $2 million
in average net income after federal income taxes for the preceding two
years; or
- satisfy alternative industry-related size criteria.
The SBA Regulations also prohibit a small business investment company from
providing funds to a small business concern for certain purposes, like relending
and investment outside the United States.
The amount of annual interest payments SII may charge its borrowers is
limited by the SBA Regulations. Under these regulations, the maximum annual
financing costs, including interest, of loans with equity features to small
business concerns may not exceed the greater of 14% or 6 percentage points above
the "debenture rate." As defined in the SBA Regulations, the "debenture rate" is
the interest rate announced, from time to time, by the SBA on SBA debentures. As
of December 31, 1998, the maximum annual financing cost applicable to SII was
14%. The SBA Regulations also allow a small business investment company to
charge a processing fee of up to 4%, which fee is not included in the financing
cost calculation.
The SBA restricts the ability of a small business investment company to
repurchase its capital stock, to retire its debentures and to lend money to its
officers, directors and employees or invest in affiliates of those persons. The
SBA also prohibits, without prior SBA approval, a "change of control" or
transfers which would result in any person, or group of persons acting in
concert, owning 10% or more of any class of capital stock of a small business
investment company. A "change of control" is any event that would result in the
transfer of the power, direct or indirect, to direct the management and policies
of a small business investment company,
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whether through ownership, contractual arrangements or otherwise. The merger
constitutes a "change in control" for these purposes.
Sirrom is a closed-end, non-diversified investment company that has elected
to be treated as a business development company and, therefore, is subject to
regulation under the 1940 Act. The 1940 Act contains prohibitions and
restrictions relating to transactions between investment companies and their
affiliates, principal underwriters and affiliates of those affiliates or
underwriters. The 1940 Act also requires that a majority of the directors be
persons other than "interested persons," as defined in the 1940 Act. In
addition, the 1940 Act provides that Sirrom may not change the nature of its
business so as to cease to be, or to withdraw its election as, a business
development company unless so authorized by the vote of a majority, as defined
in the 1940 Act, of its outstanding voting securities.
Sirrom is permitted, under specified conditions, to issue multiple classes
of indebtedness and one class of stock senior to the Sirrom common stock if its
asset coverage of any senior security, as defined in the 1940 Act, is at least
200% immediately after that issuance. Debt securities issued to the SBA are not
subject to this asset coverage test. In connection with the transfer of its
small business investment company operations to SII and the formation of SFC,
Sirrom obtained exemptive relief from the SEC with respect to certain provisions
of the 1940 Act. Accordingly, Sirrom, SII and SFC may each incur indebtedness so
long as after incurring that indebtedness Sirrom, individually, and Sirrom and
each of its investment company subsidiaries on a consolidated basis, meets the
200% asset coverage test. In addition, while senior securities are outstanding,
provisions must be made to prohibit any distribution to shareholders or the
repurchase of those securities or shares unless Sirrom meets the applicable
asset coverage ratios at the time of the distribution or repurchase. Sirrom may
also borrow amounts up to 5% of the value of its total assets for temporary or
emergency purposes.
Under the 1940 Act, a business development company may not acquire any
asset other than qualifying assets (defined below) unless, at the time of the
acquisition, qualifying assets represent at least 70% of Sirrom's total assets.
Securities issued by Canadian small businesses will not be qualifying assets.
Based on Sirrom's total assets at December 31, 1998, however, Sirrom could
acquire or originate up to $175.3 million in non-qualifying assets and retain
its business development company status. Qualifying assets are listed in Section
55(a) of the 1940 Act, and the principal categories of qualifying assets
relevant to the proposed business of Sirrom are the following:
- Securities purchased from the issuer in transactions not involving any
public offering, which issuer is an eligible portfolio company. An
eligible portfolio company is defined in the 1940 Act as any issuer
which:
(1) is organized under the laws of, and has its principal place of
business in, the United States;
(2) is not an investment company other than a small business investment
company wholly owned by the business development company; and
(3) does not have any class of securities with respect to which a broker
or dealer may extend margin credit.
- Securities of any eligible portfolio company which is controlled by the
business development company;
- Securities received in exchange for or distributed on or with respect to
securities described in the first two bullets above, or pursuant to the
exercise of options, warrants or rights relating to those securities; and
- Cash, cash items, government securities, or high quality debt securities
maturing in one year or less from the time of investment.
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In addition, a business development company must have been organized and
have its principal place of business in the United States for the purpose of
making investments in the types of securities described in the first two bullets
above. To count the securities as qualifying assets for the purpose of the 70%
test, however, the business development company must either control the issuer
of the securities or make available to the issuer of the securities significant
managerial assistance. Where the company purchases those securities in
conjunction with one or more other persons acting together, however, one of the
other persons in the group may make available the significant managerial
assistance. By the making of loans to small concerns, small business investment
companies are deemed to provide significant managerial assistance.
STATE REGULATION
Sirrom is presently licensed as a Tennessee business and industrial
development company and therefore is regulated under the Tennessee BIDCO Act.
Under the Tennessee BIDCO Act, Sirrom is subject to an annual examination by the
Tennessee Department of Financial Institutions and must obtain the approval of
the merger by the Commissioner of Financial Institutions prior to the effective
time.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of Sirrom should be read in conjunction with the selected financial data,
Sirrom's financial statements and the accompanying notes and the other financial
data included elsewhere in this proxy statement/prospectus. The financial
information provided below has been rounded in order to simplify its
presentation. However, the ratios and percentages provided below are calculated
using the detailed financial information contained in the financial statements
and the accompanying notes and the financial data included elsewhere in this
proxy statement/prospectus. The financial information contained herein reflects
the operations of Harris Williams as an unconsolidated subsidiary of Sirrom
accounted for by the equity method of accounting in conformity with the
requirements of the 1940 Act.
OVERVIEW
Sirrom's principal investment objectives are to achieve a high level of
income by collecting interest and processing and financial advisory fees and
long-term growth in its shareholders' equity through the appreciation in value
of equity interests in its portfolio companies. Sirrom's loans are typically
secured debt with relatively high fixed interest rates accompanied by warrants
to purchase equity securities of the borrower. In addition to interest on
investments, Sirrom also typically collects an up-front processing fee on each
loan it originates. Harris Williams typically obtains a monthly retainer fee for
each transaction for which it is retained and, in addition, a success fee when
the transaction is consummated.
RESULTS OF OPERATIONS
Sirrom's financial performance in the statements of operations included in
the financial statements and accompanying notes consists of four primary
elements. The first is "net operating income," which is Sirrom's income from
interest, dividends, fees and Harris Williams' pretax income, minus its total
operating expenses, including interest expense. The second element is "net
realized gain (loss) on investments," which is the proceeds received from the
disposition of portfolio assets minus their stated costs at the beginning of the
period. The third element is the "change in unrealized appreciation
(depreciation) of investments," which is the net change in the fair values of
Sirrom's portfolio assets compared with their fair values at the beginning of
the period or their stated costs, as appropriate. Generally, "net realized gain
(loss) on investments" and "change in unrealized appreciation (depreciation) of
investments" are inversely related. When an appreciated asset is sold to realize
a gain, a decrease in unrealized appreciation occurs since the gain associated
with the asset is transferred from the "unrealized" category to the "realized"
category. Conversely, when a loss is realized on a depreciated portfolio asset,
the reclassification of the loss from "unrealized" to "realized" causes an
increase in unrealized appreciation and an increase in realized loss. The fourth
element is "provision for income taxes," which primarily consists of taxes on
the pre-tax income of Harris Williams.
Fiscal Years Ended December 31, 1998, 1997 and 1996
Net Operating Income. During the year ended December 31, 1998, Sirrom
earned interest on investments of $63.5 million, a 53.7% increase over the $41.3
million earned in 1997, which in turn was an 69.3% increase over the $24.4
million earned in 1996. The increases in interest income are a result of
increases in the average dollar amount of loans outstanding during the
applicable periods. Sirrom also collects an up-front processing fee for each
loan it originates. During fiscal 1998, Sirrom collected $7.2 million in
processing and other fees, a 2.9% increase over the $7 million collected in
1997, which in turn was a 118.7% increase over the $3.2 million collected in
1996. The modest increase in processing and other fees in 1998 is a result of
the
83
<PAGE> 94
modest increase in the dollar amount of loans originated during 1998. The large
increase in processing fees collected in 1997 over 1996 was a result of the
large increase in loans originated in 1997 as compared to 1996. In the first
quarter of 1999, Sirrom intends to change its accounting for processing fees.
This change will entail amortizing processing fees over the life of the
investment. While the change will not affect the amount of processing fees
collected, it will significantly reduce the amount of processing fee income
recognized over the next several years. The reduction will be significant
because fees collected in previous years have been fully recognized and
therefore will have no impact on income in future years. However, after this
transition period, the ratio of fee income to new loan originations should
return to historical levels because a portion of processing fees collected in
prior years will be recognized as income in the current year.
Sirrom's loan portfolio increased to $477.1 million at December 31, 1998,
an increase of 15.8% from $412 million at December 31, 1997, which in turn was
an increase of 86% from $221.5 million at December 31, 1996. The $301.8 million
of loans originated during fiscal 1998 was a 6.9% increase over the $282.4
million of loans originated during fiscal 1997, which in turn was a 113.9%
increase over the $132 million of loans originated in 1996. The decline in the
growth of loan originations in 1998 as compared to 1997 loan originations was a
result of management's decision to slow growth as described in more detail in
the section entitled "Portfolio Turnover and Credit Quality." The weighted
average interest rate charged on the loan portfolio at December 31, 1998 was
13.25% as compared to 13.28% and 13.18% at December 31, 1997 and 1996,
respectively. Sirrom also earned income from miscellaneous sources in an amount
equal to $34,000 in 1998, $61,000 in 1997, and $119,000 in 1996, primarily from
interest paid on loans to employees made in connection with purchases of common
stock of Sirrom.
Sirrom's interest expense increased to $17.3 million in 1998, a 76.5%
increase over the $9.8 million paid in 1997, which in turn was an 18.1% increase
over the $8.3 million paid in 1996. The increase in interest expense from 1996
to 1998 was primarily attributable to an increase in the average amount
outstanding under Sirrom's two revolving credit facilities and from the SBA.
Sirrom's total borrowings were $250 million on December 31, 1998, $214.3 million
on December 31, 1997, and $120.9 million on December 31, 1996.
Overhead and amortization of borrowing costs totaled $15.8 million in 1998,
$9.2 million in 1997, and $5.5 million in 1996. These increases can be largely
attributed to the increase in the number of employees from 24 in December 1996
to 61 in December 1998 (excluding Harris Williams employees), the opening of
additional offices and increased borrowings. Overhead expenses as a percentage
of average assets was 2.5%, 2.1%, and 2.0% for 1998, 1997 and 1996,
respectively. The increase in these percentages in 1998 was largely the result
of management's decision to reduce loan originations during the last half of the
year and an expected one to two quarter lag in related expense reductions.
During 1998, Harris Williams had revenues of $12.5 million, an increase of
26.3% over $9.9 million in 1997, which in turn was a 47.8% increase over $6.7
million in 1996. During 1998, Harris Williams had pre-tax income of $3.8
million, an increase of 2.7% over $3.7 million in 1997, which was in turn a
12.1% increase over $3.3 million in 1996. The modest increase in 1998 was due to
an increase in the size of the fees received on the transactions on which Harris
Williams provided advisory services and the increase in 1997 was due to an
increase in the number of transactions closed. Harris Williams provided advisory
services on 14 transactions that closed during 1998, and 15 transactions in
1997, and 13 transactions during 1996. Income taxes of $1.1 million, $825,000
and $207,000 were provided on Harris Williams' pre-tax income in 1998, 1997 and
1996, respectively.
Realized Gain (Loss) on Investments. Sirrom's net realized loss on
investments was $61.4 million during the year ended December 31, 1998 compared
to a net realized gain on investments of $10.7 million and $9.5 million during
the years ended December 31, 1997, and 1996,
84
<PAGE> 95
respectively. Realized losses for 1998 were $84 million offset in part by $22.6
million in realized gains. Approximately one third of the net realized loss for
the year ended December 31, 1998 was attributable to loans to two borrowers,
Saraventures Fixtures, Inc. and Precision Panel Products, Inc., whose
manufacturing operations were consolidated during 1998 as part of a
restructuring strategy that was ultimately unsuccessful and another third was
attributable to the final resolution of loans that had been graded 4, 5 or 6 for
over one year. The net realized loss for 1998 was also increased by the
reduction in realized gains during the second half of 1998 as a result of the
decline in stock market valuations in the second half of 1998 and the virtual
cessation of initial public offerings that followed. The following table sets
forth the details of realized gains and losses that occurred during the year
ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Vista Information Solutions, Inc. common stock........... $ 4,246
Hoveround Corporation warrants........................... 4,100
Network Event Theaters, Inc. common stock................ 3,374
Master Graphics, Inc. common stock....................... 2,203
NOVA Corporation common stock............................ 1,360
Multimedia Learning, Inc. warrant........................ 1,170
Towne Services, Inc. common stock........................ 1,116
Hunt Leasing & Rental Corporation warrants............... 598
Bohdan Automation, Inc. warrants......................... 477
PMTS Services, Inc. warrants............................. 469
Atlantic Security Systems, Inc. warrants................. 434
QuadraMed Corporation common stock....................... 357
Merge Technologies, Inc. common stock.................... 355
Patton Management Corporation warrants................... 303
Voice FX Corporation common stock........................ 245
Family Golf Centers, Inc. common stock................... 237
CellCall, Inc. common stock.............................. 228
Global Marine Electronics, Inc. warrants................. 200
Skillmaster, Inc. warrant................................ 200
Protect America, Inc. warrants........................... 185
Outdoor Promotions, LLC warrants......................... 182
UOL Publishing, Inc. common stock........................ 173
Quadravision Communications Limited warrant.............. 156
Video Update common stock................................ 99
Encore Medical corporation stock......................... 17
Just Vacations, Inc. Foreign Exchange loan............... (59)
Fypro, Inc. loan......................................... (79)
Sherwood, Inc. preferred stock........................... (100)
Miscellaneous............................................ (110)
Assured Power, Inc. loan................................. (200)
Valdawn Watch Company preferred stock.................... (240)
</TABLE>
85
<PAGE> 96
SCHEDULE OF REALIZED GAINS (LOSSES) FOR THE YEAR
ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
BankCard Services, Inc. loan............................. (277)
Hydrofuser Industries, Inc. loan......................... (295)
Home Link Services, Inc. loan............................ (298)
TCOM Systems, Inc. loan.................................. (346)
National Health Systems, Inc. loan....................... (420)
H.S.A. International other investment.................... (441)
KWC Management Co., LLC loan............................. (500)
Sherwood, Inc. loan...................................... (500)
Sirvys Systems loan...................................... (704)
C.J. Spirits, Inc. loan.................................. (758)
Daxxes Corporation loan.................................. (848)
SWS6, Inc. loan.......................................... (994)
Home Link Services, Inc. preferred stock................. (1,000)
Newfoundland Career Academy, Ltd. loan................... (1,160)
Champion Glove Manufacturing, Inc. loan.................. (1,250)
Hancock Company other investment......................... (1,400)
Workout expenses......................................... (1,538)
NRI Service and Supply, L.P. loan........................ (1,550)
IJL Holdings, Inc. loan.................................. (1,600)
IOL 2000/Suncoast Medical Group loan..................... (1,628)
Wearever Health Products, LLC loan....................... (1,650)
Saraventures Fixtures, Inc. preferred stock.............. (1,659)
Multimedia 2000, Inc. common and preferred stock......... (2,085)
Aero Products Corporation loan........................... (2,300)
Nationwide Engine Supply, Inc. loan...................... (2,300)
Summit Publishing Group, Ltd loan........................ (2,375)
Vision 2000, Inc. loan................................... (2,403)
Amscot Holdings, Inc. loan............................... (2,437)
SWS6, Inc. preferred stock............................... (2,449)
GC Management, Inc. loan................................. (2,500)
Valdawn Watch Company loan............................... (3,022)
Digital Transmission Systems, Inc. loan.................. (3,500)
Vision 2000, Inc. common and preferred stock............. (4,247)
Fypro, Inc. preferred stock.............................. (4,659)
</TABLE>
86
<PAGE> 97
SCHEDULE OF REALIZED GAINS (LOSSES) FOR THE YEAR
ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Fulcrum Direct, Inc. loan................................ (5,000)
Mesa International, Inc. loan............................ (5,667)
Saraventures Fixtures, Inc. loan......................... (8,478)
Precision Panel, Inc. loan............................... (8,892)
--------
$(61,434)
========
</TABLE>
Change in Unrealized Appreciation (Depreciation) of Investments. For the
year ended December 31, 1998, Sirrom recorded a change in unrealized
depreciation of $55.3 million. Sirrom recorded change in unrealized depreciation
of investments of $1.6 million in 1997 and a change in unrealized appreciation
of investment of $2.6 million in 1996. The significant change in unrealized
depreciation for 1998 was the result of the increase in the number and dollar
amount of loans (from $76.7 million to $136.5 million) graded 4, 5 and 6 at
December 31, 1998 versus December 31, 1997, and the additional unrealized
depreciation taken against loans in those categories based upon Sirrom's
experience in 1998 that the amount ultimately recovered on loans graded 4, 5 and
6 was less than previously anticipated. The following table sets forth
information regarding changes in unrealized appreciation (depreciation) of
investments made during the year ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
LOANS:
2021 Interactive, LLC.................................... $ (1,250)
Action Sports Group, LLC................................. (750)
Affinity Fund, Inc....................................... (1,000)
Air Age Services of San Antonio, Inc..................... (500)
Altris Software, Inc..................................... (2,571)
Capital Network Systems, Inc............................. (1,000)
Amscot Holdings, Inc..................................... (900)
Assured Power, Inc....................................... 150
Auburn International, Inc................................ (2,375)
Avionics Systems, Inc.................................... (1,500)
B & N Company, Inc....................................... (2,600)
Bankcard Services Corporation............................ 150
BroadNet, Inc............................................ (1,750)
Bug Z., Inc.............................................. (1,500)
Caldwell/VSR, Inc........................................ (125)
Cardiac Control Systems, Inc............................. (500)
Carter Kaplan Holdings, LLC.............................. 549
Cedaron Medical, Inc..................................... (500)
Champion Glove Manufacturing Co., Inc.................... 1,200
C.J. Spirits, Inc........................................ 650
Compass Plastics & Technologies, Inc..................... (6,686)
Compression, Inc......................................... (4,350)
</TABLE>
87
<PAGE> 98
SCHEDULE OF SIGNIFICANT UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
LOANS:
Corporate Link, Inc...................................... (325)
Cover-All Technologies, Inc.............................. (2,700)
Cybo Robotics, Inc....................................... (275)
Cytech Systems, Inc...................................... (1,240)
Dalts, Inc............................................... (500)
Data National Corporation................................ (425)
Digital Transmission Systems, Inc........................ (500)
DynaGen, Inc............................................. (900)
Ergobilt, Inc............................................ (1,800)
Executrain............................................... (250)
Express Shipping Centers, Inc............................ (2,150)
Fortrend Engineering Corp................................ (1,000)
Fypro, Inc............................................... 150
GC Management, Inc....................................... 250
Gloves, Inc.............................................. (1,500)
Good Food Fast Companies, The............................ (2,600)
Great Train Store Company................................ (750)
H.S.A. International, Inc. other investment.............. 250
Hancock Company other investment......................... 1,250
Hunt Industries.......................................... (100)
IOL 2000, Inc............................................ 1,225
Jim Bridges Acquisition Company.......................... (1,500)
KOS Corp. Industries..................................... (200)
KWC Management Company, LLC.............................. 450
Leisure Clubs International, Inc......................... (350)
M.A.P.A., Inc............................................ (2,325)
MCG, Inc................................................. (150)
Mead-Higgs Company, Inc.................................. (1,400)
Multimedia 2000, Inc..................................... (4,050)
National Health Systems, Inc............................. 300
Nationwide Engine Supply, Inc............................ (100)
NRI Service & Supply L.P................................. (400)
Omni Home Medical, Inc................................... (450)
One Call Comprehensive Care, Inc......................... (1,475)
Pacific Linen, Inc....................................... (2,000)
Pipeliner Systems, Inc................................... 100
Recompute Corporation.................................... (600)
Reef Chemical Company, Inc............................... (1,500)
Rynel Ltd., Inc.......................................... (700)
Saraventures Fixtures, Inc............................... 3,500
SFG Technologies Inc..................................... (125)
Sheet Metal Specialties, Inc............................. (325)
</TABLE>
88
<PAGE> 99
SCHEDULE OF SIGNIFICANT UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
LOANS:
Smartchoice Automotive Group, Inc........................ (650)
Southern Specialty Brands, Inc........................... (175)
Street Level Media Inc................................... (225)
SWS3, Inc. other investment.............................. (250)
TAC Systems, Inc......................................... (900)
Talent Metal Products.................................... (2,300)
Telecontrol Systems, Inc................................. (200)
Teltronics, Inc.......................................... (687)
Tie & Track Systems, Inc................................. (750)
Toccoa Associates, LLC................................... (325)
Tulsa Industries, Inc.................................... (3,000)
Umbrellas Unlimited, LLC................................. (150)
Universal Automotive Industries, Inc..................... (1,125)
Valdawn Watch Company.................................... 635
Vision 2000, Inc......................................... 250
Wearever Health Products, LLC............................ (500)
Wolfgang Puck Food Company, Inc.......................... (500)
Workout expenses other investment........................ (350)
Other Loans.............................................. (236)
PRIVATE COMPANY EQUITY SECURITIES:
Bravo Corporation common stock........................... (350)
DentalCare Partners, Inc. common stock................... (300)
Front Royal, Inc. common stock........................... 150
Fypro, Inc. preferred stock.............................. 611
Home Link, Inc. preferred stock.......................... 250
Multimedia 2000, Inc. preferred stock.................... 1,973
PaySys International, Inc. common stock.................. (175)
Pipeliner Systems, Inc. preferred stock.................. 200
Potomac Group, Inc. common stock......................... 3,901
Potomac Group, Inc. preferred stock...................... (1,000)
Recycling Technologies, Inc. preferred stock............. (1,050)
Saraventures Fixtures, Inc. preferred stock.............. 1,659
Valdawn Watch Co., Inc. preferred stock.................. 240
Vision 2000, Inc. common stock........................... (175)
Vision 2000, Inc. preferred stock........................ 1,375
Zahren Alternative Power Corp. common stock.............. 165
Zahren Alternative Power Corp. preferred stock........... (100)
Other Private Company Equity Securities.................. (65)
PRIVATE COMPANY WARRANTS:
American Rockwool Acquisition Corp....................... 675
Anton Airfoods, Inc...................................... 350
</TABLE>
89
<PAGE> 100
SCHEDULE OF SIGNIFICANT UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
PRIVATE COMPANY WARRANTS:
Auburn International, Inc................................ (150)
CF Data Corp............................................. (150)
Check into Cash, Inc..................................... 3,839
CMHC Systems, Inc........................................ 200
Columbus Medical Holdings, LLC........................... 300
Co-Mack Technologies, Inc................................ (400)
CSM, Inc................................................. 150
Data National Corporation................................ (450)
Dyntec, Inc.............................................. 350
Endeavor Technologies, Inc............................... 5,025
Entek Scientific Corporation............................. (350)
Express Shipping Centers, Inc............................ (262)
FaxNet Corporation....................................... 325
Front Royal, Inc......................................... 350
GerAssist, Inc........................................... 225
Gulfstream International Airlines, Inc................... (130)
Hoveround Corporation.................................... (3,750)
Hunt Leasing & Rental Corporation........................ (250)
I. Schneid Holdings, LLC................................. 150
ILD Communications, Inc.................................. 500
Master Graphics, Inc..................................... 1,050
Mesa International, Inc.................................. (750)
Metrolease, Inc.......................................... 470
Mobility Electronics, Inc................................ 950
Moore Diversified Products, Inc.......................... 200
Multimedia Learning, Inc................................. (450)
Mytech Corporation....................................... 175
NASC, Inc................................................ 250
One Coast Network Corporation............................ 1,700
Outdoor Promotions LLC................................... 100
Pacific Linen, Inc....................................... (548)
Pathology Consultants of America, Inc.................... 500
Patton Management Corporation............................ (185)
Physicians Surgical Care, Inc............................ 407
Pritchard Paint & Glass Company.......................... 750
R&R International, Inc................................... 325
Ready Personnel, Inc..................................... 1,100
Reef Chemical Company, Inc............................... (300)
Relax the Back Corporation............................... 700
Relevant Knowledge, Inc.................................. 150
Stratford Safety Products, Inc........................... 175
Systech Group, Inc....................................... 300
</TABLE>
90
<PAGE> 101
SCHEDULE OF SIGNIFICANT UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
PRIVATE COMPANY WARRANTS:
Talus Solutions, Inc..................................... 200
Telecommunications Systems, Inc.......................... 300
Teltrust, Inc............................................ 825
Towne Services, Inc...................................... 1,500
TRC Acquisitions, Inc.................................... 100
Vision Software, Inc..................................... 600
Voice FX Corporation..................................... (250)
Wearever Health Products, LLC............................ (250)
Zahren Alternative Power Corp............................ 350
Other Private Company Warrants........................... 103
PUBLIC COMPANY WARRANTS AND EQUITY SECURITIES:
ACT Teleconferencing, Inc. warrants...................... (368)
Altris Software, Inc. warrants........................... (450)
Altris Software, Inc. preferred stock.................... (3,000)
Biker's Dream, Inc. warrants............................. 391
Clinicor, Inc. preferred stock........................... (1,650)
Compass Plastics & Technologies, Inc. common stock....... (1,878)
Compass Plastics & Technologies, Inc. warrants........... (385)
Consumat Systems, Inc. common stock...................... (579)
Dreams, Inc. warrants.................................... 302
Environmental Tectonics Corp. preferred stock............ 275
Ergobilt, Inc. warrants.................................. (182)
Family Golf Centers common stock......................... (250)
Great Train Store Company warrants....................... (110)
Master Graphics, Inc. common stock....................... (2,000)
Medical Resources Inc. common stock...................... (320)
Merge Technologies, Inc. common stock.................... (500)
Network Event Theatres, Inc. common stock................ 780
Nova Corp. common stock.................................. (1,197)
PMT Services, Inc. common stock.......................... 697
Premiere Technologies, Inc. common stock................. (430)
Quadramed Corporation common stock....................... (209)
Recompute Corporation warrants........................... 164
Smart Choice Automotive Group, Inc. warrants............. (150)
Tava Technologies, Inc. warrants......................... 110
Teltronics, Inc. preferred stock......................... (650)
Teltronics, Inc. warrants................................ (102)
Towne Services, Inc. common stock........................ (580)
UOL Publishing, Inc. common stock........................ (354)
Vista Information Solutions, Inc. common stock........... (3,385)
Vista Information Solutions, Inc. warrants............... (185)
</TABLE>
91
<PAGE> 102
SCHEDULE OF SIGNIFICANT UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
PUBLIC COMPANY WARRANTS AND EQUITY SECURITIES:
Vista Information Solutions, Inc. preferred stock........ 650
Other Public Company Warrants and Equity Securities...... (222)
Amortization of loan discount............................ 1,814
--------
$(55,336)
========
</TABLE>
Provision for Income Taxes. Beginning in February 1995, Sirrom elected to
be taxed as an RIC as defined by the Internal Revenue Code. If Sirrom, as an
RIC, satisfies certain requirements relating to the source of its income, the
diversification of its assets and the distribution of its net income, Sirrom is
generally taxed as a pass through entity that acts as a partial conduit of
income to its shareholders. To maintain its RIC status, Sirrom must, in general:
derive at least 90% of its gross income from dividends, interest and gains from
the sale or disposition of securities; meet investment diversification
requirements defined by the Internal Revenue Code; and distribute to
shareholders at least 90% of its net income (other than long-term capital
gains). Neither Sirrom, SII nor SFC will elect to be treated as an RIC in 1999.
Therefore, in 1999 Sirrom, SII and SFC will make provisions for income taxes to
the extent appropriate.
During 1998, Sirrom paid dividends of $32.7 million compared to the $24.4
million paid in 1997 and $11.7 million paid in 1996. Of these dividends, $7.5
million, $16.9 million, and $11 million were derived from net operating income
for 1998, 1997 and 1996, respectively, and $8.8 million, $7.5 million, and
$577,000 were derived from realized capital gains for 1998, 1997 and 1996,
respectively. The remaining $16.3 million paid in 1998 was accounted for as a
return of capital. Sirrom also elected to designate $10.6 million of the
undistributed realized capital gains in 1996 as a "deemed" distribution to
shareholders of record as of the end of 1996. Accordingly, $6.9 million for
1996, net of taxes of $3.7 million, of this "deemed" distribution has been
retained and reclassified from undistributed net realized earnings to Sirrom
common stock. As a result of the realized losses taken by Sirrom in the third
and fourth quarters of 1998, Sirrom was not required under the RIC regulations
to pay additional dividends to shareholders. Therefore, in order to preserve
capital, SCC elected not to pay dividends during the last half of 1998. As
stated above, Sirrom will not elect to be treated as an RIC in 1999 and
therefore does not presently intend to pay dividends in 1999.
For the years ended December 31, 1998, 1997 and 1996, Sirrom also provided
for federal income tax at a 35% rate on undistributed long-term capital gains
and excise tax at a 4% rate on undistributed taxable net investment income and
undistributed realized long-term capital gains and provided for federal and
state income taxes on Harris Williams' pre-tax income. These tax provisions
totaled $1.1 million, $838,000, and $4.3 million for the years ended December
31, 1998, 1997 and 1996, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, Sirrom had $2.4 million in cash and cash equivalents.
At December 31, 1998, Sirrom's investment portfolio included investments in
stocks and warrants of publicly traded companies that had an ascertainable
market value and were being carried at a fair value of approximately $7.8
million and represent an additional source of liquidity. However, Sirrom's
ability to realize such values on a short-term basis is limited by market
conditions and various securities law restrictions.
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<PAGE> 103
Traditionally, Sirrom's principal sources of capital to fund its portfolio
growth have been borrowings of SII through the SBA-sponsored SBIC debenture
program, private and public sales of Sirrom's equity securities and funds
borrowed from banking institutions. In February 1995, Sirrom consummated an
initial public offering and has completed four additional public offerings since
that time, including a public offering of 6,000,000 shares of Sirrom common
stock completed in March 1998. These offerings have generated net proceeds of
$361.5 million in the aggregate. Sirrom has used the proceeds of these offerings
to temporarily repay debt and to originate new loans.
At December 31, 1998, total SBA borrowings were $101 million, the maximum
amount of SBA loans available to an SBIC at that time. Each borrowing from the
SBA has a term of ten years, is secured by the assets of SII, is guaranteed by
Sirrom and can be prepaid without penalty after five years. The average interest
rate on these borrowings was 6.9% as of December 31, 1998, and none of these
borrowings mature before 2002.
Because the significant realized losses Sirrom recorded during fiscal 1998
would have caused a breach of certain asset quality covenants contained in the
First Union credit facility, Sirrom repaid approximately $9.4 million
outstanding under the facility on January 21, 1999 and terminated the commitment
extended thereunder. In connection with the termination of the First Union
credit facility, Sirrom obtained the consent of the SBA to transfer
approximately $45.8 million of assets from SII to Sirrom. These assets will be
used as additional collateral to be sold to SFC which will allow additional
borrowings under the ING credit facility.
Sirrom has also established the $200 million ING credit facility. SFC, a
wholly owned, special purpose, bankruptcy remote subsidiary of Sirrom, is the
borrower under the ING credit facility. SFC purchases loans originated by Sirrom
and the related warrants and uses these loans and warrants as collateral to
secure borrowings from ING. SFC is generally able to borrow up to 70% of the
principal amount of conforming loans collateralizing the ING credit facility. At
December 31, 1998, $132.2 million was outstanding under the ING credit facility
and $258.5 million and $266.3 million of loans and warrants at cost and fair
value, respectively, were collateralizing the ING credit facility. To manage
interest rate risk associated with the variable interest rate under the ING
credit facility, Sirrom has entered into various hedging arrangements. Sirrom
may borrow under the ING credit facility until December 31, 2001, and it expires
on January 5, 2007. The ING credit facility is not guaranteed by Sirrom.
However, certain actions by Sirrom can trigger an event of default under the ING
credit facility, including a reduction in Sirrom's tangible net worth below
approximately $270 million. These would cause termination of further funding and
the application of the collateral pledged for repayment of the amounts
outstanding under the ING credit facility. In addition, the ING credit facility
provides that an event of default is triggered if any two of George M. Miller,
II, David M. Resha and Carl W. Stratton are no longer employed by Sirrom. If the
merger is completed, FINOVA presently intends to repay all amounts outstanding
under the ING credit facility at the effective time of the merger and to
terminate the commitment under the ING credit facility.
Sirrom presently anticipates that the merger will be completed early in the
second quarter of 1999. Sirrom believes that anticipated borrowings under the
ING credit facility, together with cash on hand, loan repayments and cash flow
from operations plus realized gains on investments, will only be adequate to
fund the continuing growth of Sirrom's investment portfolio through the second
quarter of 1999. In the event that Sirrom does not complete the merger, Sirrom
will need to incur additional short and long-term borrowings from other sources,
and sell equity in private transactions or sell certain non-core business
assets, in order to provide the funds necessary for Sirrom to continue its
growth strategy beyond that period. The availability and terms of borrowings,
sales of equity and sales of assets, will depend upon market conditions, the
interest rate environment and various other conditions, including the
performance of Sirrom's portfolio. There can be no assurances that additional
funding will be available on terms acceptable to
93
<PAGE> 104
Sirrom and failure to procure additional funding would require Sirrom to
significantly reduce its loan originations which would materially affect its
growth and market presence.
PORTFOLIO TURNOVER AND CREDIT QUALITY
During the year ended December 31, 1998, Sirrom made loans to 178 companies
totaling approximately $301.8 million and received repayments (either partial or
full) from 66 companies aggregating $94.9 million. During the year ended
December 31, 1997, Sirrom made loans to 150 companies totaling approximately
$282.3 million and received repayments (either partial or full) from 47
companies aggregating $67.7 million. During the year ended December 31, 1996,
Sirrom made loans to 84 companies totaling approximately $132 million and
received repayments (either partial or full) from 24 companies aggregating $32.6
million. Since inception, Sirrom has originated $901 million in total loans and
$220.2 million, or 24.4% have been repaid. Sirrom cannot control changes in its
portfolio of investments, as borrowers have the right to prepay loans made by
Sirrom without penalty.
Sirrom has implemented a system by which it grades all loans on a scale of
1 to 6. The system was intended to reflect the performance of the borrower's
business, as well as the collateral coverage of the loans and other relevant
factors. To monitor and manage the risk in the overall portfolio, management
tracks the weighted average portfolio grade. The weighted average grade was 3.26
and 3.04 at December 31, 1998 and 1997, respectively. Sirrom believes that
weighted average grades between 2.75 and 3.25 represent the current normal range
for the portfolio.
Management believes that loans with a grade 1 involve the least amount of
risk in Sirrom's portfolio, as the borrower is performing well above
expectations financially, and other risk factors are clearly favorable.
Management believes that loans with a grade 2 involve low risk relative to other
loans in Sirrom's portfolio, as the borrower is performing above expectations
financially and the majority of risk factors are favorable. Management believes
that loans with a grade 3 involve an acceptable risk, as the borrower is
performing as expected financially and the other risk factors are generally
favorable.
Loans graded 4 typically involve a borrower that is performing marginally
below expectations and there exists short-term negative trends or negative
events that have created some concern. Sirrom's management believes that loans
in this category require a proactive action plan to be executed by the
borrower's management and monitored by the responsible Sirrom officer. A grade 4
is typically a temporary rating that is followed by an upgrade or downgrade
within six months as the borrower's business improves or declines. As of
December 31, 1998 and 1997, Sirrom's portfolio consisted of 32 and 18 loans,
respectively, graded 4. The aggregate principal balance of loans graded 4 at
December 31, 1998 and 1997, respectively, was $66.9 million and $49 million,
which represented 11.9% and 10.2%, respectively, of the total portfolio balance
at such dates.
Loans graded 5 and 6 are placed on Sirrom's credit watch list and are
serviced by a member of Sirrom's workout group. Loans with a grade 5 are
generally in default and interest is generally not being accrued, but Sirrom's
management believes the borrower's management is capable of executing a plan to
return the borrower to an acceptable risk level. Loans with a grade 6 involve an
unacceptable level of risk with substantial probability of loss. These loans are
on non-accrual and Sirrom has charged off or expects to charge off a significant
part of the loan. At December 31, 1998 and 1997, Sirrom had loans to 31
companies with an aggregate principal balance of $69.2 million and 16 companies
with an aggregate principal balance of $27.7 million, respectively, that were
graded a 5 or 6 and that were not accruing interest, which represented 12.3% and
6.5%, respectively, of the total portfolio balance.
Since late 1995 when Sirrom refined its loan grading system to reflect
management's additional experience in monitoring its growing portfolio, the
percentage of the principal balance
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of loans graded 4 to the total portfolio balance has typically ranged between
10% and 15%, with an occasional decrease below that range. Also since that time,
the percentage of the principal balance of loans graded 5 and 6 to the total
portfolio balance has typically ranged between 6% and 10%. Given the nature of
Sirrom's business, making loans to small companies, and the risks associated
with this business, Sirrom expects the absolute dollar amount of loans graded 4,
5 and 6 and the ratio of these loans to the total portfolio to vary greatly,
individually and in the aggregate, on a quarter to quarter basis.
Sirrom believes the percentage of grade 4 loans at December 31, 1998 to be
within the current normal range of variability. Sirrom also believes the
percentage of grade 5 and 6 loans to be above the current normal range of
variability as a result of a combination of factors, including the following:
- The substantial growth in the portfolio over the last two years, coupled
with the concept that non-performance on new loans typically comes early
in the loan's life cycle, has significantly impacted the percentage
increase of loans graded 4, 5 and 6.
- Due to the tightening of credit standards within many commercial banks
and other lenders during the second half of 1998, senior lenders to
certain of Sirrom's portfolio companies have instituted interest payment
blockages with respect to Sirrom's loans under circumstances in which
they might not have done so in the past. These interest payment blockages
have caused the loans to be put on Sirrom's credit watch list when they
otherwise would not have been placed on the list.
