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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20594
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 1997 Commission File Number 1-11011
THE FINOVA GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1850 North Central Ave., P. O. Box 2209
Phoenix, AZ 85002-2209
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code - 602-207-4900
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
Junior Participating Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment of this
Form 10-K.|_|
As of March 13, 1998, approximately 56,456,000 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 $57-15/16) held by
nonaffiliates was approximately $3,211,172,000.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part Where
- -------- Incorporated
------------
1. Proxy Statement relating to 1998 Annual Meeting of Shareowners
of The FINOVA Group Inc. (but excluding information contained
therein furnished pursuant to items 402(k) and (l) of SEC III
Regulation S-K).
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TABLE OF CONTENTS
Name of Item
------------
Item # Page
- --------------------------------------------------------------------------------
Part I
Item 1 Business:
Introduction 1
General 1
Business Groups 1
Portfolio Composition 3
Investment in Financing Transactions 3
Cost and Use of Borrowed Funds 11
Matched Funding Policy 12
Credit Ratings 13
Residual Realization Experience 13
Business Development and Competition 14
Credit Quality 15
Risk Management 15
Portfolio Management 15
Delinquencies and Workouts 16
Governmental Regulation 16
Employees 16
Special Note Regarding Forward-Looking Statements 16
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 18
Optional Executive Officers of Registrant 18
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Shareowner Matters 19
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8 Financial Statements & Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 21
Part III
Item 10 Directors & Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners & Management 22
Item 13 Certain Relationships & Related Transactions 22
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22
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 to midsize businesses. FINOVA Capital has
been in operation for over 43 years.
FINOVA extends revolving credit facilities, term loans and equipment
and real estate financing primarily to "middle-market" businesses with financing
needs falling generally between $500,000 and $35 million. FINOVA operates in 16
specific industry or market niches under three market groups. FINOVA selected
these groups because its expertise in evaluating the 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 enables FINOVA to command pricing that provides a satisfactory
spread over its borrowing costs.
FINOVA seeks to maintain a high quality portfolio and to minimize
non-earning assets and write-offs. FINOVA uses clearly defined underwriting
criteria and stringent portfolio management techniques. The Company diversifies
its lending activities geographically and among a range of industries, customers
and financing products.
Due to the diversity of FINOVA's portfolio, the Company believes it is
better able to manage competitive changes in its markets and to withstand the
impact of deteriorating economic conditions on a regional or national basis.
There can be no assurance, however, that competitive changes, borrowers'
performance, economic conditions or other factors will not result in an adverse
impact on FINOVA's results of operations or financial condition.
FINOVA generates interest income, leasing income, fees and other income
through charges assessed on outstanding loans, loan servicing, leasing,
brokerage and other activities. FINOVA's primary expenses are the costs of
funding the loan and lease business, including interest paid on debt, provisions
for credit losses, marketing expenses, salaries and employee benefits, servicing
and other operating expenses and income taxes.
FINOVA is headquartered in Phoenix, Arizona with business development
offices throughout the U.S. and in London, U.K. and Toronto, Canada.
Business Groups
FINOVA operates the following principal lines of business under three
market groups:
Commercial Finance
o Business Credit offers collateral-oriented revolving credit
facilities and term loans for manufacturers, distributors,
wholesalers and service companies. Typical transaction sizes
range from $500,000 to $3 million.
o Corporate Finance provides a full range of cash
flow-oriented and asset-based term and revolving loan
products for manufacturers, wholesalers, distributors,
specialty retailers and commercial and consumer service
businesses. Typical transaction sizes range from $2 million
to $35 million.
o Inventory Finance provides inbound and outbound inventory
financing, combined inventory/accounts receivable lines of
credit and purchase order financing for equipment
distributors, value-added resellers and dealers nationwide.
Transaction sizes generally range from $500,000 to $30
million.
o Factoring Services offers full service factoring and
accounts receivable management services for entrepreneurial
and larger firms, primarily in the textile and apparel
industries. The annual factored volume of these companies is
generally between $5 million and $25 million.
1
o Rediscount Finance offers revolving credit facilities to the
independent consumer finance industry including sales,
automobile, mortgage and premium finance companies. Typical
transaction sizes range from $1 million to $35 million.
Specialty Finance
o Commercial Equipment Finance offers equipment leases, loans
and "turnkey" financing to a broad range of midsize
companies. Specialty markets include the corporate aircraft
and emerging growth technology industries, primarily
biotechnology and electronics. Typical transaction sizes
range from $500,000 to $15 million.
o Specialty Real Estate Finance focuses on first mortgage
loans for hotel and resort properties and equity investments
in real estate sale-leasebacks. Typical transaction sizes
range from $5 million to $30 million.
o Communications Finance specializes in term financing to
advertising and subscriber-supported businesses, including
radio and television stations, cable operators, outdoor
advertising firms and publishers. Typical transaction sizes
range from $1 million to $40 million.
o Franchise Finance offers equipment, real estate and
acquisition financing for operators of established franchise
concepts. Transaction sizes generally range from $500,000 to
$15 million.
o Healthcare Finance offers a full range of working capital,
equipment and real estate financing products for the U.S.
healthcare industry. Transaction sizes typically range from
$500,000 to $25 million.
o Public Finance provides tax-exempt term financing to state
and local governments, non-profit corporations and entities
using Industrial Revenue and Industrial Development Bonds.
Typical transaction sizes range from $100,000 to $5 million.
o Portfolio Services provides customized receivable servicing
and collections for timeshare developers and other
generators of consumer receivables.
o Resort Finance focuses on construction, acquisition and
receivables financing of timeshare resorts worldwide as well
as term financing for established golf resort hotels and
receivables funding for developers of second home
communities. Typical transaction sizes range from $5 million
to $35 million.
o Transportation Finance structures equipment loans, leases,
acquisition financing and leveraged lease equity investments
for commercial and cargo airlines worldwide, railroads and
operators of other transportation related equipment. Typical
transaction sizes range from $5 million to $30 million.
Through FINOVA Aircraft Investors, LLC, FINOVA also seeks to
use its market expertise and industry presence to purchase,
upgrade and resell used commercial aircraft.
Capital Markets
o FINOVA Realty Capital specializes in providing capital
markets-funded commercial real estate financing products and
commercial mortgage banking services. Typical transaction
sizes range from $1 million to $5 million.
o FINOVA Investment Alliance provides equity and debt
financing for midsize businesses in partnership with
institutional investors and selected fund sponsors. Typical
transaction sizes range from $2 million to $15 million.
