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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, 1995 Commission File Number 1-11011
THE FINOVA GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1850 North Central Ave., P. O. Box 2209
Phoenix, AZ 85002-2209
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code - 602-207-4900
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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
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. / /
As of March 6, 1996, approximately 27,329,000 shares of Common Stock ($0.01 par
value) were outstanding, and the aggregate market value of the Common Stock
(based on its closing price per share on such date) held by nonaffiliates was
approximately $1,479,182,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part Where
Document Incorporated
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1. Proxy Statement relating to 1996 Annual Meeting of Stockholders
of The FINOVA Group Inc. (but excluding information contained
therein furnished pursuant to items 402(k) and (l) of SEC
Regulation S-K.) III
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TABLE OF CONTENTS
Name of Item
Item # Page
------ ----
Part I
Item 1 Business:
Introduction 1
General 1
Lines of Business 2
Portfolio Composition 4
Investment in Financing Transactions 4
Cost and Utilization of Borrowed Funds 10
Credit Ratings 12
Residual Realization Experience 12
Business Development and Competition 13
Credit Quality 13
Risk Management 13
Portfolio Management 14
Delinquencies and Workouts 15
Governmental Regulation 15
Former Mortgage Insurance Operations 15
Employees 16
Item 2 Properties 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Optional Executive Officers of Registrant 16
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Stockholder Matters 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8 Financial Statements & Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 20
Part III
Item 10 Directors & Executive Officers of the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners & Management 20
Item 13 Certain Relationships & Related Transactions 20
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
3
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to The FINOVA Group Inc. (formerly
known as GFC Financial Corporation) and its subsidiaries (collectively "FINOVA"
or the "Company"), including FINOVA Capital Corporation (formerly known as
Greyhound Financial Corporation) and its subsidiaries (collectively "FINOVA
Capital"), including Ambassador Factors ("Ambassador") acquired on February 14,
1994 and TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador
and TriCon were merged into FINOVA Capital in 1994.
The Company is the successor to the former financial services businesses
of The Dial Corp ("Dial"). On March 18, 1992, Dial consummated the spin-off (the
"Spin-Off") of the Company by distributing one share of the Company's common
stock (the "shares") for every two shares of Dial common stock held by each
stockholder. Prior to the Spin-Off, Dial contributed to the Company (i) all of
the common stock of FINOVA Capital representing the Company's core operations,
(ii) FINOVA Capital Limited ("FCL") (formerly known as Greyhound European
Financial Group), Dial's European commercial and consumer finance businesses not
previously managed by the Company, (iii) Greyhound BID Holding Corp. ("Greyhound
BID") and (iv) Verex Corporation and subsidiaries ("Verex"), Dial's discontinued
mortgage insurance operations which had been operated in a run-off mode by Dial
since 1988. The Company sold Verex in July 1993.
The historical consolidated financial statements of FINOVA have been
retroactively restated to include the accounts and results of operations of
FINOVA Capital, FCL and Greyhound BID Holding and the investment in Verex for
all periods presented as if a pooling of interests of companies under common
control occurred. All intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
GENERAL
FINOVA is a financial services company primarily engaged in providing
collateralized financing and leasing products to commercial enterprises in
focused market niches, principally in the United States. The FINOVA Group Inc.
is a holding company which operates through its direct and indirect subsidiaries
and was incorporated in Delaware in December 1991.
FINOVA's lending activities to businesses are conducted through FINOVA
Capital and its subsidiaries. FINOVA Capital was incorporated in 1965 in
Delaware and is the successor to a California corporation that commenced
operations in 1954. FINOVA Capital has conducted business continuously since
that time. Foreign financial services are provided primarily in the United
Kingdom, where FCL has provided such services since 1964. Domestic and foreign
financial operations prior to the Spin-Off had been conducted independently of
each other for many years. Following the Spin-Off, they have been conducted as a
consolidated enterprise; however, subsequent to the Spin-Off, FINOVA announced
its intention to phase out the London based financing operations of FCL. In
early 1996, this phase out was substantially completed.
FINOVA Capital extends revolving credit facilities, term loans and
equipment and real estate financing to "middle-market" businesses with financing
needs falling generally between $500,000 to $35 million. FINOVA Capital also
offers sales financing programs to manufacturers, distributors, vendors and
franchisors which facilitate sales of their products to customers. FINOVA
Capital currently operates primarily in 14 specific industry or market niches in
which its expertise in evaluating the creditworthiness
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of prospective customers and its ability to provide value-added services enables
it to differentiate itself from its competitors and to command product pricing
which provides a satisfactory spread over the Company's borrowing costs.
The Company seeks to maintain a high quality portfolio and to minimize
nonearning assets and write-offs by using clearly defined underwriting criteria,
stringent portfolio management techniques and by diversifying its lending
activities geographically and among a range of industries, customers and loan
products. Because of the diversity of the Company's portfolio, the Company
believes it is better able to manage competitive changes in its markets and to
withstand the impact of deteriorating economic conditions on a regional or
national basis, although there can be no assurance that competitive changes,
borrowers' performance or economic conditions will not result in an adverse
impact on the Company's results of operations or financial condition.
FINOVA Capital generates interest and other income through charges
assessed on outstanding loans, loan servicing, leasing and other fees. FINOVA
Capital's primary expenses are the costs of funding its loan and lease business
(including interest paid on debt), provisions for possible credit losses,
marketing expenses, salaries and employee benefits, servicing and other
operating expenses and income taxes.
LINES OF BUSINESS
FINOVA Capital's activities currently include the following principal
lines of business:
- Commercial Equipment Finance offers equipment leases, loans and
"turnkey" financing to the supermarket, manufacturing, packaging
and general aviation industries. Typical transaction sizes are
$500,000 to $15 million.
- Commercial Finance offers collateral-oriented revolving credit
facilities and term loans for manufacturers, distributors,
wholesalers and service companies. Typical transaction sizes range
from $500,000 to $3 million.
- Commercial Real Estate Finance provides cash-flow-based financing
primarily for acquisitions and refinancings to experienced real
estate developers and owner/occupants of income-producing
properties in the United States. FINOVA Capital concentrates on
secured financing opportunities, generally between $5 million and
$25 million, involving senior mortgage term loans on
owner-occupied commercial real estate. FINOVA Capital's portfolio
of real estate leveraged leases is also managed as part of the
commercial real estate portfolio.
- Communications Finance specializes in radio and television
financing. Other markets include cable television, print and
outdoor media services in the United States. FINOVA Capital
extends secured loans to communications businesses requiring funds
for recapitalizations, refinancings or acquisitions. Loan sizes
generally are from $1 million to $40 million.
- Corporate Finance provides financing, generally in the range of $2
million to $40 million, focusing on middle market businesses
nationally, including distribution, wholesale, specialty retail,
manufacturing and services industries. The group's lending is
primarily in the form of revolving credit facilities and term
loans secured by the assets of the borrower, with significant
emphasis on the borrower's cash flow as the source of repayment of
the secured loan.
- Factoring Services provides full service factoring and accounts
receivable management services for entrepreneurial and larger
firms, operating primarily in the textile and apparel industries.
The annual factored volume of these companies is generally between
$5 million and $25 million.
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- Franchise Finance offers equipment, real estate and acquisition
financing programs for operators of established franchise
concepts. The equipment leased to the ultimate end-user is
typically purchased by FINOVA Capital from the equipment
manufacturer, vendor or dealer selected by the end-user. Typical
transaction sizes range from $500,000 to $15 million.
- Government Finance provides primarily tax-exempt financing to
state and local governments and non-profit corporations. Typical
transaction sizes range from $100,000 to $5 million.
- Inventory Finance provides inventory financing, combined
inventory/accounts receivable lines of credit and purchase order
financing for equipment distributors, value-added resellers and
dealers. Transaction sizes generally range from $500 thousand to
$30 million.
- Manufacturer and Dealer Services provides point-of-sale financing
programs and support services for regional and national
manufacturers, distributors and vendors of equipment classified as
"small ticket" in transaction size (generally transactions with an
equipment cost of less than $100,000). The equipment which FINOVA
Capital leases to the ultimate end-user is typically sold to
FINOVA Capital by the vendor participating in the financing
program.