Sirrom is closely monitoring the recent upward trend in the ratio of loans
in the lower three credit grades to the total portfolio, has decided to reduce
the rate of growth of loan originations and continues to redefine its operating
model to seek to improve overall asset quality. See "Business -- Operations." No
assurance, however can be given that the trends in total loans classified in the
lower three loan categories will not continue, or that the total loans
classified 5 and 6 will not continue to grow, particularly if overall economic
conditions nationally, internationally or in the Southeastern United States
deteriorate.
YEAR 2000 COMPLIANCE
The Year 2000 issue, in general terms, is that many existing computer
systems and microprocessors with date-based functions, including non-information
technology equipment and systems, use only two digits to identify a year. This
equipment and systems assumes that the first two digits of the year are always
"19." Consequently, on January 1, 2000, computers that are not Year 2000
compliant may read the year as 1900. The concern is that systems that calculate,
compare or sort using the incorrect date may malfunction. If these malfunctions
are not corrected, business operations could be disrupted. In an attempt to
prevent these problems, Sirrom has begun implementing a Year 2000 compliance
program. Sirrom created a Year 2000 Compliance Committee that is focusing on
three primary areas of concern: Sirrom's information technology and other
systems, third parties and portfolio companies.
Most of the software used in Sirrom's information technology systems is
provided by outside vendors. Sirrom uses two primary software programs, one to
track its investment portfolio and one to provide accounting functions. These
programs have been designated as Year 2000 compliant by the vendors.
Additionally, Sirrom will either conduct its own tests for compliance or use
third party test results. Approximately 90% of Sirrom's remaining vendors have
provided software or software upgrades designated by the software vendor as Year
2000 compliant. In addition, Sirrom has developed a Year 2000 contingency plan
to address vendor-supplied software which does not meet Sirrom's Year 2000
compliance deadlines.
Sirrom's non-information technology systems used to conduct business at its
facilities consist primarily of office equipment besides computers and
communications equipment. Sirrom
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has inventoried its non-information technology systems and has contacted its
office equipment vendors to determine the status of their Year 2000 readiness.
Sirrom does not currently believe that it faces material adverse issues for its
non-information technology systems.
Sirrom has been actively communicating with third parties about the status
of their Year 2000 readiness. These third parties include Sirrom's banks,
vendors, landlords and suppliers of telecommunication services and other
utilities. As part of the process of evaluating its options and attempting to
mitigate third party risks, Sirrom is collecting and analyzing information from
third parties.
Sirrom is also investigating the impact of the Year 2000 issue on its
portfolio companies. Beginning in February 1998, Sirrom submitted a series of
questionnaires to its portfolio companies as of December 31, 1997, to determine
their potential exposure to Year 2000 problems and the adequacy of their plans
to address any exposure. Additionally, since January 1998, Sirrom has performed
due diligence regarding the Year 2000 issue for all new borrowers. Sirrom plans
to complete its evaluation of its portfolio companies and will then complete any
necessary follow up by March 31, 1999 with those portfolio companies whom Sirrom
believes have material exposure and inadequate contingency plans. Based upon the
disclosure received from the responding companies, Sirrom believes that
companies whose loans represent approximately 90% of its portfolio have either
no material exposure to Year 2000 or are finalizing their contingency plans to
address this exposure. Sirrom has not made a determination with respect to the
balance of its portfolio as it is in the process of finalizing its review of
those companies.
Through March 31, 1999, Sirrom will continue with the testing and
remediation of its information technology and non-information technology systems
and the evaluation of its third party and portfolio company Year 2000 risks.
Sirrom will take further steps designed to reduce its exposure to these risks.
Sirrom will also further develop its contingency plan for business continuation
in the event of a Year 2000 systems failure. This contingency plan is based upon
Sirrom's existing disaster recovery plan with modifications for Year 2000 risks.
Because Sirrom has maintenance contracts with most of its software vendors,
it has not been required to purchase most of the software upgrades necessary to
ensure Year 2000 compliance. As a result, the cost of Sirrom's Year 2000 project
is expected to be relatively minor, not exceeding $200,000. This amount includes
the costs of:
- additional software;
- Sirrom's systems professionals dedicated to achieving Year 2000
compliance for Sirrom's information technology systems;
- the costs of analyzing the Year 2000 readiness of the portfolio
companies; and
- other employee and management costs.
Sirrom has included the cost of the Year 2000 project in its annual budgets for
information technology. Sirrom has postponed some minor non-Year 2000
information technology expenditures and initiatives until after 2000 so it can
concentrate resources on the Year 2000 issue. Sirrom does not expect that this
postponement will have a material effect on Sirrom's financial condition and
results of operations.
It is hard to predict the effect of Year 2000 non-readiness on the business
of Sirrom. Significant Year 2000 failures in Sirrom's systems or in the systems
of third parties could have a material adverse effect on Sirrom's business.
Given the size and age of its portfolio companies and the service-based
industries in which they primarily operate, Sirrom anticipates that few of its
portfolio companies will face any material issues regarding the Year 2000.
However, no assurance can be given that some of Sirrom's portfolio companies
will not suffer material adverse effects from Year 2000 issues. If the adverse
effects impact the companies' ability to
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repay their loans, Sirrom's operating results and financial condition could be
adversely effected. Sirrom believes that its reasonably likely worst case Year
2000 scenario is a material increase in Sirrom's credit losses due to Year 2000
problems for Sirrom's portfolio and disruption in financial markets causing
liquidity stress to Sirrom. The magnitude of these potential credit losses or
disruption cannot be determined at this time.
INTEREST RATES, EQUITY PRICES AND FOREIGN CURRENCY EXCHANGE RATES
Sirrom is subject to market risk associated with changes in interest rates,
equity prices, and foreign currency exchange rates.
Interest rates. Sirrom's balance sheet consists of two items subject to
interest rate risk. First, Sirrom's investment portfolio consists of fixed rate
loans. Given that the loans are priced at a fixed rate, changes in interest
rates do not have a direct impact on interest income. In addition, changes in
market interest rates are not typically a significant factor in the Sirrom
board's determination of fair value of these loans. Second, Sirrom's liabilities
consist of debt payable to the SBA and two financial institutions. The SBA
debentures are payable at fixed rates of interest, so changes in interest rates
do not affect Sirrom's interest expense. The two revolving credit facilities are
priced at floating rates of interest, with a basis of LIBOR, prime rate, or
commercial paper rates at Sirrom's option. As discussed in the notes to the
consolidated financial statements, Sirrom has entered into several interest rate
swap agreements to hedge against changes in interest expense related to changes
in market interest rates. While Sirrom attempts to match swaps with debt to
achieve a "perfect" hedging arrangement, at any point in time Sirrom's hedges
may not be fully effective in this regard due to (1) the amount swapped may not
match the amount borrowed due to Sirrom's inability to control the timing and
amount of loan originations and repayments and thus the amount borrowed under
the revolving credit facilities; (2) the monthly payments due from or payable to
the counterparties under the swaps are based on the average interest rate for a
30-day period for the respective interest rate being swapped (e.g., LIBOR), and
the timing and amount of Sirrom's borrowings during that period may cause
Sirrom's average interest rate paid to be different from the average rate under
the swap; and (3) the monthly payments due from or payable to the counterparty
under the commercial paper swaps are based on an index (USD-CP-H.15), and the
actual commercial paper sold by Sirrom under the ING credit facility may be at a
different interest rate than the index. As a result of these factors, at any
given time a change in interest rates could result in either an increase or
decrease in Sirrom's interest expense. Based on the amount borrowed and the swap
positions at December 31, 1998, a hypothetical 10% increase or decrease in
interest rates would result in a decrease or increase, respectively, in interest
exposure of approximately one-fourth of that amount. Additionally, changes in
interest rates could also impact the fair values of the swap agreements. See the
notes to the consolidated financial statements for fair value information
related to the swap agreements.
Equity prices. A significant portion of Sirrom's investment portfolio
consists of debt and equity investments in private companies. Sirrom would
anticipate no impact on these investments from modest changes in market equity
prices. However, should significant changes in market equity prices occur, there
could be a longer-term effect on valuations of private companies, which could
affect the carrying value and the amount and timing of gains realized on these
investments. Significant changes in market equity prices could affect the timing
of loan repayments, but should not affect the value of Sirrom's private company
loans. A smaller portion of Sirrom's investment portfolio consists of common
stocks and warrants to purchase common stock in publicly traded companies. At
December 31, 1998, these investments were carried at a fair value of $7.8
million. These investments are directly exposed to equity price risk, in that a
hypothetical ten percent change in these equity prices would result in a similar
percentage change in the fair value of these securities. Finally, Sirrom holds
debt and equity securities that are convertible into the common stock of
publicly traded companies. At December 31, 1998,
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these investments were carried at a fair value of $26.7 million. These
investments are directly exposed to equity price risk, but given that the
securities hold a liquidation preference that is senior to the common stock and
given that the securities have either an interest or dividend payment associated
with them, the change in fair value of these securities would be expected to be
less than any change in the price of the underlying common stock. Thus, a
hypothetical ten percent change in these equity prices would result in a lesser
percentage change in the fair value of these securities.
Foreign currency exchange rates. Approximately 96% and 4% of Sirrom's
investment portfolio is denominated in U.S. dollars and Canadian dollars,
respectively, as measured on a fair value basis. As such, Sirrom's exposure to
changes in foreign currency exchange rates is not material to its financial
position.
IMPACT OF INFLATION
Sirrom does not believe that inflation materially affects its business,
other than the impact that it may have on the securities markets, the valuations
of business enterprises and the relationship of the valuations to underlying
earnings. Those could all influence the value of Sirrom's investments.
DESCRIPTION OF FINOVA CAPITAL STOCK
The following summary of certain provisions of the FINOVA common stock,
preferred stock, junior participating preferred stock (the "Junior Preferred
Stock") and the rights to purchase the Junior Preferred Stock (the "Rights") of
FINOVA is not complete. Sirrom shareholders should refer to the FINOVA
Certificate and the FINOVA Bylaws, FINOVA's certificate of designations for the
Junior Preferred Stock and the Rights Agreement dated as of February 15, 1992,
as amended and restated as of September 14, 1995 (the "Rights Agreement"),
between FINOVA and Harris Trust & Savings Bank, as successor Rights Agent. To
obtain copies of those documents, see "Where You Can Find More Information."
FINOVA is authorized by the FINOVA Certificate to issue 105,000,000 shares
of capital stock, consisting of 5,000,000 shares of preferred stock, par value
$.01 per share, and 100,000,000 shares of common stock. On the recommendation of
FINOVA's board, at the 1999 annual meeting, the FINOVA shareholders will
consider approval of an amendment to FINOVA's Certificate to increase the number
of authorized shares. 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. As of February 26, 1999, there were
approximately 56,045,000 shares of FINOVA common stock outstanding, net of
approximately 2,510,000 treasury shares held by FINOVA, and no shares of
preferred stock outstanding. However, FINOVA has authorized 600,000 shares of
Junior Preferred Stock which have been reserved for issuance on the exercise of
the Rights.
FINOVA COMMON STOCK
The holders of FINOVA common stock are entitled to one vote per share. The
FINOVA Certificate does not provide for cumulative voting in the election of
directors. The FINOVA board may declare dividends on FINOVA common stock in its
discretion, if funds are legally available for those purposes. On liquidation,
holders of FINOVA common stock are entitled to receive pro rata any remaining
assets of FINOVA after FINOVA satisfies or provides for the satisfaction of all
liabilities and the obligations on its preferred stock, if any. The holders of
FINOVA common stock do not have preemptive rights to subscribe for or purchase
any shares of capital stock or other securities of FINOVA.
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PREFERRED STOCK
Under the FINOVA Certificate, the FINOVA board is authorized, without
shareholder action, to issue preferred stock in one or more series, with
designations, powers, preferences, rights, qualifications, limitations and
restrictions as the FINOVA board determines. Thus, the FINOVA board, without
shareholder approval, could authorize the issuance of preferred stock with
voting, conversion and other rights that could adversely affect the voting power
and other rights of the holders of FINOVA common stock or that could make it
more difficult for another company to enter into certain business combinations
with FINOVA. See "-- Certain Other Provisions of the Certificate of
Incorporation, the Bylaws and Delaware Law -- Preferred Stock" below.
SHAREHOLDER RIGHTS PLAN
In 1992, FINOVA issued one Right for each outstanding share of FINOVA
common stock. FINOVA has and will continue to issue one Right with each newly
issued share of FINOVA common stock, including stock issued on conversion of
preferred securities. The obligation to continue to issue the Rights, however,
will terminate on the expiration, exchange or redemption of the Rights.
Each Right entitles the registered holder to purchase from FINOVA 1/200th
of a share of the Junior Preferred Stock. The purchase price is $67.50 per
1/200th of a share, subject to adjustment under certain circumstances.
The Rights will trade only with FINOVA common stock, and FINOVA will not
issue separate certificates for the Rights until the "Rights Distribution Date."
That date occurs on the first to occur of the following events:
- 10 days after a public announcement (the "Share Acquisition Date") that a
person or group of persons acting together has become the beneficial
owner of 20% or more of FINOVA common stock, directly or indirectly
(becoming an "Acquiring Person"); or
- 10 business days after the start or announcement of an intention to make
a tender offer or exchange offer that would result in a person or group
acting together beneficially owning 20% or more of FINOVA common stock,
directly or indirectly. The FINOVA board, however, may extend this 10
business day deadline before the time the person or group becomes an
Acquiring Person.
The Rights may not be exercised until the Rights Distribution Date. The
Rights will expire on February 28, 2002 unless FINOVA extends that date or
unless FINOVA redeems or exchanges the Rights before then.
The value of each 1/200th interest in a share of Junior Preferred Stock is
intended to approximate the value of one share of FINOVA common stock, due to
the dividend, liquidation and voting rights of the Junior Preferred Stock. There
can be no assurance the value will be the same.
How the Rights Work
If a person or group becomes an Acquiring Person, their Rights become void.
The other Rights holders will have the right to exercise their Rights, at the
then current exercise price, for FINOVA common stock having a market value of
two times the exercise price of the Right. That right to purchase, however, will
not exist if the Rights Distribution Date is due to a tender or exchange offer
for all of the FINOVA common stock and the independent members of the FINOVA
board determine that the offer is at a fair price, on fair terms and is
otherwise in the best interests of FINOVA and its shareholders.
The other Rights holders also will have the same exercise rights described
above if, after a person or group becomes an Acquiring Person, FINOVA is
acquired in a merger or business
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combination or at least half of FINOVA's total assets and earning power are
sold. The tender or exchange offer exception described above applies if the
price offered to the shareholders for each share of FINOVA common stock is not
less than that paid in the tender or exchange offer, and the consideration is in
the same form as that paid in the tender or exchange offer. If the requirements
of this exception are met, then the Rights will expire.
Exchange of Rights
After a person or group becomes an Acquiring Person but before the
Acquiring Person acquires at least half of the outstanding FINOVA common stock,
the FINOVA board may exchange all or some of the Rights at an exchange ratio of
one share of FINOVA common stock for 1/200th of a share of Junior Preferred
Stock per Right, subject to adjustment.
Redemption of Rights
FINOVA may redeem all, but not less than all, the Rights for $.01 per Right
at any time before the earlier of 15 days after the Share Acquisition Date or
the expiration date noted above. The FINOVA board may determine the conditions,
terms and effective date for the redemption. FINOVA may pay the redemption price
in cash, FINOVA common stock or any other method selected by the FINOVA board.
Upon redemption, the right to exercise the Rights will terminate, and the
holders will only have the right to receive the redemption price.
No Rights as a Shareholder
Rights holders, as Rights holders, have no independent rights as
shareholders of FINOVA, including the right to vote or to receive dividends,
until the Rights are exercised.
Antitakeover Effects
The Rights have certain antitakeover effects. The Rights will substantially
dilute the ownership interest in FINOVA common stock of any Acquiring Person.
That dilution would impair the ability of the Acquiring Person to change the
composition of the FINOVA board. It also would impact its ability to acquire
FINOVA on terms not approved by the FINOVA board, including through a tender
offer at a premium to the market price, except through an offer conditioned on a
substantial number of Rights being acquired. The Rights should not interfere
with any merger or business combination approved by the FINOVA board, since
FINOVA may redeem the Rights before they become exercisable.
Junior Preferred Stock Not Registered
The Junior Preferred Stock is not registered with the SEC or any other
securities administrator. If the Rights become exercisable, FINOVA intends to
register with the SEC the Junior Preferred Stock exchangeable for the Rights.
CERTAIN OTHER PROVISIONS OF THE CERTIFICATE OF INCORPORATION, THE BYLAWS AND
DELAWARE LAW
The FINOVA Certificate and FINOVA Bylaws contain certain provisions that
could make more difficult an acquisition of FINOVA by means of a tender offer, a
proxy contest or otherwise. This description is only a summary and does not
provide all the information contained in the FINOVA Certificate and FINOVA
Bylaws. To obtain copies of these documents, see "Where You Can Find More
Information."
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Delaware law permits a corporation to eliminate or limit the personal
liability of its directors to the corporation or to any of its shareholders for
monetary damages for a breach of fiduciary duty as a director, except:
- for breach of the duty of loyalty;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for certain unlawful dividends and stock purchases and redemptions; or
- for any transaction from which the director derived an improper personal
benefit.
The FINOVA Certificate provides that no director will be personally liable to
FINOVA or its shareholders for monetary damages for any breach of his or her
fiduciary duty as a director, except as provided by Delaware law.
Board of Directors
The FINOVA Certificate and FINOVA Bylaws divide the FINOVA board into three
classes of directors, as nearly equal in number as possible. The shareholders
elect one class of directors each year for a three-year term.
The classification of directors makes it harder for shareholders to change
the composition of the FINOVA board. At least two special meetings of
shareholders, instead of one, generally will be required to change a majority of
the FINOVA board. That delay may help ensure that FINOVA's directors, if
confronted by a proxy contest, tender or exchange offer or extraordinary
corporate transaction, would have sufficient time to review the proposal as well
as any available alternatives to the proposal and to act in what they believe to
be the best interest of the shareholders. The classification provisions apply to
every election of directors, regardless of whether a change in the composition
of the FINOVA board would be beneficial to FINOVA and its shareholders and
whether or not a majority of the shareholders believe that a change is
desirable.
The classification provisions also could discourage a third party from
initiating a proxy contest, tender offer or other attempt to obtain control of
FINOVA, even though an attempt might be beneficial to FINOVA and its
shareholders. The classification of the FINOVA board thus increases the
likelihood that incumbent directors will retain their positions. In addition,
because the classification provisions may discourage accumulations of large
blocks of FINOVA's stock by purchasers whose objective is to take control of
FINOVA and remove a majority of the FINOVA board, the classification of the
FINOVA board could reduce the likelihood of fluctuations in the market price of
FINOVA common stock that might result from accumulations of large blocks.
Accordingly, shareholders could be deprived of certain opportunities to sell
their shares of FINOVA common stock at a higher market price than otherwise
might be the case.
Number of Directors; Removal; Filling Vacancies
The FINOVA Certificate provides that, subject to any rights of preferred
shareholders to elect additional directors under specified circumstances, the
number of directors will be fixed as stated in the FINOVA Bylaws. The FINOVA
Bylaws provide that, subject to any rights of holders of preferred stock to
elect directors under specified circumstances, the number of directors will be
fixed exclusively by directors constituting a majority of the total number of
directors that FINOVA would have if there were no vacancies on the FINOVA board,
but must consist of between 3 and 17 directors.
In addition, the FINOVA Bylaws provide that, subject to any rights of
preferred shareholders, and unless the FINOVA board otherwise determines, any
vacancies will be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum. Accordingly,
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absent an amendment to the FINOVA Bylaws, the FINOVA board could prevent any
shareholder from enlarging the FINOVA board and filling the new directorships
with that shareholder's own nominees.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the shareholders for cause. In addition, the FINOVA Certificate and FINOVA
Bylaws provide that directors may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of the voting power of all the then
outstanding shares of stock entitled to vote generally in the election of
directors, voting as a single class.
Shareholder Action by Written Consent; Special Meetings
Shareholders of FINOVA must act only through an annual or special meeting.
Shareholders cannot act by written consent in lieu of a meeting. Only the
Chairman or a majority of the whole FINOVA board may call a special meeting.
Shareholders of FINOVA are not able to call a special meeting to require that
the FINOVA board do so. At a special meeting, shareholders may consider only the
business specified in the notice of meeting given by FINOVA. Preferred
shareholders may be given different rights from those noted above.
The provisions of the FINOVA Certificate and FINOVA Bylaws prohibiting
shareholder action by written consent may have the effect of delaying
consideration of a shareholder proposal until the next annual meeting, unless a
special meeting is called by the Chairman or at the request of a majority of the
FINOVA board. These provisions also would prevent the holders of a majority of
stock from unilaterally using the written consent procedure to take shareholder
action. Moreover, a shareholder could not force shareholder consideration of a
proposal over the opposition of the Chairman and the FINOVA board by calling a
special meeting of shareholders before the time the Chairman or a majority of
the FINOVA board believes this consideration to be appropriate.
Advance Notice Provisions for Shareholder Nominations and Shareholder Proposals
The FINOVA Bylaws establish an advance notice procedure for shareholders to
nominate directors, or bring other business before an annual meeting of
shareholders of FINOVA.
A person may not be nominated for a director position unless that person is
nominated by or at the direction of the FINOVA board or by a shareholder who has
given appropriate notice to FINOVA's Secretary during the periods noted below
before the meeting. Similarly, a shareholder may not bring business before an
annual meeting unless the shareholder has given FINOVA's Secretary appropriate
notice of its intention to bring that business before the meeting. FINOVA's
Secretary must receive the nomination or proposal between 70 and 90 days before
the first anniversary of the prior year's annual meeting. If FINOVA's annual
meeting date is advanced by more than 20 days or delayed by more than 70 days
from that anniversary date, then FINOVA's Secretary must receive the notice
between 90 days before the meeting and the later of the 70th day before the
meeting or 10 days after the meeting date is first publicly announced.
If the FINOVA board increases the number of directors and if FINOVA has not
publicly announced nominees for each open position within 80 days before the
first anniversary of the prior year's annual meeting, shareholders may nominate
directors for the new position, but only those newly created positions, if
FINOVA's Secretary receives the notice no later than 10 days following public
announcement of that change.
Shareholders may nominate directors only at a special meeting by sending
appropriate notice for receipt by FINOVA's Secretary between the 90th day before
the meeting and the later of the 70th day before the meeting or the 10th day
after the first public announcement of the meeting date.
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A shareholder's notice proposing to nominate a person for election as a
director must contain certain information, including the identity and address of
the nominating shareholder, the class and number of shares of stock of FINOVA
beneficially owned by the shareholder and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the proposed nominee. A shareholder's notice relating to the conduct
of business other than the nomination of directors must contain certain
information about that business and about the proposing shareholder, including a
brief description of the business the shareholder proposes to bring before the
meeting, the reasons for conducting that business at the meeting, the name and
address of the shareholder, the class and number of shares of stock of FINOVA
beneficially owned by that shareholder and any material interest of the
shareholder in the business so proposed. If the Chairman or other officer
presiding at a meeting determines that a person was not properly nominated, or
other business was not properly brought before the meeting, the person will not
be eligible for election as a director, or the business will not be conducted at
the meeting, as appropriate.
Advance notice of nominations or proposed business by shareholders gives
the FINOVA board time to consider the qualifications of the proposed nominees,
the merits of the proposals and, to the extent deemed necessary or desirable by
the FINOVA board, to inform shareholders about those matters. The FINOVA board
also may recommend positions regarding those nominees or proposals, so that
shareholders can better decide whether to attend the meeting or to grant a proxy
regarding the nominee or that business.
Although the FINOVA Bylaws do not give the FINOVA board any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, these procedures may preclude a contest for the election
of directors or the consideration of shareholder proposals if the proper
procedures are not followed, or discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal, without regard to whether consideration of the
nominees or proposals might be harmful or beneficial to FINOVA and its
shareholders.
Preferred Stock
The FINOVA Certificate authorizes the FINOVA board to establish one or more
series of preferred stock and to determine, for any series of preferred stock,
the terms and rights of the series, including;
- the designation of the series;
- the number of shares of the series, which the FINOVA board may increase
or decrease, but not below the number of shares of that series then
outstanding, unless otherwise provided by the terms of the series;
- whether dividends, if any, will be cumulative or noncumulative and the
dividend rate of the series, if any;
- the dates at which dividends, if any, will be payable;
- the redemption rights and price or prices, if any, for shares of the
series;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
- the amounts payable on shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of FINOVA's
affairs;
- whether the shares of the series will be convertible into shares of any
other class or series, or any other security, of FINOVA or any other
corporation, and, if so, the specification of class or series or
security, the conversion price or prices or rate or rates,
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any adjustments to the prices or rates, the date or dates as of which the
shares shall be convertible and all other terms upon which the conversion
may be made;
- restrictions on the issuance of shares of the same series or of any other
class or series; and
- the voting rights, if any, of the holders of shares of the series.
FINOVA believes that the ability of the FINOVA board to issue one or more
series of preferred stock will provide FINOVA with flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs which might arise. The authorized shares of preferred stock, as well as
shares of FINOVA common stock, will be available for issuance without further
action by FINOVA's shareholders, unless approval is required by applicable law
or the rules of any stock exchange or automated quotation system on which
FINOVA's securities are listed or traded. The NYSE currently requires
shareholder approval in several instances, including where the present or
potential issuance of shares could result in an increase in the number of shares
of common stock, or in the amount of voting securities, outstanding of at least
20%, subject to certain exceptions. If the approval of FINOVA's shareholders is
not required for the issuance of shares of preferred stock or FINOVA common
stock, the FINOVA board may determine not to seek shareholder approval.
Although the FINOVA board has no intention at the present time of doing so,
it could issue a series of preferred stock that could, depending on its terms,
impede a merger, tender offer or other takeover attempt. The FINOVA board will
make any determination to issue shares with those terms based on its judgment as
to the best interests of FINOVA and its shareholders. The FINOVA board, in so
acting, could issue preferred stock having terms that could discourage an
acquisition attempt, including a tender offer or other transaction, in which an
acquiror would change the composition of the FINOVA board. An acquisition
attempt could be discouraged in this manner even if some, or a majority, of
FINOVA's shareholders believe it to be in their best interests or in which
shareholders might receive a premium for their stock over the then current
market price of the stock.
Merger/Sale of Assets
The FINOVA Certificate provides that certain "business combinations" must
be approved by the holders of at least 66 2/3% of the voting power of the shares
not owned by an "interested stockholder," unless the business combinations are
approved by the "Continuing Directors" or meet certain requirements regarding
price and procedure. The terms quoted in this paragraph are defined in the
FINOVA Certificate.
Amendment of Certain Provisions of the Certificate of Incorporation and Bylaws
Under Delaware law, shareholders may adopt, amend or repeal the bylaws and,
with approval of the board, the certificate of incorporation of a corporation.
In addition, a corporation's board may adopt, amend or repeal the bylaws if
allowed by the certificate of incorporation. The FINOVA Certificate requires a
vote of:
- at least 80% of the outstanding shares of voting stock, voting together
as a single class, to amend provisions of the FINOVA Certificate relating
to the prohibition of shareholder action without a meeting; the number,
election and term of FINOVA's directors; and the removal of directors;
- at least 66 2/3% of the outstanding shares of voting stock, voting
together as a single class, to amend the provisions of the FINOVA
Certificate relating to approval of certain business combinations; and
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- at least a majority of the outstanding shares of voting stock, voting
together as a single class, to amend all other provisions of the FINOVA
Certificate.
The FINOVA Certificate further provides that the FINOVA Bylaws may be
amended by the FINOVA board or by the affirmative vote of the holders of at
least 80% of the voting power of the outstanding shares of voting stock, voting
together as a single class. These supermajority voting requirements make it more
difficult for the shareholders to amend the FINOVA Bylaws or any of the
provisions of the FINOVA Certificate, even if a majority of FINOVA's
shareholders believe that amendment would be in their best interests.
Antitakeover Legislation
Subject to certain exceptions, Delaware law does not allow a corporation to
engage in a business combination with any interested stockholder for a
three-year period following the date that the shareholder becomes an interested
stockholder, unless:
- before that date, the board approved either the business combination or
the transaction in which the shareholder became an interested
stockholder;
- on that date, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares); or
- on or after that date, the board and 66 2/3% of the outstanding voting
stock not owned by the interested stockholder approved the business
combination.
Except as specified by Delaware law, an interested stockholder includes (1)
any person that is the owner of 15% or more of the outstanding voting stock of
the corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at any
time within three years immediately before the relevant date, and (2) the
affiliates and associates of that person.
Under certain circumstances, Delaware law makes it more difficult for an
interested stockholder to enter into various business combinations with a
corporation for a three-year period. Shareholders, however, may adopt an
amendment to a corporation's certificate of incorporation or bylaws excluding
the corporation from these restrictions. However, the FINOVA Certificate and the
FINOVA Bylaws do not exclude FINOVA from the restrictions imposed under Delaware
law. These provisions of Delaware law may encourage companies interested in
acquiring FINOVA to negotiate in advance with the FINOVA board, since the
shareholder approval requirement would be avoided if a majority of the FINOVA
board approves either the business combination or the transaction which results
in the shareholder becoming an interested stockholder.
COMPARISON OF RIGHTS OF SIRROM SHAREHOLDERS
AND FINOVA SHAREHOLDERS
Sirrom is incorporated under the laws of the State of Tennessee. FINOVA is
incorporated under the laws of the State of Delaware. The Sirrom shareholders'
rights are currently governed by Tennessee law, the Sirrom Charter and the
Sirrom Bylaws. Upon the exchange of your shares of Sirrom common stock for
shares of FINOVA common stock, your rights will be governed by Delaware law, the
FINOVA Certificate and the FINOVA Bylaws. Material differences between your
rights as a holder of shares of Sirrom common stock and your rights as a FINOVA
shareholder are summarized below.
As a shareholder of a business development company you are currently
entitled to vote on any change in the fundamental policies of Sirrom and on any
election by Sirrom to withdraw its status as a business development company.
There will be no corresponding rights as a FINOVA
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shareholder. As a company licensed under the Tennessee BIDCO Act, and therefore
subject to regulation by the Tennessee Department of Financial Institutions,
Sirrom must have shareholder approval for any change in control. As a
shareholder of FINOVA you will not have similar rights.
The following summary highlights certain differences in the TBCA, the DGCL,
the FINOVA Certificate, the FINOVA Bylaws, the Sirrom Charter and the Sirrom
Bylaws. The identification of specific differences is not meant to indicate that
other equally, or more significant differences, do not exist. Copies of the
FINOVA Certificate and the FINOVA Bylaws are incorporated into this document by
reference. Copies of the Sirrom Charter and the Sirrom Bylaws will be furnished
to you upon request. FINOVA will send copies of any of these to you at your
request. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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<S> <C>
AUTHORIZED STOCK
The Sirrom Charter authorizes stock consisting of The FINOVA Certificate authorizes stock consisting of
75,000,000 shares of common stock, no par value per 100,000,000 shares of common stock, par value $.01
share. per share, and 5,000,000 shares of preferred stock,
par value $.01 per share. FINOVA anticipates that it
will seek shareholder approval to increase its
authorized shares at its next shareholders meeting.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
Under the TBCA generally, a corporation's board of In Delaware, a corporation's board of directors must
directors and a majority of the outstanding shares of recommend and the shareholders holding a majority of
common stock entitled to vote on the following must the outstanding shares of a corporation entitled to
approve a merger, share exchange, or sale, lease, vote must vote in favor of certain mergers or
exchange or other disposition of substantially all of consolidations, and sales, leases or exchanges of all
a corporation's assets. In accordance with the TBCA, or substantially all of a corporation's assets.
submission by a corporation's board of directors of Additionally, similar board recommendations and
that action may be conditioned on any basis, shareholder approval is required for most amendments
including conditions regarding a super-majority to the corporation's certificate of incorporation.
voting requirement or that no more than a certain
number of shares indicate that they will seek A shareholder vote of the surviving corporation is
dissenters' rights, if the rights are otherwise not required to approve the merge in the following
available. situations:
Under the TBCA generally, the shareholders of a - the related agreement of merger does not amend the
corporation need not vote on a merger or share corporation's certificate of incorporation;
exchange if the corporation is the surviving
corporation and the following results occur: - each share of common stock outstanding immediately
before the merger is an identical outstanding
- the charter remains unchanged after the or treasury share of common stock after the
transaction, subject to certain exceptions; merger; and
- each shareholder of the corporation immediately - the number of shares of common stock to be issued
before the transaction holds an identical in the merger, or to be issuable upon conversion of
number of shares, with identical rights and any convertible instruments to be issued in the
preferences, after the transaction; merger, does not exceed 20% of the shares of
the common stock outstanding immediately before
- the number of voting shares outstanding the merger.
immediately after the transaction plus the
number of voting shares issuable as a result of
the transaction, either by conversion of
securities issued pursuant to the transaction
or the exercise of rights and warrants issued
pursuant to the transaction, does not exceed by
more than 20% the number of voting shares of
the surviving corporation outstanding
immediately before the transaction; and
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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<S> <C>
- the number of participating shares outstanding
immediately after the transaction, plus the
number of participating shares issuable as a
result of the transaction, either by conversion
of securities issued pursuant to the
transaction or the exercise of rights and
warrants issued pursuant to the transaction,
does not exceed by more than 20% the total
number of participating shares outstanding
immediately before the transaction.
Shareholders of a corporation are not entitled to
vote on a sale, lease, exchange or other disposition
of substantially all the assets of a corporation if
the transfer was conducted in the regular course of
business or if the transfer was made to a wholly
owned subsidiary of the corporation.
BOARD OF DIRECTORS
Under the TBCA, directors, unless their terms are Under Delaware law, directors, unless their terms are
staggered, hold office until the next annual meeting staggered, are elected at each annual shareholders
of shareholders and until their successors are meeting. The certificate of incorporation may
elected and qualify. A Tennessee corporation may authorize the election of certain directors by one or
stagger the terms of its directors by dividing the more classes or series of shares, and the certificate
total number of directors into two or three groups of incorporation, an initial bylaw or a bylaw adopted
made up of one-half or one-third of the total number by a vote of the shareholders may provide for
of directors. The charter may also authorize the staggered terms for the directors. The certificate of
election of directors by any class or series of incorporation or the bylaws also may allow the
shares. Unless the charter or bylaws provide shareholders or the board of directors to fix or
otherwise, directors of a Tennessee corporation are change the number of directors, but a corporation
elected by a plurality of all the votes cast at a must have at least one director. Under Delaware law,
meeting at which a quorum is present. In Tennessee, shareholders do not have cumulative voting rights
every corporation having more than 50 shareholders unless provided for in the certificate of
must have a board of directors consisting of one or incorporation.
more individuals. The exact number of directors must Under the DGCL, a director of a corporation that does
be specified in or fixed under the charter or bylaws. not have a classified board of directors or
In Tennessee, absent a provision in a corporation's cumulative voting may be removed, with or without
charter limiting removal of directors for cause only, cause, with the approval of a majority of the
a director, or the entire board of directors, may be outstanding shares entitled to vote at an election.
removed with or without cause, by the shareholders of The FINOVA Certificate provides that the number of
the corporation. Any removal of a director may only directors will be fixed by the FINOVA Bylaws and may
be done at a meeting called for that purpose, and the be increased or decreased if allowed under the FINOVA
number of votes cast to remove a director must exceed Bylaws.
the number of votes cast not to remove the director.
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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<S> <C>
The Sirrom Bylaws, provide that the board may have no According to the FINOVA Bylaws, the number of
fewer than 4 nor more than 15 members. The Sirrom directors will be fixed exclusively by resolution
board has the authority to fix the exact number of adopted by a majority of the whole board, but must
directors, within the minimum and maximum, or the consist of not less than 3 nor more than 17
range for the size of the board. In addition, the directors. Currently, the FINOVA board is divided
Sirrom board decides whether the size of the board into three classes and is composed of 8 directors.
will be fixed or variable-range.
Under the FINOVA Bylaws a plurality of votes cast at
Under the Sirrom Bylaws, directors must be elected at shareholders meetings at which directors are to be
the first annual shareholders meeting and at each elected is required to elect the directors. A
subsequent annual shareholders meeting. Each director director holds office for a term of 3 years and until
serves for a term of one year. The directors' terms his or her successor is duly elected and qualified.
expire at the next annual shareholders meeting The FINOVA Certificate does not provide for
following their election. Currently, the Sirrom board cumulative voting.
consists of 10 directors, all of whom are elected Under the FINOVA Certificate and FINOVA Bylaws, any
annually. director, or the entire FINOVA board, may be removed
from office at any time, but only for cause and only
Under the Sirrom Bylaws, a director can be removed by the affirmative vote of the holders of at least
with or without cause by the Sirrom shareholders at a 80% of the voting power of the then- outstanding
meeting called specifically for that purpose, if the voting stock, voting together as a single class.
number of votes cast to remove the director exceeds
the number of votes cast not to remove director. The
notice of the meeting sent to shareholders must
specifically state that the purpose of the meeting is
the removal of one or more directors.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Under the TBCA, there is no specific provision either With limited exceptions, Delaware law permits a
expressly permitting or prohibiting a corporation corporation to adopt a provision in its certificate
from limiting the liability of its directors for of incorporation eliminating or limiting the personal
monetary damages. liability of a director, but not an officer, to the
corporation or its shareholders for monetary damages
The Sirrom Charter provides that, to the fullest for breach of fiduciary duty as a director. The
extent permitted by the TBCA, a director will not be following are items for which a corporation cannot
liable to the corporation or its shareholders for limit the liability of a director:
monetary damages for breach of his or her fiduciary
duty as a director. - any breach of the director's duty of loyalty to the
corporation or its shareholders;
- acts or omissions not in good faith or which
involve intentional misconduct or a knowing
violation of law;
- liability under Section 174 of the DGCL for
unlawful payment of dividends or stock purchases or
redemptions; or
- any transaction from which the director derived an
improper personal benefit.
FINOVA's Certificate expressly includes the DGCL
provisions covering limited liability of its
directors.