FINOVA is a Delaware corporation. The Company was incorporated in 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 about $2.6 billion at
December 31, 1992 to $8.7 billion at December 31, 1997. Income from continuing
operations increased from $36.8 million in 1992 to $139.1 million in 1997.
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.
2
Portfolio Composition
The total assets under management of the Company consist of FINOVA's
net investment in financing transactions plus certain assets that are owned by
others but managed by the Company and are not reported on the Company's balance
sheet (securitized assets and participations sold). The Company's investment in
financing transactions is primarily settled in U.S. dollars.
Investment in Financing Transactions
The following tables detail FINOVA's investment in financing transactions
(before reserve for credit losses) at December 31, 1997, 1996, 1995, 1994, and
1993.
3
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
-------------------------------------------------------------------------------------------------------
Loans, conditional sale and
other financing contracts:
Commercial $ 4,299,909 51.2 $ 3,592,193 49.2 $ 3,389,363 53.4 $ 2,732,734 51.1 $ 1,397,863 49.1
Real estate 1,656,075 19.7 1,713,485 23.5 1,534,177 24.1 1,237,488 23.2 945,892 33.2
Factored receivables 750,399 8.9 564,430 7.7 189,486 3.0 157,862 3.0
Operating leases 712,927 8.5 517,690 7.1 460,798 7.3 412,782 7.7 147,222 5.2
Leveraged leases 619,557 7.4 514,573 7.1 366,196 5.8 287,518 5.4 283,782 10.0
Direct financing leases 360,589 4.3 396,388 5.4 408,059 6.4 514,595 9.6 71,812 2.5
----------- ------ ------------ ------ ------------ ------ ----------- ------ ----------- -----
Total investment in
financing transactions 8,399,456 100.0 7,298,759 100.0 6,348,079 100.0 5,342,979 100.0 2,846,571 100.0
====== ====== ====== ====== =====
Securitized assets 336,607 300,000 200,000 -- --
Participations sold 121,360 64,546 -- -- --
----------- ------------ ------------ ---------- -----------
Total managed assets $ 8,857,423 $ 7,663,305 $ 6,548,079 $5,342,979 $ 2,846,571
=========== ============ ============ ========== ===========
4
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------- ---------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------------------------------- --------------------------------- --------------------
Transportation Finance (3) (4) $ 1,631,685 $ $ $ $ $ $ 1,631,685 19.4%
Resort Finance (4) 1,166,199 14,450 3,974 26,240 1,210,863 14.4%
Corporate Finance (4) 791,733 981 26,888 819,602 9.8%
Specialty Real Estate Finance 610,711 24,120 38,055 7,648 10,853 196 691,583 8.2%
Communications Finance (4) 628,947 8,724 24,452 662,123 7.9%
Commercial Equipment Finance 614,712 1,816 11,802 4,030 632,360 7.5%
Rediscount Finance (4) 609,641 993 610,634 7.3%
Inventory Finance(4) 544,108 4,333 548,441 6.5%
Healthcare Finance 525,846 1,515 666 528,027 6.3%
Franchise Finance(4) 430,651 808 2,171 305 433,935 5.2%
Factoring Services 196,843 30,205 227,048 2.7%
Business Credit 195,897 7,559 203,456 2.4%
Public Finance 135,826 135,826 1.6%
Other (5) 40,347 23,526 63,873 0.8%
------------ ---------- ---------- --------- -------- -------- ------------ -----
TOTAL(4) $ 8,123,146 $ 36,449 $ 52,505 $ 121,540 $ 37,093 $ 28,723 $ 8,399,456 100.0%
============ ========== ========== ========= ======== ======== ============ =====
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.1 million on repossessed assets
during 1997, including $3.1 million in Specialty Real Estate Finance and
$1.0 million in Resort Finance.
(3) Transportation Finance includes $302.9 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and $36.6 million in Franchise Finance and participations of $40.2 million
in Corporate Finance, $61.0 million in Communications Finance, $8.5 in
Transportation Finance, $4.6 million in Rediscount Finance, $5.1 million in
Resort Finance, and $1.9 million in Inventory Finance.
(5) Primarily includes London-based FINOVA Capital Limited and assets retained
subsequent to the sale of the Manufacturer and Dealer Services line of
business which occurred in November 1996.
--------------------
5
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------- ---------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Assets Impaired Other Amount %
------------------------------------- --------------------------------- --------------------
Transportation Finance (3) $ 1,330,578 $ $ $ $ $ $ 1,330,578 18.2
Resort Finance (4) 1,124,462 2,963 13,878 77 25,136 1,166,516 16.0
Corporate Finance (4) 630,399 3,211 14,695 335 648,640 8.9
Specialty Real Estate Finance 700,932 30,245 46,068 6,748 9,853 940 794,786 10.9
Communications Finance (4) 535,701 8,796 14,129 3,095 561,721 7.7
Commercial Equipment Finance 570,574 7,900 6,564 585,038 8.0
Rediscount Finance (4) 421,232 245 421,477 5.8
Inventory Finance (4) 314,446 1,273 315,719 4.3
Healthcare Finance 497,540 1,304 1,194 500,038 6.9
Franchise Finance 366,202 1,104 1,985 996 370,287 5.0
Factoring Services 220,701 3,419 224,120 3.1
Business Credit 160,006 11,963 171,969 2.3
Public Finance 150,361 13 150,374 2.1
Other 52,998 4,498 57,496 0.8
------------- ---------- ---------- --------- --------- --------- ------------ -----
Total Continuing Operations (4) $ 7,076,132 $ 46,319 $ 59,946 $ 63,751 $ 38,419 $ 14,192 $ 7,298,759 100.0
============= ========== ========== ========= ========= 39,143 ============ =====
Discontinued Operations (5) ---------
$ 53,335
TOTAL =========
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $5.1 million on repossessed assets
during 1996, including $4.4 million in Specialty Real Estate Finance and
$0.7 million in Resort Finance.
(3) Transportation Finance includes $160.8 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and participations of $24.6 million in Corporate Finance, $27.5 million in
Communications Finance, $4.8 million in Rediscount Finance, $4.4 million in
Resort Finance and $3.2 million in Inventory Finance.
