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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-11011
THE FINOVA GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0695381
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1850 NORTH CENTRAL AVE., P.O. BOX 2209 PHOENIX, AZ 85002-2209
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 602-207-4900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment of this Form 10-K. [ ]
As of February 26, 1999, approximately 56,045,000 shares of Common Stock
($0.01 par value) were outstanding, and the aggregate market value of the Common
Stock (based on its closing price per share on such date of $50 13/16) held by
nonaffiliates was approximately $2,794,608,000.
DOCUMENTS INCORPORATED BY REFERENCE
PART WHERE
DOCUMENT INCORPORATED
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1. Proxy Statement relating to 1999 Annual Meeting of
Shareowners of The FINOVA Group Inc. (but excluding
information contained therein furnished pursuant to items
402(k) and (l) of SEC Regulation S-K). III
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TABLE OF CONTENTS
ITEM # NAME OF ITEM PAGE
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Part I
Item 1 Business:
Introduction.............................................. 1
General................................................... 1
Business Groups........................................ 1
Portfolio Composition.................................. 3
Investment in Financing Transactions................... 3
Cost and Use of Borrowed Funds......................... 11
Matched Funding Policy................................. 12
Credit Ratings......................................... 13
Residual Realization Experience........................ 13
Business Development and Competition................... 14
Credit Quality......................................... 15
Risk Management........................................ 15
Portfolio Management................................... 16
Delinquencies and Workouts............................. 16
Governmental Regulation................................ 16
Employees................................................. 17
Special Note Regarding Forward-Looking Statements......... 17
Item 2 Properties.................................................. 18
Item 3 Legal Proceedings........................................... 18
Item 4 Submission of Matters to a Vote of Security Holders......... 18
Optional Executive Officers of Registrant............................ 19
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Shareowner Matters......................... 20
Item 6 Selected Financial Data..................................... 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
Item 8 Financial Statements & Supplementary Data................... 22
Item 9 Changes in and Disagreements with Accountants on Accounting
& Financial Disclosure...................................... 22
Part III
Item 10 Directors & Executive Officers of the Registrant............ 22
Item 11 Executive Compensation...................................... 22
Item 12 Security Ownership of Certain Beneficial Owners &
Management.................................................. 23
Item 13 Certain Relationships & Related Transactions................ 23
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 23
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively
"FINOVA" or the "Company"), including FINOVA Capital Corporation and its
subsidiaries ("FINOVA Capital").
GENERAL
The FINOVA Group Inc. is a financial services holding company. Through its
principal subsidiary, FINOVA Capital, the Company provides a broad range of
financing and capital market products. FINOVA concentrates on lending to
mid-size businesses. FINOVA Capital has been in operation since 1954.
FINOVA extends revolving credit facilities, term loans and equipment and
real estate financing primarily to "middle-market" businesses with financing
needs falling generally between $500,000 and $35 million.
FINOVA operates in 18 specific industry or market niches under three market
groups. FINOVA selected these niches because its expertise in evaluating the
creditworthiness of prospective customers and its ability to provide value-added
services enables the Company to differentiate itself from its competitors. That
expertise and ability also enable FINOVA to command pricing that provides a
satisfactory spread over its borrowing costs.
FINOVA seeks to maintain a high quality portfolio and to minimize
non-earning assets and write-offs. FINOVA uses clearly defined underwriting
criteria and stringent portfolio management techniques. The Company diversifies
its lending activities geographically and among a range of industries, customers
and loan products.
Due to the diversity of FINOVA's portfolio, the Company believes it is
better able to manage competitive changes in its markets and to withstand the
impact of deteriorating economic conditions on a regional or national basis.
There can be no assurance, however, that competitive changes, borrowers'
performance, economic conditions or other factors will not result in an adverse
impact on FINOVA's results of operations or financial condition.