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<TABLE>
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
The TBCA provides that a corporation may indemnify Under Delaware law, a corporation may indemnify any
any director or officer against liability incurred in person made a party or threatened to be made a party
connection with a proceeding if the director or to any type of proceeding, other than an action by or
officer acted in good faith or reasonably believed, in the right of the corporation, because he is or was
in the case of conduct in his or her official an officer, director, employee or agent of the
capacity with the corporation, that the conduct was corporation against expenses, judgments, fines and
in the corporation's best interest. In all other amounts paid in settlement actually and reasonably
civil cases, a corporation may indemnify a director incurred in connection with the proceeding if the
or officer who reasonably believed that his or her following standards are met.
conduct was not opposed to the best interest of the
corporation. In connection with any criminal A corporation may indemnify a director if he acted in
proceeding, a corporation may indemnify any director good faith and in a manner he reasonably believed to
or officer who had no reasonable cause to believe be in or not opposed to the best interests of the
that his or her conduct was unlawful. corporation. In the case of a criminal proceeding, a
corporation may indemnify a director if the director
In actions brought by or in the right of the had no reasonable cause to believe that his conduct
corporation, however, the TBCA does not allow was unlawful. A corporation may also indemnify any
indemnification if the director or officer is person who was serving at the request of the
adjudged to be liable to the corporation. Similarly, corporation as a director, officer, employee or agent
the TBCA prohibits indemnification in connection with of another corporation or entity in a similar fashion
any proceeding charging improper personal benefit to with respect to actions by or in the right of the
a director or officer if the director or officer is corporation, court approval is required as a
adjudged liable because a personal benefit was prerequisite to indemnification of expenses in
improperly received. respect of any claim as to which a person has been
adjudged liable to the corporation.
In cases when the director or officer is wholly
successful, on the merits or otherwise, in the A corporation may indemnify any person made a party
defense of any proceeding instigated because of his or threatened to be made a party to any threatened,
or her status as a director or officer of a pending or completed action or suit brought by or in
corporation, the TBCA mandates that the corporation the right of the corporation because he was an
indemnify the director or officer against reasonable officer, director, employee or agent of the
expenses incurred in the proceeding. Notwithstanding corporation, against expenses actually and reasonably
the foregoing, the TBCA provides that a court may incurred in connection with the action or suit if he
order a corporation to indemnify a director or acted in good faith and in a manner he reasonably
officer for reasonable expense if, in consideration believed to be in or not opposed to the best
of all relevant circumstances, the court determines interests of the corporation. A corporation may also
that the individual is fairly and reasonably entitled indemnify any person who was serving at the request
to indemnification, whether or not the standard of of the corporation as a director, officer, employee
conduct set forth above was met. or agent of another corporation or entity in a
similar fashion. However, a corporation cannot
indemnify any person found liable to the corporation
unless the court determines the person is entitled to
indemnification.
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<TABLE>
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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<S> <C>
The Sirrom Bylaws allow for indemnification of A corporation must indemnify a director, officer,
members of the Sirrom board to the extent the assets employee or agent who successfully defends himself in
of Sirrom are greater than its liabilities, a proceeding to which he was a party because he was a
following, from any costs, expenses, damages, claims, director, officer, employee or agent of the
liabilities, fines and judgments incurred by or corporation against expenses actually and reasonably
asserted against the director by reason of any action incurred by him. Expenses incurred by an officer or
taken or not taken on behalf of the corporation and director, or other employees or agents as deemed
in furtherance of its interests so long as the appropriate by the board of directors, in defending a
director's actions meet the following standards. No civil or criminal proceeding may be paid by the
director will be liable to Sirrom or any Sirrom corporation in advance of the final disposition of
shareholder for any action taken or not taken by him the proceeding upon receipt of an undertaking by or
in good faith and in a manner reasonably believed by on behalf of that person to repay the amount if it is
the director to be in or not opposed to the best ultimately determined that he is not entitled to
interests of Sirrom. With respect to criminal actions indemnification by the corporation.
or proceedings, no director will be liable if he or
she had reasonable cause to believe that the conduct A corporation may purchase and maintain insurance on
was not unlawful. behalf of any person who is or was a director,
These provisions do not modify, limit or waive any officer, employee or agent of the corporation or who
right of the SBA. Any amendment of the Sirrom Bylaws is or was serving at the request of the corporation
regarding indemnification requires the prior written as a director, officer, employee or agent of another
consent of the SBA. corporation or other entity. The insurance may cover
any liability asserted against the person and
incurred by the person in that capacity, or arising
out of the person's status, whether or not the
corporation would have the power to indemnify the
person against the liability.
The FINOVA Certificate provides that each person
entitled to indemnification under the FINOVA
Certificate must be indemnified by FINOVA, under the
FINOVA Bylaws, to the fullest extent permitted by the
DGCL.
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<TABLE>
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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AMENDMENTS TO CHARTER/CERTIFICATE OF INCORPORATION AND BYLAWS
Under the TBCA, amendments to a corporation's charter Under DGCL, an amendment to the certificate of
after the issuance of shares generally require: incorporation of a corporation may be approved by a
majority of the total outstanding shares and a
- recommendation of the board of directors; and majority of the outstanding shares of each class
entitled to vote upon the proposed amendment. A
- the approval of shareholders who hold a higher vote can be required by the certificate of
majority of the votes entitled to be cast on incorporation.
the amendment by any voting group if the
amendment would create dissenter's rights. The Under the FINOVA Certificate, certain amendments
charter or other provisions of the TBCA could require greater approval than provided for in the
require a greater vote. DGCL. The affirmative vote of the holders of at least
80% of the voting power of the then-outstanding
The Sirrom Charter contains no provision for voting stock, voting as a single class, is required
amendment. to:
In Tennessee, a corporation's board of directors can - amend, repeal or adopt any provision that allows
amend the corporation's bylaws unless the TBCA, the the affirmative vote of the holders of less than
charter or the shareholders specify otherwise; 80% of the voting power of the then-outstanding
provided, however, the shareholders may amend or voting stock, voting as a single class, to alter,
repeal the bylaws even if the bylaws may also be amend or repeal any provision of the FINOVA Bylaws;
amended or repealed by the board. The TBCA does not
have general voting requirements for bylaw - amend, repeal or adopt any provision that allows
amendments. Bylaws that increase quorum or voting the affirmative vote of the holders of less than
requirements for shareholders or directors are 80% of the voting power of the then-outstanding
subject to special rules. Generally, these amendments voting stock, voting as a single class, to remove
must be passed according to the quorum and voting any director from office; and
requirements already in place or the new
requirements, whichever are greater. The board of - amend provisions in the FINOVA Certificate about
directors of a corporation may not adopt, amend or prohibiting shareholder action without a meeting.
repeal a bylaw amendment proposed by the shareholders The FINOVA Certificate also requires the affirmative
that fixes a greater quorum or voting requirement for vote of the holders of 66 2/3% of the voting power of
shareholders. the shares of the then-outstanding voting stock,
voting as a single class, including the affirmative
The Sirrom Bylaws provide that shareholders holding a vote of the holders of 2/3 of the voting power of
majority of the shares represented at a shareholders the then-outstanding voting stock owned by
meeting may vote to amend, alter, repeal or restate non-interested shareholders to amend, repeal or adopt
the Sirrom Bylaws. A majority of the members of the any provisions inconsistent with the FINOVA
Sirrom board who are present at any regular or Certificate's requirement of increased shareholder
special meeting may also vote to amend, alter, repeal approval for certain business combinations.
or restate the Sirrom Bylaws.
The DGCL provides that a corporation's shareholders
may amend the bylaws. Also, the corporation's
certificate of incorporation may grant that authority
to the corporation's directors, as long as the
shareholders' power to amend the bylaws is not
limited or removed.
Under the FINOVA Certificate, the FINOVA board is
expressly authorized and empowered to adopt, amend or
repeal the FINOVA Bylaws. However, the bylaws adopted
by the FINOVA board under this authorization may be
amended or repealed by the FINOVA board or by the
shareholders having voting power to vote on such
matter. Further, the affirmative vote of shareholders
of at least 80% of the voting power of the
then-outstanding voting stock, voting as a single
class, shall be required to alter, amend or repeal
any provision of the FINOVA Bylaws.
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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<S> <C>
SPECIAL MEETINGS OF SHAREHOLDERS; ACTION WITHOUT A MEETING
The Sirrom Bylaws require shareholders of at least Under the FINOVA Bylaws, special meetings of the
10% of all the votes entitled to be cast on a shareholders may be called only by the Chairman of
proposed issue to call a special meeting of the Board or by a majority of the FINOVA board. A
shareholders. majority is determined as a majority of the total
number of directors if there were no vacancies on the
Only that business within the purpose or purposes FINOVA board.
described in the meeting notice may be conducted at
the special shareholders meeting. The FINOVA Certificate expressly provides that any
action required or permitted to be taken by its
Under the Sirrom Bylaws, action required or permitted shareholders must be taken at a properly called
to be taken at a shareholders meeting may be taken annual or special meeting of shareholders. FINOVA
without a meeting if all shareholders entitled to shareholders may not take action without a meeting.
vote on the action consent to taking the action
without a meeting and the action is supported by the
number of affirmative votes that would be necessary
to authorize or take the action at a meeting of the
shareholders. Shareholders not entitled to vote on
the action taken must be given notice of the action
at least ten days before the action is taken if the
shareholders would have received notice of the action
had it been voted on at a properly called
shareholders meeting.
DIVIDENDS AND OTHER DISTRIBUTIONS
The TBCA provides that a corporation generally may The DGCL generally provides that a corporation may
make dividends or other distributions to its declare and pay dividends out of its surplus or, when
shareholders. A corporation cannot make dividends or no surplus exists, out of net profits for the fiscal
other distributions if after the distribution the year in which the dividend is declared and/or the
corporation would not be able to pay its debts as previous fiscal year. However, dividends may not be
they become due in the usual course of business, or paid out of net profits if the capital of the
if the corporation's total assets would be less than corporation is less than the amount of capital
the sum of its total liabilities plus, unless the represented by the issued and outstanding stock of
corporation's charter provides otherwise, the amount all classes having a preference upon the distribution
that would be needed to satisfy the preferential of assets.
dissolution rights of its shareholders whose
preferential rights are superior to those receiving The FINOVA Bylaws provide that the FINOVA board may
the distribution. periodically declare, and the corporation may pay,
dividends on its outstanding shares in the manner and
The Sirrom Bylaws provide that the Sirrom board may, upon the conditions provided by law and the FINOVA
periodically, declare dividends on its outstanding Certificate.
shares of capital stock. In that event, the record
date for determining shareholders entitled to receive
the payment of any dividend shall be decided by the
Sirrom board, but shall be at least ten days before
the date of the payment. Sirrom's obligations to
distribute its net income as a result of its RIC
status are discussed more fully on page 92.
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SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
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<S> <C>
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Under the TBCA, shareholders are generally entitled Under Delaware law, in certain circumstances, a
to dissenter's rights in connection with: shareholder of a Delaware corporation is entitled to
demand appraisal and obtain payment of the judicially
- mergers and share exchanges requiring determined fair value of his or her shares in the
shareholder approval; event of any plan of merger or consolidation to which
the corporation in which he or she is a shareholder
- sales of all or substantially all the is a party. The shareholder must continuously hold
corporation's property, unless in the usual and the shares through the effective date of the merger,
regular course of business or certain otherwise comply with the requirements of Delaware
liquidations or court ordered sales, if law for the perfection of appraisal rights and must
shareholders are entitled to vote on the sale not vote in favor of the merger. However, this right
or exchange; and to demand appraisal does not apply to shareholders
if:
- certain amendments to a corporation's charter
that materially and adversely affect rights in - they are shareholders of a surviving corporation
respect of a dissenter's shares. and a vote of the shareholders of the corporation
is not necessary to authorize the merger or
Dissenter's rights are not available for any shares consolidation; or
that are listed on a registered securities exchange
or classified as "national market system" securities - the shares held by the shareholders are either
as defined in the rules to the Exchange Act. Sirrom listed on a national securities exchange,
shareholders are not entitled to dissenter's rights, designated as a national market system security on
due to a listing of Sirrom's stock on the NYSE. an interdealer quotation system by the NASD or are
held of record by more than 2,000 shareholders on
the date set to determine the shareholders entitled
to vote on the merger or consolidation.
Notwithstanding the above, appraisal rights are
available for the shares of any class or series of
stock of a Delaware corporation if the agreement of
merger or consolidation requires the shareholders to
accept for their stock anything except:
- shares of stock of the corporation surviving or
resulting from the merger or consolidation;
- shares of stock of any other corporation which at
the effective date of the merger or consolidation
will be listed on a national securities exchange,
designated as a national market system security on
an interdealer quotation system by the NASD or held
of record by more than 2,000 shareholders;
- cash in lieu of fractional shares of these
corporations; or
- any combination of these.
FINOVA's shareholders are not entitled to any
additional dissenter's rights under the FINOVA
Certificate.
</TABLE>
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<TABLE>
<CAPTION>
SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
- ----------------------------------------------------- -----------------------------------------------------
<S> <C>
PREEMPTIVE RIGHTS
Tennessee law does not provide for preemptive rights Delaware law provides for preemptive rights with
unless a corporation's charter specifically so respect to new share issuances only as and to the
provides. The Sirrom Charter expressly provides that extent provided in a corporation's certificate of
its shareholders shall not have preemptive rights. incorporation. The FINOVA Certificate does not
expressly grant preemptive rights to the FINOVA
shareholders.
SHAREHOLDER RIGHTS PLANS
Shareholder rights plans are valid and enforceable Shareholder rights plans are valid and enforceable
under Tennessee law. Sirrom does not have a under Delaware law. Currently, FINOVA has a
shareholder rights plan in place. shareholder rights plan in place. See "Description of
FINOVA Capital Stock -- Shareholder Rights Plan."
BUSINESS COMBINATION STATUTE
The Tennessee Business Combination Act (the In general, the DGCL prevents an interested
"Combination Act") provides that a party owning 10% stockholder from engaging in a "business combination"
or more of the stock in a "resident domestic with a Delaware corporation for three years after the
corporation" is an "interested shareholder." An person became an interested stockholder. An
interested shareholder cannot engage in a business "interested stockholder" is defined generally, for
combination with the resident domestic corporation purposes of the DGCL, as a person owning 15% or more
unless the combination: of a corporation's outstanding voting stock, except
any person who owned and has continued to own shares
- takes place at least five years after the in excess of the 15% limitation since December 23,
interested shareholder first acquired 10% or 1987. For purposes of the DGCL, the term business
more of the resident domestic corporation; and combination includes mergers or the following types
of transactions between a corporation and an
- either is approved by at least two-thirds of interested stockholder:
the non-interested voting shares of the
resident domestic corporation or satisfies - mergers, consolidations and sales or other
certain fairness conditions specified in the dispositions of 10% or more of the assets of a
Combination Act. corporation to or with an interested stockholder;
These provisions apply unless one of two events - certain transactions resulting in the issuance or
occurs: transfer to an interested stockholder of any
stock of the corporation or its subsidiaries;
- A business combination with an entity can or
proceed without delay when approved by the
target corporation's board of directors before - other transactions resulting in a disproportionate
that entity becomes an interested shareholder, financial benefit to the interested stockholder.
or
The three-year ban may be avoided if:
- the resident corporation may enact a charter
amendment or bylaw to remove itself entirely - before the person became an interested stockholder,
from the Combination Act. This charter or bylaw the board of directors of the corporation approved
amendment must be approved by a majority of the either the business combination or the transaction
shareholders who have held shares for more than in which the interested stockholder became an
one year before the vote. In addition, the interested stockholder, or
charter amendment or bylaw cannot become operative
until two years after the vote. An interested - upon consummation of the transaction in which the
shareholder, for purposes of the Combination Act, shareholder became an interested stockholder, the
is any person who is an affiliate or associate of shareholder owned at least 85% of the outstanding
the corporation or the beneficial owner, directly voting stock of the corporation without regard to
or indirectly, of 10% or more of the outstanding those shares owned by officers of the corporation
voting shares of the corporation. or certain employee stock plans; or
</TABLE>
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<TABLE>
<CAPTION>
SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
- ----------------------------------------------------- -----------------------------------------------------
<S> <C>
Sirrom has not adopted a provision in the Sirrom
Charter or Sirrom Bylaws removing it from coverage of - on or after the date when the person became an
the Combination Act. interested stockholder, the business combination is
approved by the board of directors of the
corporation and authorized at an annual or special
meeting of shareholders, not by written consent, by
the affirmative vote of the shareholders of at
least 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested
stockholder.
The Combination Act further provides an exemption This provision does not apply to a corporation if the
from liability for officers and directors of resident certificate of incorporation or bylaws contain a
corporations who do not approve proposed business provision expressly electing not to be governed by
combinations or charter or bylaw amendments removing this provision or the corporation does not have
their corporations from the Combination Act's voting stock either listed on a national securities
coverage if the officers and directors acted with the exchange, authorized for quotation on an inter-
"good faith belief" that the proposed business dealer quotation system of a registered national
combination would adversely affect their securities association or held of record by more than
corporation's employees, customers, suppliers or the 2,000 holders.
communities in which their corporation operates, and
these factors are permitted to be considered by the The statute does not apply to certain business
board of directors under the charter. combinations with an interested stockholder when the
combination is:
The United States Court of Appeals for the Sixth
Circuit has held that the Combination Act is - proposed after the public announcement of, and
unconstitutional to the extent that it applies to before the consummation or abandonment of a merger
target corporations organized under the laws of or consolidation;
states other than Tennessee.
- a sale of 50% or more of the aggregate market value
of the assets of the corporation on a consolidated
basis or the aggregate market value of all
outstanding shares of the corporation;
- a tender offer for 50% or more of the outstanding
voting shares of the corporation;
- with or by a person who either was not an
interested stockholder during the previous three
years or who became an interested stockholder with
the approval of the board; or
- approved or not opposed by a majority of the
current directors who were also directors before
any person became an interested stockholder during
the previous three years.
The FINOVA Certificate and FINOVA Bylaws do not
remove FINOVA from the restrictions imposed by the
Delaware business combination statute.
CONTROL SHARE ACQUISITION ACT
The Tennessee Control Share Acquisition Act (the The DGCL contains no similar provision for control
"TCSAA") removes the voting rights of a purchaser's share acquisitions.
shares any time an acquisition of shares in a covered
corporation brings the purchaser's voting power to
one-fifth, one-third or
</TABLE>
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<TABLE>
<CAPTION>
SIRROM SHAREHOLDERS FINOVA SHAREHOLDERS
- ----------------------------------------------------- -----------------------------------------------------
<S> <C>
a majority of all voting power. The purchaser's
voting rights can be established only by a majority
vote of the other shareholders at a special meeting
of shareholders called by the purchaser for the
purpose of conducting a vote. The purchaser can
demand a meeting before making a control share
acquisition only if it holds at least 10% of the
outstanding shares of the corporation and announces a
good faith intention to make the control share
acquisition. A target corporation may or may not
redeem the purchaser's shares if the shares are not
granted voting rights. The TCSAA applies only to
corporations that have adopted provisions in their
charter or bylaws expressly declaring that the TCSAA
will apply. Neither the Sirrom Charter nor the Sirrom
Bylaws expressly declare that the TCSAA will apply.
INVESTOR PROTECTION ACT
Tennessee's Investor Protection Act (the "TIPA") The DGCL contains no similar provisions for investor
applies to tender offers directed at corporations, protection.
called "offeree companies," that have "substantial
assets" in Tennessee and are either incorporated in
or have a principal office in Tennessee. TIPA
requires an offeror making a tender offer for an
offeree company to file a registration statement with
the Commission of Commerce and Insurance, referred to
as the "commissioner." When the offeror intends to
gain control of the offeree company, the registration
statement must indicate any plans the offeror has for
the offeree company. The commissioner may require
additional information material to the takeover offer
and may call for hearings. TIPA does not apply to an
offer that the offeree company's board of directors
recommends to shareholders.
In addition to requiring the offeror to file a
registration statement with the commissioner, TIPA
requires the offeror and the offeree company to
deliver to the commissioner all solicitation
materials used in connection with the tender offer.
TIPA prohibits "fraudulent, deceptive, or
manipulative acts or practices" by either side, and
gives the commissioner standing to apply for
equitable relief to the Chancery Court of Davidson
County, Tennessee, or to any other chancery court
having jurisdiction whenever it appears to the
commissioner that the offeror, the offeree company,
or any of their respective affiliates has engaged in
or is about to engage in a violation of TIPA. Upon
proper showing, the Chancery Court may grant
injunctive relief. TIPA further provides civil and
criminal penalties for violations.
The United States Court of Appeals for the Sixth
Circuit has held that TIPA is unconstitutional as
applied to target corporations organized under the
laws of states other than Tennessee.
</TABLE>
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<PAGE> 127
LEGAL MATTERS
The validity of the shares of FINOVA common stock to be issued in
connection with the merger will be passed upon for FINOVA by Morgan, Lewis &
Bockius LLP.
Morgan, Lewis & Bockius LLP, counsel to FINOVA, and Bass, Berry & Sims PLC,
counsel to Sirrom, will each deliver opinions concerning federal income tax
consequences of the merger.
EXPERTS
The consolidated financial statements included in this proxy
statement/prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports, appearing herein and elsewhere in this
registration statement and are included in reliance upon the reports of that
firm, given upon their authority as experts in accounting and auditing.
The audited financial statements of Sirrom included in the proxy
statement/prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent auditors, as stated in their reports
with respect thereto. They are included in reliance upon the authority of Arthur
Andersen LLP as experts in giving these reports.
FUTURE SHAREHOLDER PROPOSALS
At times, shareholders seek to nominate directors or present proposals for
inclusion in the proxy statement and form of proxy for consideration at the
annual meeting. To be included in FINOVA's proxy statement or considered at an
annual or any special meeting, you must timely submit nominations of directors
or proposals, in addition to meeting other legal requirements. FINOVA had to
receive proposals for the 1999 annual meeting no later than November 27, 1998,
for possible inclusion in the proxy statement, or between February 13 and March
5, 1999, for possible consideration at the meeting, which is expected to take
place on Thursday, May 13, 1999. Direct any proposals, as well as related
questions to the Secretary, The FINOVA Group Inc., 1850 N. Central Avenue, P.O.
Box 2209. Phoenix, Arizona 85002-2209.
FINOVA's 1999 Proxy Statement issued in connection with its annual meeting
will list the dates by which proposals must be submitted for the 2000 annual
meeting.
If the merger does not occur, Sirrom shareholder proposals intended for
inclusion in the proxy statement and for consideration at Sirrom's 2000 annual
meeting must be received by November 13, 1999. Send those proposals to Sirrom
Capital Corporation, 500 Church Street, Suite 200, Nashville, Tennessee 37219,
Attn: Secretary. Proposals must be in writing and must satisfy the requirements
of the federal securities laws. In addition, the Sirrom Bylaws establish an
advance notice procedure with regard to certain matters, including shareholder
proposals not included in Sirrom's proxy statement, to be brought before an
annual meeting of shareholders. In general, notice must be received by the
Secretary of Sirrom by November 13, 1999 and must contain specified information
concerning the matters to be brought before the meeting and concerning the
shareholder proposing those matters.
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<PAGE> 128
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
1940 Act.............................. 24
Acquiring Person...................... 99
Antitrust Division.................... 42
Brown Lawsuit......................... 77
Combination Act....................... 114
DGCL.................................. 27
EPS................................... 35
Exchange Act.......................... 25
FDIC.................................. 69
FINOVA Bylaws......................... 43
FINOVA Certificate.................... 43
First Union credit facility........... 22
FTC................................... 42
Goldman Sachs......................... 28
Harris Williams....................... 19
Hirsch Lawsuit........................ 77
HSR Act............................... 42
IBES.................................. 34
ING................................... 22
ING credit facility................... 22
Internal Revenue Code................. 9
Junior Preferred Stock................ 98
LTM................................... 35
NYSE.................................. 9
Orrock Lawsuit........................ 77
RIC................................... 9
Rights................................ 98
Rights Agreement...................... 98
Rights Distribution Date.............. 99
Robinson-Humphrey..................... 28
SAFECO................................ 25
SBA................................... 22
SBA Regulations....................... 43
SBIA.................................. 43
SCC Canada............................ 70
Securities Act........................ 32
SFC................................... 22
Share Acquisition Date................ 99
SII................................... 22
Sirrom Bylaws......................... 25
Sirrom Charter........................ 25
Sirrom Partners....................... 25
Tandem Capital........................ 51
TBCA.................................. 25
TCSAA................................. 115
TD.................................... 70
TIPA.................................. 116
Trinity Holdings Lawsuit.............. 77
</TABLE>
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<PAGE> 129
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
SIRROM CAPITAL CORPORATION
THE FINOVA GROUP INC.
AND FINOVA NEWCO INC.
DATED AS OF JANUARY 6, 1999
<PAGE> 130
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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Article I
The Merger....................................................................... 1
Section 1.1. The Merger.................................................. 1
Section 1.2. Shareholder Meeting, Closing, Effective Time of the 2
Merger......................................................
Section 1.3. Conversion and Cancellation of Securities................... 2
Section 1.4. Exchange of Certificates.................................... 3
Section 1.5. Employee Benefit Plans; Options............................. 4
Section 1.6. No Dissenter or Appraisal Rights............................ 5
Article II
Representations and Warranties of the Company.................................. 5
Section 2.1. Organization, Powers and Qualifications..................... 5
Section 2.2. Subsidiaries................................................ 6
Section 2.3. Capital Stock............................................... 7
Section 2.4. Charter, Bylaws, Minute Books and Records................... 7
Section 2.5. Authority; Binding Effect................................... 8
Section 2.6. No Conflict; Approvals...................................... 8
Section 2.7. Governmental Consents and Approvals......................... 8
Section 2.8. SEC Reports................................................. 9
Section 2.9. Financial Statements........................................ 9
Section 2.10. Absence of Certain Changes.................................. 10
Section 2.11. Indebtedness; Absence of Undisclosed Liabilities............ 10
Section 2.12. Assets...................................................... 10
Section 2.13. Contracts................................................... 11
Section 2.14. Insurance................................................... 11
Section 2.15. Financing Transactions...................................... 11
Section 2.16. Authorizations; Compliance with Law......................... 12
Section 2.17. Taxes....................................................... 13
Section 2.18. Absence of Litigation; Claims............................... 14
Section 2.19. Employee Benefit Plans; Employment Agreements............... 14
Section 2.20. Labor Matters............................................... 16
Section 2.21. Environmental Matters....................................... 16
Section 2.22. Intellectual Property....................................... 18
Section 2.23. Regulatory Matters.......................................... 19
Section 2.24. Adequacy of Disclosure...................................... 19
Section 2.25. Registration Statement; Proxy Statement/Prospectus.......... 19
Section 2.26. Board Action; Vote Required................................. 20
Section 2.27. Year 2000 Compliant......................................... 20
Section 2.28. Affiliates.................................................. 21
Section 2.29. Opinion of Financial Advisors............................... 21
Section 2.30. Brokers and Finders......................................... 21
</TABLE>
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Article III
Representations and Warranties of Parent and Merger Sub........................ 21
Section 3.1. Organization and Powers..................................... 21
Section 3.2. Authority; Binding Effect................................... 21
Section 3.3. No Conflict; Approvals...................................... 22
Section 3.4. Governmental Consents and Approvals......................... 22
Section 3.5. Capital Stock............................................... 22
Section 3.6. Registration Statement; Proxy Statement/Prospectus.......... 23
Section 3.7. SEC Reports................................................. 23
Section 3.8. Financial Statements........................................ 23
Section 3.9. Absence of Certain Changes.................................. 24
Section 3.10. Absence of Litigation; Claims; Absence of Undisclosed 24
Liabilities.................................................
Section 3.11. Compliance with Law......................................... 24
Section 3.12. Brokers and Finders......................................... 24
Section 3.13. Adequacy of Disclosure...................................... 24
Article IV
Other Agreements............................................................... 24
Section 4.1. Conduct of the Company's Business........................... 24
Section 4.2. Parent's Undertakings....................................... 27
Section 4.3. Access to Information....................................... 27
Section 4.4. Stockholder Vote; Proxy Statement........................... 27
Section 4.5. Commercially Reasonable Efforts............................. 29
Section 4.6. Public Announcements........................................ 29
Section 4.7. Notification................................................ 29
Section 4.8. Subsequent Financial Statements............................. 29
Section 4.9. Control of Operations....................................... 30
Section 4.10. Regulatory and Other Authorizations......................... 30
Section 4.11. Tax-Free Reorganization..................................... 31
Section 4.12. Takeover Statute............................................ 31
Section 4.13. Indemnification of Directors and Officers................... 31
Section 4.14. No Solicitation............................................. 31
Section 4.15. Certain Modifications; Financial and Accounting 32
Adjustments.................................................
Section 4.16. Continuing Employees........................................ 33
Article V
Conditions to Closing.......................................................... 33
Section 5.1. Conditions to the Obligations of the Company and Parent and 33
Merger Sub..................................................
Section 5.2. Conditions to the Obligations of the Company................ 34
Section 5.3. Conditions to the Obligations of Parent and Merger Sub...... 35
</TABLE>
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Article VI
Termination, Amendment and Waiver.............................................. 36
Section 6.1. Termination................................................. 36
Section 6.2. Effect of Termination....................................... 38
Section 6.3. Liquidated Damages.......................................... 39
Section 6.4. Amendment................................................... 39
Section 6.5. Waiver...................................................... 40
Article VII
Miscellaneous.................................................................. 40
Section 7.1. Survival of Representations and Warranties.................. 40
Section 7.2. Entire Agreement............................................ 40
Section 7.3. Notices..................................................... 40
Section 7.4. Governing Law............................................... 41
Section 7.5. Descriptive Headings........................................ 41
Section 7.6. Parties in Interest......................................... 41
Section 7.7. Counterparts................................................ 41
Section 7.8. Expenses.................................................... 41
Section 7.9. Personal Liability.......................................... 41
Section 7.10. Binding Effect; Assignment.................................. 42
Section 7.11. Severability................................................ 42
Section 7.12. Legal Fees And Costs........................................ 42
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT"), dated as of January
6, 1999, is made by and among Sirrom Capital Corporation, a Tennessee
corporation (the "COMPANY"), The FINOVA Group Inc., a Delaware corporation
("PARENT"), and FINOVA Newco Inc., a Delaware corporation and wholly-owned
subsidiary of Parent ("MERGER SUB").
W I T N E S S E T H
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company and the sole stockholder of Merger Sub have each approved the business
combination described herein in which the Company will become a subsidiary of
Parent as a result of a merger of Merger Sub with and into the Company upon the
terms and subject to the conditions hereinafter set forth (the "MERGER"),
pursuant to which each outstanding share of Common Stock, no par value ("COMPANY
COMMON STOCK"), of the Company will be converted into the right to receive
shares of Common Stock, par value $.01 per share ("PARENT COMMON STOCK"), of
Parent in the manner set forth herein;
WHEREAS, the Boards of Directors of Parent and the Company have each
determined that the Merger and the other transactions contemplated hereby are
consistent with, and in furtherance of, their respective business strategies and
goals and have each approved the Merger upon the terms and conditions set forth
herein;
WHEREAS, the Board of Directors of Merger Sub and Parent, as the sole
stockholder of Merger Sub have approved and adopted this Agreement.
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "CODE"); and
WHEREAS, concurrently with the execution and delivery of this Agreement,
and as a condition and inducement to the willingness of Parent and Merger Sub to
enter into this Agreement, each director of the Company has entered into a
Shareholders Agreement dated as of the date hereof (the "SHAREHOLDERS
AGREEMENT") pursuant to which such holders have agreed, INTER ALIA, to vote all
his or her shares of Company Common Stock in favor of the Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. Subject to the terms and conditions hereof and
in accordance with the General Corporation Law of the State of Delaware, as
amended (the "DGCL") and the Tennessee Business Corporation Act, as amended (the
"TBCA"), at the Effective Time (hereinafter defined): (a) Merger Sub shall be
merged with and into the Company and the separate existence of Merger Sub shall
cease, (b) the Company, as the surviving corporation in the Merger (the
"SURVIVING CORPORATION"), (i) shall be a wholly-owned subsidiary of Parent, (ii)
shall continue its corporate existence under the laws of the State of Tennessee,
and (iii) shall succeed to all rights, assets, liabilities and obligations of
Merger Sub and the Company in accordance with the DGCL and the TBCA; (c) the
Amended and Restated Charter of the Company (the "CHARTER"), as in effect
immediately prior to the Effective Time, shall continue as the Charter of the
Surviving Corporation; (d) the Bylaws of Merger Sub, as in effect
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<PAGE> 134
immediately prior to the Effective Time, shall continue as the Bylaws of the
Surviving Corporation; (e) the directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation; and (f) the
officers of the Merger Sub immediately prior to the Effective Time shall
continue as the officers of the Surviving Corporation. From and after the
Effective Time, the Merger will have all the effects provided by applicable law.
SECTION 1.2. Shareholder Meeting, Closing, Effective Time of the
Merger. The Company shall submit this Agreement, the Merger and the revocation
of the Company's election to be treated as a "Business Development Company"
under the Investment Company Act of 1940, as amended (the "1940 ACT") to the
holders of Company Common Stock for approval and adoption at the Shareholders
Meeting (hereinafter defined) to be held as soon as practicable following the
date of this Agreement in accordance with Section 4.4 hereof. Subject to the
Merger receiving all requisite shareholder approvals and subject to the other
provisions of this Agreement, the parties shall hold a closing (the "CLOSING")
on the next business day (or such later date as the parties hereto may agree)
following the later of (a) the Shareholders Meeting, or (b) the first business
day on which the last of the conditions set forth in Article V hereof is
fulfilled or waived (such later date, the "CLOSING DATE"), at 9:00 A.M. at the
offices of Morgan, Lewis & Bockius LLP at 1701 Market Street, Philadelphia,
Pennsylvania, or at such other time or place as the parties agree upon. Within
two business days after the Closing Date, the parties hereto shall cause the
Merger to be consummated by filing a certificate of merger (the "DELAWARE
CERTIFICATE OF MERGER") with the Secretary of State of the State of Delaware and
the articles of merger (the "TENNESSEE ARTICLES OF MERGER") with the Secretary
of State of the State of Tennessee in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL and the TBCA, as the case
may be (the date and time of such filings, or such other date or time agreed
upon by Parent and the Company and set forth therein, the "EFFECTIVE TIME").
SECTION 1.3. Conversion and Cancellation of Securities.
(a) At the Effective Time, each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than Excluded Shares
described in Section 1.3(b) hereof), by virtue of the Merger and without any
action on the part of the holder thereof, shall be converted into, and become
exchangeable for, the right to receive (i) 0.1634 shares (the "EXCHANGE RATIO")
of Parent Common Stock ("STOCK CONSIDERATION"); provided, however, (x) if the
Effective Time shall not have occurred by June 1, 1999, the Exchange Ration
shall be increased by .0005 shares, and (y) if the Company shall have entered
into a binding agreement for the settlement of the litigation referred to in
Part II, Item 1 of the Company's Form 10-Q for the Quarter Ended September 30,
1998 (the "SETTLEMENT AGREEMENT"), the cost of which to the Company is less than
$10,000,000, the Exchange Ratio shall be increased by a number of shares equal
to .00027 times the quotient of (A) $10,000,000 less such cost of such
settlement by the Company, divided by (B) 1,000,000. The consideration to be
received by the holders of Company Common Stock pursuant to this Section 1.3(a)
is hereinafter referred to as the "MERGER CONSIDERATION."
(b) At the Effective Time, each share of Company Common Stock owned by
Parent, Merger Sub or any other direct or indirect subsidiary of Parent and each
share of Company Common Stock owned by the Company or any direct or indirect
subsidiary of the Company and in each case not held on behalf of third parties
(collectively, "EXCLUDED SHARES"), shall by virtue of the Merger and without any
action on the part of the holder thereof, be automatically canceled and retired
and cease to exist, and no cash, securities or other property shall be payable
in respect thereof.
(c) At the Effective Time, each share of Merger Sub common stock, par value
$.01 per share ("MERGER SUB COMMON STOCK"), issued and outstanding immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action by the holder thereof, be
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<PAGE> 135
converted into one validly issued, fully paid and nonassessable common share, no
par value, of the Surviving Corporation ("SURVIVING CORPORATION COMMON STOCK").
(d) If between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock shall be changed into a different
number of shares by reason of any reclassification, recapitalization, split-up,
combination or exchange of shares, or any dividend payable in stock shall be
declared thereon with a record date within such period, the Merger Consideration
shall be adjusted accordingly to provide to the holders of Company Common Stock
the same economic effect as contemplated by this Agreement.
SECTION 1.4. Exchange of Certificates.
(a) Prior to the Closing Date, the Parent shall select a bank or trust
company to act as exchange agent (the "EXCHANGE AGENT") in connection with the
surrender of certificates evidencing shares of Company Common Stock converted
into shares of Parent Common Stock pursuant to the Merger. At the Effective
Time, Parent shall deposit with the Exchange Agent one or more certificates
representing the aggregate number of shares of Parent Common Stock to be issued
in the Merger for the Merger Consideration (the "MERGER STOCK"), which shares of
Merger Stock shall be deemed to be issued at the Effective Time. At and
following the Effective Time, Parent shall deliver to the Exchange Agent such
cash as may be required from time to time to make payment of cash in lieu of
fractional shares in accordance with Section 1.4(h).
(b) As soon as practicable after the Effective Time, Parent shall cause the
Exchange Agent to mail to each person who was, at the Effective Time, a holder
of record of a certificate or certificates that immediately prior to the
Effective Time evidenced outstanding shares of Company Common Stock (the
"CERTIFICATES"), (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, which shall be in a form and
contain any other provisions as Parent and the Surviving Corporation may
reasonably agree and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Stock. Upon the proper surrender of
Certificates to the Exchange Agent, together with a properly completed and duly
executed letter of transmittal and such other documents as may be required by
the Exchange Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor certificates representing the shares of the Merger Stock
that such holder has the right to receive pursuant to the terms hereof (together
with any dividend or distribution with respect thereto made after the Effective
Time and any cash paid in lieu of fractional shares pursuant to Section 1.4(h)),
and the Certificate so surrendered shall be canceled. If any portion of the
Merger Stock is to be paid to a person other than the person who is the record
holder of the Company Common Stock at the Effective Time, it shall be a
condition to such payment that the certificate evidencing the Company Common
Stock so surrendered shall be properly endorsed or otherwise be in proper form
for transfer and that it be accompanied by all documents required to properly
evidence and effect such transfer and by evidence reasonably satisfactory to the
Surviving Corporation and Parent that any applicable stock transfer tax has been
paid.