(5) Reflects assets retained by FINOVA subsequent to the sale of the
Manufacturer and Dealer Services' line of business.
--------------------
6
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------- -----------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------------------------------- ---------------------------------- ----------------------
Transportation Finance (3) $ 929,043 $ $ $ $ $ $ 929,043 14.6
Resort Finance 943,661 2,849 12,064 2,583 26,559 987,716 15.6
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 10.3
Specialty Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 12.3
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.8
Commercial Equipment Finance 345,039 69 6,079 351,187 5.5
Rediscount Finance 345,264 345,264 5.4
Inventory Finance 202,879 430 203,309 3.2
Healthcare Finance 451,503 81 1,231 452,815 7.2
Franchise Finance 327,356 1,462 6,408 1,850 337,076 5.3
Factoring Services 188,892 594 189,486 3.0
Business Credit 200,365 12,685 213,050 3.4
Public Finance 121,956 47 122,003 1.9
Other 78,645 1,275 2,360 6,061 88,341 1.5
----------- --------- ---------- --------- --------- --------- ------------ ------
Total Continuing Operations (4) $ 6,131,107 $ 17,260 $ 56,585 $ 76,883 $ 49,988 $ 16,256 $ 6,348,079 100.0
=========== ========= ========== ========= ========= ========= ============ ======
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.2 million on repossessed assets
during 1995, including $3.2 million in Specialty Real Estate Finance, $0.6
million in Resort Finance and $0.4 million in Communications Finance.
(3) Transportation Finance included $144 million of aircraft financing business
booked through the London office.
(4) Excludes $200 million of securitized assets which are managed by the
Company.
--------------------
7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(Dollars in Thousands)
Revenue Accruing Nonaccruing
--------------------------------------- ---------------------------------
Repos-
sessed Delin- Repos- Leases Total
Original Rewritten Assets quent sessed & Carrying
Rate Contracts (1) Loans Assets Other Amount %
--------------------------------------- --------------------------------- --------------------
Transportation Finance (2) $ 706,242 $ 14,620 $ $ $ $ $ 720,862 13.5
Resort Finance 634,735 4,506 7,314 2,582 30,393 679,530 12.7
Corporate Finance 746,671 21,275 6,952 2,674 777,572 14.5
Specialty Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 14.0
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 11.0
Commercial Equipment Finance 293,609 769 7,589 301,967 5.6
Rediscount Finance 99,353 99,353 1.9
Inventory Finance 58,595 642 59,237 1.1
Healthcare Finance 467,131 1,719 468,850 8.8
Franchise Finance 281,890 7,632 12,242 301,764 5.6
Factoring Services 157,090 772 157,862 3.0
Business Credit 181,741 12,003 193,744 3.6
Public Finance 93,491 144 93,635 1.8
FINOVA Capital Limited (3) 93,700 1,561 4,265 2 4,800 104,328 2.0
Other 36,951 8,918 297 46,166 0.9
------------ ----------- ---------- ---------- --------- --------- ----------- ------
Total Continuing Operations $ 5,074,939 $ 63,888 $ 55,106 $ 73,519 $ 60,451 $ 15,076 $ 5,342,979 100.0
============ =========== ========== ========== ========= ========= =========== ======
- --------------------
NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets
during 1994, including $2.0 million in Specialty Real Estate Finance, $0.8
million in Communications Finance and $0.5 million in Resort Finance.
(2) Transportation Finance included $66.9 million of aircraft finance business
booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also includes $39.2 million of
Consumer Finance assets, of which $4.8 million were nonaccruing. Consumer
Finance accounts were generally considered nonaccruing after being 180 days
delinquent.
--------------------
8
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
Revenue Accruing Nonaccruing
--------------------------------- ------------------------------------
Repos-
sessed Delin- Repos- Leases Total
Original Rewritten Assets quent sessed & Carrying
Rate Contracts (1) Loans Assets Other Amount %
--------------------------------- ------------------------------------ --------------------
Transportation Finance (2) $ 604,416 $ $ $ 841 $ $ $ 605,257 21.2
Resort Finance 530,617 4,869 12,163 11,597 7,404 440 567,090 19.9
Corporate Finance 397,779 27,921 4,243 5,462 386 435,791 15.3
Specialty Real Estate Finance 500,598 1,574 27,844 5,759 20,838 556,613 19.6
Communications Finance 487,890 7,989 8,949 21,730 11,564 538,122 18.9
Rediscount Finance 19,439 19,439 0.7
FINOVA Capital Limited (3) 107,486 4,430 2,720 23 9,600 124,259 4.4
---------- ---------- --------- --------- ---------- --------- ------------ ------
TOTAL $2,648,225 $ 46,783 $ 48,956 $ 46,890 $ 45,291 $ 10,426 $ 2,846,571 100.0
========== ========== ========= ========= ========== ========= ============ ======
- --------------------
NOTES:
(1) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Specialty Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in Resort
Finance.
(2) Transportation Finance included $31.9 million of aircraft finance business
booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also includes $45.3 million of
Consumer Finance assets, of which $9.6 million were nonaccruing. Consumer
Finance accounts were generally considered nonaccruing after being 180 days
delinquent.
--------------------
9
The Company's geographic portfolio diversification at December 31, 1997
was as follows:
GEOGRAPHIC PORTFOLIO DIVERSIFICATION
December 31, 1997
(Dollars in thousands)
State Total Percent
------------------------- ---------------- ------------
California $ 1,386,337 15.7%
Florida 928,459 10.5
Texas 713,368 8.1
New York 617,428 7.0
Arizona 304,706 4.6
New Jersey 320,502 3.6
Illinois 308,994 3.5
Virginia 286,399 3.2
Pennsylvania 253,255 2.9
Nevada 245,830 2.8
Massachusetts 214,617 2.4
Georgia 174,778 2.0
Other (1) 3,102,750 33.7
------------- ---------
$ 8,857,423 100.0%
============ =========
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
6% of the total.