FINOVA generates interest, leasing, fees and other income through charges
assessed on outstanding loans, loan servicing, leasing, brokerage and other
activities. FINOVA's primary expenses are the costs of funding the loan and
lease business, including interest paid on debt, provisions for credit losses,
marketing expenses, salaries and employee benefits, servicing and other
operating expenses and income taxes.
FINOVA's principal executive offices are located at 1850 North Central
Avenue, P.O. Box 2209, Phoenix, Arizona 85002-2209, telephone (602) 207-4900.
FINOVA also has business development offices throughout the U.S. and in London,
U.K. and Toronto, Canada.
BUSINESS GROUPS
FINOVA operates the following principal lines of business under three
market groups:
Commercial Finance
- Business Credit offers collateral-oriented revolving credit facilities
and term loans for manufacturers, distributors, wholesalers and service
companies. Typical transaction sizes range from $500,000 to $3 million.
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- Commercial Services (formerly Factoring Services) offers full service
factoring and accounts receivable management services for entrepreneurial
and larger firms, primarily in the textile and apparel industries. The
annual factored volume of these companies is generally between $5 million
and $25 million. This line provides accounts receivable financing and
loans secured by equipment and real estate.
- Corporate Finance provides a full range of cash flow-oriented and
asset-based term and revolving loan products for manufacturers,
wholesalers, distributors, specialty retailers and commercial and
consumer service businesses. Typical transaction sizes range from $2
million to $35 million.
- Distribution & Channel Finance (formerly Inventory Finance) provides
inbound and outbound inventory financing, combined inventory/accounts
receivable lines of credit and purchase order financing for equipment
distributors, value-added resellers and dealers nationwide. Transaction
sizes generally range from $500,000 to $30 million.
- Growth Finance provides collateral based working capital financing
primarily secured by accounts receivable. Typical transaction sizes range
from $100,000 to $1 million and are made to small and midsize businesses
with annual sales under $10 million.
- Rediscount Finance offers revolving credit facilities to the independent
consumer finance industry including sales, automobile, mortgage and
premium finance companies. Typical transaction sizes range from $1
million to $35 million.
Specialty Finance
- Commercial Equipment Finance offers equipment leases, loans and "turnkey"
financing to a broad range of midsize companies. Specialty markets
include the corporate aircraft and emerging growth technology industries,
primarily biotechnology and electronics. Typical transaction sizes range
from $500,000 to $15 million.
- Communications Finance specializes in term financing to advertising and
subscriber-supported businesses, including radio and television stations,
cable operators, outdoor advertising firms and publishers. Typical
transaction sizes range from $1 million to $40 million.
- Franchise Finance offers equipment, real estate and acquisition financing
for operators of established franchise concepts. Transaction sizes
generally range from $500,000 to $15 million.
- Healthcare Finance offers a full range of working capital, equipment and
real estate financing products for the U.S. healthcare industry.
Transaction sizes typically range from $500,000 to $25 million.
- Portfolio Services provides customized receivable servicing and
collections for timeshare developers and other generators of consumer
receivables.
- Public Finance provides tax-exempt term financing to state and local
governments, non-profit corporations and entities using industrial
revenue or development bonds. Typical transaction sizes range from
$100,000 to $5 million.
- Resort Finance focuses on construction, acquisition and receivables
financing of timeshare resorts worldwide as well as term financing for
established golf resort hotels and receivables funding for developers of
second home communities. Typical transaction sizes range from $5 million
to $35 million.
- Specialty Real Estate Finance provides term financing for hotel, anchored
retail office and owner-occupied properties. Typical transaction sizes
range from $5 million to $30 million.
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- Transportation Finance structures equipment loans, leases, acquisition
financing and leveraged lease equity investments for commercial and cargo
airlines worldwide, railroads and operators of other transportation
related equipment. Typical transaction sizes range from $5 million to $30
million. Through FINOVA Aircraft Investors, LLC, FINOVA also seeks to use
its market expertise and industry presence to purchase, upgrade and
resell used commercial aircraft.