(c) Except as otherwise expressly provided herein, the Surviving
Corporation shall pay all charges and expenses of the Parent, the Merger Sub and
the Company, including those of the Exchange Agent, in connection with the
exchange of Certificates for shares of Merger Stock. Any Merger Stock or other
cash delivered to the Exchange Agent pursuant to Section 1.4(a) hereof, and not
exchanged pursuant to Section 1.4(b) hereof for Company Common Stock or for
fractional interests pursuant to Section 1.4(h) hereof within six months after
the Effective Time, shall be returned by the Exchange Agent to the Surviving
Corporation which shall thereafter act as exchange agent subject to the rights
of holders of Company Common Stock hereunder.
(d) At the Effective Time, the stock transfer books of the Company shall be
closed and no transfer of shares of Company Common Stock shall thereafter be
made.
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(e) None of Parent, Merger Sub, the Company, the Surviving Corporation or
the Exchange Agent will be liable to any holder of shares of Company Common
Stock for any shares of Merger Stock, dividends or distributions with respect
thereto, or cash payable in lieu of fractional shares pursuant to Section 1.4(h)
hereof delivered to a state abandoned property administrator or other public
official pursuant to any applicable abandoned property, escheat or similar law.
(f) If any Certificates shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificates to
be lost, stolen or destroyed, the Exchange Agent will deliver in exchange for
such lost, stolen or destroyed Certificates, the Merger Stock for the shares
represented thereby, deliverable in respect thereof, as determined in accordance
with the terms hereof. When authorizing such payment in exchange for any lost,
stolen or destroyed Certificates, the person to whom the Merger Stock is to be
issued, as a condition precedent to such delivery, shall give Parent a bond
satisfactory to Parent against any claim that may be made against Parent with
respect to the Certificates alleged to have been lost, stolen or destroyed.
(g) No dividend or other distribution declared or made after the Effective
Time with respect to the Merger Stock with a record date after the Effective
Time shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Merger Stock issuable upon surrender thereof until the holder
of such Certificate shall surrender such Certificate in accordance with Section
1.4(b). Subject to the effect of applicable law, following surrender of any such
Certificate there shall be paid, without interest, to the record holder of
certificates representing whole shares of Merger Stock issued in exchange
therefor: (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Merger Stock; and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender of such Certificate and a
payment date subsequent to such surrender payable with respect to such whole
shares of Merger Stock. No holder of Company Common Stock shall be entitled to
any interest on any cash amounts payable for fractional interests pursuant to
Section 1.4(h) hereof.
(h) No certificates or scrip evidencing fractional shares of Merger Stock
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests shall not entitle the owner thereof to any rights of
a stockholder of Parent. In lieu of any such fractional shares, each holder of a
Certificate previously evidencing Company Common Stock, upon surrender of such
Certificate for exchange pursuant to this Article I, shall be paid an amount in
cash (without interest), rounded to the nearest cent, determined by multiplying
(a) the closing price for a share of Parent Common Stock on the NYSE Composite
Transaction Tape on the first business day immediately following the Effective
Time, by (b) the fractional interest to which such holder would otherwise be
entitled (after taking into account all shares of Company Common Stock held of
record by such holder at the Effective Time).
SECTION 1.5. Employee Benefit Plans; Options. At the Effective Time, each
option or warrant granted by the Company to purchase shares of Company Common
Stock, which is outstanding and unexercised immediately prior thereto, shall be
assumed by Parent and converted into an option or warrant to purchase shares of
Parent Common Stock on the same terms and conditions as are in effect for the
original option or warrant as of the Closing Date as adjusted as set forth
below. Each such option or warrant that is converted shall be converted into an
option or warrant to purchase such number of shares of Parent Common Stock at
such exercise price as is determined as provided below (and otherwise having the
same duration and other terms as the original option or warrant):
(a) the number of shares of Parent Common Stock to be subject to the
new option or warrant shall be equal to the product of (i) the number of
shares of Company Common
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Stock subject to the original option or warrant, and (ii) the Exchange
Ratio, the product being rounded, if necessary, up or down, to the nearest
whole share; and
(b) the exercise price per share of Parent Common Stock under the new
option or warrant shall be equal to (i) the exercise price per share of
Company Common Stock under the original option or warrant divided by (ii)
the Exchange Ratio, rounded, if necessary, up or down, to the nearest cent.
The adjustments provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consistent with Section 424(a) of the Code. Prior to the Effective Time,
the Board of Directors of the Company shall take such action as may be required
under the governing option plans and agreements to effectuate the foregoing.
Prior to the Effective Time, Parent shall reserve for issuance the number
of shares of Parent Common Stock necessary to satisfy Parent's obligations under
this Section 1.5. Promptly after the Effective Time (but in no event later than
five business days thereafter), Parent shall file with the Securities and
Exchange Commission (the "SEC") a registration statement on an appropriate form
under the Securities Act of 1933, as amended, and the rules and regulations
thereunder (the "SECURITIES ACT"), with respect to the shares of Parent Common
Stock subject to options to acquire Parent Common Stock issued pursuant to this
Section 1.5, and shall use its best efforts to maintain the current status of
the prospectus contained therein, as well as comply with applicable state
securities or "blue sky" laws, for so long as such options remain outstanding.
SECTION 1.6. No Dissenter or Appraisal Rights. Pursuant to Section
48-23-102 of the TBCA, the holders of shares of Company Common Stock shall not
have any dissenters or appraisal rights with respect to this Agreement or the
Merger.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, Parent and Merger
Sub as follows, except as set forth on a Disclosure Schedule delivered by the
Company concurrently with the execution and delivery of this Agreement (the
"COMPANY SCHEDULE"), each of which exceptions shall specifically identify the
relevant subsection hereof to which it relates and shall be deemed to be
representations and warranties as if made hereunder:
SECTION 2.1. Organization, Powers and Qualifications. (a) The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Tennessee. The Company has all requisite corporate power
and authority to carry on its business as it has been and is now being conducted
and to own, lease and operate the properties and assets used in connection
therewith. The Company is duly qualified as a foreign corporation authorized to
do business and is in good standing in every jurisdiction in which such
qualification is required, all of which jurisdictions are disclosed in the
COMPANY SCHEDULE, except where the failure to be so qualified would not have a
Company Material Adverse Effect. As used in this Agreement, "COMPANY MATERIAL
ADVERSE EFFECT" shall mean any fact, condition, event, development or occurrence
which, individually or when taken together with all other such facts,
conditions, events, developments or occurrences other than changes in the
general economic conditions and other conditions affecting financial
institutions or the credit market generally, would reasonably be expected to
have a material adverse effect on the financial condition, operating results,
business or prospects of the Company and the Subsidiaries (hereinafter defined),
taken as a whole.
(b) The Company (i) has qualified for and validly elected to be treated as
a business development company under the 1940 Act; such election has not been
revoked or rescinded and
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is in full force and effect, and (ii) is in compliance with the 1940 Act and the
rules and regulations promulgated thereunder.
(c) The Company (i) has been licensed by the Tennessee Department of
Financial Institutions to operate as a business industrial development company
("BIDCO") under the laws of the State of Tennessee and (ii) has been granted a
California lenders license by the Department of Corporations of the State of
California and each such license has not been revoked or rescinded and is in
full force and effect.
SECTION 2.2. Subsidiaries.
(a) "SUBSIDIARY" means, with respect to any party, any corporation, limited
liability company, partnership, joint venture, or other business association or
entity, at least a majority of the voting securities or economic interests of
which is directly or indirectly owned or controlled by such party or by any one
or more of its Subsidiaries, except where such ownership or control results
solely from such party's ownership or control of unexercised warrants or
convertible debt instruments issued by such entity. As used in this Agreement,
"JOINT VENTURE" means, with respect to any party, any corporation, limited
liability company, partnership, joint venture or other business association or
entity in which (i) such party or any one or more of its Subsidiaries, directly
or indirectly, owns or controls more than five percent (5%) and less than a
majority of any class of the outstanding voting securities or economic
interests, or (ii) such party or a Subsidiary of such party is a general
partner; provided, however, that the term Joint Venture shall not include any
party, any corporation, limited liability company, partnership, joint venture or
other business association or entity in which the Company or any of its
Subsidiaries owns or controls any equity interests solely pursuant to a
Financing Transaction (hereinafter defined), (collectively, "PORTFOLIO
COMPANIES").
(b) The COMPANY SCHEDULE lists each Subsidiary and each Joint Venture of
the Company, the jurisdiction of its organization and the amount of its
securities outstanding and the owners thereof. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Each Subsidiary has all requisite power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate the assets and properties used in connection
therewith. Each Subsidiary is duly qualified as a foreign corporation authorized
to do business and is in good standing in every jurisdiction in which such
qualification is required, all of which jurisdictions are disclosed in the
COMPANY SCHEDULE except where the failure to be so qualified would not have a
Company Material Adverse Effect. All issued and outstanding shares of capital
stock of each Subsidiary have been duly authorized, are validly issued and
outstanding, are fully paid and nonassessable and were issued in compliance with
all applicable federal and state securities laws, and, except as set forth on
the COMPANY SCHEDULE, are lawfully owned of record and beneficially by the
Company or another Subsidiary free and clear of all pledges, liens, claims,
security interests and other charges or defects in title of any nature
whatsoever ("LIENS"). There are no existing subscriptions, options, warrants,
convertible securities, calls, commitments, agreements, conversion rights or
other rights of any character (contingent or otherwise) calling for or requiring
the issuance, transfer, sale or other disposition of any shares of the capital
stock of any Subsidiary, or calling for or requiring the issuance of any
securities or rights convertible into or exchangeable for shares of capital
stock of any Subsidiary, nor is the Company or any Subsidiary subject to any
obligation (contingent or otherwise) to repurchase, redeem or otherwise acquire
shares of capital stock of any Subsidiary, in any case except as set forth in
the COMPANY SCHEDULE. Except for the Subsidiaries, the Joint Ventures or the
Portfolio Companies or as set forth in the COMPANY SCHEDULE, neither the Company
nor any Subsidiary directly or indirectly (i) owns or controls any shares of any
corporation nor has any voting securities of, nor the right to share in the
income or losses of, either of record, beneficially or equitably, any
association, partnership, limited liability company, joint venture or other
legal entity, or (ii) is a general partner of any partnership.
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(c) Sirrom Investments Inc. ("SII"), a wholly owned subsidiary of the
Company, has obtained a license from the Small Business Administration ("SBA")
to operate as a small business investment company; such license has not been
revoked or rescinded and is in full force and effect, and is in compliance with
the Small Business Investment Act of 1958 and all applicable SBA Regulations.
SII and Sirrom Funding Corporation ("SFC"), a wholly owned subsidiary of the
Company, are each registered investment companies under the 1940 Act; each such
registration has not been revoked or rescinded and is in full force and effect,
and is in compliance with the 1940 Act and the rules and regulations promulgated
thereunder.
SECTION 2.3. Capital Stock. The Company has authorized capital stock
consisting of 75,000,000 shares of Company Common Stock. As of December 31,
1998: (i) 37,229,196 shares of Company Common Stock were issued and outstanding,
(ii) no shares of Company Common Stock were held as treasury shares, and (iii)
7,199,098 shares of the Company Common Stock were reserved for issuance under
the Company stock option or equity compensation plans (the "COMPANY STOCK
PLANS") (including 5,707,098 shares reserved for issuance under the Company's
Amended and Restated 1996 Incentive Stock Option Plan, 4,519,718 of which were
subject to outstanding options and 1,167,350 of which were reserved for future
option grants, 1,000,000 shares reserved for issuance under the Company's
Amended and Restated 1994 Employee Plan, 633,786 of which were subject to
outstanding options and 358,214 of which were reserved for future grants, and
492,000 shares reserved for issuance under the Company's Amended and Restated
1995 Stock Option Plan for Non-Employee Directors, 200,400 of which were subject
to outstanding options and 260,000 of which were reserved for future option
grants). The COMPANY SCHEDULE lists all option holders, the date each option to
purchase Company Common Stock was granted, the Company Stock Plan under which
such options were granted, the number of shares subject to each such option, the
expiration date of each such option and the price at which such option may be
exercised under the applicable Company Stock Plan. Since December 31, 1998, (i)
no additional shares of capital stock have been reserved for issuance by the
Company, (ii) the only issuances of shares of capital stock of the Company have
been issuances of Company Common Stock upon the exercise of outstanding Company
stock options listed in the COMPANY SCHEDULE and (iii) no shares of Company
Common Stock came to be held by the Company as treasury shares. All of the
issued and outstanding shares of Company Common Stock have been duly authorized
and are validly issued and outstanding, fully paid and nonassessable, and were
issued in compliance with all applicable federal and state securities laws, in
all material respects. No shares of capital stock issued by the Company are or
were at the time of their issuance subject to preemptive rights. There are no
existing subscriptions, options, warrants, convertible securities, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) calling for or requiring the issuance, transfer, sale
or other disposition of any shares of the capital stock of the Company or of any
Subsidiary, or calling for or requiring the issuance of any securities or rights
convertible into or exchangeable for shares of capital stock of the Company or
of any Subsidiary, nor is the Company or any Subsidiary subject to any
obligation (contingent or otherwise) to repurchase, redeem or otherwise acquire
shares of capital stock of the Company or any Subsidiary, in any case except as
set forth on the COMPANY SCHEDULE and as contemplated by this Agreement. There
are no voting trusts or other agreements or understandings to which the Company
is a party, nor, to the knowledge of the Company, to which any shareholder of
the Company is a party, with respect to the voting of capital stock of the
Company, other than this Agreement, or the Shareholders Agreement.
SECTION 2.4. Charter, Bylaws, Minute Books and Records. The copies of the
Charter and all amendments thereto and of the Bylaws, as amended, of the Company
and the Subsidiaries which have been delivered to Parent are true, correct and
complete copies thereof as in effect on the date hereof. The minute books of the
Company and the Subsidiaries which have been made available for inspection
contain minutes, which are accurate and complete in all material respects, of
all meetings and accurate consents in lieu of meetings of the Board of Directors
(and any
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committee thereof) and of the shareholders of the Company and the Subsidiaries
since the respective dates of incorporation. The books and records of the
Company and each Subsidiary accurately reflect, in all material respects, the
transactions to which the Company or the Subsidiary is a party or by which their
properties are subject or bound, and the assets and liabilities of the Company
or the Subsidiary.
SECTION 2.5. Authority; Binding Effect. The Company has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby and thereby. All necessary
action, corporate or otherwise, required to have been taken by or on behalf of
it by applicable law, its charter document or otherwise to authorize (i) the
approval, execution and delivery on its behalf of this Agreement and (ii) its
performance of its obligations under this Agreement and the consummation of the
transactions contemplated hereby and thereby have been taken, including the
receipt of the unanimous approval by the Company's Board of Directors, except
that the adoption of this Agreement must be approved by the affirmative vote of
a majority of the votes of all outstanding shares of Company Common Stock of
record on the record date for the Shareholders Meeting ("REQUIRED COMPANY
SHAREHOLDER APPROVAL"). This Agreement constitutes the Company's valid and
binding agreement, enforceable against it in accordance with its terms, except
(a) as the same may be limited by applicable bankruptcy, insolvency, moratorium
or similar laws of general application relating to or affecting creditors'
rights, including without limitation, the effect of statutory or other laws
regarding fraudulent conveyances and preferential transfers, and (b) for the
limitations imposed by general principles of equity and commercial
reasonableness.
SECTION 2.6. No Conflict; Approvals. Except as set forth in the COMPANY
SCHEDULE, the execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and thereby will not, (a)
violate or conflict with the Company's Charter or Bylaws or the comparable
organizational documents of any of its Subsidiaries, or (b) constitute a breach
or default (or an event that with notice or lapse of time or both would become a
breach or default) or give rise to any Lien, third party right of termination,
cancellation, material modification or acceleration, or loss of any benefit,
under any Contract (hereinafter defined) to which the Company or any Subsidiary
is a party or by which it is bound, or (c) subject to the consents, approvals,
orders, authorizations, filings, declarations and registrations specified in
Section 2.7 or in the COMPANY SCHEDULE, conflict with or result in a violation
of any permit, concession, franchise or license or any law, rule or regulation
applicable to the Company or any of its Subsidiaries or any of their properties
or assets, except, in the case of clauses (b) and (c), for any such breaches,
defaults, Liens, third party rights, cancellations, modifications, accelerations
or losses of benefits, conflicts or violations which would not have a Company
Material Adverse Effect and would not impair the ability of the Company to
perform its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby and thereby.
SECTION 2.7. Governmental Consents and Approvals. Except as set forth on
the COMPANY SCHEDULE, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby or thereby will require
any consent, approval, order, authorization, or permit of, or filing with or
notification to, any local, state, federal or foreign court, administrative
agency, commission or other governmental or regulatory authority, agency or
instrumentality ("GOVERNMENTAL ENTITY"), except (a) the filing of the
Registration Statement (hereinafter defined) with the SEC in accordance with the
Securities Act, and the entry of an order by the SEC permitting such
Registration Statement to become effective, and compliance with applicable state
securities laws, (b) the filing of the Proxy Statement (hereinafter defined) and
related proxy materials with the SEC in accordance with the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (the "EXCHANGE
ACT"), (c) the filings with and consents of the Commission to withdraw the
Parent's election to be treated as a business development company and to
deregister each subsidiary that has
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registered as an investment company in accordance with the 1940 Act, (d)
notification pursuant to, and expiration or termination of the waiting period
under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations thereunder (the "HSR ACT"), (e) the filings with and
consents or approvals of the SBA, (f) the filings with and consent of the
Tennessee Department of Financial Institutions and the California Department of
Corporations, (g) the filing and recording of the Delaware Certificate of Merger
in accordance with the DGCL and the Tennessee Articles of Merger in accordance
with the TBCA, and (h) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent it from performing its obligations under this Agreement without having a
Company Material Adverse Effect.
SECTION 2.8. SEC Reports. The Company has filed all required forms,
reports and documents with the SEC since January 1, 1995 (collectively, the
"COMPANY'S SEC REPORTS"), including without limitation the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the "COMPANY 1997 FORM
10-K") and the Company's Quarterly Report on Form 10-Q for the quarter ending
September 30, 1998. The Company's SEC Reports have complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act. As of their respective dates, none of the Company's SEC Reports, including,
without limitation, any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. There have been
filed as exhibits to, or incorporated by reference in, the Company 1997 Form
10-K and all subsequently filed Forms 10-Q, all contracts which, as of the date
thereof, were material as described in Item 601(b)(10) of Regulation S-K except
as set forth on the COMPANY SCHEDULE. The Company has heretofore delivered to
Parent, in the form filed with the SEC, all of the Company's SEC Reports.
SECTION 2.9. Financial Statements. The Company has delivered to Parent
true and complete copies of (a) consolidated balance sheets of the Company and
Subsidiaries at December 31, 1997 and 1996 and the related consolidated
statements of earnings, changes in shareholders' equity and statements of cash
flow for the years then ended, together with the notes thereto, audited by
Arthur Andersen LLP (the "COMPANY'S AUDITORS"), and (b) unaudited consolidated
balance sheets of the Company and Subsidiaries at September 30, 1998 and 1997
and related consolidated statements of income, changes in shareholders' equity
and statements of cash flow for the periods ended September 30, 1998 and 1997,
all of which have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods involved,
subject in the case of interim financial statements to normal year-end
adjustments and to the absence of full footnotes. Such balance sheets, including
the related notes, fairly present the consolidated financial position, assets
and liabilities (whether accrued, absolute, contingent or otherwise) of the
Company and Subsidiaries at the dates indicated and such consolidated statements
of income, changes in shareholders' equity and statements of cash flow fairly
present the consolidated results of operations, changes in shareholders' equity
and cash flow of the Company and Subsidiaries for the periods indicated. The
unaudited consolidated financial statements as at and for the periods ended
September 30, 1998 and 1997 contain all adjustments, which are solely of a
normal recurring nature, necessary to present fairly the financial position at
September 30, 1998 and 1997 and the results of operations and changes in
shareholders' equity and financial position for the periods then ended. The
audited consolidated balance sheet of the Company and its Subsidiaries at
December 31, 1997 (the "AUDIT DATE") described above is referred to herein as
the "COMPANY 1997 BALANCE SHEET." The audited consolidated financial statements
of the Company and its Subsidiaries as at and for the year ended December 31,
1997 are referred to herein as the "COMPANY AUDITED FINANCIAL STATEMENTS."
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SECTION 2.10. Absence of Certain Changes. (a) Except as described in the
COMPANY SCHEDULE, since September 30, 1998, the Company and the Subsidiaries
have conducted their business solely in the ordinary course consistent with past
practice and policies and procedures, to the extent the Company has adopted any
such policies and procedures (the "ORDINARY COURSE"). Except as otherwise
disclosed on the COMPANY SCHEDULE, since September 30, 1998, the Company and the
Subsidiaries have not:
(a) suffered any Company Material Adverse Effect;
(b) been subject to any other events or conditions of any character
that would have a Company Material Adverse Effect or impair the ability of
the Company to perform its obligations under this Agreement or prevent or
delay the consummation of any of the transactions contemplated hereby;
(c) made any material change to their respective accounting methods,
principles or practices;
(d) been subject to any revaluation of any assets of the Company or
any of its Subsidiaries that, individually or in the aggregate has had, or
would reasonably be expected to have a Company Material Adverse Effect,
including writing down the value of loans, warrants or other securities
held by the Company;
(e) incurred any material liabilities, other than liabilities incurred
in the Ordinary Course or discharged or satisfied any material Lien, or
paid any material liabilities, other than in the Ordinary Course or failed
to pay or discharge when due any liabilities of which the failure to pay or
discharge has caused or will cause any material damage or risk of material
loss to it or any of its material assets or properties; or
(f) taken or been subject to any other action or event that would have
required the consent of Parent pursuant to Section 4.1 hereof.
SECTION 2.11. Indebtedness; Absence of Undisclosed Liabilities. The
COMPANY SCHEDULE discloses as of the date hereof all indebtedness for money
borrowed of the Company or any Subsidiary, accurately disclosing for each such
indebtedness the payee, the original principal amount of the loan, the current
unpaid balance of the loan, the interest rate and the maturity date. Except as
set forth on the COMPANY SCHEDULE, neither the Company nor the Subsidiaries have
any material indebtedness, liability or obligation of any kind (whether known or
unknown, accrued, absolute, asserted or unasserted, contingent or otherwise)
except (a) as and to the extent reflected, reserved against or otherwise
disclosed in the Company 1997 Balance Sheet, or (b) for liabilities and
obligations incurred subsequent to the Audit Date in the ordinary course of
business and which do not have a Company Material Adverse Effect or impair the
ability of the Company to perform its obligations under this Agreement or
prevent or delay the consummation of any of the transactions contemplated
hereby.
SECTION 2.12. Assets. Except as described in the COMPANY SCHEDULE, the
Company and the Subsidiaries have good and marketable title to all their real
and personal properties and assets, including, without limitation, those assets
and properties reflected in the Company 1997 Balance Sheet in the amounts and
categories reflected therein, free and clear of all Liens, except (a) the lien
of current taxes not yet due and payable, (b) properties, interests, and assets
disposed of by the Company or any Subsidiary since the Audit Date solely in the
Ordinary Course, (c) such secured indebtedness as is disclosed in the Company
1997 Balance Sheet covering the properties referred to therein, and (d) such
imperfections of title, easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially detract from
the value, or interfere with the present or proposed use, of the properties
subject thereto ("PERMITTED LIENS").
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SECTION 2.13. Contracts.
(a) The COMPANY SCHEDULE lists each written or oral contract, agreement,
arrangement, lease, instrument, mortgage or commitment to which the Company or a
Subsidiary is a party or may be bound or to which their respective properties or
assets may be subject ("CONTRACT") (i) which is material to the Company or a
Subsidiary; (ii) which is with any present or former employee or for the
employment of any person or consultant or which is a non-compete arrangement
with any employee of the Company or a Subsidiary; (iii) which is a severance
agreement, program or policy of the Company or a Subsidiary with or relating to
its employees; (iv) under the terms of which any of the rights or obligations of
a party thereto will be modified or altered as a result of the transactions
contemplated hereby or which contain change in control provisions; (v) which
involves a material commission, representative, franchise, distributorship, or
sales agency arrangement; (vi) which is a material conditional sale or lease
arrangement; (vii) which involves a material license, or other material
arrangement which relates in whole or in part to any material software, patent,
trademark, trade name, service mark or copyright or to any material ideas,
technical assistance or other know-how of or used by the Company or a Subsidiary
in the conduct of its business; (viii) which represents any material
confidentiality or non-disclosure arrangement pursuant to which the Company or a
Subsidiary has agreed to keep confidential information obtained from any other
person; (ix) which is an arrangement limiting or restraining the Company or any
Subsidiary or any successor thereto from engaging or competing in any manner or
in any business; or (x) under which the Company or any Subsidiary guarantees the
payment or performance by others or in any way is or will be liable with respect
to material obligations of any other person.
(b) All Contracts are valid and binding and in full force and effect as to
the Company on the date of this Agreement except to the extent they have
previously expired in accordance with their terms or except to the extent that
their invalidity would not have a Company Material Adverse Effect. None of the
Company, the Subsidiaries nor, to the Company's knowledge, any other parties,
have violated any provision of, or committed or failed to perform any act which
with notice, lapse of time or both would constitute a default under the
provisions of, any Contract, the termination or violation of which, or the
default under which, might have a Company Material Adverse Effect. True and
complete copies of all Contracts listed on the COMPANY SCHEDULE or listed in the
Company 1997 Form 10-K, together with all amendments thereto through the date
hereof, have been delivered to Parent.
(c) The Company terminated the Portfolio Purchase Agreement, dated as of
December 4, 1998, by and between the Company and Tandem Capital LLC on or before
the date hereof pursuant to the terms of such agreement and has paid Tandem
Capital LLC all liquidated damages or other expenses associated with the
termination of such agreement.
SECTION 2.14. Insurance. The COMPANY SCHEDULE accurately sets forth all
policies of insurance, other than title insurance policies, held by or on behalf
of the Company. The COMPANY SCHEDULE lists all outstanding claims thereunder in
excess, individually or in the aggregate, of $25,000.
All such policies of insurance are in full force and effect, and no notice of
cancellation has been received. In the reasonable judgment of the Company, such
policies are in amounts which are adequate in relation to the business and
properties of the Company, and all premiums to date have been paid in full.
SECTION 2.15. Financing Transactions.
(a) The COMPANY SCHEDULE sets forth for each financing transaction
conducted by the Company or any Subsidiary (the "FINANCING TRANSACTIONS") the
following information as of September 30, 1998 and as of the last day of the
month prior to the Closing Date: the name and address of the borrower; the
principal amount of the loan and the remaining term of the note;
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whether the debt is subordinate; the amount of shares for which a warrant has
been issued to the Company and the exercise price thereto; the terms and amounts
of any additional equity interest held by the Company or any Subsidiary in the
borrower; and the value reflected on the Company's books of any debt or equity
interest in such party.
(b) Accurate and complete copies of each of the agreements, contracts,
leases and other instruments entered into by the Company or its Subsidiaries, as
the case may be, with respect to the Financing Transactions (the "FINANCING
DOCUMENTS") are in the files of the Company and have been made available to
Parent. The original execution copy of the Financing Documents are in the
possession of the Company, a trustee under a securitization transaction or a
secured lender to the Company. The Company has caused to be filed UCC-1
financing statements with respect to all or substantially all of the property
pledged to the Company pursuant to any Financing Transaction and has made such
other filings or notifications, or taken possession or has obtained certificates
of title, as are necessary to give the Company a perfected security interest in
and lien upon any such property.
(c) Each of the Financing Documents is valid and enforceable in accordance
with its terms except as may be limited by bankruptcy laws or other similar laws
affecting rights of creditors generally or general principals of commercial
reasonableness; the Company is, and to the Company's actual knowledge all other
parties thereto are, in compliance in all material respects with the provisions
thereof; the Company is not, and to the Company's actual knowledge no other
party thereto is, in default in the performance, observance or fulfillment of
any material obligation, covenant or condition contained therein, except as
disclosed in the COMPANY SCHEDULE; and, to the Company's actual knowledge, no
event has occurred which with or without the giving of notice or lapse of time,
or both, would constitute a default thereunder. Each of the Financing Documents
accurately and completely describes the terms of the Financing Transaction and
there have been no amendments, modifications or waivers that are not reflected
therein.
(d) There has been no adverse determination in any administrative
proceeding or in any court of law, nor any adverse settlement, ongoing
administrative proceeding or other similar action, which would materially impair
the ability of the Company to realize the current value of the Financing
Transactions.
(e) With respect to each Financing Transaction in which the Company has
been issued securities or warrants to acquire securities, to the Company's
knowledge, each such security was issued in compliance with the requirements of
the Securities Act and the Company has not taken any actions which would violate
the restrictions imposed upon the Company in connection with such securities
under the applicable securities laws, pursuant to contract or otherwise.
SECTION 2.16. Authorizations; Compliance with Law. (a) The Company and
the Subsidiaries hold all licenses, franchises, certificates, consents, permits,
approvals, certificates of public convenience and necessity, and authorizations
("AUTHORIZATIONS") from all Governmental Entities and other persons (including
without limitation all required Authorizations which may be issued or required
by the SBA, the Internal Revenue Service (the "IRS") or the SEC) which are
necessary for the lawful conduct of their respective businesses and their use
and occupancy of their assets and properties in the manner heretofore conducted,
used and occupied, except where the failure to hold any of the foregoing would
not have a Company Material Adverse Effect or impair the ability of the Company
to perform its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby. A complete and
correct list of the material Authorizations held by the Company and the
Subsidiaries are set forth in the COMPANY SCHEDULE. All of such Authorizations
are valid, in good standing and in full force and effect and the Company and the
Subsidiaries have duly performed in all material respects all of their
respective obligations under such Authorizations. No event has occurred with
respect to the material Authorizations which permits, or after notice or lapse
of time or both would permit,
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revocation or termination thereof or would result in any other material
impairment of the rights of the holder of any of the Authorizations, and no
terminations thereof have been, to the knowledge of the Company, threatened.
(b) The Company and each of the Subsidiaries is in compliance with all
applicable laws, statutes, ordinances, codes, rules, regulations, orders or
directives of any Governmental Entities (collectively, "LAWS"), except where
such violations would not have a Company Material Adverse Effect, and the
Company has not received any notice from a Governmental Entity within five years
of the date hereof of any violation of any Law.
SECTION 2.17. Taxes.
(a) All federal, state, local and foreign tax returns, reports, statements
and other similar filings required to be filed by the Company or the
Subsidiaries (the "TAX RETURNS") on or prior to the date hereof or with respect
to taxable periods ending on or prior to the date hereof with respect to any
federal, state, local or foreign taxes, assessments, deficiencies, fees and
other governmental charges or impositions (including, without limitation, all
income tax, unemployment compensation, social security, payroll, sales and use,
excise, privilege, property, ad valorem, transfer, franchise, license, school
and any other tax or similar governmental charge or imposition (including
interest, penalties or additions with respect thereto) under the laws of the
United States or any state or municipal or political subdivision thereof or any
foreign country or political subdivision thereof) ("TAXES") have been timely
filed with the appropriate Governmental Entities in all jurisdictions in which
such Tax Returns are required to be filed, and all such Tax Returns correctly
reflect the liabilities of the Company and the Subsidiaries for Taxes for the
periods, property or events covered thereby.
(b) All Taxes, including, without limitation, those which are called for by
the Tax Returns, or heretofore or hereafter claimed to be due with respect to
taxable periods ending on or before the Effective Time by any taxing authority
from the Company and the Subsidiaries, have been fully paid or properly accrued.
Except as set forth in the COMPANY SCHEDULE, the accruals for Taxes contained in
the Company 1997 Balance Sheet are adequate to cover the tax liabilities of the
Company and the Subsidiaries as of the Audit Date and include adequate provision
for all deferred taxes, and nothing has occurred subsequent to that date to make
any of such accruals inadequate.
(c) Neither the Company nor the Subsidiaries have received any notice of
assessment or proposed assessment in connection with any Taxes or Tax Returns
and there are no pending tax examinations of or tax claims asserted against the
Company or the Subsidiaries or any of their respective assets or properties.
Neither the Company nor any Subsidiary has extended, or waived the application
of, any statute of limitations of any jurisdiction regarding the assessment or
collection of any Taxes.
(d) There are no Tax liens (other than any lien for current Taxes not yet
due and payable) on any of the assets or properties of the Company or the
Subsidiaries, except to the extent that any such lien would not have,
individually or in the aggregate, a Company Material Adverse Effect. The Company
has no knowledge of any basis for any additional assessment of any Taxes. The
Company and the Subsidiaries have made all deposits required by law to be made
with respect to employees' withholding and other employment taxes, including
without limitation the portion of such deposits relating to taxes imposed upon
the Company or the Subsidiaries.
(e) The representation and warranties contained in the Company Tax
Certificate (hereinafter defined) are true and correct.
(f) The Company, SII and SFC have each qualified for and validly elected to
be treated as a Regulated Investment Company (a "RIC") under Subchapter M of the
Code. Each of the Company, SII and SFC have taken all steps necessary, including
making all required distributions, to maintain such entity's status as an RIC.
The accruals on the Company's books for
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distributions to shareholders are sufficient to satisfy the applicable
regulations under Subchapter M of the Code for maintenance of its status as a
RIC.
SECTION 2.18. Absence of Litigation; Claims.
(a) Except as set forth in the COMPANY SCHEDULE there are no claims,
actions, suits, proceedings or investigations pending or, to the knowledge of
the Company, threatened against the Company or any of its Subsidiaries, or any
properties or rights of the Company or any of its Subsidiaries, or with respect
to which any director, officer, employee or agent is or may be entitled to claim
indemnification from the Company or any Subsidiary, before any Governmental
Entity or arbitrator, which, if decided adversely to the Company or such
Subsidiary, would have a Company Material Adverse Effect or impair the ability
of the Company to perform its obligations under this Agreement or prevent or
delay the consummation of any of the transactions contemplated hereby, nor is
there any judgement, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against the Company or any of its Subsidiaries
having or which, insofar as reasonably can be foreseen, in the future would have
such effect, nor, to the knowledge of the Company, are there any state of facts
which could give rise to such a claim.
(b) The securities litigation set forth in the COMPANY SCHEDULE is covered
by the Company's director and officer insurance policies, no insurance carriers
of such policies have denied, or threatened to deny, coverage of such
litigation, except as set forth in the COMPANY SCHEDULE, and any amount that the
Company would owe under such litigation would not exceed the Company's total
insurance program (excluding deductibles).
SECTION 2.19. Employee Benefit Plans; Employment Agreements.
(a) The COMPANY SCHEDULE lists all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar fringe or
employee benefit plans, programs or arrangements, and any current or former
employment or executive compensation or severance agreements, written or
otherwise, for the benefit of, or relating to, any employee of the Company, any
trade or business (whether or not incorporated) which is a member of a
controlled group including the Company or which is under common control with the
Company (an "ERISA AFFILIATE") within the meaning of Section 414 of the Code, or
any Subsidiary of the Company, as well as each plan with respect to which the
Company or an ERISA Affiliate could incur liability under Section 4069 (if such
plan has been or were terminated) or Section 4212(c) of ERISA (together, the
"EMPLOYEE PLANS"), excluding former agreements under which the Company has no
remaining obligations and any of the foregoing that are required to be
maintained by the Company under the laws of any foreign jurisdiction. With
respect to each Employee Plan, as applicable, a copy of (i) each such written
Employee Plan (other than those referred to in Section 4(b)(4) of ERISA),
together with all amendments, trust agreements, insurance policies and service
agreements; (ii) the three most recently filed Forms 5500 or 5500 C/R and any
financial statements attached thereto; (iii) the most recent IRS determination
letter; (iv) the most recent summary plan description; (v) all reports submitted
within the preceding three years by third-party administrators, actuaries,
investment managers, consultants, or other independent contractors, has been
furnished to Parent and (vi) with respect to each Employee Plan under which
health benefits are provided, a statement as to the actual and contingent
labilities of each such plan to the extent that no insurance or trust fund
assets are available to provide such benefits.
(b) (i) Except as set forth in the COMPANY SCHEDULE, or as required by
Section 4980B of the Code, none of the Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person and none of the
Employee Plans is a "multiemployer plan" as such term is defined in Section
3(37) of ERISA; (ii) there has been no breach of any fiduciary
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duty, as described in Section 404 of ERISA, or no 'prohibited transaction', as
such term is defined in Section 406 of ERISA or Section 4975 of the Code, with
respect to any Employee Plan, which could be reasonably expected to result in
any material liability of the Company or any of its Subsidiaries; (iii) all
Employee Plans are in compliance in all material respects with the requirements
prescribed by any and all applicable statutes (including ERISA and the Code),
orders, or governmental rules and regulations currently in effect with respect
thereto (including all applicable requirements for notification to participants
or the Department of Labor, the IRS or Secretary of the Treasury), all Employee
Plans have been operated at all times in all material respects in accordance
with their terms, and the Company and each of its Subsidiaries have performed
all material obligations required to be performed by them under, are not in any
material respect in default under or violation of, and have no knowledge of any
material default or violation by any other party to, any of the Employee Plans;
(iv) each Employee Plan (other than a standardized prototype Plan which is
subject to a favorable IRS opinion) intended to qualify under Section 401(a) of
the Code and each trust intended to qualify under Section 501(a) of the Code is
the subject of a favorable determination letter from the IRS, and nothing has
occurred which may reasonably be expected to impair such determination; (v) all
contributions required to be made to any Employee Plan pursuant to Section 412
of the Code, or the terms of the Employee Plan or any collective bargaining
agreement, have been made on or before their due dates and a reasonable amount
has been accrued for contributions to each Employee Plan for the current plan
years; (vi) with respect to each Employee Plan, no "reportable event" within the
meaning of Section 4043 of ERISA (excluding any such event for which the 30 day
notice requirement has been waived under the regulations to Section 4043 of
ERISA) nor any event described in Section 4062, 4063, 4604 or 4041 of ERISA has
occurred; (vii) neither the Company nor any ERISA Affiliate has incurred, nor
reasonably expects to incur, any liability under Title IV of ERISA (other than
liability for premium payments to the Pension Benefit Guaranty Corporation
arising in the ordinary course); (viii) neither the Company nor any ERISA
Affiliate has incurred any liability for any excise, income or other taxes or
penalties with respect to any Employee Plan, and no event has occurred and no
circumstance exists that could be reasonably expected to give rise to any such
liability; (ix) there are no pending or threatened claims against any Employee
Plan (other than routine claims for benefits) or against any fiduciary of an
Employee Plan with respect to such plan, nor is there any reasonable basis for
such a claim; (x) no Employee Plan is presently under audit or examination (nor
has notice been received of a potential audit or examination) by any
governmental entity; and (xi) no matters are pending with respect to any
Employee Plan under any governmental corrective or remedial program.