--------------------
The following is an analysis of the reserve for credit losses for the
years ended December 31:
RESERVE FOR CREDIT LOSSES
(Dollars in Thousands)
1997 1996 1995 1994 1993
---------------------------------------------------------
Balance, beginning of year $ 148,693 $ 129,077 $ 110,903 $ 64,280 $ 69,291
Provision for credit losses 69,200 41,751 37,568 10,439 5,706
Write-offs (45,487) (32,017) (25,631) (28,109) (12,575)
Recoveries 2,287 3,296 2,104 1,780 717
Other (including reserves related to
acquisitions) 2,395 6,586 4,133 62,513 1,141
---------- ---------- ---------- ---------- ---------
Balance, end of year $ 177,088 $ 148,693 $ 129,077 $ 110,903 $ 64,280
========== ========== ========== ========== =========
--------------------
Included above is a specific impairment reserve of $24.5 million at
December 31, 1997, which applies to $158.0 million of impaired loans. The
remaining $152.6 million of the reserve for credit losses is designated for
general purposes and represents management's best estimate of potential losses
in the portfolio considering delinquencies, loss experience and collateral. At
December 31, 1996, the specific impairment reserve was $6.2 million, which
applied to $110.1 million of impaired loans. Additions to general and specific
reserves are reflected in current operations. Management may transfer reserves
between the general and specific reserves as appropriate.
10
Write-offs by line of business during the years ended December 31, were
as follows:
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
1997 1996 1995 1994 1993
-------------------------------------------------------------
Factoring Services (1) $ 24,382 $ 5,098 $ 3,728 $ 1,148 $
Corporate Finance 6,577 9,470 4,660 4,233 3,741
Commercial Equipment Finance (1) 3,722 3,207 2,271 1,257
Resort Finance 2,700 4,275 2,000 2,730
Specialty Real Estate Finance 2,106 1,793 2,275 1,461 2,320
Healthcare Finance (1) 1,798 1,018 314 377
Inventory Finance (1) 1,777 201 442
Communications Finance 750 2,994 4,037 8,300 1,488
Franchise Finance (1) 696 3,267 3,448 2,247
FINOVA Capital Limited (UK) 47 895 1,523 5,140 5,026
Business Credit (1) 452 774
Other 932 722
--------- --------- --------- --------- ---------
$ 45,487 $ 32,017 $ 25,631 $ 28,109 $ 12,575
========= ========= ========= ========= =========
Write-offs as a percentage
of average managed assets (2) 0.56% 0.46% 0.44% 0.66% 0.48%
========= ========= ========= ========= =========
- --------------------
NOTES:
(1) Acquired in 1994.
(2) Excludes participations sold in which FINOVA has transferred credit risk.
--------------------
A further breakdown of the portfolio by line of business can be found in
Annex A, Notes C and D.
Cost and Use of Borrowed Funds
FINOVA Capital relies on borrowed funds as well as internal cash flow
to finance its operations. It has also raised funds through the sale or
securitization of assets, but does not rely on those methods as a primary source
of capital.
11
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:
Year Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------
Short-term and variable rate long-term debt (1) 6.4% 6.5% 7.2% 5.5% 4.7%
Fixed-rate long-term debt (1) 7.1% 7.2% 7.3% 8.1% 11.4%
Aggregate borrowed funds (1) 6.6% 6.8% 7.2% 6.3% 6.3%
Rate earned on average earning assets (2) (3) 12.3% 11.8% 12.1% 11.3% 10.9%
Spread percentage (4) 6.2% 5.8% 5.7% 5.9% 5.4%
- ---------------------
NOTES:
(1) Includes the effects of interest rate swap and hedge agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation and include gains on sale of assets.
(4) Spread percentages represent interest margins earned as a percentage of
average earning assets.
--------------------
The effective costs presented above include costs of commitment fees
and related borrowing costs. They do not necessarily predict future costs of
funds. For further information on FINOVA Capital's cost of funds, refer to Annex
A, Notes E and F.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
1.52 1.50 1.44 1.58 1.50
========= ========== ========== ========== ==========
Variations in interest rates generally do not have a substantial impact
on the ratio because fixed-rate and floating-rate assets are generally matched
with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the above ratio, consists of income from continuing operations before income
taxes and fixed charges. Combined fixed charges include interest and related
debt expense and a portion of rental expense representing interest and preferred
stock dividends grossed up to a pre-tax basis.
Matched Funding Policy
FINOVA 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
Credit Ratings
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
Commercial Senior
Paper Debt
-------------- ----------
Duff & Phelps Credit Rating Co. D1 A
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 A-
In addition, FINOVA Finance Trust, a subsidiary trust of the Company,
issued mandatory redeemable convertible preferred securities ("TOPrS") in
December 1996 having investment-grade ratings as follows:
Duff & Phelps Credit Rating Co. BBB+
Fitch Investors Services, Inc. A-
Moody's Investors Services, Inc. Baa2
Standard & Poor's Ratings Group BBB+
For further information relating to the TOPrS, refer to Annex A, Note
G.
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 terminations (other
than foreclosures) in excess of carrying amounts. There can be no assurance,
however, that those results can be achieved in future years. Actual proceeds
will depend on current market values for those assets at the time of sale. While
market values are generally beyond the control of FINOVA, the Company has some
discretion in the timing of sales of the assets. Sales proceeds on lease
terminations in excess of carrying amounts are reported as gains on sale of
assets when the assets are sold.
13
Income from leasing transactions is affected by gains from asset sales
on lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1997, the
proceeds to FINOVA 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:
PROCEEDS FROM SALES OF LEASED ASSETS
(Dollars in Thousands)
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
- -------------------------------------------------------- ------------------------------------------
1997 $ 114,680 $ 96,656 119% $ 63,733 $ 58,127 110%
1996 87,311 75,910 115% 15,634 13,872 113%
1995 1,402 905 155% 44,395 37,053 120%
1994 6,477 5,865 110% 15,287 14,164 108%
1993 --- --- --- 486 248 196%
- --------------------
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, 1997 was 31.2% of the
original cost of those assets (27.1% excluding the original costs of the assets
and residuals applicable to real estate leveraged leases, which typically have
higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1997 for financing contracts excluding leveraged
leases were 7.6 and 5.1 years, respectively, and for leveraged leases were
approximately 17.5 and 11.9 years, respectively. The comparable average initial
term and remaining term at December 31, 1996 for financing contracts excluding
leveraged leases were 7.2 and 4.6 years, respectively, and for leveraged leases
were approximately 18.6 and 11.9 years, respectively. FINOVA Capital uses either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from those appraised
values.
For a discussion of accounting for lease transactions, refer to Annex
A, Notes A and C.
Business Development and Competition
FINOVA Capital develops business primarily through direct solicitation
by its own sales force. Customers are also introduced by independent brokers and
referred by other financial institutions and other sources.