Capital Markets
- Realty Capital specializes in providing capital markets-funded commercial
real estate financing products and commercial mortgage banking services.
Typical transaction sizes range from $1 million to $5 million.
- Investment Alliance provides equity and debt financing for midsize
businesses in partnership with institutional investors and selected fund
sponsors. Typical transaction sizes range from $2 million to $15 million.
- Loan Administration provides in-house servicing for FINOVA's commercial
loan products as well as servicing and sub-servicing of other mortgage
and consumer loans, including residential real estate, mobile homes,
automobiles and other consumer products.
FINOVA is a Delaware corporation. The Company was incorporated in 1991 to
serve as the successor to The Dial Corp's financial services businesses. In
March 1992, Dial transferred those businesses to FINOVA in a spin-off. Since
that time, FINOVA has increased its total assets from $2.6 billion at December
31, 1992 to $10.5 billion at December 31, 1998. Income from continuing
operations increased from $36.8 million in 1992 to $169.7 million in 1998.
Management believes FINOVA ranks among the largest independent commercial
finance companies in the U.S., based on total assets. FINOVA's common stock is
traded on the New York Stock Exchange under the symbol "FNV."
PORTFOLIO COMPOSITION
The total assets under management consist of FINOVA's net investment in
financing transactions plus certain assets that are owned by others but managed
by the Company and are not reported on the Company's balance sheet (securitized
assets and participations sold). The Company's investment in financing
transactions is primarily settled in U.S. dollars.
INVESTMENT IN FINANCING TRANSACTIONS
The following tables detail FINOVA's investment in financing transactions
(before reserve for credit losses) at December 31, 1998, 1997, 1996, 1995 and
1994.
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INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------------------------------------------------------------------
1998 % 1997 % 1996 % 1995 %
----------- ----- ---------- ----- ---------- ----- ---------- -----
Loans and other financing
contracts:
Commercial.................. $ 5,668,375 56.6 $4,299,909 51.2 $3,592,193 49.2 $3,389,363 53.4
Real estate................. 1,648,935 16.5 1,656,075 19.7 1,713,485 23.5 1,534,177 24.1
Leveraged leases.............. 780,836 7.8 619,557 7.4 514,573 7.1 366,196 5.8
Operating leases.............. 648,185 6.5 712,927 8.5 517,690 7.1 460,798 7.3
Fee-based receivables......... 626,499 6.2 750,399 8.9 564,430 7.7 189,486 3.0
Direct financing leases....... 396,759 4.0 360,589 4.3 396,388 5.4 408,059 6.4
Financing contracts held for
sale........................ 241,947 2.4
----------- ----- ---------- ----- ---------- ----- ---------- -----
Investment in financing
transactions.............. 10,011,536 100.0 8,399,456 100.0 7,298,759 100.0 6,348,079 100.0
===== ===== ===== =====
Securitized assets............ 436,064 336,607 300,000 200,000
Participations sold........... 101,532 121,360 64,546
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Total managed assets(1)....... $10,549,132 $8,857,423 $7,663,305 $6,548,079
=========== ========== ========== ==========
DECEMBER 31,
------------------
1994 %
---------- -----
Loans and other financing
contracts:
Commercial.................. $2,732,734 51.1
Real estate................. 1,237,488 23.2
Leveraged leases.............. 287,518 5.4
Operating leases.............. 412,782 7.7
Fee-based receivables......... 157,862 3.0
Direct financing leases....... 514,595 9.6
Financing contracts held for
sale........................
---------- -----
Investment in financing
transactions.............. 5,342,979 100.0
=====
Securitized assets............
Participations sold...........
----------
Total managed assets(1)....... $5,342,979
==========
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NOTES:
(1) Excludes managed assets serviced under the mini-CMBS structure due to the
expected short-term nature of the servicing rights. For further discussion
see Annex A, Note C.