- Medical Finance offers a full range of equipment and real estate
financing and asset management services for the U.S. health care
industry, targeting middle market health care providers in the
United States. Transaction sizes typically range from $500,000 to
$25 million.
- Rediscount Finance offers $1 million to $35 million revolving
credit lines to regional consumer finance companies, which in turn
extend credit to consumers. FINOVA Capital's customers provide
credit to consumers to finance home improvements, automobile
purchases, insurance premiums and a variety of other financial
needs.
- Resort Finance focuses on successful, experienced resort
developers, primarily of timeshare resorts, second home resort
communities, golf resorts and resort hotels. Extending funds
through a variety of lending options, Resort Finance provides
loans and lines of credit ranging from $5 million to $30 million
for construction, acquisitions, receivables financing and
purchases and other uses. Through FINOVA Portfolio Services, Inc.,
Resort Finance offers expanded convenience and service to its
customers. Professional receivables collections and cash
management give developers the ability of having loan-related
administrative functions performed for them by FINOVA Capital.
- Transportation Finance/Capital Services structures secured
financings for specialized areas of the transportation industry,
principally involving domestic and foreign used aircraft, some new
aircraft, as well as domestic short-line railroads including new
and used rail equipment. Typical transactions range from $5
million to $30 million and involve financing up to 80% of the fair
market value of used equipment and as equity participants in
leveraged lease transactions. Traditionally focused on the
domestic marketplace, FINOVA Transportation Finance has been
active in international aircraft lending and leasing since 1992
through an office in London, England. Through its Capital Services
activity, FINOVA Capital also provides leveraged lease financing
on transportation equipment.
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PORTFOLIO COMPOSITION
The total assets under the management of the Company consist of the
Company's net investment in financing contracts plus certain assets that are
owned by others but managed by the Company and are not reflected on the
Company's balance sheet ("securitized assets").
The Company's investment in financing transactions is primarily settled
in U.S. dollars, except for approximately $36 million, $87 million and $100
million at December 31, 1995, 1994 and 1993, respectively, which is primarily
due in British pounds. The exchange rate of British pounds to dollars at
December 31, 1995, 1994 and 1993 was 1.55:1, 1.57:1 and 1.48:1, respectively.
INVESTMENT IN FINANCING TRANSACTIONS
The following tables detail FINOVA's investment in financing
transactions (before reserve for possible credit losses) at December 31, 1995,
1994, 1993, 1992 and 1991. Under Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"),
in-substance foreclosed assets are accounted for as loans, rather than
repossessed assets. The Company adopted SFAS 114, effective January 1, 1995,
resulting in the reclassification of nonaccruing in-substance foreclosed assets
to nonaccruing loans. The tables for years prior to 1995 have been restated to
reflect this change in classification; accordingly, in-substance foreclosed
assets of $25.3 million, $31.7 million, $13.2 million and $0 have been
reclassified from repossessed assets to loans at December 31, 1994, 1993, 1992
and 1991, respectively.
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
December 31,
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1995 % 1994 % 1993 % 1992 % 1991 %
---------------------------------------------------------------------------------------------------
Loans, conditional sales and
other financing contracts:
Commercial $3,439,687 50.4 $2,797,160 49.4 $1,397,863 49.1 $1,028,181 42.3 $967,693 42.4
Real estate 1,534,177 22.5 1,237,488 21.8 945,892 33.2 891,190 36.7 772,285 33.9
Direct financing leases 828,713 12.1 774,834 13.6 71,812 2.5 138,871 5.7 201,327 8.8
Operating leases 460,798 6.8 412,782 7.3 147,222 5.2 100,911 4.2 75,204 3.3
Leveraged leases 366,196 5.4 287,518 5.1 283,782 10.0 269,370 11.1 265,363 11.6
Factored receivables 189,486 2.8 157,862 2.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total investment in financing 6,819,057 100.0 5,667,644 100.0 $2,846,571 100.0 $2,428,523 100.0 $2,281,872 100.0
transactions ===== ===== ========== ===== ========== ===== ========== =====
Securitized assets 303,304 253,386
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Total managed assets $7,122,361 $5,921,030
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
Revenue Accruing Nonaccruing
---------------------------- --------------------------
Repos- Repos- Lease Total
Original Impaired sessed sessed & Carrying
Rate (1) Assets Impaired Assets Other Amount %
(2)
---------------------------- -------------------------- -----------------
Resort Finance $ 943,661 $ 2,849 $12,064 $ 2,583 $26,559 $ $ 987,716 14.5
Transportation Finance (3) 929,043 929,043 13.6
Commercial Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 11.5
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.1
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 9.6
Manufacturing & Dealer Services (4) 443,474 108 24,637 468,219 6.9
Medical Finance 454,262 81 1,231 455,574 6.7
Commercial Equipment Finance 345,039 69 6,079 351,187 5.2
Rediscount Finance 345,264 345,264 5.1
Franchise Finance 327,356 1,462 6,408 1,850 337,076 4.9
Commercial Finance 200,365 12,685 213,050 3.1
Inventory Finance 202,879 430 203,309 3.0
Factoring Services 188,892 594 189,486 2.8
Government Finance 121,956 47 122,003 1.8
Other 78,645 1,275 2,360 6,061 88,341 1.2
---------- ------- ------- ------- ------- ------- ---------- -----
TOTAL (4) $6,577,340 $17,260 $56,585 $76,991 $49,988 $40,893 $6,819,057 100.0
========== ======= ======= ======= ======= ======= ========== =====
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NOTES:
(1) Consists of troubled debt restructurings.
(2) The Company earned income totaling $4.2 million on repossessed assets
during 1995, including $3.2 million in Commercial Real Estate Finance, $0.6
million in Resort Finance and $0.4 million in Communications Finance.
(3) Transportation Finance includes $144 million of aircraft financing business
booked through the London office.
(4) Excludes $303 million of assets securitized which the Company manages,
including $200 million in Corporate Finance and $103 million in
Manufacturing and Dealer Services.
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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 %
------------------------------ ------------------------- -----------------
Resort Finance $ 634,735 $ 4,506 $ 7,314 $ 2,582 $30,393 $ $ 679,530 12.0
Transportation Finance (2) 706,242 14,620 720,862 12.7
Commercial Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 13.2
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 10.4
Corporate Finance 746,671 21,275 6,952 2,674 777,572 13.8
Manufacturer and Dealer
Services (3) (4) 301,251 113 19,715 321,079 5.7
Medical Finance 470,717 1,719 472,436 8.3
Commercial Equipment Finance 293,609 769 7,589 301,967 5.3
Rediscount Finance 99,353 99,353 1.8
Franchise Finance 281,890 7,632 12,242 301,764 5.3
Commercial Finance 181,741 12,003 193,744 3.4
Inventory Finance 58,595 642 59,237 1.0
Factoring Services 157,090 772 157,862 2.8
Government Finance 93,491 144 93,635 1.7
FINOVA Capital Limited (5) 93,700 1,561 4,265 2 4,800 104,328 1.8
Other 36,951 8,918 297 46,166 0.8
---------- ------- ------- ------- ------- ------- ---------- -----
TOTAL (4) $5,379,776 $64,001 $55,106 $73,519 $60,451 $34,791 $5,667,644 100.0
========== ======= ======= ======= ======= ======= ========== =====
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NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets
during 1994, including $2.0 million in Commercial Real Estate Finance, $0.8
million in Communications Finance and $0.5 million in Resort Finance.
(2) Transportation Finance included $66.9 million of aircraft finance business
booked through the London office.
(3) Manufacturer and Dealer Services accounts were generally considered
nonaccruing after being 120 days delinquent.
(4) Excluded $253.4 million of assets securitized which the Company managed.