(c) The COMPANY SCHEDULE provided pursuant to Section 1.5 hereof sets forth
a true and complete list of each current or former employee, officer or director
of the Company or any of its Subsidiaries who holds any option to purchase
Company Common Stock as of the date hereof, together with the number of shares
of Company Common Stock which are subject to such option, the date of grant of
such option, the extent to which such option is vested (or will become vested
within six months from the date hereof, or as a result of, the Merger), the
option price of such option (to the extent determined as of the date hereof),
whether such option is intended to qualify as an incentive stock option within
the meaning of Section 422(b) of the Code (an "ISO"), and the expiration date of
such option. The COMPANY SCHEDULE also sets forth the total number of such ISOs
and such nonqualified options.
(d) Except as disclosed on the COMPANY SCHEDULE, any amount that could be
received (whether in cash or property or the vesting of property) as a result of
any of the transactions contemplated by this Agreement by any employee, officer
or director of the Company or any of its affiliates who is a "disqualified
individual" (as such term is defined in Proposed Treasury Regulation Section
1.280G-1) under any employment, severance or termination agreement, other
compensation arrangement or Employee Plan currently in effect would not be
characterized as an "excess parachute payment" (as such term is defined in
Section 280G of the Code).
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SECTION 2.20. Labor Matters. There are no controversies pending or, to
the knowledge of the Company, threatened, between the Company or any of its
Subsidiaries and any of their respective employees. Neither the Company nor any
of its Subsidiaries is party to any collective bargaining agreement or other
labor agreement with any union or labor organization and no union or labor
organization has been recognized by the Company or any of its Subsidiaries as an
exclusive bargaining representative for employees of the Company or any of its
Subsidiaries. To the Company's knowledge, there is no current union
representation question involving employees of the Company or any of its
Subsidiaries, nor does the Company have knowledge of any significant activity or
proceeding of any labor organization (or representative thereof) or employee
group to organize any such employees. Neither the Company nor any of its
Subsidiaries has made any commitment not in collective bargaining agreements
listed on the COMPANY SCHEDULE that would require the application of the terms
of any collective bargaining agreements entered into by the Company or any of
its Subsidiaries to Parent, to any Joint Venture of Parent, or to any Subsidiary
of Parent (other than the Company or its Subsidiaries). Except as disclosed in
the COMPANY SCHEDULE, (a) there is no material active arbitration under any
collective bargaining agreement involving the Company or any of its
Subsidiaries, (ii) there is no material unfair labor practice, grievance,
employment discrimination or other labor or employment related charge, complaint
or claim against the Company or any of its Subsidiaries pending before any
court, arbitrator, mediator or governmental agency or tribunal, or, to the
Company's knowledge, threatened, (iii) there is no strike, picketing or work
stoppage by, or any lockout of, employees of the Company or any of its
Subsidiaries pending, or to the Company's knowledge, threatened, against or
involving the Company or any of its Subsidiaries, and (iv) there is no active
arbitration under any collective bargaining agreement involving the Company or
any of its Subsidiaries regarding the employer's right to move work from one
location or entity to another, or to consolidate work locations, or involving
other similar restrictions on business operations. There is no proceeding,
claim, suit, action or governmental investigation pending or, to the knowledge
of the Company, threatened, relating to labor matters in respect of which any
director, officer, employee or agent of the Company or any of its Subsidiaries
is or may be entitled to claim indemnification from the Company or a Subsidiary
pursuant to their respective charters or bylaws or under any indemnification
agreements.
SECTION 2.21. Environmental Matters.
(a) The Company and each of the Subsidiaries is in material compliance with
all applicable Environmental Laws (hereinafter defined) and neither the Company
nor any of the Subsidiaries has received any written or, to the Company's
knowledge, oral, communication from any person or Governmental Entity that
alleges that the Company or any of the Subsidiaries is not in compliance with
applicable Environmental Laws where such non-compliance would have a Company
Material Adverse Effect.
(b) The Company and each of the Subsidiaries has obtained or has applied
for all material Environmental Permits (hereinafter defined) necessary for the
construction of their facilities or the conduct of their operations, and all
such material Environmental Permits are effective or, where applicable, a
renewal application has been timely filed and is pending agency approval, and
the Company and the Subsidiaries are in material compliance with all terms and
conditions of such material Environmental Permits. Neither the Company nor any
of the Subsidiaries has knowledge of any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans that may
interfere with, or prevent, future continued material compliance on the part of
the Company or any of the Subsidiaries with the material Environmental Permits.
Neither the Company nor any of the Subsidiaries has knowledge of matters or
conditions that would preclude reissuance or transfer of any material
Environmental Permit, including amendment of such instrument, to Parent or one
of its Subsidiaries where such action is necessary to maintain compliance with
Environmental Laws in all material respects.
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(c) Neither the Company nor any of the Subsidiaries has knowledge of any
current Environmental Law or Environmental Permit imposing any future
requirement which could reasonably be expected to result in the accrual of a
material cost not disclosed in writing to Parent.
(d) There is no Environmental Claim (hereinafter defined) pending or, to
the knowledge of the Company, threatened (i) against the Company or any of the
Subsidiaries, (ii) against any person or entity whose liability for any
Environmental Claim the Company or any of the Subsidiaries has or may have
retained or assumed either contractually or by operation of law, or (iii)
against any real or personal property or operations which the Company or any of
the Subsidiaries owns, leases or manages, in whole or in part.
(e) The Company has no knowledge of any Releases (hereinafter defined) of
any Hazardous Material (hereinafter defined) that would be reasonably likely to
form the basis of any Environmental Claim against the Company or any of the
Subsidiaries, against any person or entity whose liability for any Environmental
Claim the Company or any of the Subsidiaries has or may have retained or assumed
either contractually or by operation of law, against any person or entity that
has executed a guarantee in favor of the Company or in which the Company has an
equity interest or affecting any assets that are pledged as collateral to the
Company.
(f) The Company has no knowledge, with respect to any predecessor of the
Company or any of the Subsidiaries, of any Environmental Claim pending or
threatened, or of any Release of Hazardous Materials that would be reasonably
likely to form the basis of any material Environmental Claim against the Company
or any of the Subsidiaries.
(g) To the Company's knowledge, the Company has disclosed to Parent all
facts which the Company reasonably believes form the basis of a material current
or future cost relating to any environmental matter affecting the Company and
the Subsidiaries which would or reasonably could have a Company Material Adverse
Effect.
(h) Neither the Company nor any of its Subsidiaries, nor, to the knowledge
of the Company, any owner of premises leased or operated by the Company or any
of its Subsidiaries has filed any notice with respect to such premises under
federal, state, local or foreign law indicating past or present treatment,
storage or disposal of Hazardous Materials, as regulated under 40 C.F.R. Parts
264-267 or any state, local or foreign equivalent or is engaging or has engaged
in business operations involving the generation, transportation, treatment,
recycling or disposal of any waste regulated under the Environmental Laws that
pertain to radioactive materials or the nuclear power industry, including,
without limitation, requirements of Volume 10 of the Code of Federal
Regulations.
(i) Except as set forth in the COMPANY SCHEDULE, none of the properties
owned, leased or operated by the Company, the Subsidiaries or, to the knowledge
of the Company, any predecessor thereof are now or were in the past, listed on
the National Priorities list of Superfund Sites, the CERCLIS Information System,
or any other comparable state or local environmental database.
(j) The Merger will not require any governmental approvals under the
Environmental Laws, including those that are triggered by sales or transfers of
businesses or real property.
(k) As used in this Section 2.20:
(i) "ENVIRONMENTAL CLAIM" means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, directives, claims,
liens, investigations, proceedings or notices of noncompliance or violation
(written or oral) by any person or entity (including any federal, state,
local or foreign Governmental Entity having jurisdiction over the Company
or the Subsidiaries) alleging potential liability of the Company or the
Subsidiaries (including, without limitation, potential responsibility for
or liability for enforcement, investigatory costs,
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cleanup costs, governmental response costs, removal costs, remedial costs,
natural resources damages, property damages, personal injuries or
penalties) arising out of, based on or resulting from (A) the presence, or
Release or threatened Release into the environment, of any Hazardous
Materials at any location, whether or not owned, operated, leased or
managed by the Company or any of the Subsidiaries (including but not
limited to obligations to clean up contamination resulting from leaking
underground storage tanks); or (B) circumstances forming the basis of any
violation or alleged violation by the Company or the Subsidiaries of any
Environmental Law; or (C) any and all claims by any third party against the
Company or the Subsidiaries seeking damages, contribution, indemnification,
cost recovery, compensation or injunctive relief resulting from the
presence or Release of any Hazardous Materials, but with respect to the
foregoing, only if an adverse determination would or reasonably could have
a Company Material Adverse Effect, individually or in the aggregate.
(ii) "ENVIRONMENTAL LAWS" means all applicable foreign, federal, state
and local laws (including the common law), rules, requirements and
regulations relating to pollution, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or protection of human health as it relates to the
environment including, without limitation, laws and regulations relating to
Releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials.
(iii) "HAZARDOUS MATERIALS" means (A) any petroleum or any by-products
or fractions thereof, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, any form of natural gas, explosives, and
polychlorinated biphenyls; (B) any chemicals, materials or substances,
whether waste materials, raw materials or finished products, which are now
defined as or included in the definition of 'hazardous substances,'
'hazardous wastes,' 'hazardous materials,' 'extremely hazardous
substances,' 'restricted hazardous wastes,' 'toxic substances,' 'toxic
pollutants,' 'pollutants,' 'contaminants,' or words of similar import under
any Environmental Law; and (C) any other chemical, material or substance,
whether waste materials, raw materials or finished products, regulated or
forming the basis of liability under any Environmental Law in a
jurisdiction in which the Company or any of the Subsidiaries operates.
(iv) "RELEASE" means any release, spill, emission, leaking, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
environment (including without limitation ambient air, atmosphere, soil,
surface water, groundwater or property).
SECTION 2.22. Intellectual Property.
(a) The Company and each of its Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
technology, know-how, computer software programs or applications, and tangible
or intangible proprietary information or materials that are used in its or any
of its Subsidiaries' businesses as currently conducted, and to the actual
knowledge of its executive officers all patents, trademarks, trade names,
service marks and copyrights held by it and/or its Subsidiaries are valid and
subsisting, except for any failures to so own, be licensed or possess or to be
valid and subsisting, as the case may be, that, individually or in the
aggregate, will not have a Company Material Adverse Effect.
(b) Except as disclosed in the Company's SEC Reports filed prior to the
date hereof or as is not reasonably likely to have a Company Material Adverse
Effect:
(i) it and its Subsidiaries are not, nor will any of them be as a
result of the execution and delivery of this Agreement or the performance
of its obligations hereunder, in violation of any licenses, sublicenses and
other agreements as to which it or any of its Subsidiaries is a
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party and pursuant to which it or any Subsidiary is authorized to use any
third-party patents, trademarks, service marks and copyrights ("THIRD-PARTY
INTELLECTUAL PROPERTY RIGHT");
(ii) to its knowledge, no claims as of the date hereof with respect to
(A) the patents, registered and material unregistered trademarks and
service marks, registered copyrights, trade names, and any applications
therefor owned by it or any of its Subsidiaries (the "OWNED INTELLECTUAL
PROPERTY RIGHTS"); (B) any trade secrets material to it; or (C) Third-Party
Intellectual Property Rights, are currently pending or, threatened by any
person or entity; and
(iii) to its knowledge, there is no unauthorized use, infringement or
misappropriation of any of the Owned Intellectual Property Rights by any
third party, including any of its or any of its Subsidiaries' employees or
former employees.
SECTION 2.23. Regulatory Matters.
(a) Except as disclosed in the COMPANY SCHEDULE, there are no proceedings
or investigations pending or, to the Company's knowledge, threatened, before any
domestic or foreign court, administrative, governmental or regulatory body in
which any of the following matters are being considered, nor has the Company or
any of its Subsidiaries received written notice or inquiry from any such body,
government official, consumer advocacy or similar organization or any private
party, indicating that any of such matters should be considered or may become
the object of consideration or investigation: (i) reduction of principal amount
of outstanding loans or warrants; (ii) reduction of earnings or (iii) refunds of
amounts previously charged to customers.
(b) Except as disclosed in the COMPANY SCHEDULE, neither the Company nor
any of its Subsidiaries has any outstanding regulatory commitments regarding (i)
reduction of principal amount of outstanding loans or warrants; (ii) reduction
of earnings or (iii) refunds of amounts previously charged to customers, to or
by any domestic or foreign court, administrative, governmental or regulatory
body, government official, consumer advocacy or similar organization.
SECTION 2.24. Adequacy of Disclosure. The Company has made available to
Parent copies of all documents listed or referred to in the COMPANY SCHEDULE
hereto or referred to herein. Such copies are, and all documents and materials
delivered or made available in connection with Parent's investigation of the
Company in connection with the transactions contemplated hereby are, true and
complete and include all amendments, supplements and modifications thereto or
waivers currently in effect thereunder. No representation or warranty by the
Company in this Agreement nor any certificate, schedule, statement, document or
instrument furnished or to be furnished to Parent pursuant hereto, or in
connection with the negotiation, execution or performance of this Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact required to be stated herein or therein or
necessary to make any statement herein or therein not misleading.
SECTION 2.25. Registration Statement; Proxy Statement/Prospectus. The
information supplied by the Company for inclusion in the registration statement
of Parent on Form S-4 pursuant to which shares of Parent Common Stock will be
registered with the SEC (the "REGISTRATION STATEMENT") does not and will not
contain, at the time the information is supplied and when the Registration
Statement is declared effective by the SEC, any untrue statement of a material
fact nor does or will it omit to state any material fact required to be stated
in the Registration Statement or necessary in order to make the statements in
the Registration Statement not misleading. The information supplied by the
Company for inclusion in the proxy statement/prospectus (the "PROXY STATEMENT")
to be sent to the shareholders of the Company in connection with the special
meeting of the Company's shareholders to consider this Agreement and the Merger
(the "SHAREHOLDERS MEETING") does not and will not, at the
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time the Proxy Statement is first mailed to shareholders, at the time of the
Shareholders Meeting, or at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it was made, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made in the Proxy Statement not false
or misleading or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Shareholders Meeting which has become false or misleading;
provided, however, that no representation or warranty is made by the Company
with respect to information related to, or supplied by, the Parent, its
affiliates or advisors. If at any time prior to the Effective Time any event
relating to the Company or any of its affiliates should be discovered by the
Company which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, the Company shall promptly inform
Parent.
SECTION 2.26. Board Action; Vote Required. (a) The Board of Directors of
the Company has unanimously determined that the transactions contemplated by
this Agreement are in the best interests of the Company and its shareholders and
has resolved to recommend to such shareholders that they vote in favor thereof.
(b) The provisions of Section 48-35-205 of the TBCA will not apply to this
Agreement or any of the transactions contemplated hereby or thereby. No other
"fair price," "moratorium," "control share acquisition" or other form of
antitakeover statute or regulation (each a "TAKEOVER STATUTE") as in effect on
the date hereof or any anti-takeover provision in the Company's Charter or
Bylaws is applicable to the Company, the shares of Company Common Stock, the
Merger or the other transactions contemplated by this Agreement.
(c) The Company has been advised by each of its directors and executive
officers that each such person intends to vote their respective shares of
Company Common Stock in favor of the approval and adoption of this Agreement and
the Merger.
(d) The holders of shares of Company Common Stock do not have any
dissenters or appraisal rights with respect to this Agreement or the Merger
pursuant to Section 48-23-102 of the TBCA.
SECTION 2.27. Year 2000 Compliant. The Company and each of its
Subsidiaries has taken preliminary steps to identify and analyze both internally
developed and acquired software which is material to its operations and utilizes
date embedded codes that may experience operations problems when the Year 2000
is reached and, where problems have arisen, has made, or have coordinated with
customers, suppliers, financial institutions and others with which it has
business relationships that are material to the Company's business to make, all
necessary modifications to the identified software to make such software Year
2000 compliant. Except as disclosed in the Company SEC Reports, the Company and
its Subsidiaries have not incurred, and do not expect to incur, significant
operating expenses to be Year 2000 compliant, and business operations have not
been disrupted and, to the Company's knowledge, its customers have not
experienced any material interruption of service as a result of making such
software Year 2000 compliant. "YEAR 2000 COMPLIANT" means, with respect to the
Company's and each Subsidiaries' information technology, the information
technology is designed to be used prior to, during and after the calendar Year
2000 A.D., and the information technology used during each such time period will
accurately receive, provide and process date/time data (including, without
limitation, calculating, comparing and sequencing) from, into and between the
20th and 21st centuries, including the years 1999 and 2000, and leap-year
calculations and will not materially malfunction, cease to function, or provide
invalid or incorrect results as a result of date/time data, to the extent that
other information technology, used in combination with the information
technology being acquired, properly exchanges date/time data with it.
"INFORMATION TECHNOLOGY," means computer software, computer firmware, computer
hardware (whether general or specific
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purpose), and other similar or related items of automated, computerized, or
software system(s) that are used or relied on by the Company or the Subsidiary
in the conduct of its business.
SECTION 2.28. Affiliates. Except for the persons listed on the COMPANY
SCHEDULE there are no persons who, to the knowledge of the Company, may be
deemed to be affiliates of the Company under Rule 145 under the Securities Act.
Concurrently with the execution and delivery of this Agreement, the Company has
delivered to Parent an executed letter agreement, substantially in the form of
Exhibit A hereto, from each of such persons.
SECTION 2.29. Opinion of Financial Advisors. The Company has received the
opinions of Goldman Sachs and Robinson Humphrey (the "COMPANY FINANCIAL
ADVISORS"), each as of the date hereof, to the effect that, as of such date, the
Merger Consideration is fair from a financial point of view to the holders of
Company Common Stock and a copy of each such opinion has been made available to
Parent.
SECTION 2.30. Brokers and Finders. The COMPANY SCHEDULE lists all those
financial advisors, including the Company Financial Advisors, employed or
retained by the Company and the amounts that are due such persons in connection
with this Agreement and the transactions contemplated hereby. Neither the
Company nor any Subsidiary nor any of their respective officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finder's fees in connection with the transactions
contemplated herein, except that the Company has employed those financial
advisors listed on the COMPANY SCHEDULE pursuant to the terms of engagement
letters, a true and complete copy of each of which has previously been furnished
to Parent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub each represents and warrants to the Company as
follows, except as set forth on a Disclosure Schedule delivered by Parent
concurrently with the execution and delivery of this Agreement (the "PARENT
SCHEDULE"), each of which exceptions shall specifically identify the relevant
subsection hereof to which it relates and shall be deemed to be representations
and warranties made hereunder:
SECTION 3.1. Organization and Powers. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Each of Parent and the
Merger Sub has all requisite corporate power and authority to carry on its
business as it has been and is now being conducted and to own, lease and operate
the properties and assets used in connection therewith.
SECTION 3.2. Authority; Binding Effect. Each of Parent and Merger Sub has
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. All necessary
action, corporate or otherwise, required to have been taken by or on behalf of
each of Parent and Merger Sub by applicable law, each of their respective
charter document(s) or otherwise to authorize (i) the approval, execution and
delivery on their behalf of this Agreement and (ii) their performance of their
obligations under this Agreement and the consummation of the transactions
contemplated hereby has been taken. This Agreement constitutes a valid and
binding agreement of each of Parent and Merger Sub, enforceable against each of
Parent and Merger Sub in accordance with its terms, except (A) as the same may
be limited by applicable bankruptcy, insolvency, moratorium or similar laws of
general application relating to or affecting creditors' rights, including
without limitation, the effect of statutory or other laws regarding fraudulent
conveyances and preferential transfers, and (B) for the limitations imposed by
general principles of equity and commercial reasonableness.
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SECTION 3.3. No Conflict; Approvals. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, (i) violate or conflict with the Parent's or Merger Sub's charter or
bylaws, or (ii) constitute a breach or default (or an event that with notice or
lapse of time or both would become a breach or default) or give rise to any
lien, third party right of termination, cancellation, material modification or
acceleration, or loss of any benefit, under any contract to which the Parent or
any subsidiary is a party or by which it is bound, or (iii) subject to the
consents, approvals, orders, authorizations, filings, declarations and
registrations specified in Section 3.4 or in the PARENT SCHEDULE in response
thereto, conflict with or result in a violation of any permit, concession,
franchise or license or any law, rule or regulation applicable to the Parent or
any of its subsidiaries or any of their properties or assets, except, in the
case of clauses (ii) and (iii), for any such breaches, defaults, liens, third
party rights, cancellations, modifications, accelerations or losses of benefits,
conflicts or violations which would not have a Parent Material Adverse Effect
and do not impair the ability of the Parent to perform its obligations under
this Agreement or prevent or delay the consummation of any of the transactions
contemplated hereby. As used in this Agreement, "PARENT MATERIAL ADVERSE EFFECT"
shall mean any fact, condition, event, development or occurrence which,
individually or when taken together with all other such facts, conditions,
events, developments or occurrences, other than changes in the general economic
conditions and other conditions affecting financial institutions or the credit
market generally, would reasonably be expected to have a material adverse effect
on the financial condition, operating results, business or prospects of Parent
and its subsidiaries (hereinafter defined), taken as a whole.
SECTION 3.4. Governmental Consents and Approvals. Except as set forth on
the PARENT SCHEDULE, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will require any
consent, approval, order, authorization, or permit of, or filing with or
notification to, any Governmental Entity, except (a) the filing of the
Registration Statement with the SEC in accordance with the Securities Act and
the entry of an order by the SEC permitting such Registration Statement to
become effective, and compliance with applicable state securities laws, (b) the
filing of a registration statement with the SEC in an appropriate form with
respect to the shares of Parent Common Stock subject to options to acquire
Parent Common Stock issued pursuant to Section 1.5 hereof, (c) notification
pursuant to, and expiration or termination of the waiting period under the HSR
Act, (d) the filing and recording of the Certificate of Merger in accordance
with the DGCL, and (e) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent it from performing its obligations under this Agreement without having a
Parent Material Adverse Effect.
SECTION 3.5. Capital Stock.
(a) Parent has authorized capital stock consisting of 100,000,000 shares of
Parent Common Stock. As of December 31, 1998: (i) 55,840,059 shares of Parent
Common Stock were issued and outstanding and (ii) 2,714,616 shares of Parent
Common Stock were held as treasury shares. All of the issued and outstanding
shares of Parent have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and were issued in compliance with
all applicable Federal and state securities laws. No shares of capital stock
issued by Parent are or were at the time of their issuance subject to preemptive
rights. The shares of Parent Common Stock to be delivered to the Stockholders at
the Effective Time, when delivered in accordance with the terms of this
Agreement, will be valid and legally issued shares of Parent capital stock,
fully paid and nonassessable and, subject to registration under the Securities
Act and approval for listing by The New York Stock Exchange (the "NYSE"), all of
such shares will be approved for quotation on the principal stock exchange on
which Parent Common Stock is traded.
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(b) The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock, of which 1,000 shares are outstanding. All of the issued and
outstanding shares of Merger Sub are owned beneficially, and of record by
Parent.
SECTION 3.6. Registration Statement; Proxy Statement/Prospectus. The
information supplied by the Parent for inclusion in the Registration Statement
shall not contain, at the time the Registration Statement is declared effective
by the SEC, any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement not misleading.
The information supplied by the Parent for inclusion in the Proxy Statement
shall not, at the time the Proxy Statement is first mailed to shareholders, at
the time of the Stockholders Meeting, or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
was made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Proxy Statement not false or misleading or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Stockholders Meeting which has become false
or misleading; provided, however, that no representation or warranty is made by
the Parent with respect to information related to, or supplied by, the Company,
its affiliates or advisors. If at any time prior to the Effective Time any event
relating to the Parent or any of its affiliates should be discovered by the
Parent which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, the Parent shall promptly inform the
Company.
SECTION 3.7. SEC Reports. Parent has filed all required forms, reports
and documents with the SEC since January 1, 1995 (collectively, the "PARENT'S
SEC REPORTS"), including without limitation Parent's Annual Report on Form 10-K
for the year ended December 31, 1997 and the Parent's Quarterly Report on Form
10-Q for the quarter ending September 30, 1998. The Parent's SEC Reports have
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act. As of their respective dates, none of
Parent's SEC Reports, including, without limitation, any financial statements or
schedules included or incorporated by reference therein, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated or incorporated by reference therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 3.8. Financial Statements. The Parent has delivered to the
Company true and complete copies of (a) consolidated balance sheets of the
Parent and its subsidiaries at December 31, 1997 and 1996 and the related
consolidated statements of earnings, changes in stockholders' equity and
statements of cash flow for the years then ended, together with the notes
thereto, audited by Deloitte & Touche LLP (the "PARENT'S AUDITORS") and (b)
unaudited consolidated balance sheets of Parent and its subsidiaries at
September 30, 1998 and 1997 and related consolidated statements of income,
changes in shareholders' equity and statements of cash flows for the periods
ended September 30, 1998 and 1997, all of which have been prepared in accordance
with GAAP consistently applied throughout the periods involved, subject in the
case of interim financial statements to normal year-end adjustments and to the
absence of full footnotes. Such balance sheets, including the related notes,
fairly present the consolidated financial position, assets and liabilities
(whether accrued, absolute, contingent or otherwise) of the Parent and its
subsidiaries at the dates indicated and such consolidated statements of income,
changes in stockholders' equity and statements of cash flow fairly present the
consolidated results of operations, changes in stockholders' equity and cash
flow of the Parent and its subsidiaries for the periods indicated. The unaudited
consolidated financial statements as at and for the periods ended September 30,
1998 and 1997 contain all adjustments, which are solely of a normal recurring
nature, necessary to present fairly the financial position at September 30, 1998
and 1997 and the results of operations and change in
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shareholders' equity and financial position for the periods then ended. The
audited consolidated balance sheet of Parent and its subsidiaries at December
31, 1997 described above is referred to herein as the "PARENT 1997 BALANCE
SHEET."
SECTION 3.9. Absence of Certain Changes. Except as otherwise disclosed on
the PARENT SCHEDULE, since September 30, 1998, the Parent and its subsidiaries
have not been subject to any other events or conditions of any character that
would have a Parent Material Adverse Effect or impair the ability of Parent to
perform its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby.
SECTION 3.10. Absence of Litigation; Claims; Absence of Undisclosed
Liabilities. There are no claims, actions, suits, proceedings or investigations
pending or, to the knowledge of Parent, threatened against Parent or any of its
subsidiaries, or any properties or rights of Parent or any of its subsidiaries,
before any Governmental Entity or arbitrator, which, if decided adversely to
Parent or such subsidiary, would have a Parent Material Adverse Effect or impair
the ability of Parent to perform its obligations under this Agreement or prevent
or delay the consummation of any of the transactions contemplated hereby, nor is
there any judgement, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against Parent or any of its subsidiaries
having or which, insofar as reasonably can be foreseen, in the future would have
such effect. Neither Parent nor its Subsidiaries have any material indebtedness,
liability or obligation of any kind (whether known or unknown, accrued,
absolute, asserted or unasserted, contingent or otherwise) except (a) as and to
the extent reflected, reserved against or otherwise disclosed in the Parent 1997
Balance Sheet, or (b) for liabilities and obligations incurred subsequent to
December 31, 1997 in the ordinary course of business and which do not have a
Parent Material Adverse Effect or impair the ability of the Parent to perform
its obligations under this Agreement or prevent or delay the consummation of any
of the transactions contemplated hereby.
SECTION 3.11. Compliance with Law. Parent and each of its Subsidiaries is
in compliance with all applicable Laws, except where such violations would not
have a Parent Material Adverse Effect.
SECTION 3.12. Brokers and Finders. Neither the Parent nor any of its
respective officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated herein, except that the Parent has
employed Credit Suisse First Boston as its financial advisor.
SECTION 3.13. Adequacy of Disclosure. The Parent has made available to
Company copies of all documents listed or referred to in the PARENT SCHEDULE
hereto or referred to herein. Such copies are, and all documents and materials
delivered or made available in connection with Company's investigation of the
Parent in connection with the transactions contemplated hereby are, true and
complete and include all amendments, supplements and modifications thereto or
waivers currently in effect thereunder. No representation or warranty by the
Parent in this Agreement nor any certificate, schedule, written statement,
document or instrument furnished or to be furnished to Company pursuant hereto,
or in connection with the negotiation, execution or performance of this
Agreement, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated herein or
therein or necessary to make any statement herein or therein not misleading.
ARTICLE IV
OTHER AGREEMENTS
SECTION 4.1. Conduct of the Company's Business. The Company covenants and
agrees that, between the date of this Agreement and the Effective Time, unless
Parent shall otherwise consent in writing, and except as otherwise expressly
contemplated hereby or on the COMPANY
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SCHEDULE, the business of the Company and the Subsidiaries shall be conducted
only in, and such entities shall not take any action except in, the Ordinary
Course; the Company and its Subsidiaries will use their commercially reasonable
efforts to preserve substantially intact the business organization of the
Company and its Subsidiaries, to keep available the services of those of its
present officers, employees and consultants and to preserve the present
relationships of the Company and its Subsidiaries with customers, suppliers and
other persons with which the Company and the Subsidiaries have significant
business relations; and the Company and its Subsidiaries will advise each of its
respective officers of their fiduciary duty to the Company prior to the
Effective Time to operate the business in due course, maintain the
confidentiality of information arising from or generated by the business of the
Company and to avoid taking any action which would have a Company Material
Adverse Effect. By way of amplification and not limitation, except as otherwise
expressly contemplated by this Agreement or the COMPANY SCHEDULE, the Company
agrees on behalf of itself and its Subsidiaries that, without the prior written
consent of Parent, they will, between the date of this Agreement and the
Effective Time:
(a) not directly or indirectly do any of the following: (i) amend or
propose to amend its Charter or Bylaws; (ii) split, combine or reclassify
any outstanding shares of its capital stock, or declare, set aside or pay
any dividend payable in cash, stock, property or otherwise with respect to
such shares; (iii) redeem, purchase, acquire or offer to acquire any shares
of its capital stock; (iv) issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of, any additional shares of, or securities
convertible or exchangeable for, or any options, warrants or rights of any
kind to acquire any shares of, its capital stock of any class or other
property or assets whether pursuant to any rights agreement, stock option
plans described in the COMPANY SCHEDULE or otherwise, PROVIDED, HOWEVER,
that (a) the Company may issue options in the Ordinary Course, which
options shall have an exercise price per share of not less than (i) the
Starting Price (hereinafter defined) divided by (ii) the Exchange Ratio,
the product being rounded, if necessary, up or down, to the nearest cent,
and shall be granted in accordance with the amounts and limitations set
forth in the COMPANY SCHEDULE and (b) the Company may issue shares of
Company Common Stock pursuant to currently outstanding options referred to
in the COMPANY SCHEDULE in response to Section 2.3 above; (v) accelerate,
amend or change the period of exerciseability of options or restricted
stock granted under any of the Company Stock Plans or authorize cash
payments in exchange for any options granted under any of such plans except
as required by the terms of such plans or any related agreements in effect
as of the date of this Agreement, or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this paragraph (a);
(b) not, directly or indirectly (i) acquire (by merger, consolidation
or acquisition of stock or assets) any corporation, partnership, limited
liability company or other business organization or division thereof or
enter into or acquire any interest in any Joint Venture; (ii) issue, sell,
pledge, dispose of or encumber any assets (including without limitation
licenses, Authorizations or rights) of the Company or the Subsidiaries or
enter into any securitization transactions, excluding transactions between
the Company and its Subsidiaries and any transactions required under the
Company's current credit facilities; (iii) incur any indebtedness for
borrowed money or issue any debt securities; provided, however, the Company
may incur indebtedness under the Company's current credit facilities up to
an amount of such facilities on the date of this Agreement and any
transactions made pursuant to the Company's current credit facilities, (iv)
make any commitments or agreements for capital expenditures or capital
additions or betterments exceeding in the aggregate $100,000, except such
as may be involved in ordinary repair, maintenance or replacement of its
assets; (v) enter into or modify any material contract, lease or agreement
except in the Ordinary Course; (vi) terminate, modify, assign, waive,
release or relinquish any material contract rights, including those arising
under any Financing Documents except in the Ordinary Course
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or under any insurance policies, or amend any material rights or claims not
in the Ordinary Course or except as expressly provided herein; (vii) settle
or consent to the settlement of any litigation if such settlement, together
with any related litigation or claims, would cost the Company or any
Subsidiary, directly or indirectly (including pursuant to any
indemnification obligations) more than $10,000,000, provided, however, that
the Company may settle any litigation arising out of its relationships with
the Portfolio Companies in the Ordinary Course; (viii) other than in prior
consultation with the Parent, restructure or materially change the
Company's or any Subsidiary's investment security portfolio through
purchases, sales or otherwise, or the manner in which such portfolio is
classified or reported, except in the Ordinary Course; (ix) purchase any
securities or create any loans in the Tandem Capital division, (x) purchase
any securities or create any loans for an amount exceeding $65,000,000 per
quarter in the aggregate or $5,000,000 for any single borrower, or (xi)
enter into any contract, agreement, commitment or arrangement with respect
to any of the matters set forth in this paragraph (b);
(c) not, directly or indirectly (i) initiate any litigation or
arbitration proceeding, except in the Ordinary Course, (ii) revalue any of
its assets, including writing down the value of inventory or writing off
notes or accounts receivable, other than in the Ordinary Course, or as
required by GAAP or any applicable laws, (iii) make any material change to
their respective accounting methods, principles or practices, or (iv)
settle or compromise any Tax liability, or prepare or file any Tax Return
inconsistent with past practice or, on any such Tax Return, take any
position, make any election, or adopt any method that is inconsistent with
positions taken, elections made or methods used in preparing or filing
similar Tax Returns in prior periods;
(d) not, directly or indirectly, (i) grant any increase in the salary
or other compensation of its employees except in the Ordinary Course or
grant any bonus to any employee or enter into any employment agreement or
make any loan to or enter into any material transaction of any other nature
with any officer or employee of the Company, except as disclosed on the
COMPANY SCHEDULE or on the letter to Parent dated January 4, 1999; (ii)
take any action to institute any new severance or termination pay practices
with respect to any directors, officers or employees of the Company or to
increase the benefits payable under its severance or termination pay
practices; (iii) adopt or amend, in any respect, except as may be required
by applicable law or regulation, any bonus, profit sharing, compensation,
stock option, restricted stock, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund, plan or
arrangement for the benefit or welfare of any directors, officers or
employees;
(e) use reasonable best efforts to cause the persons listed on the
COMPANY SCHEDULE to enter into employment/consulting agreements prior to
Closing in the form substantially set forth in Exhibit B hereto, containing
the terms set forth opposite such person's name on the COMPANY SCHEDULE;
(f) not, directly or indirectly, take or omit to take any action that
is reasonably likely to result in a breach of any contract, commitment or
obligation if the result would, individually or in the aggregate, have a
Company Material Adverse Effect;
(g) not, directly or indirectly, take any action which would cause its
representations and warranties contained herein if made on and as of the
date of such action or agreement, untrue or incorrect in any material
respect;
(h) not, directly or indirectly, take (and will use reasonable efforts
to prevent any affiliate of the Company from taking) or agree in writing or
otherwise to take any action which could reasonably be expected to
adversely affect or delay the ability of any of the parties to obtain any
approval of any governmental or regulatory body required to consummate the
transactions contemplated hereby;
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(i) not, directly or indirectly, take (and will use reasonable efforts
to prevent any affiliate of the Company from taking) or agree in writing or
otherwise to take, (i) any of the actions described in this Section 4.l, or
(ii) any action which could prevent it from performing, or cause it not to
perform, its obligations under this Agreement, or (iii) any action that
would cause the Merger not to be treated as a reorganization within the
meaning of Section 368(a) of the Code;
(j) the Company shall make sufficient distributions in order to: (i)
qualify as a RIC for the year ended December 31, 1998; and (ii) avoid
imposition of federal excise tax for the years ended October 31, 1998 (with
respect to capital gain net income) and December 31, 1998 (with respect to
ordinary income);
(k) from January 1, 1999 until the Closing, except to the extent
necessary to maintain its status as an RIC for the year ended December 31,
1998 and avoid federal excise tax for any period ending on or before
December 31, 1998, the Company shall operate and conduct its affairs as if
it were a C corporation and not an RIC for federal income tax purposes; and
(l) use reasonable best efforts to cause the Company's accountants to
perform such activities in connection with the quarterly preparation and
review of the Company's interim financial statements as they have
historically performed.
SECTION 4.2. Parent's Undertakings. Parent will not, directly or
indirectly, take (and will use reasonable efforts to prevent any affiliate of
the Company from taking) any action that would cause the Merger not to be
treated as a reorganization within the meaning of Section 368(a) of the Code or
any action which would cause any of the Parent's representations and warranties
in this Agreement to be untrue or incorrect in any material respect, or prevent
it from performing or cause it not to perform, its obligation under this
Agreement. Parent shall as promptly as practicable following the date hereof
apply for approval for listing of Parent Common Stock to be issued pursuant to
the Merger on the NYSE upon official notice of issuance. Parent shall establish
a Retention Plan substantially in accordance with the terms and provisions set
forth in the PARENT SCHEDULE.
SECTION 4.3. Access to Information. Between the date of this Agreement
and the Closing Date, the Company will (a) give Parent and its authorized
representatives access, during regular business hours upon reasonable notice, to
all offices and other facilities and to all of its books and records, (b) permit
Parent to make such reasonable inspections as it may require, and (c) cause its
officers and those of its Subsidiaries to furnish Parent with such financial and
operating data and other information with respect to the business and properties
of the Company, as Parent may from time to time reasonably request and as the
Company may have on hand or be able to produce without undue hardship,
including, without limitation, such of the foregoing as parent deems necessary
for it to complete, prior to Closing, a due diligence review and valuation of
all of the Company's Financing Transactions. Between the date of this Agreement
and the Closing Date, Parent will cause its officers and those of its
Subsidiaries to furnish the Company with all financial and operating data and
other information with respect to the business and properties of Parent, as
Company may from time to time reasonably request and as Parent may have on hand
or be able to produce without undue hardship, provided, that the requested
information is of a type customarily provided to the Company's underwriters in
connection with a public offering of securities. All such access and information
obtained by Parent or Company and their respective authorized representatives
shall be subject to the terms and conditions of the letter agreement between the
Company and Parent dated May 20, 1998 (the "CONFIDENTIALITY AGREEMENT").