4
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED LEASE & CARRYING
RATE(1) IMPAIRED ASSETS(2) IMPAIRED ASSETS OTHER AMOUNT %
---------- -------- ----------- -------- ----------- ------- ----------- -----
Transportation
Finance(3).............. $2,140,541 $ 61,895 $ $ $ $ $ 2,202,436 22.0
Resort Finance............ 1,209,062 16,415 24,800 1,250,277 12.5
Corporate Finance......... 729,461 16,183 41,007 1,115 787,766 7.9
Rediscount Finance........ 766,250 999 3,762 771,011 7.7
Commercial Equipment
Finance................. 712,854 1,526 4,858 10,884 17,855 4,135 752,112 7.5
Communications Finance.... 694,863 7,169 24,264 726,296 7.3
Specialty Real Estate
Finance................. 635,952 16,966 34,230 9,799 7,620 194 704,761 7.0
Healthcare Finance........ 597,201 7,018 5,902 1,102 611,223 6.1
Franchise Finance......... 597,916 1,619 1,741 1,763 2,120 274 605,433 6.0
Distribution & Channel
Finance................. 561,734 6,029 567,763 5.7
Business Credit........... 292,696 7,416 300,112 3.0
Realty Capital............ 265,125 265,125 2.6
Public Finance............ 183,099 183,099 1.8
Commercial Services....... 160,012 648 8,912 936 170,508 1.7
Other(5).................. 30,072 25,344 55,416 0.6
Growth Finance............ 45,901 45,901 0.5
Investment Alliance....... 12,297 12,297 0.1
---------- -------- ------- -------- ------- ------- ----------- -----
TOTAL(4).................. $9,635,036 $106,006 $65,261 $119,738 $54,446 $31,049 $10,011,536 100.0
========== ======== ======= ======== ======= ======= =========== =====
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NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.7 million on repossessed assets during
1998, including $2.4 million in Specialty Real Estate Finance, $1.0 million
in Resort Finance, $0.9 million in Healthcare Finance, $0.2 million in
Rediscount Finance and $0.2 million in Commercial Equipment Finance.
(3) Transportation Finance includes $419.7 million of aircraft financing
business booked through the London office.
(4) Excludes $537.6 million of assets securitized and participations sold which
the Company manages, including securitizations of $300.0 million in
Corporate Finance and $136.1 million in Franchise Finance and participations
of $49.3 million in Corporate Finance, $21.4 million in Communications
Finance, $5.4 million in Resort Finance, $6.9 million in Rediscount Finance,
$3.8 million in Business Credit, $12.6 million in Transportation Finance and
$2.1 million in Distribution & Channel Finance.
(5) Primarily includes other assets retained from disposed or discontinued
operations.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED LEASE & CARRYING
RATE(1) IMPAIRED ASSETS(2) IMPAIRED ASSETS OTHER AMOUNT %
---------- -------- ----------- -------- ----------- ------- ---------- -----
Transportation
Finance(3)............. $1,631,685 $ $ $ $ $ $1,631,685 19.4
Resort Finance........... 1,166,199 14,450 3,974 26,240 1,210,863 14.4
Corporate Finance........ 791,733 981 26,888 819,602 9.8
Specialty Real Estate
Finance................ 610,711 24,120 38,055 7,648 10,853 196 691,583 8.2
Communications Finance... 628,947 8,724 24,452 662,123 7.9
Commercial Equipment
Finance................ 614,712 1,816 11,802 4,030 632,360 7.5
Rediscount Finance....... 609,641 993 610,634 7.3
Distribution & Channel
Finance................ 544,108 4,333 548,441 6.5
Healthcare Finance....... 525,846 1,515 666 528,027 6.3
Franchise Finance........ 430,651 808 2,171 305 433,935 5.2
Commercial Services...... 196,843 30,205 227,048 2.7
Business Credit.......... 195,897 7,559 203,456 2.4
Public Finance........... 135,826 135,826 1.6
Other(5)................. 40,347 23,526 63,873 0.8
---------- ------- ------- -------- ------- ------- ---------- -----
TOTAL(4)................. $8,123,146 $36,449 $52,505 $121,540 $37,093 $28,723 $8,399,456 100.0
========== ======= ======= ======== ======= ======= ========== =====
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NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.1 million on repossessed assets during
1998, including $3.1 million in Specialty Real Estate Finance and $1.0
million in Resort Finance.