(5) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, FINOVA Capital Limited included $39.2 million of Consumer
Finance assets, of which $4.8 million were nonaccruing. Consumer Finance
accounts were generally considered nonaccruing after being 180 days
delinquent.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
Revenue Accruing Nonaccruing
----------------------------- -------------------------
Delin- Repos- Leases Total
Original Repos- quent sessed & Carrying
Rate Rewritten sessed Loans Assets Other Amount %
Contracts Assets
(4)
----------------------------- ------------------------- ------------------
Resort Finance $ 530,617 $ 4,869 $12,163 $11,597 $ 7,404 $ 440 $ 567,090 19.9
Transportation Finance (1) (2) 604,416 841 605,257 21.2
Commercial Real Estate Finance 500,598 1,574 27,844 5,759 20,838 556,613 19.6
(1)
Communications Finance 487,890 7,989 8,949 21,730 11,564 538,122 18.9
Corporate Finance (1) 397,779 27,921 4,243 5,462 386 435,791 15.3
Rediscount Finance 19,439 19,439 0.7
FINOVA Capital Limited (3) 107,486 4,430 2,720 23 9,600 124,259 4.4
---------- ------- ------- ------- ------- ------- ---------- -----
$2,648,225 $46,783 $48,956 $46,890 $45,291 $10,426 $2,846,571 100.0
========== ======= ======= ======= ======= ======= ========== =====
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NOTES:
(1) Reclassifications (effective January 1, 1993): Approximately $169 million
of accruing assets were reclassified from Corporate Finance with $163
million going to Transportation Finance because they primarily represented
aircraft financing and $6 million to Commercial Real Estate Finance.
Additionally, $6.5 million of nonaccruing assets ($5.1 million classified
as repossessed assets and $1.4 million classified as 90 days delinquent)
were reclassified from Corporate Finance to Commercial Real Estate Finance.
(2) Transportation Finance included $31.9 million of aircraft finance business
booked through the London office.
(3) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, FINOVA Capital Limited included $45.3 million of Consumer
Finance assets, of which $9.6 million were nonaccruing. Consumer Finance
accounts were generally considered nonaccruing after being 180 days
delinquent.
(4) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Commercial Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in Resort
Finance.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1992
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------ ---------------------------
Repos- Delin- Repos-
Original Rewritten sessed quent sessed Leases Carrying
Rate Contracts Assets Loans Assets & Amount %
(3) Other
------------------------------ --------------------------- --------------------
Resort Finance $ 488,224 $ 1,356 $ $ 6,524 $ 7,365 $ 635 $ 504,104 20.8
Transportation Finance 328,962 328,962 13.5
Commercial Real Estate Finance 463,571 12,482 21,509 6,302 15,052 518,916 21.4
Communications Finance 382,914 32,548 8,744 13,182 437,388 18.0
Corporate Finance (1) 420,006 16,081 14,436 5,111 611 456,245 18.8
FINOVA Capital Limited (2) 154,609 5,839 6,000 60 16,400 182,908 7.5
---------- ------- ------- ------- ------- ------- ----------- -----
$2,238,286 $68,306 $21,509 $42,006 $40,770 $17,646 $ 2,428,523 100.0
========== ======= ======= ======= ======= ======= =========== =====
- --------------------
NOTES:
(1) Included $5.1 million of public sector Latin American loans that were
written-down to estimated market value. During 1992, FINOVA successfully
liquidated 72% of the face value of public sector Latin American loans at
favorable market prices, which were approximately $3.1 million in excess of
the carrying amount.
(2) The FINOVA Capital Limited balance included transactions in Europe and
other countries (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. FINOVA Capital Limited included $57.8 million of Consumer Finance
assets, of which $16.4 million were nonaccruing. Consumer Finance accounts
were generally considered nonaccruing after being 180 days delinquent.
(3) The Company earned income of $1.9 million on repossessed accruing assets in
Commercial Real Estate Finance during 1992.
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1991
(Dollars in Thousands)
Revenue Accruing Nonaccruing
--------------------- ---------------------------------- Total
Original Rewritten Delinquent Repossessed Leases & Carrying
Terms Contracts Loans Assets Other Amount %
--------------------- ---------------------------------- ----------------------
Resort Finance $ 430,113 $ 1,511 $ $ 7,317 $ 1,056 $ 439,997 19.3
Transportation Finance 223,803 223,803 9.8
Commercial Real Estate 431,097 15,734 10,504 20,002 477,337 20.9
Finance
Communications Finance 321,918 12,340 16,636 350,894 15.4
Corporate Finance 429,053 14,594 7,386 3,694 454,727 19.9
FINOVA Capital Limited (1) 263,995 5,095 11,975 826 31,900 313,791 13.8
Latin America (2) 21,323 21,323 0.9
---------- ------- ------- ------- ------- ---------- -----
$2,121,302 $49,274 $46,501 $28,145 $36,650 $2,281,872 100.0
========== ======= ======= ======= ======= ========== =====
- --------------------
NOTES:
(1) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, FINOVA Capital Limited included $94.3 million of Consumer
Finance assets of which $31.9 million were nonaccruing. Consumer Finance
accounts were generally considered nonaccruing after being 180 days
delinquent.
(2) Included $15.5 million of Latin American loans written-down to market
value.
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The Company's geographic portfolio diversification at December 31, 1995
was as follows:
State Total Percent
----------------- ---------- -------
California $ 961,301 14.1%
Texas 597,285 8.8%
Florida 501,169 7.4%
New York 398,784 5.8%
Pennsylvania 297,039 4.4%
New Jersey 241,404 3.5%
Michigan 236,177 3.5%
Arizona 233,193 3.4%
Illinois 229,773 3.4%
Nevada 206,671 3.0%
Virginia 183,102 2.7%
Other (1) 2,733,159 40.0%
---------- -----
$6,819,057 100.0%
========== =====
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
4% of the total.
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
1995 1994 1993 1992 1991
-------------------------------------------------------------
(Dollars in Thousands)
Balance, beginning of year $122,233 $ 64,280 $ 69,291 $ 87,600 $ 77,098
Provision for possible credit
losses (1) 47,300 16,670 5,706 6,740 77,687
Write-offs (1) (35,533) (35,127) (12,575) (23,661) (68,346)
Recoveries 2,216 1,898 717 749 663
Other (including addition of TriCon
and Ambassador reserves in 1994) 4,117 74,512 1,141 (2,137) 498
-------- -------- -------- -------- --------
Balance, end of year $140,333 $122,233 $ 64,280 $ 69,291 $ 87,600
======== ======== ======== ======== ========
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NOTE:
(1) In 1991, the Company recorded a special provision for possible credit
losses of $65 million and recorded a $47.8 million write-down of Latin
American assets and recorded write-offs of $15 million in the foreign
operations (FCL) portfolio.
The reserve for possible credit losses includes $16 million and $13 million
at December 31, 1995 and 1994, respectively, of reserves applicable to
securitizations previously classified as accrued liabilities.
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Included in the above is a specific impairment reserve of $15.7 million at
December 31, 1995, which applies to $35.2 million of the $94.3 million of
impaired loans. The remaining $124.6 million of the reserve for possible credit
losses is designated for general purposes and represents management's estimate
of the amount to cover potential losses in the portfolio considering
delinquencies, loss experience and collateral. Additions to general and specific
reserves are reflected in current operations. Management may transfer reserves
between the general and specific reserves as considered necessary.
Write-offs by line of business, experienced by the Company during the years
ended December 31, were as follows:
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
1995 1994 1993 1992 1991
-----------------------------------------------
Manufacturer and Dealer Services $ 9,902 $ 7,018 $ $ $
(1)
Corporate Finance 4,660 4,233 3,741 1,000 668
Communications Finance 4,037 8,300 1,488 1,500 1,200
Factoring Services (2) 3,728 1,148
Franchise Finance (1) 3,448 2,247
Commercial Real Estate Finance 2,275 1,461 2,320 4,417 2,204
Commercial Equipment Finance (1) 2,271 1,257
Resort Finance 2,000 2,730 330
FINOVA Capital Limited (3) 1,523 5,140 5,026 15,838 15,593
Commercial Finance (1) 452 774
Medical Finance (1) 314 377
Inventory Finance (1) 201 442
Latin America (3) 47,759
Other 722 906 592
------- ------- ------- ------- -------
$35,533 $35,127 $12,575 $23,661 $68,346
======= ======= ======= ======= =======
Write-offs as a percentage
of managed assets 0.50% 0.59% 0.44% 0.97% 3.00%
======= ======= ======= ======= =======
- --------------------
NOTES:
(1) These Lines of Business were not part of the Company's portfolio prior to
May, 1994.