FINOVA Capital is engaged in an extremely competitive activity. It
competes with banks, insurance companies, leasing companies, the credit units of
equipment manufacturers and other finance companies. Some of these competitors
have substantially greater financial resources and are able to borrow at costs
below those of FINOVA Capital. FINOVA Capital's principal means of competition
is through a combination of service, structure and innovation in transactions,
the interest rate charged for money and concentration in focused market niches.
The interest rate FINOVA Capital charges for money is a function of its
borrowing costs, its operating costs and other factors. While many of FINOVA
Capital's larger competitors are able to offer lower interest rates based upon
their lower borrowing costs, FINOVA Capital seeks to maintain the
competitiveness of the interest rates it offers by emphasizing strict control of
its operating costs. FINOVA's ability to manage costs is, in part, dependent on
factors beyond the Company's control, such as the cost of funds, outside
litigation expenses and competitive salaries.
14
Credit Quality
FINOVA Capital has maintained a high-quality asset base through the use
of clearly defined underwriting standards, portfolio management techniques,
monitoring of covenant compliance and active collections and workout efforts.
Risk Management
FINOVA Capital generally investigates its prospective customers through
a review of historical financial statements, published credit reports, credit
references, discussions with management, analysis of location feasibility,
personal visits and collateral appraisals and inspections. In many cases,
depending upon the results of its credit investigations and the nature of the
financing being provided, FINOVA Capital obtains additional collateral or
guarantees from others. As part of its underwriting process, FINOVA Capital
considers the management, industry, financial position and collateral being
provided by a proposed borrower or lessee. The purpose, term, amortization and
amount of any proposed transaction generally must be clearly defined and within
established corporate guidelines. In addition, FINOVA attempts to avoid undue
concentrations in any one customer, industry or geographic region.
o Management. FINOVA Capital considers the reputation, experience and
depth of management; quality of product or service; adaptability to
changing markets and demand; and prior banking, finance and trade
relationships.
o Industry. FINOVA Capital evaluates critical aspects of each industry to
which it lends, including general trend, seasonality and cyclicality;
governmental regulation; the effects of taxes; the economic value of
goods or services provided; and potential environmental or other
liabilities.
o Financial. FINOVA Capital's review of a prospective borrower normally
includes a thorough analysis of the borrower's financial performance.
Items considered include net worth; composition of assets and
liabilities; debt service coverage; liquidity; sales growth and earning
power; and cash flow generation and reliability.
o Collateral. FINOVA Capital regards collateral as an important factor in
a credit evaluation and, for collateral dependent transactions, has
established maximum loan to value ratios, normally ranging from 60% -
90%, for each of its lines of business.
The underwriting process includes, in addition to the analysis of the
factors noted above, the design and implementation of transaction structures and
strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors portfolio concentrations in the areas of
total exposure to a single borrower and related entities, within a given
geographical area and with respect to an industry and/or product type within an
industry. FINOVA Capital has established concentration guidelines for each line
of business. Geographic concentrations are reviewed periodically and evaluated
based on historic loan experience and prevailing market and economic conditions.
FINOVA Capital's financing contracts and leases generally require the
customer to pay taxes, license fees and insurance premiums and to perform
maintenance and repairs at the customer's expense. Contract payment rates are
based on several factors, including the cost of borrowed funds, term of
contract, credit-worthiness of the prospective customer, type and nature of
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In direct finance lease transactions,
lessees generally are granted an option to purchase the equipment at the end of
the lease term at its then fair market value or, in some cases, are granted an
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
Portfolio Management
In addition to the review at the time of original underwriting, FINOVA
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
15
customer cash flow performance and trends; periodically confirm operations of
the customer; conduct periodic reappraisals of the underlying collateral; seek
to identify issues concerning the vulnerabilities of the customer; seek to
resolve outstanding issues with the borrower; and prepare 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 contacted to advise them of the
situation and the potential obligation under the guarantee agreement. If an
invoice becomes 31 days past due, it is reported as delinquent. A notice of
default is generally sent prior to an invoice becoming 45 days past due and,
between 60 and 90 days past the due date, if satisfactory negotiations are not
underway, outside counsel is generally retained to help protect FINOVA Capital's
rights and to pursue its remedies.
When accounts become more than 90 days past due income recognition is
usually suspended, and FINOVA Capital vigorously pursues its legal remedies.
Foreclosed or repossessed assets are considered to be nonperforming, and are
reported as such unless the assets generate sufficient cash to result in a
reasonable rate of return. Those accounts are continually reviewed, and
write-downs are taken as deemed necessary. While pursuing collateral and
obligors, FINOVA Capital generally continues to negotiate the restructuring or
other settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for credit losses is adequate. For additional
information regarding the reserve for credit losses, see Annex A, Note D.
Governmental Regulation
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions and mortgage
broker activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Authority, 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, 1997, the Company had 958 employees compared to 891 at
December 31, 1996. None of the employees were covered by collective bargaining
agreements. FINOVA believes its employee relations are satisfactory.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking," in that they
do not discuss historical fact but instead note future expectations,
projections, intentions or other items relating to the future. These
forward-looking statements include matters in the sections of this report
captioned "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." They are also made in documents
incorporated in this report by reference, or in which this report may be
incorporated, such as a prospectus.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause FINOVA's actual results or performance to
differ materially from those contemplated by the forward-looking statements.
Many of those factors are noted in conjunction with the forward-looking
statements in the text. Other important factors that could cause actual results
to differ include:
16
o The results of FINOVA's efforts to implement its business strategy.
Failure to fully implement its business strategy might result in
decreased market penetration, adverse effects on results of operations
and other adverse results.
o The effect of economic conditions and the performance of FINOVA's
borrowers. Economic conditions in general or in particular market
segments could impact the ability of FINOVA's borrowers to operate or
expand their businesses, which might result in decreased performance
for repayment of their obligations or reduce demand for additional
financing needs.
o Actions of FINOVA's competitors and FINOVA's ability to respond to
those actions. As noted in "Business Development and Competition,"
FINOVA seeks to remain competitive without sacrificing prudent lending
standards. Doing business under those standards becomes more difficult,
however, when competitors offer financing with less stringent criteria.