SECTION 4.4. Stockholder Vote; Proxy Statement.
(a) As promptly as practicable after the date hereof, the Company shall
take all action necessary in accordance with Rules 14a-1 ET. SEQ. of the
Exchange Act, the 1940 Act, the rules
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of the NYSE, the DGCL, the TBCA, and its Charter and Bylaws to call, give notice
of, convene and hold the Shareholders Meeting as promptly as practicable (unless
such date shall be delayed due to circumstances reasonably beyond the control of
the parties) to consider and vote upon the approval and adoption of this
Agreement and the transactions contemplated hereby, including the revocation of
the Company's status as a business development company under the 1940 Act, and
for such other purposes as may be necessary or desirable. Subject to Section
4.4(b), the Board of Directors of the Company shall use its commercially
reasonable efforts to solicit and secure from its shareholders such approval and
adoption of this Agreement and the transactions contemplated hereby, which
efforts may include, without limitation, soliciting shareholder proxies therefor
and to advise the other party upon its request, from time to time, as to the
status of the shareholder vote then tabulated.
(b) As promptly as practicable after the date hereof, the Company and
Parent shall jointly prepare and file with the SEC preliminary proxy materials
of the Company under the Exchange Act with respect to the Merger, and a
preliminary prospectus of Parent with respect to Parent Common Stock to be
issued in the Merger and will thereafter use their respective best efforts to
respond to any comments of the SEC with respect thereto and to cause the
Registration Statement to become effective, and the Proxy Statement and proxy to
be mailed to the Company's shareholders, as promptly as practicable. The Proxy
Statement shall include the unqualified recommendation of the Company's Board of
Directors that the Company's shareholders vote in favor of the approval and
adoption of this Agreement and the transactions contemplated hereby, provided
that the Board of Directors of the Company may fail to make such recommendation
or may withdraw, modify or amend such recommendation in a manner adverse to the
Parent, if (but only if) the Board of Directors, after consultation with and
based upon the advice of independent legal counsel, determines that the making
of such recommendation or the failure to so withdraw, modify or amend such
recommendation would constitute a breach of the fiduciary duties of such
director to the shareholders of the Company.
(c) As soon as practicable after the date hereof, the Company and Parent
shall prepare and file any other filings required to be filed by each under the
Exchange Act or any other federal or state securities laws relating to the
Merger and the transactions contemplated hereby (collectively "OTHER FILINGS")
and will use their best efforts to respond to any comments of the SEC or any
other appropriate government official with respect thereto.
(d) The Company and Parent shall cooperate with each other and provide to
each other all information necessary in order to prepare the Registration
Statement, the Proxy Statement and the Other Filings (collectively, the "SEC
TRANSACTION FILINGS") and shall provide promptly to the other party any
information that such party obtains that could necessitate amending any such
document.
(e) The Company and Parent will notify the other party promptly of the
receipt of any comments from the SEC or its staff or any other appropriate
government official and of any requests by the SEC or its staff or any other
appropriate government official for amendments or supplements to any of the SEC
Transaction Filings or for additional information and will supply the other
party with copies of all correspondence between the Company or any of its
representatives or Parent and any of its representatives, as the case may be, on
the one hand, and the SEC or its staff or any other appropriate government
official, on the other hand, with respect thereto. If at any time prior to the
Effective Time, any event shall occur that should be set forth in an amendment
of, or a supplement to, any of the SEC Transaction Filings, the Company and
Parent agree promptly to prepare and file such amendment or supplement and to
distribute such amendment or supplement as required by applicable law,
including, in the case of an amendment or supplement to the Proxy Statement,
mailing such supplement or amendment to the Company's shareholders. Parent shall
not be required to maintain the effectiveness of the Registration Statement for
the purpose of resale by shareholders of the Company who may be affiliates of
the Company or Parent pursuant to Rule 145 under the Securities Act.
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(f) The information provided and to be provided by the Company and Parent
for use in SEC Transaction Filings shall at all times prior to the Effective
Time be true and correct in all material respects and shall not omit to state
any material fact required to be stated therein or necessary in order to make
such information not false or misleading, and the Company and Parent each agree
to promptly correct any such information provided by it for use in the SEC
Transaction Filings that shall have become false or misleading. The SEC
Transaction Filings, when filed with the SEC or any appropriate government
official, shall comply as to form in all material respects with all applicable
requirements of law.
(g) The Company and the Parent shall cooperate with each other, provide to
each other all information necessary for the preparation of any presentations to
any rating agency and participate, to the extent requested in any reviews or
discussions with any rating agency.
SECTION 4.5. Commercially Reasonable Efforts. Except as otherwise
provided herein, each of the parties hereto agrees to use its commercially
reasonable efforts to take, or cause to be taken, all appropriate action, and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws, statutes, ordinances, codes, rules and regulations to
consummate and make effective the transactions contemplated by this Agreement in
the most expeditious manner practicable, including but not limited to the
satisfaction of all conditions to the Merger, and to consummate the Merger as
promptly as practicable, but in no event later than July 15, 1999.
SECTION 4.6. Public Announcements. The Company and Parent shall consult
with each other before issuing any press release or otherwise making any public
statements with any news media with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any such press release or
make any such public statement without the prior consent of the other party,
which consent shall not be unreasonably withheld; provided, however, that a
party may, without the prior consent of the other party, issue such press
release or make such public statement as may be required by law or the
applicable rules of any stock exchange, including the NYSE, if it has used its
commercially reasonable efforts to consult with the other party and to obtain
such party's consent but has been unable to do so in a timely manner; PROVIDED,
FURTHER, that nothing contained herein shall prevent any party from promptly
making all filings with Governmental Entities and all disclosure as may, in its
good faith judgment, be required or advisable in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby (in which case the disclosing party shall advise the other
parties and provide them with a copy of the proposed disclosure or filing prior
to making the disclosure or filing). In this regard, the parties shall make a
joint public announcement of the Merger and the transactions contemplated
thereby immediately upon the signing of this Agreement.
SECTION 4.7. Notification. Each party hereto shall, in the event of, or
promptly after obtaining knowledge of the occurrence or threatened occurrence
of, any fact or circumstance that would cause or constitute a breach of any of
its representations and warranties set forth herein, give notice thereof to the
other parties and shall use its best efforts to prevent or promptly to remedy
such breach, provided, however, that none of such notices shall be deemed to
modify, amend or supplement the representations and warranties of the such party
or the disclosure schedules of such party for the purposes of Article V hereof,
unless the other party shall have consented thereto in writing.
SECTION 4.8. Subsequent Financial Statements. (a) Prior to the Effective
Time, the Company will consult with Parent prior to (i) making publicly
available its financial results for any period and (ii) the filing of, and will
timely file with the SEC, each Annual Report on Form 10-K, Quarterly Report on
Form 10-Q and Current Report on Form 8-K required to be filed by the Company
under the Exchange Act and the rules and regulations promulgated thereunder and
will promptly deliver to the Parent copies of each such report filed with the
SEC. All such reports will
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comply in all material respects with all the applicable requirements of the
Securities Act and the Exchange Act. All contracts which are required to be
filed as exhibits to, or incorporated by reference in, the Company's 1998 Form
10-K will be filed or incorporated by reference. As of their respective dates,
none of such reports shall contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The respective audited financial statements and unaudited
interim financial statements of the Company, included in such reports will
fairly present the financial position of the Company and its subsidiary as of
the dates thereof and the results of its operations and cash flows for the
periods then ended in accordance with generally accepted accounting principles
applied on a consistent basis and, subject, in the case of unaudited interim
financial statements, to normal year-end adjustments and any other adjustments
described therein.
(b) The Parent will timely file with the SEC, each Annual Report on Form
10-K, Quarterly Report on Form 10-Q and Current Report on Form 8-K required to
be filed by the Parent under the Exchange Act and the rules and regulations
promulgated thereunder and will promptly deliver to the Company copies of each
such report filed with the SEC. All such reports will comply in all material
respects with all the applicable requirements of the Securities Act and the
Exchange Act. As of their respective dates, none of such reports shall contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
respective audited financial statements and unaudited interim financial
statements of the Parent, included in such reports will fairly present the
financial position of the Parent as of the dates thereof and the results of its
operations and cash flows for the periods then ended in accordance with
generally accepted accounting principles applied on a consistent basis and,
subject, in the case of unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein.
SECTION 4.9. Control of Operations. Nothing contained in this Agreement
shall give Parent, directly or indirectly, the right to control or direct the
Company's operations prior to the Effective Time. Prior to the Effective Time,
each of the Company and Parent shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision over its
respective operations.
SECTION 4.10. Regulatory and Other Authorizations. (a) Each party hereto
agrees to use commercially reasonable efforts to comply with all legal
requirements which may be imposed on such party with respect to the Merger and
to obtain all Authorizations, consents, orders and approvals of Governmental
Entities and non-governmental third parties that may be or become necessary for
(i) its respective execution and delivery of, and the performance of its
respective obligations pursuant to, this Agreement and (ii) the ownership of the
Surviving Corporation by Parent, and each party will cooperate fully with the
other parties in promptly seeking to obtain all such authorizations, consents,
orders and approvals. Without limitation, the Company and Parent shall each make
an appropriate filing of a Notification and Report Form pursuant to the HSR Act
no later than 20 days after the date hereof and shall promptly respond to any
request for additional information with respect thereto. Each such filing shall
request early termination of the waiting period imposed by the HSR Act.
(b) Notwithstanding anything else to the contrary contained in this
Agreement, Parent shall have no obligation to oppose, challenge or appeal any
suit action or proceeding by any Governmental Entity before any court or
governmental authority, agency or tribunal, domestic or foreign or any order or
ruling by any such body (i) seeking to restrain or prohibit or restraining or
prohibiting the consummation of the Merger or any of the other transactions
contemplated by this Agreement, (ii) seeking to prohibit or limit or prohibiting
or limiting the ownership, operation or control by the Company, Parent or any of
their respective Subsidiaries of any portion of the business or assets of the
Company, Parent or any of their respective Subsidiaries or seeking to
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compel or compelling the Company, Parent or any of their respective Subsidiaries
to dispose of, grant rights in respect of, or hold separate any portion of the
business or assets of the Company, Parent or any of their respective
subsidiaries. Neither the Company nor any of its Subsidiaries shall take or
agree to take any of the actions described in the immediately preceding sentence
without the prior written consent of Parent.
SECTION 4.11. Tax-Free Reorganization. Each of Parent and the Company
will use its best efforts to cause the Merger to qualify as a "reorganization"
within the meaning of Section 368(a) of the Code, and to enable its respective
counsel to render the opinions contemplated by Sections 5.2(c) and 5.3(h). Each
party shall make and shall use its best efforts to cause those of its respective
officers and shareholders that counsel to the parties shall reasonably request
to make, such representations and certifications as counsel to the parties shall
reasonably request to enable them to render such opinion, including, without
limitation, the representations of Parent contained in a certificate of Parent
(the "PARENT TAX CERTIFICATE") in a form satisfactory to Morgan, Lewis & Bockius
LLP and representations of the Company contained in a certificate of the Company
(the "COMPANY TAX CERTIFICATE") in a form satisfactory to Morgan, Lewis &
Bockius LLP.
SECTION 4.12. Takeover Statute. If any Takeover Statute shall become
applicable to the transactions contemplated hereby each of the Company and
Parent and the members of their respective Boards of Directors shall grant such
approvals and take such actions as are reasonably necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate or minimize the
effects of such statute or regulation on the transactions contemplated hereby.
SECTION 4.13. Indemnification of Directors and Officers. For a period of
four years after the Effective Time (or, if any claim or claims are asserted or
made within such four year period, until the final disposition of such claim, if
longer), Parent shall, or shall cause the Company, as the Surviving Corporation,
to (a) maintain in effect the current or similar provisions regarding
indemnification of officers and directors contained in the Charter and Bylaws of
the Company, and (b) indemnify the directors and officers of the Company to the
maximum extent to which the Company is permitted to indemnify such officers and
directors under its charter and bylaws and applicable law. Parent hereby agrees,
as of the Effective Time, to guarantee the Company's indemnification obligations
set forth in the preceding sentence. For the period of time of such
indemnification obligations, Parent shall cause the Company to maintain in
effect the director and officer insurance policies in effect on the date hereof,
or in the event that Parent shall consent to increase the amount of coverage
thereunder, such policies with such increased coverage in effect as of Effective
Time; provided, however, that Parent may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions which are
not less advantageous than such policy and provided, further, that Parent shall
not be obligated to provide such coverage to the extent that the cost of such
coverage exceeds 150% of the cost of the current annual premium of such coverage
immediately prior to the Effective Time (which the Company represents is no more
than $119,000).
SECTION 4.14. No Solicitation. (a) Without the prior written consent of
Parent, from and after the date hereof, the Company will not, and will not
authorize or permit any of the Subsidiaries or their officers, directors,
employees, financial advisors, agents and other representatives
("REPRESENTATIVES") to, directly or indirectly, (i) solicit, initiate or
encourage (including by way of furnishing non-public information) or take any
other action to facilitate knowingly any inquiries or the making of any proposal
which constitutes or may reasonably be expected to lead to an Acquisition
Proposal (as defined herein) from any person or (ii) engage in any discussion or
negotiations relating to any Acquisition Proposal; PROVIDED, HOWEVER, that
notwithstanding any other provision hereof, the Company may, (A) at any time
prior to the time the Company's shareholders shall have voted to approve this
Agreement engage in discussions or negotiations with a third party (and may
furnish such third party information
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concerning the Company and its business, properties and assets to such party)
who (without any solicitation, initiation, encouragement, discussion or
negotiation, directly or indirectly, by or with the Company or the
Representatives after the date hereof) makes an unsolicited bona fide written
Acquisition Proposal if, and only to the extent that, (1) the third party has
first made an Acquisition Proposal that is financially superior, with respect to
the holders of the Company Common Stock generally, to the transactions
contemplated by this Agreement and has demonstrated that the funds necessary for
the Acquisition Proposal are reasonably likely to be available (as determined in
good faith in each case by the Company's Board of Directors after consultation
with its financial advisors) (such an Acquisition Proposal, a "SUPERIOR
PROPOSAL"), and the Company's Board of Directors shall conclude in good faith,
after considering applicable provisions of state law on the basis of advice of
outside counsel, that such action is necessary for the Board of Directors to
avoid breaching its fiduciary duties to the shareholders of the Company under
applicable law, and (2) prior to furnishing such information to or entering into
discussions or negotiations with such person or entity, the Company receives
from such person or entity an executed confidentiality agreement in
substantially the same form as the Confidentiality Agreement, and (3) the
Company shall have fully complied with this Section 4.14; and/or (B) comply with
Rule 14e-2 promulgated under the Exchange Act with regard to a tender or
exchange offer. As used herein, "ACQUISITION PROPOSAL" shall mean a proposal or
offer for a tender or exchange offer, merger, consolidation or other business
combination involving the Company or any Subsidiary of the Company or any
proposal to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets of, the Company or any Subsidiary thereof.
(b) The Company shall immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted heretofore by the Company or its Representatives with
respect to the foregoing. The Company shall notify Parent orally and in writing
of any such inquiries, offers or proposals (including, without limitation, the
terms and conditions of any such proposal and the identity of the person making
it), within 24 hours of the receipt thereof, shall keep Parent informed of the
status and details of any such inquiry, offer or proposal, and shall give Parent
at least three business days prior written notice of (i) any meeting of the
Board of Directors of the Company to take any action with respect to an
Acquisition Proposal or to withdrawing or modifying, in a manner adverse to
Parent, its recommendation to the Company's shareholders in favor of approval of
the Merger, and (ii) any confidentiality or similar agreement to be entered into
with any person making such inquiry, offer or proposal.
(c) During the period from the date of this Agreement through the Effective
Time, the Company shall not terminate, amend, modify or waive any provision of
any confidentiality or standstill agreement to which it or any of its
Subsidiaries is a party. During such period, the Company shall enforce, to the
fullest extent permitted under applicable law, the provisions of any such
agreement, including, but not limited to, by obtaining injunctions to prevent
any breaches of such agreements and to enforce specifically the terms and
provisions thereof in any court of the United States of America or of any state
having jurisdiction.
SECTION 4.15. Certain Modifications; Financial and Accounting
Adjustments. Prior to the Effective Time, the Company and Parent shall consult
with respect to business practices and policies and shall make such
modifications or changes to the Company's practices or policies as may be
mutually agreed upon and approved by the parties. The Company shall make (a) the
modifications and financial adjustments set forth in the COMPANY SCHEDULE, being
those modifications and adjustments necessary, as of December 31, 1998, to
prepare the financial statements of the Company as of such date in accordance
with GAAP and (b) provided that it has been advised in writing that all
conditions to Parent's obligations hereunder have been satisfied or waived,
those additional modifications and financial adjustments required to be made
prior to Closing in order to prepare the financial statements of the Company, as
of the quarter
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end immediately preceding the Closing Date, in accordance with GAAP, which
additional modifications and financial adjustments shall be made after the
Company shall have consulted with the Parent regarding same, including, without
limitation, Parent's due diligence review and valuation of all the Company's
Financing Transactions performed by Parent prior to Closing pursuant to Section
4.3. The Company and Parent shall also consult with respect to the character,
amount and timing of other restructuring charges and financial adjustments to be
taken by the Company as mutually agreed upon and approved by the parties, and
shall take such charges and make such adjustments in accordance with generally
accepted accounting principles. The Company's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue or
breached in any respect for any purpose as a consequence of any modifications or
changes to such policies or practices or any financial adjustments which may be
undertaken in accordance with this Section 4.15.
SECTION 4.16. Continuing Employees. (a) From and after the Closing Date,
Parent shall, or shall cause the Surviving Corporation to, provide benefits to
continuing employees of the Company and its Subsidiaries ("CONTINUING
EMPLOYEES") that, in the aggregate, are no less favorable than the benefits such
Continuing Employees were entitled to immediately prior to the Effective Time.
Notwithstanding the foregoing, nothing in this Section 4.16 shall require (i)
the continuation of any benefit plan of any variety or prevent the amendment or
termination thereof (subject to the provision, in the aggregate, of the benefits
as provided in the preceding sentence) or (ii) Parent or the Surviving
Corporation to continue or maintain the employment of any Continuing Employee.
(b) With respect to any benefits plans of Parent or its subsidiaries in
which the Continuing Employees participate after the Closing Date, Parent shall,
or shall cause the Surviving Corporation to: (i) waive any limitations to
pre-existing conditions, exclusions and waiting periods with respect to
participation and coverage requirements applicable to the Continuing Employees
under any welfare benefit plan, as defined in Section 3(1) of ERISA, in which
such employees may be eligible to participate after the Closing Date (provided,
however, that no such waiver shall apply to a pre-existing condition of any
Continuing Employee who was, as of the Closing Date, excluded from participation
in a Company benefit plan by nature of such pre-existing condition), (ii)
provide each Continuing Employee with credit for any co-payments and deductibles
paid prior to the Closing Date in satisfying any applicable deductible or
out-of-pocket requirements under any welfare benefit plan in which such
employees may be eligible to participate after the Closing Date, and (iii)
recognize all service of the Continuing Employees with the Company for all
welfare benefit purposes, except (i) for those benefit plans of Parent for which
the Company Employees were ineligible to participate or for which there are no
comparable plans at the Company and (ii) to the extent such treatment would
result in duplicative accrual on or after the Closing Date of benefits for the
same period of service.
ARTICLE V
CONDITIONS TO CLOSING
SECTION 5.1. Conditions to the Obligations of the Company and Parent and
Merger Sub. The respective obligations of the Company, on the one hand, and
Parent and Merger Sub, on the other hand, to consummate the transactions
contemplated hereby are subject to the requirements that:
(a) Shareholder Approval. This Agreement shall have been approved and
adopted by the requisite vote of the shareholders of the Company in
accordance with the TBCA and the Charter of the Company.
(b) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other
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legal or regulatory restraint or prohibition shall have been issued and be
in effect (i) restraining or prohibiting the consummation of the Merger or
any of the transactions contemplated hereby or (ii) prohibiting or limiting
the ownership, operation or control by the Company, Parent or any of their
respective subsidiaries of any portion of the business or assets of the
Company, Parent or any of their respective subsidiaries, or compelling the
Company, parent or any of their respective Subsidiaries to dispose of,
grant rights in respect of, or hold separate any portion of the business or
assets of the Company, parent or any of their respective subsidiaries
(except as contemplated by Section 4.10(b) hereof); nor shall any action
have been taken by a Governmental Entity or any federal, state or foreign
statute, rule, regulation, executive order, decree or injunction shall have
been enacted, entered, promulgated or enforced by any Governmental Entity
or arbitrator, which is in effect and has the effect of making the Merger
illegal or otherwise prohibiting the consummation of the Merger.
(c) No Litigation. There shall not be any litigation or other
proceeding pending (exclusive of the litigation referred to in Section
2.18(b) hereof) or threatened against the Company or any of its
Subsidiaries which, in the reasonable opinion of Parent, would restrain or
invalidate the transactions contemplated by this Agreement, would impair
the ability of either party to perform its obligations under this
Agreement, prevent or delay the consummation of any transaction
contemplated thereby or would prevent Parent from realizing, in its
reasonable opinion, in all material respects the economic benefits of the
transactions contemplated by this Agreement that Parent currently
anticipates receiving therefrom.
(d) HSR Act. Any waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(e) Registration Statement. The Registration Statement shall have
been declared effective under the Securities Act and no stop orders with
respect thereto shall have been issued, and Parent shall have received all
requisite authorizations under all applicable state securities or blue sky
laws necessary to consummate the transaction.
(f) NYSE Listing. Approval for listing by the NYSE upon official
notice of issuance of Parent Common Stock to be issued in the Merger shall
have been received by Parent.
SECTION 5.2. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the transactions contemplated hereby
are subject to the further requirements that:
(a) Representations and Warranties. The representations of Parent set
forth in the Agreement shall be true and correct (without regard to any
materiality qualifier contained therein) in all material respects as of the
date of this Agreement and (except to the extent such representations speak
of an earlier date) as of the Closing Date as though made on and as of the
Closing Date. The Company shall have received a certificate signed on
behalf of Parent by the Chairman, President and Chief Executive Officer,
Executive Vice President -- Corporate Development and the Chief Financial
Officer or the Vice President -- Controller, Financial Accounting of the
Parent to the foregoing effect.
(b) Performance of Obligations. Each of the obligations of Parent and
the Merger Sub to be performed on or before the Closing Date pursuant to
the terms of this Agreement shall have been duly performed in all material
respects on or before the Closing Date and at the Closing the Company shall
have received a certificate signed on behalf of Parent by the Executive
Vice President -- Corporate Development and the Chief Financial Officer or
the Vice President -- Controller, Financial Accounting of the Parent to the
foregoing effect.
(c) Tax Opinion. Bass, Berry & Sims PLC shall have delivered to the
Company its written opinion, dated as of the Closing Date, in form and
substance reasonably satisfactory
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to the Company, substantially to the effect that (i) the Merger constitutes
a reorganization under Section 368(a) of the Code, (ii) Parent, Merger Sub
and the Company will each be a party to that reorganization within the
meaning of Section 368(b) of the Code, (iii) Parent, Merger Sub and the
Company will not recognize any gain or loss for U.S. federal income tax
purposes as a result of the Merger and (iv) the shareholders of the Company
will not recognize any gain or loss for U.S. Federal income tax purposes
upon their exchange of the Company Common Stock solely for Parent Common
Stock pursuant to the Merger (except with respect to cash received in lieu
of a fractional share interest in Parent Common Stock).
(d) Absence of Material Adverse Effect. No Parent Material Adverse
Effect shall have occurred.
SECTION 5.3. Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the transactions contemplated
hereby are subject to the further requirements that:
(a) Representations and Warranties. The representations of Company
set forth in the Agreement shall be true and correct (without regard to any
materiality qualifier contained therein) in all material respects and the
representations of the Company set forth in Section 2.14(c) shall be true
and correct as of the date of this Agreement and (except to the extent such
representations speak of an earlier date) as of the Closing Date as though
made on and as of the Closing Date. Parent shall have received a
certificate signed on behalf of Company by the Chief Executive Officer and
the Chief Financial Officer of the Company to the foregoing effect.
(b) Performance of Obligations. Each of the obligations of the
Company to be performed on or before the Closing Date pursuant to the terms
of this Agreement shall have been duly performed in all material respects
on or before the Closing Date. At the Closing Parent shall have received a
certificate signed on behalf of Company by the Chief Executive Officer and
the Chief Financial Officer of the Company to the foregoing effect.
(c) Absence of Material Adverse Effect. No Company Material Adverse
Effect shall have occurred.
(d) No Equity Rights in Surviving Corporation. There shall not be any
securities, rights, warrants, options, or other instruments outstanding
which, after consummation of the Merger, would be convertible into or
exercisable for securities of the Surviving Corporation, and Parent shall
be satisfied that all outstanding options and warrants of the Company will
become options or warrants solely with respect to Parent Common Stock on
the terms described in Section 1.5 hereof.
(e) Regulatory Consents. All authorizations, consents, orders or
approvals of, or declarations or filings with, and all expirations of
waiting periods imposed by, any governmental body, agency or official (all
of the foregoing, "REGULATORY CONSENTS") which are necessary for the
consummation of the transactions contemplated hereby, other than immaterial
Regulatory Consents the failure to obtain which would have no material
adverse effect on the consummation of the transactions contemplated hereby
and no Company Material Adverse Effect, are listed on the COMPANY SCHEDULE
and shall have been filed, have occurred or have been obtained (all such
permits, approvals, filings and consents and the lapse of all such waiting
periods being referred to as the "REQUISITE REGULATORY APPROVALS") and all
such Requisite Regulatory Approvals shall be in full force and effect,
provided, however, that a Requisite Regulatory Approval shall not be deemed
to have been obtained if in connection with the grant thereof there shall
have been an imposition by any state or federal governmental body, agency
or official of any condition, requirement, restriction or change of
regulation, or any other action directly or indirectly related to such
grant taken by such governmental body, which would reasonably be
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expected to either have a Company Material Adverse Effect or prevent Parent
from realizing, in its reasonable opinion, in all material respects the
economic benefits of the transactions contemplated by this Agreement that
Parent currently anticipates receiving therefrom.
(f) Non-Regulatory Consents. The Company shall have obtained the
consent or approval of any person whose consent or approval shall be
required under any agreement or instrument which the Company is bound or to
which the Company's assets or business are subject or affected in order to
permit the consummation of the transactions contemplated hereby, except
those which the failure to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on the Company; provided, that
the Parent shall have received the right to use, and ownership of the
Harris Williams name. The Parent shall have obtained the consent or
approval of any person whose consent or approval shall be required under
any agreement or instrument which the Parent is bound or to which the
Parent's assets or business are subject or affected in order to permit the
consummation of the transactions contemplated hereby, except those which
the failure to obtain would not, individually or in the aggregate, have a
Parent Material Adverse Effect; provided that the Parent shall have
obtained the necessary consents that this Agreement and the transactions
contemplated hereby shall not be considered "change of control" events
under the Employment and Noncompetition Agreements, dated May 16, 1996,
between the Company and Chris Williams and the Employment and
Noncompetition Agreements, dated May 16, 1996, between the Company and
Hiter Harris.
(g) Tax Opinion. Morgan, Lewis & Bockius LLP shall have delivered to
Parent its written opinion, dated as of the Closing Date, in form and
substance reasonably satisfactory to Parent, substantially to the effect
that (i) the Merger constitutes a reorganization under Section 368 of the
Code, (ii) Parent, Merger Sub and the Company will each be a party to that
reorganization within the meaning of Section 368(b) of the Code, and (iii)
Parent, Merger Sub and the Company will not recognize any gain or loss for
U.S. federal income tax purposes as a result of the Merger.
(h) Employment/Consulting Arrangements. Each person listed on the
COMPANY SCHEDULE shall have entered into an employment agreement as
contemplated by Section 4.1(e), and each person listed on the COMPANY
SCHEDULE shall have entered into a severance agreement in the form of
Exhibit C hereto and a confidentiality, noncompetition and nonsolicitation
agreement in the form of Exhibit D hereto.
(i) 401(k) Plan Termination. The Company and its Subsidiaries shall
have taken all appropriate corporate action necessary to have terminated
their retirement and profit sharing plans maintained pursuant to Section
401(k) of the Code or otherwise so that a distribution of assets under such
plan may be made to all participants and beneficiaries of such plan.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1. Termination. This Agreement may be terminated (by written
notice by the terminating party to the other party) and the transactions
contemplated hereby may be abandoned at any time prior to the Closing Date:
(a) By mutual written consent of each of Parent and the Company;
(b) By either Parent or the Company if the Merger shall not have been
consummated on or before July 15, 1999 (the "TERMINATION DATE"); provided,
however, that the right to terminate this Agreement under this Section
6.1(b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted
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<PAGE> 169
in, the failure of the Closing or the Effective Time to occur on or before
the Termination Date;
(c) By either Parent or the Company if a Governmental Entity or
arbitrator shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the parties shall use their
commercially reasonable efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable;
(d) By Parent if the Company shall have breached, or failed to comply
with, in any material respect any of its obligations under this Agreement
or any representation or warranty made by the Company shall have been
incorrect in any material respect when made or shall have since ceased to
be true and correct in any material respect, and such breach, failure or
misrepresentation is not cured within 30 days after notice thereof and such
breaches, failures or misrepresentations, individually or in the aggregate,
result or would reasonably be expected to result in a Company Material
Adverse Effect, and by the Company if the Parent shall have breached, or
failed to comply with, in any material respect any of its obligations under
this Agreement or any representation or warranty made by the Parent shall
have been incorrect in any material respect when made or shall have since
ceased to be true and correct in any material respect, and such breach,
failure or misrepresentation is not cured within 30 days after notice
thereof and such breaches, failures or misrepresentations, individually or
in the aggregate, result or would reasonably be expected to result in a
Parent Material Adverse Effect;
(e) By Parent (i) if there has been a breach of any of the
representations, warranties, covenants or agreements set forth in Section
2.18(b), 4.1(b)(vii), 4.15, (ii) if Parent shall have determined, in its
sole discretion, that the Company has failed to make the additional
modifications and financial adjustments required to be made by the Company
prior to the Closing pursuant to Section 4.15(b) or (iii) if the Company's
directors and officers insurance policy, including any insurance binders
currently in effect, is revoked, in whole or in part, prior to the
Effective Time and the Company has not procured equivalent substitute
insurance satisfactory to Parent.
(f) By Parent after the occurrence of an event which results in a
Company Material Adverse Effect or by the Company after the occurrence of
an event which results in a Parent Material Adverse Effect;
(g) By Parent if the Board of Directors of the Company or any
committee of the Board of Directors of the Company (i) shall withdraw or
modify in any manner adverse to Parent its approval or recommendation of
this Agreement, (ii) within 15 business days after Parent's request, shall
fail to reaffirm such approval or recommendation; provided that such a
request is made after the Board of Directors of Company has taken any of
the actions specified in clause (ii) of Section 4.14(a) hereof with respect
to an Acquisition Proposal and such Acquisition Proposal has not been
rejected by such Board of Directors or withdrawn, (iii) shall approve or
recommend any acquisition of a material portion of its assets or any tender
offer for shares of its capital stock, in each case, other than by Parent
or an affiliate thereof, (iv) a tender offer or exchange offer for any of
the outstanding shares of the Company Common Stock shall have been
commenced or a registration statement with respect thereto shall have been
filed (other than by Parent or an affiliate thereof) and the Board of
Directors of the Company shall have recommended that the shareholders of
the Company tender their shares in such tender or exchange offer or
publicly announced its intention to take no position with respect to such
tender or exchange offer, or (v) shall resolve to take any of the actions
specified in this clause (g);
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<PAGE> 170
(h) By either Parent or the Company if the Required Company
Shareholder Approval shall fail to have been obtained at the Shareholders
Meeting, including any adjournments thereof;
(i) by the Company at any time during the five business day period
beginning on the Determination Date, if both of the following conditions
are satisfied:
(1) the Average Closing Price as of the Determination Date shall be
less than the product of $54.25 (the "STARTING PRICE") and .75; and
(2) (i) the number obtained by dividing the Average Closing Price
as of the Closing Date by the Starting Price (such number being referred
to herein as the "PARENT RATIO") shall be less than (ii) the number
obtained by dividing the Index Price on the Determination Date by the
Index Price on the Starting Date and subtracting 0.10 from such quotient
(such number being referred to herein as the "INDEX RATIO");
subject to the following four sentences. If the Company elects to exercise its
termination right pursuant to the immediately preceding sentence, it shall give
prompt written notice to Parent, which notice by the Company shall be
irrevocable. During the five-day period commencing with its receipt of such
notice, Parent shall have the option, of adjusting the Exchange Ratio to equal
the lesser of (i) a number equal to a quotient (rounded to the nearest
one-ten-thousandth), the numerator of which is the product of 0.75, the Starting
Price and the Exchange Ratio (as then in effect) and the denominator of which is
the Average Closing Price as of the Determination Date, and (ii) a number equal
to a quotient (rounded to the nearest one-ten-thousandth), the numerator of
which is the Index Ratio multiplied by the Exchange Ratio (as then in effect)
and the denominator of which is the Parent Ratio. If Parent makes an election
contemplated by the preceding sentence, within such five-day period it shall
give prompt written notice to the Company of such election and the revised
Exchange Ratio, whereupon no termination shall have occurred pursuant to this
Section 6.1(i) and this Agreement shall remain in effect in accordance with its
terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section 6.1(i). For
purposes of this Section 6.1(i), the following terms shall have the meanings
indicated:
"Average Closing Price" means the average of the last reported sale
prices per share of Parent Common Stock as reported on the NYSE Composite
Transaction Tape for the ten consecutive trading days ending at the close
of business on the Determination Date.
"Determination Date" means the fifth trading day on the NYSE
immediately preceding the date on which all conditions to the Closing set
forth in Article V shall have been satisfied or waived (other than
conditions that by their terms, cannot be satisfied until the Closing
Date).
"Index Price" on a given date means closing price of the Standard &
Poor's Financial Index as of 4:00 pm as reported on Bloomberg Information
Services.
In the event that between the date of this Agreement and the Effective
Time, the issued and outstanding shares of Parent Common Stock shall have
been affected or changed into a different number of shares of Parent Common
Stock or a different class of shares as a result of a stock split, reverse
stock split, stock dividend, spin-off, extraordinary dividend,
recapitalization, reclassification or other similar transaction with a
record date within such period, the prices of Parent Common Stock shall be
appropriately adjusted for purposes of applying this Section 6.1(i).
SECTION 6.2. Effect of Termination.
(a) In the event of termination of this Agreement as provided in Section
6.1 hereof, this Agreement shall forthwith become void and there shall be no
liability on the part of any of the
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parties, except as set forth in the last sentence of Section 4.3 and Section 4.6
hereof, 6.2(b) and (c) and 6.3.
(b) If this Agreement is terminated (i) by the Parent pursuant to Section
6.1(d) or (h) hereof or by Company pursuant to Section 6.1(h) hereof and (x) at
the time of such termination or prior to the Shareholders Meeting there shall
have been an Acquisition Proposal (whether or not such offer shall have been
rejected or shall have been withdrawn prior to the time of such termination or
of the Stockholders Meeting) and (y) within one year after termination of the
Agreement the Company shall have entered into an agreement with respect to, or
consummated, an Acquisition Proposal, or (ii) by Parent pursuant to Section
6.1(d) due to a willful breach by the Company of any of its obligations,
representations or warranties under this Agreement and either (x) or (y) of
clause (i) above has occurred, or (iii) by Parent pursuant to Section 6.1(g),
then the Company shall pay to Parent a cash termination fee of $13.8 million
(the "TERMINATION FEE") less any Liquidated Damages, if any, previously paid
pursuant to Section 6.3 hereof within one business date of the following date,
as applicable:
(1) if such amount is payable under the preceding clause (i) of this
Section 6.2(b), the earliest date that the conditions set forth in
subclauses (x) and (y) of such clause (i) shall have occurred;
(2) if such amount is payable under the preceding clause (ii) of this
Section 6.2(b), the earliest date that the condition set forth in either
subclause (x) or (y) of subclause (i) of this Section 6.2(b) shall have
occurred; or
(3) if such amount is payable under the preceding clause (iii) of this
Section 6.2(b), the date of termination.
(c) If the Company fails to promptly pay to Parent any Termination Fee due
under Section 6.2(b), Company shall pay the costs and expenses (including
reasonable legal and expert fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the publicly
announced base rate of Citibank, N.A. from the date such fee was required to be
paid.
SECTION 6.3. Liquidated Damages. If this Agreement is terminated by
either Parent or Company, pursuant to Section 6.1(d) hereof, due to a willful
breach by the other party of any of its obligations, representations or
warranties under this Agreement, the breaching party agrees to pay the other
party liquidated damages equal to all expenses incurred by such other party in
connection with the negotiation, execution and performance of the transactions
contemplated hereby (including without limitation all fees and expenses payable
to the party's financial advisers and counsel), not to exceed $3,000,000. The
parties agree that the foregoing damages shall constitute liquidated damages and
not a penalty. Receipt of the foregoing damages shall constitute the sole and
exclusive remedy of the terminating party, at law or in equity, and shall
terminate each party's rights under this Agreement; provided, however, that
Parent shall also be entitled to receive any Termination Fee due or which become
due pursuant Section 6.2(b)(ii). Each of the parties hereto acknowledges and
agrees that this Section 6.3 has been agreed upon, after negotiation, as
reasonable under the circumstances and that the foregoing damages constitute a
reasonable estimate of the damages of the parties.
SECTION 6.4. Amendment. This Agreement may be amended by Parent and the
Company pursuant to a writing adopted by action taken by Parent and the Company
at any time before the Effective Time; provided, however, that, after approval
of this Agreement by the shareholders of the Company, no amendment may be made
which would alter or change the amount or kinds of consideration to be received
by the holders of Company Common Stock upon consummation of the Merger or which
would materially and adversely affect the holders of Company Common
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<PAGE> 172
Stock, except to the extent approved by the shareholders of the Company. This
Agreement may not be amended except by an instrument in writing signed by the
Parties.