(2) This Line of Business was not part of the Company's portfolio prior to
February, 1994.
(3) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65.0 million and recorded write-offs of
$15.0 million related to nonearning assets in the FCL (foreign) portfolio
and a $47.8 million write-down to reduce Latin American assets to current
market value.
A further breakdown of the portfolio by line of business can be found in
Note C of Notes to Consolidated Financial Statements in Annex A.
COST AND UTILIZATION OF BORROWED FUNDS
FINOVA Capital relies on borrowed funds as well as internal cash flow to
finance its operations. FINOVA Capital follows a policy of relating provisions
under its loans and leases to the terms on which it obtains funds so that, to
the extent feasible, floating-rate assets are funded with floating-rate
borrowings and fixed-rate assets are funded with fixed-rate borrowings. For
further discussion on FINOVA Capital's debt and matched funding policy, see
Notes E and F of Notes to Consolidated Financial Statements included in Annex A.
10
13
The following table reflects the approximate average pre-tax effective
cost of borrowed funds and pre-tax equivalent rate earned on accruing assets for
FINOVA Capital for each of the periods listed:
Year Ended December 31,
-----------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------
Short-term and variable rate long-term debt (1) 7.2% 5.5% 4.7% 5.3% 8.1%
Fixed-rate long-term debt (1) 7.3% 8.1% 11.4% 10.6% 10.9%
Aggregate borrowed funds (1) 7.2% 6.3% 6.3% 7.2% 9.3%
Rate earned on average earning assets (2) (3) 12.5% 11.6% 10.9% 11.9% 13.6%
Spread percentage (4) 5.8% 6.0% 5.4% 5.1% 4.9%
- ---------------------
NOTES:
(1) Includes the effect of interest rate swap agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation and include gains on sale of assets.
(4) Spread percentages represent interest margins earned as a percentage of
average earning assets.
The effective costs presented above include costs of commitment fees
and related borrowing costs and do not purport to predict the costs of funds in
the future.
For further information on FINOVA Capital's cost of funds, refer to
Notes E and F of the Notes to Consolidated Financial Statements included in
Annex A.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
1.43 1.55 1.50 1.34 --
==== ==== ==== ==== ====
Variations in interest rates generally do not have a substantial impact
on the ratio because fixed-rate and floating-rate assets are generally matched
with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the ratio of income to combined fixed charges and preferred stock dividends,
consists of the sum of income before income taxes and fixed charges. Combined
fixed charges include interest and related debt expense and a portion of rental
expense determined to be representative of interest and preferred stock
dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to cover
combined fixed charges by $37.0 million. The decline in the ratio in 1991 was
due to restructuring and other charges and transaction costs recorded in the
fourth quarter of 1991. Those charges and costs were recorded in connection with
the Spin-Off.
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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 BBB+
There can be no assurance that FINOVA Capital's ratings will be
maintained. Such ratings can be modified at any time. A credit rating is not a
recommendation to buy, sell or hold securities. Each rating should be evaluated
independently of any other rating. Neither The FINOVA Group Inc. nor any of
FINOVA Capital's subsidiaries have applied for credit ratings.
RESIDUAL REALIZATION EXPERIENCE
In the last 41 years, FINOVA Capital has realized, in the aggregate,
proceeds from the sale of assets upon lease terminations (other than
foreclosures) in excess of carrying amounts; however, there can be no assurance
that such results will be realized in future years. Proceeds actually realized
will depend on current market values for those assets at the time of sale which
are generally beyond the control of the Company, although the Company has some
discretion in the timing of subsequent dispositions of such assets. Sales
proceeds upon lease terminations in excess of carrying amounts are reported as
gains when the assets are sold.
Income from leasing activities is affected by gains from asset sales
upon lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1995, the
proceeds to FINOVA Capital from sales of assets upon early termination of leases
and at the expiration of leases have exceeded the respective carrying amounts
and estimated residual values as follows:
Early Terminations (Notes 1, 2 and 4) Terminations at End of Lease Term
(Note 3)
- -------------------------------------------- ---------------------------------
Proceeds
Proceeds Estimated as a % of
Carrying as a % of Residual Estimated
Sales Amount Carrying Sales Value of Residual
Year Proceeds of Assets Amount Proceeds Assets Value
- -------------------------------------------- ---------------------------------
(Dollars in Thousands) (Dollars in Thousands)
1995 $ 2,664 $ 2,018 132% $84,447 $67,186 126%
1994 6,477 5,865 110% 30,161 25,682 117%
1993 -- -- -- 486 248 196%
1992 20,493 17,527 117% 2,164 1,768 122%
1991 25,027 21,904 114% 10,114 6,553 154%
- ----------
Notes:
(1) Excludes foreclosures for credit reasons which are immaterial to the above
amounts.
(2) Excludes proceeds of $3.2 million in 1993 on assets held for sale.
(3) Excludes proceeds of $2.0 million in 1993 received on guarantees.
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(4) Excludes gain on securitizations of $4.0 million in 1994.
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA Capital at December 31, 1995 aggregated 19.0%
of the original cost of such assets (10.2% excluding the original costs of the
assets and residuals applicable to real estate leveraged leases, which typically
have higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1995 for financing contracts excluding leveraged
leases were 6.4 and 4.6 years, respectively, and for leveraged leases were
approximately 20 and 13 years, respectively. The comparable average initial term
and remaining term at December 31, 1994 for financing contracts excluding
leveraged leases were 6.5 and 3.7 years, respectively, and for leveraged leases
were approximately 20 and 11 years, respectively. FINOVA Capital utilizes either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from such appraised
values.
For a discussion of accounting for lease transactions, refer to Notes A
and C of Notes to Consolidated Financial Statements included in Annex A.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA Capital develops business primarily through direct solicitation
by its own sales force. Customers are also introduced by independent brokers and
referred by other financial institutions.
At December 31, 1995, FINOVA Capital had 81,821 financing contracts with
65,554 customers (including 881 contracts with consumer finance customers and
75,116 small ticket contracts with 61,347 customers in Manufacturer and Dealer
Services), compared with 88,034 financing contracts with 70,892 customers
(including 2,313 contracts with consumer finance customers and 79,027 small
ticket contracts with 64,886 customers in Manufacturer and Dealer Services) at
December 31, 1994.
FINOVA Capital is engaged in an extremely competitive activity. It
competes with banks, insurance companies, leasing companies, the credit units of
equipment manufacturers and other finance companies. Some of these competitors
have substantially greater financial resources and are able to borrow at costs
below those of FINOVA Capital. FINOVA Capital's principal means of competition
is through a combination of service, the interest rate charged for money and
concentration in focused market niches. The interest rate it charges for money
is a function of its borrowing costs, its operating costs and other factors.
While many of FINOVA Capital's larger competitors are able to offer lower
interest rates based upon their lower borrowing costs, FINOVA Capital seeks to
maintain the competitiveness of the interest rates it offers by emphasizing
strict control of its operating costs. The Company's ability to manage costs is,
in part, dependent on factors beyond the Company's control, such as the cost of
funds, outside litigation expenses and competitive salaries.
CREDIT QUALITY
As a result of the use of clearly defined underwriting standards,
portfolio management techniques, monitoring of covenant compliance and active
collections and workout efforts, FINOVA Capital seeks to maintain a high-quality
asset base.
RISK MANAGEMENT
FINOVA Capital generally conducts investigations of its prospective
customers through a review of historical financial statements, published credit
reports, credit references, discussions with management, analysis of location
feasibility, personal visits and collateral appraisals and inspections. In many
cases, depending upon the results of its credit investigations and the nature of
the financing being provided, FINOVA Capital obtains additional collateral or
guarantees from others.
13
16
As part of its underwriting process, FINOVA Capital considers the
management, industry, financial position and level of collateral of a proposed
obligor. The purpose, term, amortization and amount of any proposed transaction
generally must be clearly defined and within established corporate policy. In
addition, underwriters attempt to avoid undue concentrations in any one
customer, industry or regional location.