FINOVA seeks to maintain credit quality at the risk of growth in
assets, if necessary.
o The cost of FINOVA's capital. That cost depends on many factors, some
of which are beyond FINOVA's control, such as its portfolio quality,
ratings, prospects and outlook.
o Changes in government regulations, tax rates and similar matters. For
example, government regulations could significantly increase the cost
of doing business or could eliminate certain tax advantages of some of
FINOVA's financing products.
o Other risks detailed in FINOVA's other SEC reports or filings.
ITEM 2. PROPERTIES.
FINOVA's principal executive offices are located in premises leased
from Viad Corp (formerly The Dial Corp) in Phoenix, Arizona. FINOVA 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 1999.
ITEM 3. LEGAL PROCEEDINGS.
FINOVA is a party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts.
Litigation often results from the FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties, and it is possible that some of the legal
actions, proceedings or claims could be decided against FINOVA. Although the
ultimate amount for which FINOVA may be held liable, if any, is not
ascertainable, FINOVA believes that any resulting liability would not materially
affect its financial position or results of operations.
17
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 1997.
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who
serve as executive officers of FINOVA.
Name Age Position and Background
- -------------------------- ------- ----------------------------------------------------------------
Samuel L. Eichenfield 61 Chairman, President and Chief Executive Officer of FINOVA and
FINOVA Capital for more than five years.
Matthew M. Breyne 40 Executive Vice President of FINOVA since 1998. Before that he
was Group Vice President - Communications Finance or similar
positions of FINOVA Capital for more than five years.
Derek C. Bruns 38 Senior Vice President - Internal Audit or similar positions of
FINOVA for more than five years.
Robert J. Fitzsimmons 57 Senior Vice President - Treasurer of FINOVA and FINOVA Capital
or similar positions and director of FINOVA Capital for more
than five years.
William J. Hallinan 55 Senior Vice President - General Counsel and Secretary or
similar positions of FINOVA and FINOVA Capital for more than
five years.
Robert M. Korte 42 Senior Vice President - Strategy and Technology of FINOVA since
1994. Before that he was Vice President-Human and Corporate
Development of FINOVA and FINOVA Capital since 1991.
Bruno A. Marszowski 56 Senior Vice President - Controller and Chief Financial Officer
of FINOVA and FINOVA Capital since 1994. Before that he was Vice
President - Controller of FINOVA since 1992, and of FINOVA
Capital for more than five years.
William C. Roche 44 Senior Vice President - Human Resources & Facilities Planning
of FINOVA and FINOVA Capital since 1994. Before that he was
Manager-Compensation and similar positions with AlliedSignal for
seven years.
John J. Bonano 55 Executive Vice President or similar positions of FINOVA Capital
for more than five years.
Jack Fields, III 43 Executive Vice President or similar positions of FINOVA Capital
for more than five years.
Robert E. Radway 37 Executive Vice President of FINOVA Capital since 1997. Before
that he was Senior Vice President - Corporate Development and
Communications of FINOVA since 1993.
Gregory C. Smalis 45 Executive Vice President - Portfolio Management or similar
positions and a director of FINOVA Capital since 1993.
18
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, 1996 through December 31, 1997. Amounts have been
restated to give effect to a stock split effective October 1, 1997.
Sales Price Range of Common Stock
----------------------------------------------------
1997 1996
----------------------------------------------------
Quarters: High Low High Low
---------- ---------- ---------- ----------
First $ 39-1/2 $ 31-7/8 $ 28 $ 23-1/8
Second 38-7/8 32-1/16 28-3/16 24
Third 48-1/4 37-7/8 30-1/4 24-1/8
Fourth 50 40-1/4 33-5/8 29-13/16
Dividends Declared on
Common Stock
----------------------
1997 1996
--------- ---------
February $ 0.12 $ 0.11
May 0.12 0.11
August 0.14 0.12
November 0.14 0.12
--------- ---------
$ 0.52 $ 0.46
========= =========
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 1998, the Board of Directors declared a dividend of $0.14 per share,
payable April 1, 1998, for shareowners of record on February 27, 1998. 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 March 13, 1998, 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 $57 15/16.
19
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA, which
have been derived from the audited Consolidated Financial Statements of FINOVA
for the five years ended December 31, 1997. 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 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, Notes B and H.
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
(Dollars in Thousands, except per share data)
OPERATIONS:
Income earned from financing
transactions $ 944,724 $ 797,934 $ 702,116 $ 474,200 $ 255,216
Interest margins earned 455,642 369,105 309,084 227,463 124,847
Provision for credit losses 69,200 41,751 37,568 10,439 5,706
Gains on sale of assets 30,261 12,949 10,889 3,877 5,439
Income from continuing
operations 139,098 116,493 93,798 73,770 37,846
Net income 139,098 117,000 97,629 74,313 37,347
Basic earnings from continuing
operations per share 2.56 2.14 1.72 1.48 0.96
Basic earnings per share 2.56 2.15 1.79 1.49 0.95
Basic adjusted weighted average
outstanding shares 54,405,000 54,508,000 54,633,000 49,765,000 39,277,000
Diluted earnings from continuing
operations per share 2.42 2.08 1.69 1.46 0.90
Diluted earnings per share 2.42 2.09 1.76 1.47 0.89
Diluted adjusted weighted average
shares 59,161,000 56,051,000 55,469,000 50,436,000 40,552,000
Dividends declared per common share $ 0.52 $ 0.46 $ 0.42 $ 0.37 $ 0.34
Dividend payout ratio 20.5% 21.7% 24.6% 26.3% 39.6%
FINANCIAL POSITION:
Investment in financing transactions $ 8,399,456 $ 7,298,759 $ 6,348,079 $ 5,342,979 $ 2,846,571
Nonaccruing assets 187,356 155,505 143,127 149,046 102,607
Reserve for credit losses 177,088 148,693 129,077 110,903 64,280
Total assets 8,719,840 7,526,734 7,036,514 5,821,343 2,834,322
Deferred income taxes 274,761 244,208 209,512 188,887 178,972
Total debt 6,764,581 5,850,223 5,649,368 4,573,354 2,079,286
Company-obligated mandatory
redeemable convertible preferred
securities of subsidiary trust solely
holding convertible debentures of
FINOVA ("TOPrS") 111,550 111,550 --- --- ---
Shareowners' equity 1,090,454 929,591 825,184 770,252 503,300
20
December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------
RATIOS:
Reserve for credit losses/managed assets 2.0% 2.0% 2.0% 2.1% 2.3%
Nonaccruing assets/managed assets 2.1% 2.0% 2.2% 2.8% 3.6%
Total debt to equity (1) 5.6x 5.6x 6.8x 5.9x 4.1x
Return on average common equity (2) 14.3% 13.3% 11.8% 11.1% 7.6%
Return on average funds employed (2) 1.8% 1.8% 1.7% 1.8% 1.4%
Equity to assets (1) 13.8% 13.8% 11.7% 13.2% 17.8%
- --------------------
NOTES:
(1) Equity in 1997 and 1996 includes the TOPrS noted above.