SECTION 6.5. Waiver. At any time before the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only as against such party and only if set
forth in an instrument in writing signed by such party and any such waiver shall
not be deemed to apply to any other circumstances.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Survival of Representations and Warranties. The
representations and warranties contained herein shall not survive beyond the
Closing Date. This Section 7.1 shall not limit any covenant or agreement of the
parties hereto which by its terms requires performance after the Closing Date.
SECTION 7.2. Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior written and oral and all contemporaneous oral agreements
and understandings with respect to the subject matter hereof.
SECTION 7.3. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy, or by registered or certified mail (postage prepaid,
return receipt requested) or by overnight courier service to the respective
parties as follows:
IF TO PARENT OR MERGER SUB:
The FINOVA Group Inc.
1850 N. Central Avenue
P.O. Box 2209
Phoenix, Arizona 85002-2209
Telecopy: (602) 207-1019
Attention: Glenn Gray
AND:
Telecopy: (602) 207-4099
Attention: Richard Lieberman
WITH A COPY TO:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Telecopy: (215) 963-5299
Attention: N. Jeffrey Klauder
40
<PAGE> 173
IF TO THE COMPANY:
Sirrom Capital Corporation
St. Cloud Corner
500 Church Street
Suite 200
Nashville, Tennessee 37219
Telecopy: (615) 256-9958
Attention: Maria-Lisa Caldwell
WITH A COPY TO:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, TN 37238
Telecopy: (615) 742-6262
Attention: Bob F. Thompson
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above. Any
notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy shall be deemed effective
on the first business day at the place of which such notice or communication is
received following the day on which such notice or communication was sent. Any
notice or communication sent by registered or certified mail shall be deemed
effective on the fifth business day at the place from which such notice or
communication was mailed following the day in which such notice or communication
was mailed.
SECTION 7.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
SECTION 7.5. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 7.6. Parties In Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person
(including without limitation any employee of the Company or any Subsidiary) any
rights or remedies of any nature whatsoever under or by reason of this Agreement
except for Section 4.10 (which is intended to be for the benefit of the persons
provided for therein, and may be enforced by such persons).
SECTION 7.7. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 7.8. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses except that Parent
and the Company shall share equally (i) the registration fees payable with
respect to filing the Proxy Statement and Registration Statement, and (ii) all
printing and mailing expenses incurred with respect to the Proxy Statement and
Registration Statement.
SECTION 7.9. Personal Liability. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect shareholder of any party hereto or any officer, director,
employee, agent, representative or investor of any party hereto.
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<PAGE> 174
SECTION 7.10. Binding Effect; Assignment. This Agreement shall inure to
the benefit of be binding upon the parties hereto and their respective legal
representatives and successors. This Agreement may not be assigned by any party
hereto.
SECTION 7.11. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
SECTION 7.12. Legal Fees and Costs. If any party hereto institutes any
action or proceeding, whether before a court or arbitrator, to enforce any
provision of this Agreement, the prevailing party therein shall be entitled to
receive from the losing party reasonable attorneys' fees and costs incurred in
such action or proceeding, whether or not such action or proceeding is
prosecuted to judgment.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
THE FINOVA GROUP INC.
By: /s/ GLENN E. GRAY
-------------------------------------
Name: Glenn E. Gray
Title: Vice President
FINOVA NEWCO INC.
By: /s/ GLENN E. GRAY
-------------------------------------
Name: Glenn E. Gray
Title: Vice President
SIRROM CAPITAL CORPORATION
By: /s/ CARL W. STRATTON
-------------------------------------
Name: Carl W. Stratton
Title: Chief Financial Officer
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APPENDIX B
GOLDMAN, SACHS & CO.
January 6, 1999
Board of Directors
Sirrom Capital Corporation
500 Church Street, Suite 200
Nashville, TN 37219
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of Common Stock, no par value (the
"Shares"), of Sirrom Capital Corporation (the "Company") of the exchange ratio
of 0.1634 shares of Common Stock, par value $0.01 per share ("FINOVA Common
Stock"), of The FINOVA Group Inc. ("FINOVA") to be received for each Share (the
"Exchange Ratio") pursuant to the Agreement and Plan of Merger, dated as of
January 6, 1999 among the Company, FINOVA and Sirrom Acquisition Corp., a wholly
owned subsidiary of FINOVA (the "Agreement").
Goldman, Sachs & Co., as a part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement. We also have provided certain investment banking services to FINOVA
and its subsidiaries from time to time including having acted as lead manager of
the $25 million medium term note offering in August 1998 and as co-manager of
the $300 million 6.250% note offering in October 1998 and may provide investment
banking services to FINOVA in the future. Goldman, Sachs & Co. is a full service
securities firm and as such may from time to time effect transactions, for its
own account or the account of customers, and hold positions in securities or
options on securities of the Company and FINOVA.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company and FINOVA for the three and four years ended December 31, 1997,
respectively; certain interim reports to stockholders and Quarterly Reports on
Form 10-Q of the Company and FINOVA; certain other communications from the
Company and FINOVA to their respective stockholders; and certain internal
financial analyses and forecasts for the Company prepared by its management. We
have also held discussions with members of the senior management of the Company
and FINOVA regarding strategic rationale for, and the potential benefits of, the
transaction contemplated by the Agreement and the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, we have reviewed the reported price and trading activity
for the Shares and FINOVA Common Stock, compared certain financial and stock
market information for the Company and FINOVA with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain
<PAGE> 176
recent business combinations in the commercial finance industry specifically and
in other industries generally and performed such other studies and analyses as
we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. In that regard, we have assumed, with
your consent, that the internal financial forecasts prepared by the management
of the Company have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the Company. As you are aware,
FINOVA did not make available in writing to us either (i) financial statements
dated subsequent to September 30, 1998 or (ii) projections or forecasts of
expected future performance. Accordingly, our review with respect to such
information was limited to discussions with senior management of FINOVA of their
estimates of financial performance for the fourth quarter of 1998 and fiscal
1999 and 2000 and the estimates of research analysts for such periods. In
addition, we are not experts in the evaluation of loan portfolios for purposes
of assessing the adequacy of allowances for losses with respect thereto and have
assumed, with your consent, that such allowances for FINOVA are in the aggregate
adequate to cover such losses. In addition, we have not reviewed individual
credit files nor have we made an independent evaluation or appraisal of the
assets and liabilities of the Company or FINOVA or any of their subsidiaries and
we have not been furnished with any such evaluation or appraisal.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of Shares should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair from a financial point of view to the
holders of Shares.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
- ---------------------------------------------------------
(GOLDMAN, SACHS & CO.)
<PAGE> 177
APPENDIX C
THE ROBINSON-HUMPHREY COMPANY, LLC
January 6, 1999
Board of Directors
Sirrom Capital Corporation
500 Church Street, Suite 200
Nashville, Tennessee 37219
Gentlemen:
We understand that Sirrom Capital Corporation (the "Company") is
considering a proposed merger of the Company with The FINOVA Group Inc.
("FINOVA"). We understand that under this merger (the "Proposed Transaction"),
the Company's shareholders will receive 0.1634 shares of FINOVA Common Stock in
exchange for each share of Company Common Stock, subject to adjustment in
certain events. We further understand that the merger will be accounted for as a
purchase and will be treated as a tax-free exchange to the Company's
shareholders. The terms and conditions of the Proposed Transaction are set forth
in more detail in the Agreement and Plan of merger dated January 6, 1999 (the
"Agreement").
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the Company's shareholders, as
of January 6, 1999, of the consideration to be received in the Proposed
Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement,
(2) publicly available information concerning the Company and FINOVA that we
believe relevant to our inquiry, (3) financial and operating information with
respect to the business, operations and prospects of the Company and FINOVA
furnished to us by the Company and FINOVA, (4) trading histories of the
Company's Common Stock and FINOVA's Common Stock, (5) a comparison of the
historical financial results and present financial condition of the Company and
FINOVA with those of other companies which we deemed relevant, (6) a comparison
of the financial terms of the Proposed Transaction with the terms of certain
other recent transactions that we deemed relevant, and (7) certain historical
data relating to percentage premiums paid in acquisitions of publicly traded
companies. In addition, we have had discussions with the management of the
Company and FINOVA concerning their respective businesses, operations, assets,
present condition and future prospects, and undertook such other studies,
analyses and investigations, as we deemed appropriate.
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion without
independent verification. With respect to the future financial performance of
FINOVA, we were directed by FINOVA to rely on publicly available estimates of
research analysts in performing our analysis and, with your knowledge, we have
assumed that such estimates are a reasonable basis upon which to evaluate the
future financial performance of FINOVA, and that FINOVA will perform
substantially in accordance with such estimates. In arriving at our opinion, we
have not conducted a physical inspection of the properties and facilities of the
Company or FINOVA and have not made nor obtained any evaluations or appraisals
of the assets or liabilities of the Company or FINOVA. Our opinion is
necessarily based upon market, economic and other conditions as they exist on,
and can be evaluated as of, the date of this letter.
<PAGE> 178
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of the rendering of
this opinion. We have also performed various investment banking services for the
Company in the past (including acting as managing underwriter for several public
offerings of Common Stock and a private placement of debt) and have received
customary fees for such services. In the ordinary course of our business, we
actively trade in the equity securities of the Company for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
offered in the Proposed Transaction is fair to the shareholders of the Company.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered in connection with its consideration of the Proposed
Transaction. This opinion is not intended to be and does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote with respect to the Proposed Transaction.
Very truly yours,
/s/ THE ROBINSON-HUMPHREY COMPANY, LLC
- ---------------------------------------------------------
THE ROBINSON-HUMPHREY COMPANY, LLC
<PAGE> 179
APPENDIX D
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20594
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
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)
<TABLE>
<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:
<TABLE>
<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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment of this Form 10-K. [ ]
As of February 26, 1999, approximately 56,045,000 shares of Common Stock
($0.01 par value) were outstanding, and the aggregate market value of the Common
Stock (based on its closing price per share on such date of $50 13/16) held by
nonaffiliates was approximately $2,794,608,000.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
PART WHERE
DOCUMENT INCORPORATED
- -------- ------------
<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
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 180
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM # NAME OF ITEM PAGE
- ------ ------------ ----
<S> <C> <C>
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...................................... 23
Item 12 Security Ownership of Certain Beneficial Owners &
Management.................................................. 23
Item 13 Certain Relationships & Related Transactions................ 23
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 23
</TABLE>
i
<PAGE> 181
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> 182
- 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> 183
- 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> 184
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>
- ---------------
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> 185
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>
- ---------------
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
<PAGE> 186
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>
- ---------------
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> 187
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>
- ---------------
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
<PAGE> 188
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>
- ---------------
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
<PAGE> 189
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>
- ---------------
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> 190
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> 191
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> 192
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> 193
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.
13
<PAGE> 194
Income from leasing transactions is affected by gains from asset sales on
lease termination and, hence, can be somewhat less predictable than income from
non-leasing activities. During the five years ended December 31, 1998, the
proceeds to FINOVA Capital from sales of assets on early termination of leases
and at the expiration of leases have exceeded the carrying amounts and estimated
residual values as follows:
<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.
14
<PAGE> 195
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.
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, credit-worthiness of the prospective customer, type and nature of
15
<PAGE> 196
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In direct finance lease transactions,
lessees generally are granted an option to purchase the equipment at the end of
the lease term at its then fair market value or, in some cases, are granted an
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
In addition to the review at the time of original underwriting, FINOVA
Capital attempts to preserve and enhance the earnings quality of its portfolio
through proactive management of its financing relationships with its clients.
This process includes the periodic appraisal or verification of the collateral
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.
16
<PAGE> 197
GOVERNMENTAL REGULATION
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions and mortgage
broker activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Administration , and
Communications Finance is regulated by the Federal Communication Commission.
FINOVA Capital's international activities are also subject to a variety of laws
and regulations of the countries in which the business is conducted.
EMPLOYEES
At December 31, 1998, the Company had 1,262 employees compared to 958 at
December 31, 1997. The increase primarily included employees from FINOVA Realty
Capital ("FRC"), which was not consolidated until 1998, and employees from
companies acquired in 1998. None of the employees were covered by collective
bargaining agreements. FINOVA believes its employee relations are satisfactory.
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.
17
<PAGE> 198
- 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.
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> 199
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> 200
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> 201
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> 202
<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 this proxy statement/prospectus
considering the Sirrom merger, that information is also contained in Appendix E,
and is incorporated into this item by reference until superseded by the Proxy
Statement.
For information regarding FINOVA's executive officers, see the Optional
Item in Part I, following Item 4.
22
<PAGE> 203
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Proxy Statement. For this proxy statement/prospectus considering the Sirrom
merger, that information is also contained in Appendix E, and is incorporated
into this item by reference until superseded by the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Proxy Statement. For this proxy statement/prospectus considering the Sirrom
merger, that information is also contained in Appendix E, and is incorporated
into this item by reference until superseded by 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...................................... 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......... 20-44
Supplemental Selected Financial Data............... 45-46
</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).
</TABLE>
23
<PAGE> 204
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).
(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).
</TABLE>
24
<PAGE> 205
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).
(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).
</TABLE>
25
<PAGE> 206
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).+
(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).+
</TABLE>
26
<PAGE> 207
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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>
- ---------------
* Filed with this report.
+ 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> 208
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> 209
ANNEX A
<PAGE> 210
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-13
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-45
</TABLE>
A-ii
<PAGE> 211
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> 212
- ---------------
(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> 213
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.
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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 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.
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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 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.
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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 administering problem loan accounts in 1997, including an increase with
respect to the Commercial Services line of business.
As a percentage of operating margin, operating expenses declined slightly
to 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.
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FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent on any one
lender. FINOVA also relies on the issuance of commercial paper as a major
funding source. During 1998, FINOVA Capital issued $18.4 billion of commercial
paper, at a weighted average cost of 5.67% (with an average of $3.5 billion
outstanding during the year) and raised $1.6 billion, as noted above, through
new long-term financings of one to twelve year durations. At December 31, 1998
and 1997, commercial paper and short-term bank borrowings totaled $3.9 billion
and $3.1 billion, respectively, and were supported by available unused revolving
credit lines which, if not renewed, are convertible to long-term debt at
FINOVA's option.
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>
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<PAGE> 218
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.
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
that 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
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<PAGE> 219
primarily for FINOVA Realty Capital. See Note F of Notes to Consolidated
Financial Statements for further discussion of FINOVA's derivatives.
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.
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<PAGE> 220
Income before allocations was $67.0 million in 1998 compared to $72.5
million in 1997. The decrease in 1998 was primarily due to previously reported
problems experienced in the Commercial Services line of business related to its
wholesale textile customers, which resulted in net write-offs of $35.7 million
in 1998 compared to $23.3 million in 1997. As a result of the Commercial
Services portfolio problems, the unit experienced higher operating expenses and
a decline in fee-based volume. Commercial Services is currently refocusing its
portfolio towards more retail customers and other industries. Excluding the net
effects of Commercial Services, income before allocations of the Commercial
Finance group would have increased 20.2% in 1998.
Managed assets grew to $3.01 billion in 1998 from $2.76 billion in 1997, an
increase of 9.0%. The growth in managed assets was slowed due to compression in
the Commercial Services unit, partially offset by strong growth in the
Rediscount Finance operation. Fee-based businesses, which make up a portion of
Commercial Finance, rely more on volume growth to increase income than asset
growth. Therefore, half 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
A-10
<PAGE> 221
(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 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.
A-11
<PAGE> 222
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
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.
A-12
<PAGE> 223
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FINOVA's primary market risk exposure is the volatility of interest rates.
FINOVA seeks to manage interest rate risk and preserve income through a
diversified borrowing base and a matched-funding policy. A diversified borrowing
base consists of short and long-term debt with a fixed or variable rate.
FINOVA's matched-funding policy, set by the Board of Directors or Audit
Committee and administered by the Finance Committee, requires that floating-rate
assets be financed with similar floating-rate liabilities and fixed-rate assets
be financed with similar fixed-rate liabilities. Under the matched-funding
policy, the difference between floating-rate assets and floating-rate
liabilities should not exceed 3% of total assets for any extended period.
FINOVA engages in hedging transactions using primarily interest rate swaps,
and to a lesser extent, other derivative instruments to lower its interest costs
and to manage its interest rate risk. Derivative instruments are used for
non-trading and non-speculative purposes only. A hedge consists of a position
that is substantially equal and opposite of the asset or liability being hedged.
It is structured to provide a high degree of correlation at the inception of the
hedge and throughout the hedge period so that hedging results will substantially
offset the effects of interest rate changes on the exposed item.
Hedge transactions are authorized to be entered into with financial
institutions rated "A" or better by Standard & Poors Rating Group or Moody's
Investors Service, Inc., who must also be lenders or credit support providers to
FINOVA or its subsidiaries. Without approval from the Finance Committee, the
notional principal amount of aggregate hedges on a net basis with a given
counter party cannot exceed 10% of FINOVA's total debt outstanding as of the
time of entering into the derivative transaction.
FINOVA uses a sensitivity analysis model to measure the exposure of net
income to increases or decreases in interest rates. The model measures the
change in annual net income if interest rates on floating-rate assets,
liabilities and derivative instruments increased or decreased by 100 basis
points (1%), assuming no prepayments. Based on the model used, a 100 basis point
shift in interest rates would affect net income by less than 6.5%.
Certain limitations are inherent in the model used in the above interest
rate risk measurements. Modeling changes require certain assumptions that may
oversimplify the manner in which actual yields and costs respond to changes in
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> 224
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> 225
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 the
years then ended. 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 the years then ended in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------------------------------
Deloitte & Touche LLP
Phoenix, Arizona
February 10, 1999
A-15
<PAGE> 226
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> 227
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> 228
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> 229
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> 230
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> 231
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 December 31,
1998, approximately $197.6 million of goodwill (net of
A-21
<PAGE> 232
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)
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> 233
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> 234
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
A-24
<PAGE> 235
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)
$922.6 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> 236
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 that 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
A-26
<PAGE> 237
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)
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.
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> 238
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
A-28
<PAGE> 239
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)
three years. Income earned on impaired loans is recognized in the same manner as
it is on other accruing loans. Cash collected on all nonaccruing loans is
applied to the carrying amount.
Had all nonaccruing assets outstanding at December 31, 1998, 1997 and 1996
remained accruing, pre-tax income earned would have increased by approximately
$19 million, $22 million and $19 million, respectively.
NOTE E DEBT
The Company satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank loans
and public notes. The Company's commercial paper borrowings are supported by
unused revolving bank credit agreements totaling $4.4 billion. FINOVA Capital
currently maintains a five-year revolving credit facility and a 364-day facility
with numerous lenders, in the aggregate principal amount of $2.0 billion.
Separately, 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> 240
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> 241
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.
A-31
<PAGE> 242
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)
FINOVA also enters into short-term treasury rate locks, options, swaptions
and other derivative investments to hedge interest rate risks associated with
the warehousing of loans, primarily for FRC.
In a treasury rate lock, FINOVA agrees to lock in an interest rate on a
U.S. Treasury security until a specified date in the future. Prior to the
expiration date, if treasury rates decrease, there is an associated loss on the
hedge. If treasury rates increase, FINOVA will immediately benefit from an
increase in the hedge value.
In a treasury put option, FINOVA pays an up-front fee (premium) to have the
right, but not the obligation to sell a pre-determined treasury security at an
agreed-upon strike rate. Prior to the expiration date of the option, if treasury
rates decrease, the option expires worthless and there is no additional hedge
loss. If treasury rates increase and surpass the strike rate, the value of the
option will increase. In addition to the level of interest rates, the option
value also depends on other variables including volatility and the time to
maturity.
A swaption gives FINOVA the right, but not the obligation, to enter into a
swap on the exercise date. An up-front premium is the only cost incurred by
FINOVA. If swap rates rise above the strike rate, the option value will
increase. If swap rates decrease, the option will not be exercised and will
expire worthless. In addition to the level of swap rates, the option value also
depends on other variables including volatility and time to maturity.
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>
A-32
<PAGE> 243
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 the benefit of its customers, FINOVA enters into interest rate cap
agreements. The total notional amount of these agreements at December 31, 1998
was $25.0 million, none of which was in a pay or receive position. These
agreements will mature as follows: $15.9 million in 1999, $1.5 million in 2000
and $7.6 million in 2001.
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
A-33
<PAGE> 244
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)
price in either case will be $50 per share plus accrued and unpaid distributions
to the date fixed for redemption.
Prior to their maturity, the Preferred Securities are convertible into
FINOVA's common stock at the election of the holders of the Preferred Securities
individually. Each debenture is convertible into 1.2774 shares of FINOVA's
common stock (equivalent to a conversion price of $39.14 per share), subject to
adjustment in specified circumstances. FINOVA can terminate the conversion
rights noted above on 30 days notice on or after December 31, 1999 if it is
current on its payments for the Debentures and the closing prices of its common
stock trade at or above 120% of the conversion price of the Preferred Securities
($46.97, assuming no adjustments).
NOTE H SHAREOWNERS' EQUITY
On August 14, 1997, the Board of Directors declared a two-for-one stock
split of FINOVA's common stock effected as a stock distribution on October 1,
1997 to shareowners of record as of September 1, 1997. All share and per share
data have been restated to reflect the split.
At December 31, 1998, 1997 and 1996, The FINOVA Group Inc. had 58,555,000,
58,555,000 and 56,844,000 shares of common stock issued, with 55,721,000,
56,282,000 and 55,058,000 shares of common stock outstanding, respectively.
Approximately 6,917,000, 7,972,000 and 8,632,000 common shares were reserved for
issuance under the 1992 Stock Incentive Plan at December 31, 1998, 1997 and
1996, respectively.
In addition to the convertible preferred securities issued by FINOVA
Finance Trust in 1996, FINOVA has 5,000,000 shares of preferred stock
authorized, none of which was issued at December 31, 1998. The Board of
Directors is authorized to provide for the issuance of shares of preferred stock
in series, to establish the number of shares to be included in each series and
to fix the designation, powers, preferences and rights of the shares of each
series. In connection with FINOVA's stock incentive plan, 250,000 shares of
preferred stock are reserved for issuance of awards under that plan.
Each outstanding share of FINOVA's common stock has a tandem junior
participating preferred stock purchase right ("Right") attached to it. The
Rights contain provisions to protect shareowners in the event of an unsolicited
acquisition or attempted acquisition of 20% or more of FINOVA's common stock,
which is not believed by the Board of Directors to be in the best interest of
shareowners. The Rights are represented by the common share certificates and are
not exercisable or transferable apart from the common stock until such a
situation arises. The Rights may be redeemable by FINOVA at $0.01 per right
prior to the time any person or group has acquired 20% or more of FINOVA's
shares. FINOVA has reserved 600,000 shares of Junior Participating Preferred
Stock for issuance in connection with the Rights.
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
A-34
<PAGE> 245
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)
5 million to 20 million shares. The shareowners are expected to vote on the
measure at the 1999 annual meeting. The Board recommends approval of the
proposal.
NOTE I STOCK OPTIONS
During 1992, the Board of Directors of FINOVA adopted The FINOVA Group Inc.
1992 Stock Incentive Plan (the "Plan") for the grant of options, restricted
stock and stock appreciation rights to officers, directors and employees. The
Plan provides for the following types of awards: (a) stock options (both
incentive and non-qualified stock options), (b) stock appreciation rights and
(c) restricted stock. The Plan generally authorizes the issuance of awards for
up to 2 1/2% of the total number of shares of common stock outstanding as of the
first day of each year, with some modifications. In addition, 250,000 shares of
preferred stock are reserved for awards under the Plan.
The stock options outstanding at December 31, 1998 were granted for terms
of 10 years and generally become exercisable between one month to five years
from the date of grant. Stock options are issued at market value at the date of
grant, unless a higher exercise price is established. Since 1993, the Board has
issued multi-year, multi-priced stock options to senior executives. The exercise
price of those option grants range in price from the fair market value on the
grant date to prices up to 58.7% in excess of the grant date value. Those option
grants are intended to cover anticipated grants during the years the grants are
scheduled to vest, although the Board may issue additional grants at its
discretion. In 1998, premium-priced options were granted with exercise prices
ranging from $54.47 to $83.21.
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> 246
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> 247
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> 248
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> 249
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> 250
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> 251
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.
A-41
<PAGE> 252
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)
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>
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.
A-42
<PAGE> 253
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)
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
=========== ==========
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.
A-43
<PAGE> 254
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 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-44
<PAGE> 255
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-45
<PAGE> 256
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 $454,595 or 6.18% of
average earning assets.
(4) For the years ended December 31, 1998 and 1997 interest income is shown net
of operating lease depreciation.
A-46
<PAGE> 257
APPENDIX E: ADDITIONAL INFORMATION REGARDING FINOVA'S DIRECTORS
AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
TERMS EXPIRE AT THE 1999 ANNUAL MEETING:
<TABLE>
<C> <S>
Constance R. Curran President and Chief Executive Officer of CurranCare, Inc. (a
nationwide healthcare management company) since 1995. Vice
Chairman and National Director of APM, Patient Care Services
from 1990-1995. Formerly Vice President of the American
Hospital Association and Dean of the Medical College of
Wisconsin. Editor of Nursing Economics$ since 1990. Director
of Allegiance Corporation since 1996. Board member since
1998. Age 51.
G. Robert Durham Retired Chairman and Chief Executive Officer of Walter
Industries, Inc. (a homebuilding and financing, building
materials, natural resources and industrial manufacturing
company) since 1996. He served as Chairman and Chief
Executive Officer from 1991 to 1996. Former Chairman,
President and Chief Executive Officer of Phelps Dodge
corporation (a mining company). Director of Homestake Mining
Company, The MONY Group Inc. (formerly Mutual Life Insurance
Company of New York) and Amphenol Corp. Board member since
1992. Age 70.
Kenneth R. Smith Professor of Economics since 1980, Dean of the Karl Eller
Graduate School of Management and the College of Business
and Public Administration from 1980 to 1995, and Vice
Provost from 1992 to 1995 of The University of Arizona.
Chairman since 1996 and Director since 1990 of Apache
Nitrogen Products, Inc. Former director of Southwest Gas
Corporation. Board member since 1992. Age 56.
</TABLE>
TERMS EXPIRE AT THE 2000 ANNUAL MEETING:
<TABLE>
<C> <S>
Robert H. Clark, Jr. Chief Executive Officer since 1993, President since 1983 and
a director since 1968 of Case, Pomeroy & Company, Inc. (a
mining, oil & gas and real estate company). Also a director
of Homestake Mining Company. Board member since 1997. Age
58.
Shoshana B. Tancer Professor of International Studies for more than five years
and Director of the North American Free Trade Agreement
Center since 1993 of the American Graduate School of
International Management. Also, of-counsel to the law firm
of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
since 1992. Previously operated Tancer Law Offices for more
than five years. Former director of Mountain Bell (the
predecessor of U.S. West, Inc.) and three subsidiaries of
Merabank, a Federal Savings Bank. Board member since 1994.
Age 63.
</TABLE>
TERMS EXPIRE AT THE 2001 ANNUAL MEETING:
<TABLE>
<C> <S>
Samuel L. Eichenfield Chairman, President and Chief Executive Officer of FINOVA
for more than five years. Also, Chairman, President and
Chief Executive Officer of FINOVA Capital Corporation, the
principal operating subsidiary of FINOVA, for more than five
years. Board member since 1992. Age 62.
</TABLE>
E-1
<PAGE> 258
<TABLE>
<C> <S>
James L. Johnson Chairman Emeritus and a director of GTE Corporation (a
diversified telecommunications company) since 1993. Before
that he was its Chairman and Chief Executive Officer.
Director of The MONY Group Inc. (formerly Mutual Life
Insurance Company of New York), Harte/Hanks Communications
Co., Inc., Cell Star Corporation, Valero Energy Corporation
and Walter Industries, Inc. Board member since 1992. Age 71.
John W. Teets Chairman and Chief Executive Officer of J.W. Teets
Enterprises, L.L.C. since 1997. Before that he was the
Chairman and Chief Executive Officer or similar positions of
Viad Corp, formerly The Dial Corp, for more than 5 years.
Board member since 1992. Age 65.
</TABLE>
BOARD COMPENSATION
RETAINER AND FEES:
Non-employee directors received a $25,000 annual retainer which was
increased to $30,000 on July 1, 1998. To encourage directors to own FINOVA's
shares, they may elect to receive their retainer in cash, restricted stock or
stock options. The director generally cannot sell or transfer the restricted
stock and the options do not vest (become exercisable) until the day before the
next annual meeting of shareowners. If the director stops being a Board member
before that date, the director forfeits the shares or options, with certain
exceptions. Directors also receive $1,500 for each Board, committee or other
meeting attended. Board members receive $100 for each matter considered without
a meeting. FINOVA reimburses directors for any expenses related to their Board
service.
OPTION GRANTS:
Non-employee directors receive options to purchase 4,000 shares when they
become directors and another 3,000 each year of their term. The exercise price
of the options is the fair market value of FINOVA's shares on the grant date.
DEFERRED COMPENSATION PLANS:
Non-employee directors may defer all or part of their retainer and fees
under the Directors' Deferred Compensation Plan. Deferred amounts earn interest
at an industrial bond rate in effect each quarter. The director may generally
determine when the funds are to be paid.
Directors also may defer receipt of their cash compensation from FINOVA
through its Bonus KEYSOP Program. Officers who are eligible to receive FINOVA
restricted stock also may participate in that program. The KEYSOP program allows
its participants to receive the taxable income anytime between 6 months and 20
years after deferring it, with certain exceptions, such as termination of
employment.
The compensation that is deferred under the KEYSOP program is deposited
into a trust. The trust invests the compensation until the participant elects to
receive it, adjusted for any income or loss on those investments. The KEYSOP
accounts are invested in up to nine designated mutual funds. Dividends in the
KEYSOP are reinvested in the funds selected by the participant.
To exercise a KEYSOP option, the participant must pay 25% of the option's
fair market value on the option grant date or the exercise date, whichever is
greater. FINOVA grants KEYSOP options for 25% more than the deferred
compensation to cover the initial exercise price, so that the participants are
not unduly disadvantaged by participating in that program. This mark-up in
KEYSOP option grants results in no greater compensation to the participant than
would have occurred had he or she not elected to participate in the program.
However, participants could
E-2
<PAGE> 259
receive less compensation if the accounts lose value, since the exercise price
is always no less than 25% of the fair market value on the grant date. When the
KEYSOP options are exercised, the participant receives the securities relating
to his or her account.
RETIREMENT PLAN:
Non-employee directors participate in the Directors' Retirement Benefit
Plan. If a director is at least 62 on his or her retirement date and has at
least five years of service on the Board, FINOVA will pay the director a pension
equal to the retainer in effect on the retirement date. That pension will
continue during the life of the director for up to the number of years the
director served on the Board.
CHARITABLE AWARDS PROGRAMS:
As part of FINOVA's overall support for charities, and to help attract
directors with outstanding experience and ability, the Board implemented the
Directors' Charitable Awards Program. It enables each director to contribute
$100,000 per year for ten years to a charity or foundation selected by the
director upon his or her death. To fund the program, FINOVA purchases, at
minimal cost, life insurance on each eligible director, payable to FINOVA as
beneficiary.
E-3
<PAGE> 260
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Compensation: The following table summarizes the compensation
FINOVA paid the Chairman, President and Chief Executive Officer and each of the
four other most highly compensated executive officers as of the end of 1998,
based on salary and Management Incentive Plan bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------- ----------
------------------------------------------ PERFORMANCE SECURITIES
OTHER BASED UNDERLYING ALL
ANNUAL RESTRICTED OPTIONS/ OTHER
NAME AND COMPEN- STOCK SARS LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY(1) BONUS(1)(2) SATION(3) AWARDS(4)(5) (#)(6)(7) PAYOUTS(1) SATION(8)
- ------------------ ---- --------- ----------- --------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Samuel L. Eichenfield... 1998 $609,000 $589,512 $157,854 $1,586,936 250,000 $1,559,390 $9,600
Chairman, President and 1997 582,333 576,510 165,155 1,114,954 8,276,965 9,500
Chief Executive Officer 1996 553,500 547,965 178,193 906,044 4,355,750 9,000
William J. Hallinan..... 1998 294,333 207,211 281,044 100 527,345 9,600
Senior Vice President- 1997 281,667 202,800 203,821 20,000 669,168 9,500
General Counsel & 1996 269,500 194,040 53,099 177,455 5,000 445,198 9,000
Secretary
Jack Fields III......... 1998 266,667 224,400 380,998 500 307,704 9,600
Executive Vice President 1997 205,333 182,532 185,080 25,000 320,536 9,500
FINOVA Capital Corp. 1996 184,833 141,213 141,624 1,000 223,795 9,000
Matthew M Breyne........ 1998 266,667 211,200 266,148 500 297,560 9,600
Executive Vice President 1997 199,604 155,691 56,842 145,389 21,000 314,027 3,800
1996 179,333 101,289 138,207 1,000 186,895 7,850
John J. Bonano.......... 1998 266,667 204,000 55,068 415,965 230,778 9,600
Executive Vice President 1997 203,958 101,979 140,935 20,000 222,595 8,143
FINOVA Capital Corp. 1996 184,833 132,707 134,891 214,350 9,000
</TABLE>
- -------------------------
(1) Includes deferred compensation, if any.
(2) Bonus payments depend on both FINOVA's and individual performance. No bonus
is paid under the Management Incentive Plan unless FINOVA achieves set
performance levels.
(3) Includes personal benefits FINOVA paid, including tax gross-up payments in
1998 of $102,926 on behalf of Mr. Eichenfield and $29,728 on behalf of Mr.
Bonano.
(4) The number of shares to vest depends on FINOVA's share price and dividend
performance during each of the five years after the grant date, compared to
either the S&P 500 or S&P Financial indices. Performance-based restricted
stock ("PBRS") awards are valued in the table at the fair market value of
FINOVA's unrestricted shares at the grant date (for initial grants) and
vesting date (for shares vesting above target). Those values have not been
reduced for any performance requirements or transfer restrictions.
The PBRS granted by FINOVA vest over five years. If FINOVA's performance
equals the lesser of the S&P 500 or S&P Financial indices, the target amount
vests for that year. If FINOVA does not at least match one of those, then
the person forfeits to FINOVA that year's award of 20% of the shares.
Performance in excess of the lower index results in vestings of up to 1.7
times that year's target award.
The named officers received the following awards of PBRS:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Mr. Eichenfield.......................................... 12,000 14,400 24,000
Mr. Hallinan............................................. 2,500 2,880 4,800
Mr. Fields............................................... 5,000 2,900 4,000
Mr. Breyne............................................... 3,000 2,880 4,800
Mr. Bonano............................................... 6,000 2,880 4,800
</TABLE>
E-4
<PAGE> 261
Of the 1998 PBRS awards noted above, those grants included 2,000 "premium"
PBRS shares granted to Mr. Eichenfield, 500 shares to Mr. Breyne and 1,000
shares to Mr. Bonano as part of FINOVA's Stock Retention Incentive Program.
That program encourages executives to increase their share ownership by not
selling shares to pay the taxes due when PBRS shares vest. If the
participant does not sell any shares to pay the taxes, FINOVA will increase
the next year's grant to the person by 20% over the amount it would
otherwise have given. FINOVA will also pay the taxes due on the vesting of
those premium shares. FINOVA suspended that program in 1998, so future
awards are not anticipated, although existing awards will continue to vest
if performance targets are achieved.
The directors have discretion to amend the terms of the PBRS grants to
conform to changes in the tax laws or otherwise. Holders of PBRS receive
dividends on and may vote the target shares before they vest.
(5) The total number of target restricted shares held by each officer named
above, all of which are PBRS, and their value based on FINOVA's share price
at December 31, 1998, were: Mr. Eichenfield -- 79,600 ($4,293,425); Mr.
Hallinan -- 13,020 ($702,266); Mr. Fields -- 14,500 ($782,094); Mr.
Breyne -- 13,120 ($707,660); and Mr. Bonano -- 16,120 ($869,473).
(6) For the 1998 grants, the exercise price of Mr. Eichenfield's options for the
portions vesting in later years are higher than the grant price of the
initial vesting, as described in the next section below.
(7) Options have been adjusted for the 2-for-1 stock split in October 1997.
(8) Matching payments made by FINOVA under the Employee Stock Ownership Plan or
Savings Plan.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS:
The following table lists FINOVA's grants during 1998 of stock options and
tandem stock appreciation rights ("SARs") to the officers named in the Summary
Compensation Table. The amounts shown as potential realizable values rely on
arbitrarily assumed increases in value required by the SEC. In assessing those
amounts, please note that the ultimate value of the options, as well as your
shares, depends on actual future share prices. Market conditions and the efforts
of the directors, the officers and others to foster the future success of FINOVA
can influence those future share values.
The potential realizable values for all shareowners represent the
corresponding increases in the value of outstanding shares, assuming 56 million
shares were outstanding. Annual appreciation at 5% from the grant date would
increase the market value of all outstanding shares by more than $1.75 billion,
and 10% annual appreciation would increase it by more than $4.4 billion over the
10-year option term.
E-5
<PAGE> 262
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/SARS ASSUMED ANNUAL RATES OF SHARE
UNDERLYING GRANTED TO EXERCISE OR PRICE APPRECIATION FOR OPTION TERM
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION -------------------------------------
NAME GRANTED(1)(2) IN FISCAL YEAR ($/SHARE)(2) DATE 5% 10%
- ---- ------------- -------------- ------------ ---------- -------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
FEBRUARY GRANT:
All Shareowners'
Share If Shares at $80.63: If at $128.39:
Appreciation....... $1,743,280,000 $4,417,840,000
Mr. Breyne........... 500 .0437 49.50 2/11/08 15,560 39,428
Mr. Fields........... 500 .0437 49.50 2/11/08 15,560 39,428
AUGUST GRANT:
All Shareowners'
Share If Shares at $88.73: If at $141.28:
Appreciation....... $1,918,560,060 $4,861,360,000
Mr. Hallinan......... 100 .0087 54.4688 8/12/08 3,426 8,681
Mr. Eichenfield...... 31,250 2.7339 54.4688 8/12/08 1,070,470 2,712,785
62,500 5.4679 61.2774 8/12/08 1,715,406 5,000,032
62,500 5.4679 68.9371 8/12/08 1,236,672 4,521,301
62,500 5.4679 77.5542 8/12/08 698,103 3,982,732
31,250 2.7339 83.2092 8/12/08 172,333 1,814,647
</TABLE>
- -------------------------
(1) Mr. Eichenfield's options: The first portion of Mr. Eichenfield's options
vested on the grant date. The next three portions vest evenly over the next
three years. The final portion vests on February 28, 2002. If he has not yet
retired and if FINOVA's stock price reaches $83.2092 before March 13, 2002
(his normal retirement date), Mr. Eichenfield will be able to exercise the
options until the expiration date, even if he later retires.