- Management. FINOVA Capital considers the reputation, experience
and depth of management; quality of product or service;
adaptability to changing markets and demand; and prior banking,
finance and trade relationships.
- Industry. FINOVA Capital evaluates critical aspects of each
industry to which it lends, including general trend,
seasonality and cyclicality; governmental regulation; the
effects of taxes; the economic value of goods or services
provided; and potential environmental or other liability.
- Financial. FINOVA Capital's review of a prospective borrower
normally includes a thorough analysis of the borrower's
financial trends. Items considered include net worth;
composition of assets and liabilities; debt service coverage;
liquidity; sales growth and earning power; and cash flow
generation and reliability.
- Collateral. FINOVA Capital regards collateral as an important
factor in a credit evaluation and has established maximum loan
to value ratios, normally ranging from 60% - 95%, for each of
its lines of business.
The underwriting process includes, in addition to the analysis of the
factors set forth above, the design and implementation of transaction structures
and strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process, with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors portfolio concentrations in the areas of
aggregate exposure to a single borrower and related entities, within a given
geographical area and with respect to an industry and/or product type within an
industry. FINOVA Capital has established concentration guidelines for each line
of business. Geographic concentrations are reviewed periodically and evaluated
based on historical loan experience and prevailing market and economic
conditions.
FINOVA Capital's financing contracts and leases generally require the
customer to pay taxes, license fees and insurance premiums and to perform
maintenance and repairs at the customer's expense. Contract payment rates are
based on several factors, including the cost of borrowed funds, term of
contract, creditworthiness of the prospective customer, type and nature of
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In direct finance lease transactions,
lessees generally are granted an option to purchase the equipment at the end of
the lease term at its then fair market value or, in some cases, are granted an
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
In addition to the review at the time of original underwriting, FINOVA
Capital attempts to preserve and enhance the earnings quality of its portfolio
through proactive management of its financing relationships with its clients.
This process includes the periodic appraisal or verification of the collateral
14
17
to determine loan exposure and residual values; sales of residuals and warrants
to generate supplemental income; and review and management of covenant
compliance. The Portfolio Management department and dedicated personnel within
the business units regularly review financial statements to assess customer cash
flow performance and trends; periodically confirm operations of the customer;
conduct periodic reappraisals of the underlying collateral; seek to identify
issues concerning the vulnerabilities of the customer; seek to resolve
outstanding issues with the borrower; and prepare quarterly summaries of the
aggregate portfolio quality and concentrations for management review.
Evaluation for loan impairment is performed as a part of the portfolio
management review process. When a loan is determined to be impaired, a
write-down is taken or an impairment reserve is established based on the
difference between the recorded balance of the loan ("carrying amount") and the
relevant measured value.
DELINQUENCIES AND WORKOUTS
FINOVA Capital monitors timely payment of all accounts. Generally, when
an invoice is 10 days past due, the customer is contacted, and a determination
is made as to the extent of the problem, if any. A commitment for immediate
payment is pursued and the account is observed closely. If payment is not
received after this contact, guarantors of the account are to be contacted
within the next 20 days. If an invoice becomes 31 days past due, it is reported
as delinquent. A notice of default is generally sent prior to an invoice
becoming 45 days past due and, between 60 and 90 days past the due date, if
satisfactory negotiations are not underway, outside counsel is generally
retained to help protect FINOVA Capital's rights and to pursue its remedies.
When accounts become more than 90 days past due income recognition is
usually suspended, and FINOVA Capital vigorously pursues its legal remedies.
Foreclosed or repossessed assets are considered to be nonperforming, and are
reported as such unless such assets generate sufficient cash to result in a
reasonable rate of return. Such accounts are continually reviewed, and
write-downs are taken as deemed necessary. While pursuing collateral and
obligors, FINOVA Capital generally continues to negotiate the restructuring or
other settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for possible credit losses is adequate. For
additional information regarding the reserve for possible credit losses, see
Note D of Notes to Consolidated Financial Statements included in Annex A.
GOVERNMENTAL REGULATION
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions are subject to
additional government regulation, such as aircraft leasing, which is regulated
by the Federal Aviation Authority, and communications, which is regulated by the
Federal Communication Commission. FINOVA Capital's international activities are
also subject to a variety of laws and regulations promulgated by the governments
and various agencies of the countries in which the business is conducted.
FORMER MORTGAGE INSURANCE OPERATIONS
Verex, which conducted FINOVA's mortgage insurance operations, ceased
writing new business as of January 1, 1988 but continued to write renewals and
settle valid claims in accordance with insurance contracts in force.
Accordingly, Verex was treated as a discontinued operation. On July 16, 1993,
FINOVA consummated the sale of Verex. Proceeds from the sale of Verex were
approximately $215 million. The sale price was generally determined by the book
value of the Verex assets plus a premium of $6 million and an adjustment for the
difference between the market value and book value of Verex's investment
portfolio.
15
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EMPLOYEES
At December 31, 1995, the Company had 978 employees. None of such
employees were covered by collective bargaining agreements. The Company believes
its employee relations are satisfactory.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in premises leased
from Dial in Phoenix, Arizona. FINOVA Capital operates 46 additional offices in
the United States and one office in Europe. All such properties are leased.
Alternative office space could be obtained without difficulty in the event
leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation often results from the Company's attempts to enforce
its lending agreements against borrowers and other parties to such transactions.
Litigation is subject to many uncertainties and it is possible that some of the
legal actions, proceedings or claims referred to above could be decided against
the Company. Although the ultimate amount for which the Company may be held
liable, if any, is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who
serve as executive officers of FINOVA.
Name Age Position and Background
- --------------------- --- ----------------------------------------------------
Samuel L. Eichenfield 59 Chairman, President and Chief Executive Officer
since 1993 and Chairman and Chief Executive Officer
of The FINOVA Group Inc. since 1992; also Chairman,
President and Chief Executive Officer of FINOVA
Capital for more than five years.
Robert J. Fitzsimmons 55 Senior Vice President - Treasurer of The FINOVA
Group Inc. or similar positions since 1992; also
Senior Vice President - Treasurer or similar
positions of FINOVA Capital for more than five years
and a Director of FINOVA Capital since 1992.
William J. Hallinan 53 Senior Vice President - General Counsel and
Secretary or similar positions of The FINOVA Group
Inc. and FINOVA Capital since 1992; prior thereto
for more than five years served as Vice President -
Taxes and Associate General Counsel or a similar
position of Dial.
16
19
Name Age Position and Background
- --------------------- --- ----------------------------------------------------
Robert M. Korte 40 Senior Vice President - Strategy and Technology
since 1994 and prior thereto was Vice
President-Human and Corporate Development of The
FINOVA Group Inc. since 1992; also Vice President -
Human and Corporate Development or in similar
positions of FINOVA Capital since 1991, and prior
thereto was Assistant Vice President -
Administration.
Bruno A. Marszowski 54 Senior Vice President - Controller and Chief
Financial Officer of The FINOVA Group Inc. and
FINOVA Capital since 1994 and prior thereto was Vice
President - Controller of The FINOVA Group Inc.
since 1992; also, Vice President - Controller of
FINOVA Capital for more than five years and a
Director thereof during 1992.
Robert E. Radway 35 Senior Vice President - Corporate Development and
Communications or similar positions of The FINOVA
Group Inc. since 1993; prior thereto was Manager,
Corporate Finance Division of CMS Companies, an
investment management/merchant banking firm since
1990 and prior thereto was Vice President,
Investment Banking Division of First Fidelity
Bancorporation (a bank holding company) since 1988.
Derek C. Bruns 36 Vice President - Internal Audit or similar positions
of The FINOVA Group Inc. since 1992; prior thereto
was Senior Manager - Audit Services or in a similar
position at Deloitte & Touche LLP for more than five
years.
John J. Bonano 53 Group Vice President or similar positions of FINOVA
Capital since 1993; prior thereto was Senior Vice
President, Asset Based Finance Division of U.S.
Bancorp Financial, Inc. since 1988.