(2) Return represents income from continuing operations.
--------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
See pages 2 - 7 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included
in Supplemental Selected Financial Data of Notes to
Consolidated Financial Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING &
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning FINOVA's directors is incorporated by
reference from FINOVA's Proxy Statement issued in connection with its 1998
Annual Meeting of Shareowners (the "Proxy Statement").
For information regarding FINOVA's executive officers, see the Optional
Item in Part I, following Item 4.
21
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
Annex
Page
------------
Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations 2 - 7
Report of Management and Independent Auditors' Report 8 - 9
Consolidated Balance Sheet 10 - 11
Statement of Consolidated Income 12
Statement of Consolidated Shareowners' Equity 13
Statement of Consolidated Cash Flows 14
Notes to Consolidated Financial Statements 15 - 33
Supplemental Selected Financial Data 34 - 35
2. All Schedules have been omitted because they are not applicable or
the required information is shown in the financial statements or
related notes.
3. Exhibits.
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
22
Exhibit No.
-----------
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above are incorporated by reference.
(4.C) 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 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, 1997 8-K, Exhibit
28).
(4.I.1) Letter to shareowners regarding FINOVA's 2-for-1
Stock Split (incorporated by reference from FINOVA's
October 1, 1997 8-K, Exhibit 28.A).
23
Exhibit No.
-----------
(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, 1997 8-K, Exhibit 28.B).
(4.J) 1992 Stock Incentive Plan, as amended through the
date of this filing.*+
(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, 1997 to Sixth
Amendment noted in 10.A above.*
(10.B) Credit Agreement (Short-Term Facility) dated as of
May 16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above.*
(10.C) 1997 Management Incentive Plan.*+
(10.D) 1998 Management Incentive Plan.*+
24
Exhibit No.
-----------
(10.E.1) 1995 - 1997 Performance Share Incentive Plan
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.H).+
(10.E.2) 1996 - 1998 Performance Share Incentive Plan
(incorporated by reference from 1996 10-K, Exhibit
10.E.3).+
(10.E.3) 1997 - 1999 Performance Share Incentive Plan.*+
(10.E.4) 1998 - 2000 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 1998 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.*+
(10.N.1) Bonus KEYSOP Trust Agreement.*+
(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).+
25
Exhibit No.
-----------
(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 (filed in Exhibit 4.J to
this report).+
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27.1) Financial Data Schedule for the year ended December
31, 1997.*
(27.2) Restated Financial Data Schedule for the Quarters
ended September 30, 1997, June 30, 1997 and March 31,
1997.*
(27.3) Restated Financial Data Schedule for the Quarters
ended September 30, 1996, June 30, 1996 and March 31,
1996.*
(27.4) Restated Financial Data Schedule for the years ended
December 31, 1996 and 1995.*
*Filed with this report.
+Relating to management compensation
(b) Reports on Form 8-K
A report on Form 8-K, dated January 19, 1998, was filed by FINOVA which
reported under Item 5 and 7 the revenues, net income and selected financial data
and ratios for the fourth quarter and year ended December 31, 1997 (unaudited).
26
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the capacities
indicated, in Phoenix, Arizona on the 17th day of March, 1998.
THE FINOVA GROUP INC.
By: /s/ Samuel L. Eichenfield
---------------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
(Chief Executive Officer)
By: /s/ Bruno A. Marszowski
---------------------------------------------
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
(Chief Accounting and Financial Officer)
27
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
* *
------------------------------- ---------------------------
Robert H. Clark, Jr. (Director) G. Robert Durham (Director)
March 17, 1998 March 17, 1998
/s/ Samuel L. Eichenfield *
- -------------------------------- ---------------------------
Samuel L. Eichenfield (Chairman) James L. Johnson (Director)
March 17, 1998 March 17, 1998
* *
------------------------------- -----------------------------
Kenneth R. Smith (Director) Shoshana B. Tancer (Director)
March 17, 1998 March 17, 1998
*
-------------------------------
John W. Teets (Director)
March 17, 1998
* Signed pursuant to Powers of Attorney dated February 12, 1998.