The remaining options vest 34% after 1 year and 33% after each of years 2
and 3. All options have limited stock appreciation rights exercisable within
60 days after a change in control, subject to earlier expiration upon
termination of employment. The limited SARs entitle the person to receive,
if desired, the difference between the then-current market value and the
exercise price. In total, the option holders can exercise options or SARs
equal to the number of options granted.
(2) The listed options are all non-qualified options. The holder can pay the
exercise price and tax withholding obligations with already owned shares or
with shares vesting at that time.
1998 OPTION AND SAR HOLDINGS:
The following table lists the number of shares acquired and the value
realized as a result of option exercises during 1998 for the listed officers. It
also includes the number and value of their exercisable and non-exercisable
options and SARs as of December 31, 1998. The table contains values for "in the
money" options, meaning a positive spread between the year-end share price of
$53.9375 and the exercise price. These values have not been, and may never be,
realized. The options might never be exercised, and the value, if any, will
depend on the share price on the exercise date.
E-6
<PAGE> 263
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTION/ SARS AT IN-THE-MONEY OPTIONS/ SARS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Eichenfield.............. 82,100 $3,556,478 497,714 218,750 $18,748,408 $ 0
Mr. Hallinan................. 70,696 2,014 2,855,667 39,377
Mr. Fields................... 4,900 248,388 50,298 25,490 1,829,337 253,031
Mr. Breyne................... 4,800 249,054 35,748 24,066 1,254,986 259,112
Mr. Bonano................... 1,000 42,719 27,600 20,800 863,629 215,739
</TABLE>
LONG-TERM INCENTIVE COMPENSATION:
FINOVA's Performance Share Incentive Plans ("PSIPs") compensate executives
for helping FINOVA achieve sustained performance goals and encourage their
continued efforts on FINOVA's behalf. FINOVA's 1999-2001 PSIP measures increases
in net income from continuing operations, earnings per share and return on
average equity. FINOVA Capital's 1999-2001 PSIP measures return on average
equity, economic profit and net income from continuing operations. Achievement
is based on three year average performance. Because payouts are tied, in part,
to share price, the PSIPs also encourage participants to seek share price
appreciation.
LONG-TERM INCENTIVE PLANS -- AWARDS
IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE-BASED PLANS
PERIOD UNTIL ------------------------------
NUMBER OF MATURATION THRESHOLD TARGET MAXIMUM
NAME UNITS(1) OR PAYOUT (#) (#)(2) (#)(2)
---- --------- ------------ --------- ------ -------
<S> <C> <C> <C> <C> <C>
Mr. Eichenfield.................. 7,177 2001 0 7,177 14,354
Mr. Hallinan..................... 2,312 2001 0 2,312 4,624
Mr. Fields....................... 2,289 2001 0 2,289 4,578
Mr. Breyne....................... 2,289 2001 0 2,289 4,578
Mr. Bonano....................... 2,289 2001 0 2,289 4,578
</TABLE>
- -------------------------
(1) Recipients forfeit the awards unless performance reaches a minimum level,
generally 95% of the target. They may receive up to 200% of the target for
maximum performance, generally 110% of the target. Intermediate performance
is prorated. FINOVA based the target shares awarded on the average share
price for the preceding December of $52.42. The award, if any, is paid in
cash at the average of the average share price for each day of the last
month of the performance period, multiplied by the number of share units
awarded.
(2) The Human Resources Committee of FINOVA's Board has discretion to adjust the
target and maximum awards based on performance factors and circumstances it
selects. The targets can be adjusted up or down within set limits for each
participant. Because adjustments are within the committee's discretion, the
table disregards that possibility.
RETIREMENT PLANS:
The following table shows the estimated annual retirement benefit payable
to participants, including the officers named in this proxy statement, for the
average annual earnings and years
E-7
<PAGE> 264
of service indicated. It assumes retirement at age 65. FINOVA pays the
retirement benefits under FINOVA's Pension Plan and the Supplemental Executive
Retirement Plan -- participants do not pay for those benefits. Only certain
senior employees participate in the supplemental plan. The table includes the
supplemental benefit formula.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS FOR YEARS OF SERVICE(2)(3)(4)
AVERAGE ANNUAL -------------------------------------------------------------------
COMPENSATION(1) 15 20 25 30 35(5)
--------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
15$0,000..... $ 39,380 $ 52,500 $ 65,630 $ 78,750 $ 91,880
175,000..... 45,940 61,250 76,560 91,880 107,190
200,000..... 52,500 70,000 87,500 105,000 122,500
225,000..... 59,060 78,750 98,440 118,130 137,810
250,000..... 65,630 87,500 109,380 131,250 153,130
300,000..... 78,750 105,000 131,250 157,500 183,750
400,000..... 105,000 140,000 175,000 210,000 245,000
450,000..... 118,130 157,500 196,880 236,250 275,630
500,000..... 131,250 175,000 218,750 262,500 306,250
750,000..... 196,880 262,500 328,130 393,750 459,380
1,000,000... 262,500 350,000 437,500 525,000 612,500
1,250,000... 328,130 437,500 546,880 656,250 765,630
1,500,000... 393,750 525,000 656,250 787,500 918,750
</TABLE>
- -------------------------
(1) Consists of the employee's average salary and bonus during the 60 months
before retirement. Salary and bonus for 1996-98 for the officers named in
the Summary Compensation Table is listed in that table. At year-end, the
current average compensation for plan purposes was $1,045,523 for Mr.
Eichenfield, $429,046 for Mr. Hallinan; $328,994 for Mr. Fields; $320,895
for Mr. Breyne; and $304,749 for Mr. Bonano.
(2) Years of credited service: Mr. Eichenfield (30), Mr. Hallinan (26), Mr.
Fields (16), Mr. Breyne (12) and Mr. Bonano (9). To permit Mr. Eichenfield
to retire at age 65 with the maximum years of service, he received five
additional years of credited service in 1992 and receives three years of
service each year thereafter.
(3) Benefits are computed on a single-life annuity basis. The benefits under the
plan reflect a reduction to recognize some of the Social Security benefits
expected to be received by the employee. The plans also provide for the
payment of benefits to an employee's surviving spouse. The table excludes
adjustments for joint and survivorship provisions, which would reduce the
amounts shown. Benefits generally vest after five years of service. The
plans provide for reduced early retirement benefits. Prior plan formulas
provide for different benefits. Employees accruing benefits under the prior
or the prior and current formulas, and participants accruing benefits under
only the Pension Plan, may receive benefits different from those listed in
the table above.
(4) Federal law limits the annual benefits that can be paid from a tax-qualified
retirement plan. As permitted by that law, the supplemental plan pays
benefits above the permitted limits. Some of those excess benefits are held
in a trust, the assets of which are available to FINOVA's creditors.
(5) The Pension Plan and the normal supplemental plan benefit formula limit the
years of service for plan purposes to a maximum of 35 years.
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<PAGE> 265
EMPLOYMENT AGREEMENTS
MR. EICHENFIELD: Mr. Eichenfield has been engaged as the Chairman,
President and Chief Executive Officer of FINOVA and
of FINOVA Capital. His employment agreement employs
him to serve for a three year term and thereafter
from year to year, unless earlier terminated. The
initial term expired on March 15, 1999, so it has
been extended until March 15, 2000. The Board can
terminate him for cause, as defined in the
agreement, at any time. He serves as a member of
the Board, per his agreement, subject to reelection
by the shareowners as appropriate.
Mr. Eichenfield's base salary currently is
$627,000, subject to adjustment by the Board or the
Human Resources Committee. He participates in
FINOVA's incentive, retirement, health, and other
fringe benefit programs, as long as those benefits
are at least as favorable as specified minimums.
His participation in awards under the 1992 Stock
Incentive Plan is at the sole discretion of the
Human Resources Committee.
If Mr. Eichenfield is terminated, actually or
constructively, in violation of his agreement, he
would be entitled to receive his base, incentive,
stock-based and change in control compensation and
specified benefits during the remainder of the
agreement, but not less than an amount equal to one
year of service plus the sum of the highest bonus,
stock, Performance Share Incentive Plan and other
performance related payments during the two years
before that termination. He would be entitled to
additional payments discussed below if a
change-in-control occurs. All stock option vestings
and pension plan accruals will continue during
those periods.
MR. HALLINAN: Mr. Hallinan has been engaged as Senior Vice
President -- General Counsel and Secretary. His
base annual salary currently is $303,000. He
participates in FINOVA's incentive, retirement,
health and other fringe benefit programs, as long
as the benefits are at least as favorable as on the
date of the agreement.
Mr. Hallinan is subject to termination at any time.
However, he also is entitled to severance benefits
if Mr. Eichenfield ceases to be the Chairman and
Chief Executive Officer of FINOVA and, as a result,
Mr. Hallinan is terminated, constructively or
actually, from his current duties. In that event,
he will be paid a lump sum of three times his
highest annual salary plus the largest aggregate
annual incentive payments, pension and other
benefits that he has received during the
measurement period.
EXECUTIVE SEVERANCE PLANS: All officers named in this proxy statement
participate in one of FINOVA's Executive Severance
Plans (Tier I or Tier II). Those plans entitle
participants to immediate vesting of restricted
stock and performance-based restricted stock, and
vesting and exercisability of options if FINOVA
incurs a change in control. The Tier I plan
includes Messrs. Eichenfield and Hallinan. It
entitles them to receive a lump sum payment of
three times their highest salary, bonus and
Performance Share Incentive Plan payments if they
are discharged without cause. If specified events
occur,
E-9
<PAGE> 266
they would receive two times their salary, bonus
and PSIP payments if they voluntarily leave during
a period following a change in control. The plans
provide a tax gross up feature to cover certain
taxes the officer may have to pay resulting from
the plan. Benefits paid are reduced by other
severance benefits paid by FINOVA. The officer is
also credited with enough years of service to
assure vesting under the retirement plans or the
number of years of salary paid under the severance
plan, whichever is less. Messrs. Fields, Breyne and
Bonano along with others, participate in the Tier
II plan, which has the same terms as the Tier I
plan, except as noted below. Tier II participants
would be paid a lump sum of two times their highest
annual salary, bonus and PSIP payments, and they
cannot require payment if they voluntarily leave
following a change in control.
FINOVA placed funds in a trust to pay benefits to
certain officers under the Executive Severance and
other plans.
VALUE SHARING PLANS: To recognize the significant contributions made to
FINOVA and its shareowners by executive officers
and key employees, and to reward them in the event
of a change in control, the Human Resources
Committee adopted two change in control Value
Sharing Plans. One plan is for the Chief Executive
Officer and one for the other executive officers
and key employees. Both plans provide benefits only
if a change in control occurs and if shareowner
value is created. Participants other than the CEO
will share in a pool equal to 2.5% of the change in
control shareowner value created. That value
generally is the difference between the acquisition
value at the time of the change in control and the
market capitalization using a base price of
$20/share, which was in excess of the closing price
of $19.38 on the day the plans were adopted.
The CEO will be paid 0.75% of the change in control
shareowner value created if the change is for
$27.50/share or less, 1.5% if it is for
$42.50/share or more, and is prorated for change in
control prices between those share prices. Initial
payments credited to Mr. Eichenfield under his
employment agreement Value Sharing Plan discussed
in the 1998 Proxy Statement will be deducted from
any to be made under this change-in-control CEO
Value Sharing Plan, so that he would not be paid
twice for the same increases in shareowner value.
Payments made under both Value Sharing Plans will
be grossed up for certain taxes incurred by
participants who participate in FINOVA's Executive
Severance Plans. Per share values have been and
will be adjusted for certain events such as stock
dividends or splits, mergers, reorganizations or
recapitalizations.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
VENTANA CORPORATION: Mr. Smith serves as a director of Ventana
Corporation, which markets interactive computer
systems software and services.
E-10
<PAGE> 267
FINOVA Capital owns 200,000 shares of Ventana's
common stock, purchased before Mr. Smith became a
member of FINOVA's board. Those shares constitute
about 16% of its common stock. In addition, FINOVA
Capital has granted Ventana a $1,000,000 line of
credit, none of which was outstanding on the record
date. The line of credit to Ventana was also
granted before Mr. Smith became a member of
FINOVA's board. It was made in the ordinary course
of business on substantially the same terms,
including interest rate and collateral, as those
prevailing at the time for comparable transactions
with other persons. The line of credit does not
appear to involve more than the normal risk of
collectibility or present other unfavorable
features.
O'CONNOR CAVANAGH: The law firm of O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears has provided certain legal
services to FINOVA on a continuing basis. Ms.
Tancer is of counsel to, but is not an equity owner
of, that firm. The arrangements with that firm are
believed to be competitive with those of other law
firms serving us.
PUTNAM INVESTMENTS: Putnam Investments, Inc. is one of FINOVA's largest
shareowners. Its ownership interest is reported under "Security Ownership of
Management and Certain Beneficial
Owners -- FINOVA." Putnam is owned by Marsh &
McClennan, which acquired J & H Marsh & McClennan,
Inc. in 1997. J & H Marsh & McClennan is FINOVA's
primary insurance broker. FINOVA paid it
approximately $3.5 million during 1998 and $3.7
million during 1997, most of which was used to
purchase the underlying insurance. FINOVA believes
those transactions were at rates competitive with
others available from other brokers.
DIAL/VIAD: To facilitate the spin-off of FINOVA from The Dial
Corp, FINOVA entered into certain contracts with
Dial. Those contracts, most of which are for a
limited duration, provide among other things for
the orderly separation from Dial and the provision
by Dial of certain interim services, including tax,
communications and pension-related services. Those
services cost FINOVA approximately $1.2 million in
1997. FINOVA also subleases its executive offices
from an entity in which Dial (now known as Viad
Corp.) has an interest, at an approximate annual
rent for the remainder of the term until 2001 of
$1.9 million, including certain expenses. Those
agreements also include one for the allocation of
tax liabilities. In 1996, Dial underwent another
spin-off and changed its name to Viad Corp. Viad
retained the obligations under the arrangements
noted above. One of FINOVA's directors, Mr. Teets,
was a director of Viad until 1997.
MANAGEMENT INDEBTEDNESS: To assist officers and key employees in increasing
their share ownership, FINOVA implemented an
Executive Officer Loan Program. Under that program,
FINOVA will loan or will guarantee a loan from an
approved bank to the officer for amounts needed to
exercise stock options and to pay taxes due on
those options or other awards under FINOVA's 1992
Stock Incentive Plan. The loans carry a variable
rate of interest at the prime rate
E-11
<PAGE> 268
less 3/4 of 1%. Interest is due monthly, and the
principal is due in one year, unless extended or
accelerated at FINOVA's discretion. Smaller loans
are secured with FINOVA shares worth at least 25%
of the value of the loan. Loans above the officer's
salary and prior year's bonus must be secured 100%
with FINOVA shares. The following executive
officers have borrowed under this program during
the past three years, with their 1998 maximum
borrowings listed: Robert M. Korte: $523,248; Jack
Fields: $88,194; and Matthew M. Breyne: $74,426.
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<PAGE> 269
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law (the "DGCL"), the state of
incorporation of the Registrant, and the Certificate of Incorporation and Bylaws
of the Registrant provides for indemnification of directors and officers.
Section 145 of the DGCL provides generally that a person sued as a director,
officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if, in cases
other than actions brought by or in the right of the corporation, he or she has
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation (and in the case of a
criminal proceeding, had no reasonable cause to believe that his or her conduct
was unlawful). Section 145 provides that no indemnification for any claim or
matter may be made, in the case of an action brought by or in the right of the
corporation, if the person has been adjudged to be liable, unless the Court of
Chancery or other court determines that indemnity is fair and reasonable despite
the adjudication of liability. Indemnification is mandatory in the case of a
director, officer, employee or agent who has been successful on the merits, or
otherwise, in defense of a suit against him or her.
Directors and officers of the Registrant are covered under policies of
directors' and officers' liability insurance with coverage aggregating
$100,000,000. The directors serving the Registrant are parties to
Indemnification Agreements with the Registrant (the "Indemnification
Agreements"). The Indemnification Agreements provide substantially the same
scope of coverage afforded by provisions in the Certificate of Incorporation and
Bylaws and are designed to provide greater assurance to the directors that
indemnification will be available because as contracts, the Indemnification
Agreements may not be unilaterally modified by the Registrant's Board of
Directors or stockholders. The Indemnification Agreements generally are intended
to provide indemnification for any amounts a director is legally obligated to
pay because of claims arising out of the director's service to the Registrant or
any subsidiary of the Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following is a list of exhibits filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
2.1 Agreement and Plan of Merger dated as of January 6, 1999, by
and among The FINOVA Group Inc., FINOVA Newco Inc. and
Sirrom Capital Corporation (included as Appendix A to the
Proxy Statement/Prospectus).(1)
3.1 Articles of Incorporation of Registrant (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).
3.2 Bylaws of Registrant (incorporated by reference from
FINOVA's 1995 10-K, Exhibit 3.B).
5.1 Opinion of Morgan, Lewis & Bockius LLP, regarding the
validity of the shares of FINOVA common stock being
registered.(1)
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding certain
federal income tax matters.(1)
8.2 Opinion of Bass, Berry & Sims Plc regarding certain federal
income tax matters.(1)
21.1 Subsidiaries of the Registrant.(1)
</TABLE>
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<PAGE> 270
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
23.1 Consent of Deloitte & Touche LLP.(1)
23.2 Consent of Arthur Andersen LLP.(1)
23.3 Consent of Morgan, Lewis & Bockius LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).(1)
23.4 Consent of Goldman, Sachs & Co.(1)
23.5 Consent of The Robinson-Humphrey Company.(1)
24.1 Powers of Attorney (included on signature page to this
Registration Statement).(1)
99.1 Form of Proxy of Sirrom.(1)
</TABLE>
- -------------------------
(1) Filed herewith.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 271
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE> 272
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona on March 1, 1999.
THE FINOVA GROUP INC.
By: /s/ SAMUEL L. EICHENFIELD
--------------------------------------
Samuel L. Eichenfield
Chairman of the Board,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS SAMUEL L.
EICHENFIELD, WILLIAM J. HALLINAN, BRUNO A. MARSZOWSKI AND RICHARD LIEBERMAN, AND
EACH OF THEM ACTING ALONE, AS HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT, IN HIS
NAME, PLACE AND STEAD, TO EXECUTE AND CAUSE TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ANY OR ALL AMENDMENTS TO THIS REPORT, AND GENERALLY TO DO
ALL SUCH THINGS IN OUR NAME AND BEHALF IN OUR CAPACITIES AS OFFICERS AND
DIRECTORS TO ENABLE THE FINOVA GROUP INC. TO COMPLY WITH THE PROVISIONS OF THE
SECURITIES ACT OF 1933, AND ALL REQUIREMENTS OF THE SECURITIES AND EXCHANGE
COMMISSION, HEREBY RATIFYING AND CONFIRMING OUR SIGNATURES AS THEY MAY BE SIGNED
BY OUR ATTORNEYS OR ANY OF THEM, TO SAID REGISTRATION STATEMENT AND ANY AND ALL
AMENDMENTS THERETO.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SAMUEL L. EICHENFIELD Director, Chairman, President March 1, 1999
- --------------------------------------------------- and Chief Executive Officer
Samuel L. Eichenfield (Principal Executive Officer)
/s/ BRUNO A. MARSZOWSKI Senior Vice President -- March 1, 1999
- --------------------------------------------------- Controller and Chief Financial
Bruno A. Marszowski Officer (Principal Financial
and Accounting Officer)
/s/ ROBERT H. CLARK, JR. Director March 1, 1999
- ---------------------------------------------------
Robert H. Clark, Jr.
/s/ CONSTANCE R. CURRAN Director March 1, 1999
- ---------------------------------------------------
Constance R. Curran
</TABLE>
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<PAGE> 273
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ G. ROBERT DURHAM Director March 1, 1999
- ---------------------------------------------------
G. Robert Durham
/s/ JAMES L. JOHNSON Director March 1, 1999
- ---------------------------------------------------
James L. Johnson
/s/ KENNETH R. SMITH Director March 1, 1999
- ---------------------------------------------------
Kenneth R. Smith
/s/ SHOSHANA B. TANCER Director March 1, 1999
- ---------------------------------------------------
Shoshana B. Tancer
/s/ JOHN W. TEETS Director March 1, 1999
- ---------------------------------------------------
John W. Teets
</TABLE>
II-5
<PAGE> 274
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
5.1 Opinion of Morgan, Lewis & Bockius LLP
8.1 Opinion of Morgan, Lewis & Bockius LLP
8.2 Opinion of Bass, Berry & Sims PLC
21.1 Subsidiaries of FINOVA
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
23.4 Consent of Goldman, Sachs & Co.
23.5 Consent of The Robinson-Humphrey Company
99.1 Form of Proxy of Sirrom
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF MORGAN, LEWIS & BOCKIUS LLP]
March 1, 1999
The FINOVA Group Inc.
1850 N. Central Avenue, No. 1159
P.O. Box 2209
Phoenix, Arizona 85004
Re: The FINOVA Group Inc.: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to The FINOVA Group Inc., a Delaware corporation
(the "Company"), in connection with the preparation of a Registration Statement
on Form S-4 (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
relating to the registration of up to 6,083,251 shares of Common Stock, par
value $.01 per share (the "Shares"), of the Company to be issued in connection
with the transactions contemplated by that certain Agreement and Plan of Merger,
dated as of January 6, 1999, among the Company, FINOVA Newco Inc. and Sirrom
Capital Corporation, attached as Annex A to the Proxy Statement/Prospectus
included in the Registration Statement (the "Merger Agreement"). In rendering
the opinion set forth below, we have reviewed (a) the Registration Statement;
(b) the Company's Certificate of Incorporation and Bylaws; (c) certain records
of the Company's corporate proceedings as reflected in its minute books; (d) the
Merger Agreement; and (e) such records, documents, statutes and decisions as we
have deemed relevant. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the original of all documents submitted to us as copies
thereof.
Our opinions set forth below is limited to the General Corporation Law of
the State of Delaware (the "DGCL").
Based upon the foregoing, we are of the opinion that the Shares will, when
issued in the manner and on the terms described in the Registration Statement
and the Merger Agreement, will be duly authorized, validly issued, fully paid
and non-assessable.
We hereby consent to the use of this opinion as Exhibit 5 to the
Registration Statement and further consent to the reference to us under the
caption "Legal Matters" in the proxy statement included in the Registration
Statement. In giving such opinion, we do not thereby admit that we are acting
within the category of persons whose consent is required under Section 7 of the
Act or the rules or regulations of the Securities and Exchange Commission
thereunder.
The opinion expressed herein is solely for your benefit, and may be relied
upon only by you.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
Morgan, Lewis & Bockius LLP
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF MORGAN, LEWIS & BOCKIUS LLP ]
March 1, 1999
The FINOVA Group Inc.
1850 N. Central Avenue, No. 1159
P.O. Box 2209
Phoenix, Arizona 85004
Ladies and Gentlemen:
Pursuant to an Agreement and Plan of Merger dated as of January 6, 1999
(the "Merger Agreement") among The FINOVA Group Inc., a Delaware corporation
("FINOVA"), FINOVA Newco Inc., a Delaware corporation ("Merger Sub") and Sirrom
Capital Corporation, a Tennessee corporation ("Sirrom"), Merger Sub will merge
with and into Sirrom (the "Merger").
We have acted as counsel to FINOVA in connection with the Merger and in
that connection, you have requested our opinion as to the accuracy of the
description in the registration statement of FINOVA filed March 1, 1999 (the
"Registration Statement") of the material federal income tax consequences of the
Merger to FINOVA. In rendering our opinion, we have examined the Merger
Agreement, the Registration Statement, and such other documents and corporate
records as we have deemed necessary or appropriate. In addition, we have assumed
(i) the Merger will be consummated in the manner contemplated in the
Registration Statement and in accordance with the provisions of the Merger
Agreement, (ii) the statements concerning the Merger set forth in the
Registration Statement are accurate and complete, (iii) we will deliver an
opinion (the "Tax Opinion") to you on the date of closing pursuant to Section
5.3(h) of the Merger Agreement, based upon reasonably requested representation
letters, to the effect that (a) the Merger constitutes a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), (b) FINOVA, Merger Sub and Sirrom will each be a party to the
reorganization within the meaning of Section 368(b) of the Code, and (c) FINOVA,
Merger Sub and Sirrom will not recognize gain or loss for U.S. federal income
tax purposes as a result of the Merger; and (iv) the Merger will be treated for
federal income tax purposes in accordance with the Tax Opinion.
Under current law and on the basis and subject to (i) the accuracy of the
statements and representations contained in the materials referred to above and
the above assumptions and (ii) our considerations of such other matters as we
have deemed necessary, in our opinion the discussion of the material federal
income tax consequences of the Merger to FINOVA and Merger Sub in the
Registration Statement under the headings "Summary -- Material Federal Income
Tax Consequences" and "Material Federal Income Tax Consequences" is correct. You
have not requested, and we do not express, an opinion concerning any other tax
consequences of the Merger.
This opinion expresses our views only as to U.S. federal income tax laws in
effect as of the date hereof. It represents our best legal judgment as to the
matters addressed herein, but is not binding on the Internal Revenue Service or
the courts. Accordingly, no assurance can be given that the opinion expressed
herein, if contested, would be sustained by a court. Furthermore, the
authorities upon which we rely are subject to change either prospectively or
retroactively, and any change in such authorities or variation or difference in
the facts from those on which we rely and assume as correct, as set forth above,
might affect the conclusions stated herein.
This opinion is not to be used, circulated, quoted or otherwise referred to
for any purpose without our express written permission. We hereby consent to the
filing of this opinion as an exhibit to the Registration Statement and to the
reference to us in the section captioned "Material Federal Income Tax
Consequences" in the Registration Statement. In giving this
<PAGE> 2
consent we do not hereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ MORGAN, LEWIS & BOCKIUS LLP
--------------------------------------
Morgan, Lewis & Bockius LLP
<PAGE> 1
[LETTERHEAD OF BASS, BERRY & SIMS PLC]
EXHIBIT 8.2
MARCH 1, 1999
Board of Directors
Sirrom Capital Corporation
500 Church Street, Suite 200
Nashville, Tennessee 37219
Re SIRROM CAPITAL CORPORATION AND THE FINOVA GROUP INC.
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to Sirrom Capital Corporation, a Tennessee
corporation ("Sirrom"), in connection with a proposed reorganization (the
"Merger") to be effected through a merger of FINOVA Newco, Inc., a Delaware
corporation and newly formed, wholly owned subsidiary of The FINOVA Group Inc.,
a Delaware corporation ("FINOVA"), with Sirrom being the surviving corporation,
pursuant to the terms of the agreement and plan of merger among FINOVA, Merger
Sub and Sirrom dated as of January 6, 1999 (the "Merger Agreement"), and as
described in the Registration Statement of FINOVA on Form S-4 to be filed March
1, 1999 with the Securities and Exchange Commission today (the "Registration
Statement"). This opinion is being rendered pursuant to the requirements of Item
21(a) of Form S-4 under the Securities Act of 1933, as amended. In connection
with this opinion, we have examined and are familiar with originals or copies of
(i) the Merger Agreement, (ii) the facts set forth in the Registration
Statement, and (iii) such other documents as we have deemed necessary or
appropriate in order to enable us to render the opinions below. This opinion is
subject to certain factual assumptions and representations to be certified by
authorized representatives of Sirrom, FINOVA, and Merger Sub which are to be
delivered to us prior to or on the closing date.
Based upon and subject to the foregoing, in our opinion, the discussion of
the material federal income tax consequences of the merger generally applicable
to Sirrom and its shareholders contained in the Registration Statement under the
captions "Questions and Answers about the FINOVA/Sirrom Merger" and "Federal
Income Tax Consequences of the Merger," subject to the conditions and
limitations set forth therein, is accurate and complete. The opinions expressed
herein are expressly premised and conditioned upon the consummation of the
Merger pursuant to the terms and conditions of the Merger Agreement. Our
opinions are also based upon the application of existing law for the instant
transaction. You should note that future legislative changes, administrative
pronouncements and judicial decisions could materially alter the conclusions
reached herein. There can be no assurance that contrary positions may not be
taken by the Internal Revenue Service or by the courts. Furthermore, this
opinion does not apply to particular types of shareholders subject to special
tax treatment under federal income tax laws (including, without limitation,
dealers in securities, traders in securities that elect to use a mark-to-market
method of accounting, non-United States persons, tax exempt organizations,
Sirrom shareholders who acquired shares of Sirrom common stock through the
exercise of options, grants of performance shares under Sirrom's equity-based
compensation plans or otherwise as compensation or through a tax-qualified
retirement plan, or shareholders that hold Sirrom common stock as part of a
straddle or conversion transaction. This opinion does not address any foreign,
state or local tax consequences of the Merger that may be applicable.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the use of our name in the
Registration Statement and to the filing of this letter as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
<PAGE> 2
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
We have rendered the foregoing opinion for the sole benefit and use of
Sirrom, its Board of Directors and the shareholders of Sirrom; the views herein
may not be relied upon or furnished to any other person without our prior
written consent.
Sincerely,
/s/ BASS, BERRY & SIMS PLC
--------------------------------------
Bass, Berry & Sims PLC
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE FINOVA GROUP INC.
(December 31, 1998)
FINOVA CAPITAL CORPORATION (Delaware)
Ambre Realty, Inc. (New York)
BATCL - 1991 - III, Inc. (Delaware)
Cactus Resort Properties, Inc. (Delaware)
Commonwealth Avenue Warehouse, Inc. (Florida)
DBF Management I, LLC @
Desert Communications I, Inc. (Delaware)
Desert Communications II, Inc. (Delaware)
Desert Communications III, Inc. (Delaware)
Desert Communications V, Inc. (Delaware)
Desert Communications VI, Inc. (Delaware)
Desert Communications VII, Inc. (Delaware)
Desert Island Capital Corporation (Delaware)
Desert Hospitality II, Inc. (Florida)
Doyle & Boissiere Fund I, LLC @
FCS 505, Inc. (Delaware)
FCS 525, Inc. (Delaware)
FCS 517, Inc. (Delaware)
FINOVA Aircraft Investors, LLC@
FINOVA Aircraft Management, Inc. (Delaware)
The FINOVA (Canada) Group Inc. (Canada)
FINOVA Capital (Canada) Corporation (Canada)
FINOVA Capital Funding, Inc. (Delaware)
FINOVA Capital Funding, L.P. (Delaware)
FINOVA Capital Funding (II) Corporation (Delaware)
FINOVA Capital Limited (United Kingdom)
Greyfin Services Limited (United Kingdom)
Greyhound Equipment Finance Limited (United Kingdom)*#
Greyhound Guaranty Limited (United Kingdom)*
Greyhound Credit Limited (United Kingdom)*
Greyhound Finance International Limited (United
Kingdom)*
Greyhound Nominees Limited (United Kingdom)*
Greyhound Property Investment Limited (United Kingdom)*#
Hookgold Limited (United Kingdom)*
Secured Advances Limited (United Kingdom)
Townmead Garages Limited (United Kingdom)*
FINOVA Capital Markets, Inc. (Delaware)
FINOVA Realty Capital Inc. (Delaware)
FINOVA Realty Capital of Greater Florida Inc. (Delaware)
FINOVA (Cayman) Capital Ltd (Cayman Islands)
FINOVA Denmark, Inc. (Delaware)
FINOVA Fund Investments, Inc. (Delaware)
FINOVA Fund Investments II, Inc. (Delaware)
FINOVA Fund Investments III, Inc. (Delaware)
FINOVA Public Finance, Inc. (Delaware)
FINOVA Portfolio Services, Inc. (Arizona)
FINOVA Resort Assets Company, L.L.C. (Delaware)
FINOVA Resort Investments Company (Delaware)
FINOVA Stamford LLC (Delaware)
FINOVA Technology Finance, Inc. (Delaware)
Denton Imaging, Inc. (Texas)
F S & I (UK) Limited (United Kingdom)
FSI Funding Corp. I (Delaware)
FSI Funding Corp. II (Delaware)
Highland Park Medical Imaging, Inc. (Texas)
Melville Holding Co., Inc. (Delaware)
Greycas, Inc. (Arizona)
New Jersey Realty Corporation II (California)
New York Realty Corporation II (California)
Greyfin (Nassau) Limited (Bahamas)*
Greyfin Corporation (Liberia)*
Greyhound Shipping Corporation (Liberia)
Greyhound Real Estate Finance Company (Arizona)*
Greyhound Real Estate Investment BRB Inc. (Arizona)
Greyhound Real Estate Investment Eight Inc. (Delaware)
Greyhound Real Estate Investment Eleven Inc. (Delaware)
Greyhound Real Estate Investment Nine Inc. (Delaware)
Greyhound Real Estate Investment One Inc. (Arizona)
Greyhound Real Estate Investment S Inc. (Arizona)
Greyhound Real Estate Investment Seven Inc. (Delaware)
Greyhound Real Estate Investment Two Inc. (Arizona)
Interim Funding Corporation (Arizona)
Libra Capital Partners, L.P. @
Libra Mezanine Partners LP @
LFM, LLC. @
Pine Top Insurance Company Limited (United Kingdom)#
Resort Capital Corporation (Delaware)
TriContinental Leasing of Puerto Rico, Inc. (Delaware)
Wisconsin Hotel Operating Corporation (Wisconsin)
* INACTIVE
** SHELL CORPORATION
# IN LIQUIDATION
@ LESS THAN 50% OWNED BY FINOVA
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement of The FINOVA Group
Inc. on Form S-4 of our report dated February 10, 1999, appearing in this
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such prospectus.
/s/ DELOITTE & TOUCHE LLP
--------------------------------------
Deloitte & Touche LLP
Phoenix, Arizona
March 1, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 29, 1999 included in Sirrom Capital Corporation and
subsidiaries annual report on Form 10-K for the fiscal year ended December 31,
1998 incorporated by reference in or made part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Nashville, Tennessee
March 1, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF GOLDMAN, SACHS & CO.
March 1, 1999
Board of Directors
Sirrom Capital Corporation
500 Church Street, Suite 200
Nashville, TN 37219
Re: Registration Statement of The FINOVA Group Inc. ("FINOVA") relating to
Common Stock being registered in connection with the merger transaction
between FINOVA and Sirrom Capital Corporation ("Sirrom" or the "Company")
Gentlemen:
Reference is made to our opinion letter dated January 6, 1999 with respect to
the exchange of shares of Common Stock of FINOVA to be received for each
outstanding share of Common Stock of Sirrom pursuant to the Agreement and Plan
of Merger dated January 6, 1999.
The foregoing opinion letter is provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the "SUMMARY -- The Merger -- Opinion of Sirrom's Financial Advisors" and
"PROPOSAL 1: THE MERGER AND RELATED WITHDRAWAL OF SIRROM'S ELECTION TO BE
TREATED AS A BUSINESS DEVELOPMENT COMPANY -- Opinions of Sirrom's Financial
Advisors" and to the inclusion of the foregoing opinion in the Proxy
Statement/Prospectus included in the above-mentioned Registration Statement. In
giving such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
- ---------------------------------------------------------
Goldman, Sachs & Co.
<PAGE> 1
EXHIBIT 23.5
CONSENT OF THE ROBINSON-HUMPHREY COMPANY, LLC
March 1, 1999
The Robinson-Humphrey Company, LLC ("R-H") hereby consents to the inclusion
in the Proxy Statement/Prospectus of The FINOVA Group Inc. and Sirrom Capital
Corporation, filed as a part of this Registration Statement on Form S-4 of The
FINOVA Group Inc., of its opinion, and to the references made to R-H in the
"Summary," "The Merger" and "The Merger Agreement" sections of such Proxy
Statement/Prospectus. In giving such consent, we do not hereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, LLC
By: /s/ CHARLES H. OGBURN
------------------------------------
<PAGE> 1
EXHIBIT 99.1
PROXY CARD -- SIRROM
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SIRROM CAPITAL
CORPORATION ("SIRROM") FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
MONDAY, MARCH 22, 1999.
The undersigned hereby appoints George M. Miller, II, and Carl W. Stratton,
and each of them, as proxies, with full power of substitution, to vote all
shares of the undersigned as shown on this proxy at the Special Meeting of
Shareholders of Sirrom, to be held on Monday, March 22, 1999, at The Westin
Hermitage Hotel, 231 6th Avenue, Nashville, Tennessee, at 8:00 a.m., Central
Time, and any adjournments thereof.
(1) PROPOSAL TO APPROVE THE MERGER, THE AGREEMENT AND PLAN OF MERGER AS OF
JANUARY 6, 1999 (THE "MERGER AGREEMENT") BY AND AMONG SIRROM, THE
FINOVA GROUP INC. ("FINOVA") AND FINOVA NEWCO INC., A WHOLLY OWNED
SUBSIDIARY OF FINOVA AND THE RELATED WITHDRAWAL OF SIRROM'S ELECTION TO
BE TREATED AS A BUSINESS DEVELOPMENT COMPANY UNDER THE INVESTMENT ACT
OF 1940, AS AMENDED.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) IN THEIR DISCRETION ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE
THE MEETING OR ANY ADJOURNMENT THEREOF.
<PAGE> 2
If no direction is made, this proxy will be voted FOR the Proposal to approve
the Merger, the Merger Agreement and the related withdrawal of Sirrom's election
to be treated as a business development company under the Investment Act of
1940, as amended.
Dated:
------------------------------,
1999
Please sign here and return
promptly
------------------------------
Signature
------------------------------
Signature, if held jointly
Please sign exactly as your
name appears at left. If
registered in the names of two
or more persons, each should
sign. Executors,
administrators, trustees,
guardians, attorneys, and
corporate officers should show
their full titles.
PLEASE MARK, SIGN, DATE, AND
RETURN THE PROXY CARD NO LATER
THAN MARCH 19, 1999 USING THE
ENCLOSED ENVELOPE.
ALTERNATIVELY, PLEASE FAX YOUR
EXECUTED PROXY CARD TO
MARIA-LISA CALDWELL AT (615)
726-1208.