J. Parker Lapp 42 Group Vice President of FINOVA Capital since 1995;
prior thereto was President, Current Asset
Management Group of Heller Financial, Inc. for five
years.
Matthew M. Breyne 38 Group Vice President or similar positions of FINOVA
Capital for more than five years.
Jack Fields, III 41 Group Vice President or similar positions of FINOVA
Capital for more than five years.
Thomas C. Parrinello 54 Group Vice President of FINOVA Capital since 1994;
prior thereto was Executive Vice President of Heller
Financial for more than five years.
John Jackson 56 Senior Vice President or similar positions of FINOVA
Capital since 1994; prior thereto was in similar
positions with Bell Atlantic TriCon Leasing, Inc.
for more than five years.
Martin G. Roth 58 Group Vice President or similar positions of FINOVA
Capital for more than five years.
Gregory C. Smalis 43 Group Vice President - Portfolio Management or
similar positions and a Director of FINOVA Capital
since 1993; prior thereto served as Managing
Director of FCL from 1992 and as Vice President -
Credit of FINOVA Capital from 1987.
17
20
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY &
RELATED STOCKHOLDER MATTERS.
The principal market on which the common stock of The FINOVA Group Inc.
is traded is the New York Stock Exchange. The following tables summarize the
high and low market prices as reported on the New York Stock Exchange Composite
Tape and the cash dividends declared from January 1, 1994 through December 31,
1995:
Sales Price Range of Common Stock
-----------------------------------------------------
1995 1994
-----------------------------------------------------
Quarters: High Low High Low
------- ------- ------- -------
First $ 34 $30-5/8 $33-3/4 $28-1/4
Second 38-1/2 31-3/4 34-3/8 29-1/8
Third 45-3/4 34-7/8 39 33-1/8
Fourth 49-1/2 44-5/8 35-7/8 29-1/8
Dividends Declared on
Common Stock
1995 1994
----- -----
February $0.20 $0.18
May 0.20 0.18
August 0.22 0.18
November 0.22 0.20
----- -----
$0.84 $0.74
===== =====
Following the Spin-Off, quarterly dividends have been paid on the first
business day of each calendar quarter. It is anticipated that FINOVA will
continue to pay regular quarterly dividends on the first business day of
January, April, July and October. In February 1996, the Board of Directors
declared a dividend of $0.22 per share, payable April 1, 1996, for shareholders
of record on March 1, 1996. The declaration of dividends and their amounts will
be at the discretion of the Board of Directors of FINOVA, and there can be no
assurance that additional dividends will be declared.
FINOVA Capital is restricted in its ability to pay dividends to its
shareholder. The agreements pertaining to long-term debt of FINOVA Capital
include various restrictive covenants and require the maintenance of certain
defined financial ratios with which FINOVA Capital has complied. Under one of
18
21
these covenants, dividend payments are limited to 50 percent of accumulated
earnings after December 31, 1991.
As of March 6, 1996, there were approximately 26,544 holders of record
of The FINOVA Group Inc.'s common stock. The closing price of the common stock
on that date was $54-1/8.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA which
have been derived from the audited Consolidated Financial Statements of FINOVA
for the five years ended December 31, 1995. The information set forth below
should be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Consolidated Financial
Statements of FINOVA and the Notes thereto included in Annex A, as well as the
remainder of this Report. Per share data for income and dividends have not been
presented for 1991 and prior years as The FINOVA Group Inc. was not a publicly
held company prior to the Spin-Off.
Year Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------------
OPERATIONS: (Dollars in Thousands, except per share data)
Interest earned from financing
transactions $ 761,855 $ 503,351 $ 255,216 $ 243,337 $ 251,472
Interest margins earned 339,815 244,414 124,847 104,699 93,912
Provision for possible credit losses (1) 47,300 16,670 5,706 6,740 77,687
Gains on sale of assets 19,726 9,045 5,439 3,362 6,684
Core income (2) 97,994 80,834 40,463 34,289 31,629
Income (loss) from continuing
operations 97,629 74,313 37,846 36,750 (38,742)
Net income (loss) 97,629 74,313 37,347 48,957 (52,471)
Earnings per common and equivalent
share $ 3.51 $ 2.94 $ 1.77 $ 2.31
Dividends declared per common share $ 0.84 $ 0.74 $ 0.68 $ 0.42
Dividend payout ratio 23.9% 25.2% 38.4% 18.2%
Average outstanding common and
equivalent shares 27,832,000 25,307,000 20,332,000 20,464,000
FINANCIAL POSITION:
Investment in financing transactions $ 6,819,057 $ 5,667,644 $ 2,846,571 $ 2,428,523 $ 2,281,872
Nonaccruing assets 167,872 168,761 102,607 100,422 111,296
Reserve for possible credit losses (1) 140,333 122,233 64,280 69,291 87,600
Total assets 7,036,514 5,821,343 2,834,322 2,641,668 2,414,484
Deferred income taxes 209,512 188,887 178,972 172,727 198,366
Total debt 5,649,368 4,573,354 2,079,286 1,898,773 1,769,545
Redeemable preferred stock 25,000
Stockholders' equity 825,184 770,252 503,300 488,396 371,576
RATIOS:
Reserve for possible credit losses/managed
assets 2.0% 2.1% 2.3% 2.9% 3.8%
Nonaccruing assets/managed assets 2.4% 2.9% 3.6% 4.1% 4.9%
Total debt to stockholders' equity 6.8x 5.9x 4.1x 3.9x 4.8x
Return on average equity 12.2% 11.1% 7.5% 11.4% (12.9%)
Return on average total assets 1.5% 1.6% 1.4% 1.9% (2.2%)
Equity to assets 11.7% 13.2% 17.8% 18.5% 15.4%
- --------------------
NOTES:
(1) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65 million and recorded write-offs of $15
million related to nonearning assets in the FCL portfolio and a $47.8
million write-down to reduce Latin American assets to current market value.
(2) Core income is defined as domestic income from continuing operations plus
the charges made to deferred taxes applicable to leveraged leases in 1993
and the restructuring and other charges recorded in 1991 in connection with
the Spin-Off.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See pages 2 - 7 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included in
Supplemental Selected Financial Data of Notes to Consolidated
Financial Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING &
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this Item
is incorporated by reference from the Company's Proxy Statement issued in
connection with its 1996 Annual Meeting of Stockholders (the "Proxy Statement").
The information regarding the Company's executive officers required by
this item is found as an Optional Item in Part I, following Item 4 hereof.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
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
Statement of Consolidated Income 11
Statement of Consolidated Stockholders' Equity 12
Statement of Consolidated Cash Flows 13
Notes to Consolidated Financial Statements 14 - 32
Supplemental Selected Financial Data 33 - 34
2. All Schedules have been omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
20
23
3. Exhibits.
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
the Company's Report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K")).
(3.B) By-Laws, as amended through the date of this filing.*
(4.A) Instruments with respect to issues of long-term debt
have not been filed as exhibits to this Annual Report
on Form 10-K if the authorized principal amount of any
one of such issues does not exceed 10% of total assets
of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of each
such instrument to the Securities and Exchange
Commission upon request.
(4.B) Form of Common Stock Certificate of the Company
(incorporated by reference from the 1994 10-K, Exhibit
4.B).
(4.C) Relevant portions of the Company's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above, respectively, are hereby incorporated by
reference.
(4.D.1) Rights Agreement dated as of February 15, 1992 between
the Company and the Rights Agent named therein, as
amended (incorporated by reference from the Company's
Current Report on Form 8-K dated September 21, 1995,
Exhibit 4.1).
(4.D.2) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4.D.1 above (incorporated by
reference from the Company's Current Report on Form
8-K, dated November 30, 1995, Exhibit 4).
(4.E) Indenture dated as of November 1, 1990 between FINOVA
Capital and the Trustee named therein (incorporated by
reference from Greyhound Financial Corporation's
Registration Statement on Form S-3, Registration No.
33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17,
1992 between FINOVA Capital and the Trustee named
therein, supplementing the Indenture referenced in
Exhibit 4.E above (incorporated by reference from GFC
Financial Corporation's Annual Report on Form 10-K for
the year 1992 (the "1992 10-K"), Exhibit 4.F).