/s/ Bruno A. Marszowski
-----------------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 17, 1998
28
ANNEX A
THE FINOVA GROUP INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Highlights...................................................................................1
Management's Discussion and Analysis of Financial Condition and Results of Operations..................2
Management's Report on Responsibility for Financial Reporting..........................................8
Independent Auditors' Report...........................................................................9
Consolidated Balance Sheet............................................................................10
Statement of Consolidated Income......................................................................12
Statement of Consolidated Shareowners' Equity.........................................................13
Statement of Consolidated Cash Flows..................................................................14
Notes to Consolidated Financial Statements............................................................15
Supplemental Selected Financial Data..................................................................34
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Interest margins earned $ 455,642 $ 369,105 $ 309,084
Selling, administrative and other operating expenses 190,525 154,481 131,571
Income from continuing operations 139,098 116,493 93,798
Net income 139,098 117,000 97,629
FINANCIAL POSITION:
Average managed assets (1) 8,153,076 7,041,708 5,833,576
Ending funds employed 8,399,456 7,298,759 6,348,079
Ending managed assets (2) 8,857,423 7,663,305 6,548,079
Average earning assets (3) 7,356,845 6,324,545 5,442,119
Reserve for credit losses 177,088 148,693 129,077
Nonaccruing assets (4) 187,356 155,505 143,127
Funded new business 3,311,105 2,740,353 2,302,653
Fee based volume 4,532,494 2,937,311 1,951,310
Write-offs 45,487 32,017 25,631
CAPITALIZATION:
Total debt 6,764,581 5,850,223 5,649,368
Company-obligated mandatory redeemable convertible preferred securities
of subsidiary trust solely holding convertible debentures of FINOVA (TOPrS) 111,550 111,550
Shareowners' equity 1,090,454 929,591 825,184
PORTFOLIO QUALITY:
Write-offs as a % of average managed assets (5) 0.56% 0.46% 0.44%
Nonaccruing assets as a % of ending managed assets (5) 2.1% 2.0% 2.2%
Reserve for credit losses as a % of:
Ending managed assets (5) 2.0% 2.0% 2.0%
Nonaccruing assets 94.5% 95.6% 90.2%
As a multiple of write-offs 3.9x 4.6x 5.0x
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of average funds employed (6) 1.8% 1.8% 1.7%
Interest margins earned as a % of average earning assets (3) 6.2% 5.8% 5.7%
Selling, administrative and other operating expenses as a % of
interest margins earned 41.8% 41.9% 42.6%
Aggregate cost of funds 6.6% 6.8% 7.2%
Ratio of income to combined fixed charges 1.54x 1.50x 1.44x
Return from continuing operations on average equity 14.3% 13.3% 11.8%
Basic earnings per common share:
Continuing operations $ 2.56 $ 2.14 $ 1.72
Net income $ 2.56 $ 2.15 $ 1.79
Adjusted weighted average shares 54,405,000 54,508,000 54,633,000
Diluted earnings per share (7):
Continuing operations $ 2.42 $ 2.08 $ 1.69
Net income $ 2.42 $ 2.09 $ 1.76
Adjusted weighted average shares 59,161,000 56,051,000 55,469,000
Book value per share outstanding $ 19.37 $ 16.88 $ 15.12
Shares outstanding 56,282,000 55,058,000 54,558,000
===============================================================================================================================
(1) Includes average securitizations and participations of $388.9 million,
$327.4 million and $15.4 million for 1997, 1996 and 1995, respectively.
(2) Includes assets sold under securitization and participation agreements and
managed by the Company.
(3) Represents average funds employed excluding average deferred taxes on
leveraged leases and average nonaccruing assets.
(4) Includes nonaccruing assets classified as discontinued operations at
December 31, 1996.
(5) Excludes participations sold of $121.4 million, $64.5 million and $0
million for 1997, 1996 and 1995, respectively, in which the Company has
transferred credit risk.
(6) Average funds employed excludes average deferred taxes on leveraged leases
of $234 million, $238 million and $227 million for 1997, 1996 and 1995,
respectively.
(7) Diluted earnings per share give effect to the dilutive potential of
options, restricted stock and convertible preferred stock.
1
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, 1997, 1996 and 1995:
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, For the Year Ended December 31,
Percent Percent
(Dollars in millions) 1997 1996 Change 1996 1995 Change
- ----------------------------------------------------------------------------------------------------------------
Interest margins earned $ 455.6 $ 369.1 23% $ 369.1 $ 309.1 19%
Provision for credit losses (69.2) (41.8) 66% (41.8) (37.6) 11%
Gains on sale of assets 30.3 12.9 134% 12.9 10.9 19%
Selling, administrative and
other operating expenses (190.5) (154.5) 23% (154.5) (131.6) 17%
Income taxes (83.1) (69.3) 20% (69.3) (57.0) 22%
Preferred dividends, net (4.0) -- n/a -- -- n/a
-------- -------- -------- --------
Income from continuing
operations 139.1 116.5 19% 116.5 93.8 24%
Income and gain from
discontinued operations -- 0.5 n/a 0.5 3.8 n/a
-------- -------- -------- --------
Net Income $ 139.1 $ 117.0 19% $ 117.0 $ 97.6 20%
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
1997 Compared to 1996
Net income for 1997 increased 19% to $139.1 million from $117.0 million
in 1996. The increase reflected growth in managed assets, increased fee-related
business, higher gains on sale of assets and a lower effective income tax rate,
partially offset by higher provisions for credit losses and increased operating
expenses. Income from continuing operations for 1997 increased to $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. See Note B of Notes to Consolidated Financial Statements
for further discussion.
Interest Margins Earned. Interest margins earned, which represent the
difference between (a) interest, fee and other income earned from financing
transactions and operating lease income and (b) interest expense and operating
lease depreciation, increased 23% to $455.6 million in 1997 from $369.1 million
in 1996 due primarily to a higher level of average earnings assets and the
expansion of the fee-based businesses.
Average earning assets, which represent FINOVA's investment in
financing transactions less nonaccruing assets and deferred taxes related to
leveraged leases, increased 16% to $7.36 billion in 1997 from $6.32 billion a
year earlier. This increase primarily resulted from a 21% increase in funded new
business of $3.31 billion compared to $2.74 billion in 1996, and, to a lesser
extent, from portfolios purchased during 1997 (totaling $122 million). These
increases were partially offset by the normal amortization of the portfolio and
prepayments during the year.
The Company's interest margins earned as a percentage of average
earning assets ("spread") also increased during 1997, to 6.2% from 5.8%. A
portion of the increase in spread was due to a 54% growth in fee-based business
(to $4.53 billion from $2.94 billion in 1996), which provides interest, fee and
other income while requiring less investment in earning assets than term loans
and leases. Contributing to the increase in fee-based business was FINOVA Realty
2
THE FINOVA GROUP INC.
Capital ("FRC," formerly Belgravia Capital Corporation), a commercial mortgage
banking organization which was acquired in October 1997 (and which has
historically had its highest volume in the fourth quarter). Excluding the impact
of the FRC acquisition, FINOVA's spread improved to 6.1% in 1997. The increase
in interest margins earned was also partially attributable to lower aggregate
borrowing costs and lower debt leverage during 1997 compared to 1996.
Provision for Credit Losses. The provision for credit losses increased
66% to $69.2 million in 1997 compared to $41.8 million in 1996. In addition to
growth in FINOVA's managed assets, the increase in the provision for credit
losses primarily resulted from an increase in write-offs to $45.5 million in
1997 from $32.0 million in 1996. The higher write-offs in 1997 were primarily
attributable to FINOVA's Factoring Services line of business, due to credit
problems experienced among the line of business' wholesale textile customers.
Currently, Factoring Services is refocusing its portfolio toward retail
businesses and new industries. Total write-offs for FINOVA's other lines of
business were lower in 1997 than in 1996.
FINOVA's total write-offs during 1997 represented 0.56% of average
managed assets (excluding participations) compared to 0.46% in 1996. Details of
write-offs and