(4.G) Form of Indenture dated as of September 1, 1992
between FINOVA Capital and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S-3, Registration No. 33-51216, Exhibit 4).
(4.H) Form of Indenture dated as of October 1, 1995 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from FINOVA Capital's
Report on Form 8-K dated October 25, 1995, Exhibit
4.1).
(4.I) 1992 Stock Incentive Plan of the Company as amended
through the date hereof, with a proposed amendment
thereto as discussed more fully in the Proxy
Statement.*+
21
24
Exhibit No.
-----------
(10.A) Sixth Amendment and Restatement dated as of May 16,
1994 of the Credit Agreement dated as of May 31, 1976
among FINOVA Capital and the lender parties thereto,
and Bank of America National Trust and Savings
Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminster Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
the Corporation's Current Report on Form 8-K dated May
23, 1994, Exhibit 10.I).
(10.A.1) First Amendment dated as of September 30, 1994, to the
Sixth Amendment and Restatement, noted in 10.A above
(incorporated by reference from the 1994 10-K, Exhibit
10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the Sixth
Amendment and Restatement noted in 10.A above
(incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the period ending
September 30, 1995 (the "Third Quarter 10-Q"), Exhibit
10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the Third Quarter 10-Q, Exhibit 10.B).
(10.B) Credit Agreement (Short-Term Facility) dated as of May
16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
the Company's Report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.D).
(10.C.1) The Company's Executive Severance Plan for Tier 1
Employees.*+
(10.C.2) The Company's Executive Severance Plan for Tier 2
Employees.*+
(10.D) The Company's 1995 Management Incentive Plan
(incorporated by reference from the Third Quarter
10-Q, Exhibit 10-G).+
(10.E.1) The Company's 1995 - 1997 Performance Share Incentive
Plan (incorporated by reference from the Third Quarter
10-Q, Exhibit 10.H).+
(10.E.2) The Company's 1994 - 1996 Performance Share Incentive
Plan (incorporated by reference from the Third Quarter
10-Q, Exhibit 10-I).+
(10.E.3) The Company's 1993 - 1995 Performance Share Incentive
Plan (incorporated by reference from the Third Quarter
10-Q, Exhibit 10.H).+
(10.F.1) Employment Agreement with Samuel L. Eichenfield, dated
March 16, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.F).+
22
25
Exhibit No.
-----------
(10.F.2) Amendment to Employment Agreement referenced in 10.F.1
above (incorporated by reference from the Third
Quarter 10.Q, Exhibit 10.M).+
(10.F.3) Employment Agreement with Samuel L. Eichenfield dated
March 15, 1996.*+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.I).+
(10.H) Employment Agreement with Thomas C. Parrinello, dated
February 14, 1994 (incorporated by reference from the
1994 10-K, Exhibit 10.H).+
(10.I) The Company's Supplemental Pension Plan (incorporated
by reference from the 1994 10-K, Exhibit 10.K).
(10.I.1) Resolutions of the Board of Directors dated December
5, 1994, amending Exhibit 10.I above.*+
(10.I.2) Resolutions of the Board of Directors dated August 22,
1995, amending Exhibit 10.I and 10.I.1 above.*+
(10.J) The Company's Value Sharing Plan for Executive
Officers and Key Employees (incorporated by reference
from the Third Quarter 10-Q, Exhibit 10.K).+
(10.K) The Company's Value Sharing Plan for the Chief
Executive Officer (incorporated by reference from the
Third Quarter 10-Q, Exhibit 10.L).+
(10.L) The Company's Directors Deferred Compensation Plan
(incorporated by reference from the 1992 10-K, Exhibit
10.O).+
(10.M) The Company's Deferred Compensation Plan.*+
(10.N) Directors' Retirement Benefit Plan (incorporated by
reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1993 (the "1993
10-K"), Exhibit 10.OO).+
(10.O) Form of the Company's 1992 Stock Incentive Plan
Nonqualified Stock Option Agreement (for exempt
employees) (for August 25, 1992 and subsequent grants
through August 10, 1994) (various prices)
(incorporated by reference from the 1992 10-K, Exhibit
10.FF).+
(10.P) A description of the Company's policies regarding
compensation of directors is incorporated by reference
from the Proxy Statement.+
(10.Q) Directors' Charitable Awards Program (incorporated by
reference from the 1994 10-K, Exhibit 10.CC).+
(10.R) Interim Services Agreement dated January 28, 1992
among the Company, The Dial Corp and others
(incorporated by reference from the 1992 10-K, Exhibit
10.JJ).
(10.S) Tax Sharing Agreement dated February 19, 1992 among
the Company, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(10.T) Sublease dated as of April 1, 1991, among the Company,
The Dial Corp and others, relating to the Company's
principal office space (incorporated by reference from
the 1992 10-K, Exhibit 10.NN).
23
26
Exhibit No.
-----------
(10.U) Stock Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and Greyhound Financial
Corporation dated as of March 4, 1994 (incorporated by
reference from the 1993 10-K, Exhibit 10.QQ).
(10.V) Form of Assets Purchase Agreement between Bell
Atlantic TriCon Leasing Corporation and TriCon Capital
Corporation (incorporated by reference from the 1993
10-K, Exhibit 10.RR).
(10.W) Form of Distribution Agreement among the Company,
Greyhound Financial Corporation, The Dial Corp and
certain other parties named therein, dated as of
January 28, 1992 (incorporated by reference from the
Company's Registration Statement on Form S-1, SEC File
No. 33-45452, Annex II to the Prospectus and Exhibit
2.1).
(10.X) Stock Purchase Agreement among The FINOVA Group Inc.,
FINOVA Capital and GE Capital Mortgage Corporation
dated May 26, 1993 (incorporated by reference from the
Company's Report on Form 8-K dated July 15, 1993,
Exhibit 2).
(10.Y) Form of the Company's 1992 Stock Incentive Plan Stock
Option Agreements for grants subsequent to August 10,
1994 (for exempt employees) (various prices)
(incorporated by reference from the 1994 10-K, Exhibit
10.DD).+
(10.Z) Form of the Company's 1992 Stock Incentive Plan Stock
Option Agreements for grants subsequent to August 10,
1994 (for non-employee directors) (various prices)
(incorporated by reference from the 1994 10-K, Exhibit
10.FF).+
(10.AA) Form of the Company's 1992 Stock Incentive Plan
Restricted Stock Agreements (incorporated by reference
from the 1994 10-K, Exhibit 10.GG).+
(11) Computation of Per Share Earnings.*
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(21) Subsidiaries of the Registrant.*
(25) Powers of Attorney.*
(27) Financial Data Schedule.*
* Filed herewith.
+ Relating to Management Compensation.
(b) Reports on Form 8-K:
A Report on Form 8-K dated November 30, 1995, was filed by
Registrant, which reported under Items 5 and 7 the resignation of Bank
One, Arizona, NA (formerly The Valley National Bank of Arizona, NA) and
the appointment of Harris Trust and Savings Bank, N.A. as its Rights
Agent pursuant to the Rights Agreement between the Company and Bank One
Arizona, NA, dated as of February 15, 1992. The transition to the new
Rights Agent was effective November 30, 1995.
A Report on Form 8-K dated January 23, 1996 was filed by
Registrant, which reported under Items 5 and 7 the revenues, net income
and selected financial data and ratios for the twelve months ended
December 31, 1995.
24
27
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the capacities
indicated, in Phoenix, Arizona on the 8th day of March, 1996.
THE FINOVA GROUP INC.
By: /s/ Samuel L. Eichenfield
-------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
(Chief Executive Officer)
By: /s/ Bruno A. Marszowski
-------------------------------------
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
(Chief Accounting and Financial Officer)
---------------
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
* /s/ Samuel L. Eichenfield
- ------------------------------ ----------------------------------
G. Robert Durham (Director) Samuel L. Eichenfield (Chairman)
March 8, 1996 March 8, 1996
* *
- ------------------------------ ----------------------------------
James L. Johnson (Director) L. Gene Lemon (Director)
March 8, 1996 March 8, 1996
* *
- ------------------------------ ----------------------------------
Kenneth R. Smith (Director) Robert P. Straetz (Director)
March 8, 1996 March 8, 1996
* *
- ------------------------------ ----------------------------------
Shoshana B. Tancer (Director) John W. Teets (Director)
March 8, 1996 March 8, 1996
* Signed pursuant to Powers of Attorney dated February 8, 1996.
/s/ Bruno A. Marszowski
---------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 8, 1996
25
28
ANNEX A
29
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 - 7
Management's Report on Responsibility for
Financial Reporting 8
Independent Auditors' Report 9
Consolidated Balance Sheet at December 31, 1995 and 1994 10
Statement of Consolidated Income for the Years Ended
December 31, 1995, 1994 and 1993 11
Statement of Consolidated Stockholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993 12
Statement of Consolidated Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 13
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1995, 1994 and 1993 14 - 32
Supplemental Selected Financial Data 33 - 34
30
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 (1) 1993
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Interest margins earned $ 339,815 $ 244,414 $ 124,847
Selling, administrative and other operating expenses 155,001 113,018 58,158
Net income 97,629 74,313 37,347
FINANCIAL POSITION:
Average funds employed (AFE) 6,213,571 4,446,745 2,637,547
Ending funds employed (EFE) 6,819,057 5,667,644 2,846,571
Ending managed assets (2) 7,122,361 5,921,030 2,846,571
Average earning assets (3) 5,815,455 4,064,971 2,321,359
Reserve for possible credit losses 140,333 122,233 64,280
Nonaccruing assets 167,872 168,761 102,607
New business 2,570,993 1,799,331 1,007,794
Factoring/floor planning volume 1,951,310 1,129,936
Write-offs 35,533 35,127 12,575
CAPITALIZATION:
Total debt 5,649,368 4,573,354 2,079,286
Stockholders' equity 825,184 770,252 503,300
PORTFOLIO QUALITY:
Write-offs as a % of AFE and average securitizations (4) 0.6% 0.8% 0.5%
Nonaccruing assets as a % of ending managed assets (2) 2.4% 2.9% 3.6%
Reserve for possible credit losses as a % of:
Ending managed assets (2) 2.0% 2.1% 2.3%
Nonaccruing assets 83.6% 72.4% 62.6%
As a multiple of write-offs 3.9x 3.5x 5.1x
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of AFE (5) 1.6% 1.8% 1.6%
Interest margins earned as a % of average earning assets (3) 5.8% 6.0% 5.4%
Selling, administrative and other operating expenses as a % of
interest margins earned 45.6% 46.2% 46.6%
Aggregate cost of funds 7.2% 6.3% 6.3%
Ratio of income to combined fixed charges and preferred stock
dividends 1.4 1.6 1.5
Return on average equity 12.2% 11.1% 7.5%
Income per share (continuing operations) $ 3.51 $ 2.94 $ 1.80
Book value per share outstanding $ 30.25 $ 27.83 $ 25.06
Average outstanding common and equivalent shares 27,832,000 25,307,000 20,332,000
Shares outstanding 27,279,000 27,677,000 20,080,000
===========================================================================================================================
(1) Includes financial results from the date of acquisition for Ambassador
(February 14, 1994) and TriCon (April 30, 1994).
(2) Ending managed assets include assets sold under securitization agreements
and managed by the Company of $303,304 and $253,386 at December 31, 1995
and 1994, respectively.
(3) Average earning assets represents AFE excluding average deferred taxes on
leveraged leases and average nonaccruing assets.
(4) Average securitizations were $188 million and $183 million for 1995 and
1994, respectively.
(5) AFE in this item excludes average deferred taxes on leveraged leases of
$227 million, $225 million and $215 million for 1995, 1994 and 1993,
respectively.
1
31
THE FINOVA GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to The FINOVA Group Inc. (formerly known
as GFC Financial Corporation) and its subsidiaries (collectively, "FINOVA" or
the "Company"), including FINOVA Capital Corporation (formerly known as
Greyhound Financial Corporation) and its subsidiaries (collectively, "FINOVA
Capital"), including Ambassador Factors ("Ambassador") acquired on February 14,
1994 and TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador
and TriCon were merged into FINOVA Capital in 1994.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Net income increased 31% during 1995 to $97.6 million from $74.3 million
in 1994. The 1994 results include income from Ambassador and TriCon from the
acquisition dates.
INTEREST MARGINS EARNED. Interest margins earned, which represent the
difference between (a) interest and income earned from financing transactions
and (b) interest expense and depreciation, increased by 39% in 1995 to $339.8
million from $244.4 million in 1994. This increase was driven by a 20% growth in
managed assets (investment in financing transactions plus securitizations) which
included Ambassador and TriCon for the entire year. The primary source of the
growth in managed assets was new business, which totaled $2.6 billion for 1995
compared to $1.8 billion for 1994, an increase of 43%. Also contributing to the
improved margins were the fees associated with the factoring business, which
recorded factoring volume of $1.1 billion in 1995 compared to $847 million in
1994 and the inventory finance business, which recorded floor planning volume of
$898 million in 1995 compared to $283 million in 1994.
Interest margins earned as a percentage of average earning assets were
5.8% in 1995, compared to 6.0% in 1994. This reduction in the interest margin
percentage was expected in 1995 primarily due to the cost of hedges that the
Company entered into to lock in the spread between its lending and borrowing
rates on $1.5 billion of its floating-rate debt and to the diminishing ratio of
the higher yielding business relative to the total portfolio. Growth in interest
margins earned more than offset the higher provisions for possible credit losses
and the higher selling, administrative and other operating expenses in the 1995
period.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserves"), were greater by $30.6 million during 1995
compared to 1994 primarily due to the growth in managed assets. Management
believes that reserve coverage remains adequate at 83.6% of nonaccruing assets
and 2.0% of managed assets. Details of write-offs and other changes in the
reserve for possible credit losses can be found in Note D of Notes to
Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by $42
million in 1995 due to the growth of the Company, the large volume of new
business added and the inclusion of TriCon and Ambassador for the full year. As
a percentage of interest margins earned, these costs decreased to 45.6% in 1995
from 46.2% in the previous year. See Note M of Notes to Consolidated Financial
Statements.
GAINS ON SALE OF ASSETS. Gains on sale of assets were $10.7 million higher
in 1995 compared to 1994 primarily due to the inclusion of TriCon for the full
year and the amount and type of assets coming
2
32
THE FINOVA GROUP INC.
off lease. The 1994 gains of $9.0 million included $4.0 million (pre-tax) from
the securitization of assets in June 1994.
INCOME TAXES. Income taxes for 1995 increased to $59.6 million from $49.5
million in 1994. This increase was caused by the increase in pre-tax income,
partially offset by certain tax credits recognized during 1995. The 1995 overall
effective income tax rate for the Company approximated 37.9% compared to 40.0%
in 1994. The decrease in the effective rate is primarily related to lower
foreign tax effects and an increase in tax exempt municipal income. Details can
be found in Note I of Notes to Consolidated Financial Statements.
1994 COMPARED TO 1993
Income from continuing operations increased 96% during 1994 to $74.3
million from $37.8 million in 1993. The 1994 results included income for
Ambassador and TriCon from the acquisition dates. Net income for the 1994 period
rose to $74.3 million from $37.3 million in 1993, an increase of 99%. Income
from continuing operations and net income in 1993 included a $4.9 million
adjustment for tax rate increases applicable to deferred income taxes generated
by the Company's leveraged lease portfolio. Net income in 1993 included a $0.5
million loss from the Company's discontinued mortgage insurance subsidiary sold
in July 1993.
INTEREST MARGINS EARNED. Interest margins earned increased to $244.4
million in 1994 from $124.8 million in 1993, an increase of 96%. This increase
was driven by portfolio growth, together with the addition of TriCon and
Ambassador in 1994. The primary source of the portfolio growth was new business,
which totaled $1.8 billion for 1994 compared to $1.0 billion for 1993 (an
increase of 80%).
Interest margins earned, measured as a percent of average earning assets,
were 6.0%. This measurement compares to 5.4% for the 1993 period and reflects
the contributions of the acquisitions made in 1994, the continuing healthy
returns of the charter financial operati