(3) Transportation Finance includes $302.9 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and $36.6 million in Franchise Finance and participations of $40.2 million
in Corporate Finance, $61.0 million in Communications Finance, $8.5 million
in Transportation Finance, $4.6 million in Rediscount Finance, $5.1 million
in Resort Finance and $1.9 million in Distribution & Channel Finance.
(5) Primarily includes other assets retained from disposed or discontinued
operations.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED LEASE & CARRYING
RATE(1) IMPAIRED ASSETS(2) IMPAIRED ASSETS OTHER AMOUNT %
---------- -------- ----------- -------- ----------- ------- ---------- -----
Transportation
Finance(3).......... $1,330,578 $ $ $ $ $ $1,330,578 18.2
Resort Finance........ 1,124,462 2,963 13,878 77 25,136 1,166,516 16.0
Corporate Finance..... 630,399 3,211 14,695 335 648,640 8.9
Specialty Real Estate
Finance............. 700,932 30,245 46,068 6,748 9,853 940 794,786 10.9
Communications
Finance............. 535,701 8,796 14,129 3,095 561,721 7.7
Commercial Equipment
Finance............. 570,574 7,900 6,564 585,038 8.0
Rediscount Finance.... 421,232 245 421,477 5.8
Distribution & Channel
Finance............. 314,446 1,273 315,719 4.3
Healthcare Finance.... 497,540 1,304 1,194 500,038 6.9
Franchise Finance..... 366,202 1,104 1,985 996 370,287 5.0
Commercial Services... 220,701 3,419 224,120 3.1
Business Credit....... 160,006 11,963 171,969 2.3
Public Finance........ 150,361 13 150,374 2.1
Other................. 52,998 4,498 57,496 0.8
---------- ------- ------- ------- ------- ------- ---------- -----
Total Continuing
Operations(4)....... $7,076,132 $46,319 $59,946 $63,751 $38,419 $14,192 $7,298,759 100.0
========== ======= ======= ======= ======= ======= ========== =====
Discontinued
Operations(5)....... 39,143
-------
TOTAL................. $53,335
=======
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NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $5.1 million on repossessed assets during
1996, including $4.4 million in Specialty Real Estate Finance and $0.7
million in Resort Finance.
(3) Transportation Finance includes $160.8 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and participations of $24.6 million in Corporate Finance, $27.5 million in
Communications Finance, $4.8 million in Rediscount Finance, $4.4 million in
Resort Finance and $3.2 million in Distribution & Channel Finance.
(5) Reflects assets retained by FINOVA subsequent to the sale of the
Manufacturer and Dealer Services' line of business.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED 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
Distribution & Channel
Finance................. 202,879 430 203,309 3.2
Healthcare Finance........ 451,503 81 1,231 452,815 7.2
Franchise Finance......... 327,356 1,462 6,408 1,850 337,076 5.3
Commercial Services....... 188,892 594 189,486 3.0
Business Credit........... 200,365 12,685 213,050 3.4
Public Finance............ 121,956 47 122,003 1.9
Other..................... 78,645 1,275 2,360 6,061 88,341 1.5
---------- ------- ------- ------- ------- ------- ---------- -----
Total Continuing
Operations(4)........... $6,131,107 $17,260 $56,585 $76,883 $49,988 $16,256 $6,348,079 100.0
========== ======= ======= ======= ======= ======= ========== =====
- ---------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.2 million on repossessed assets during
1995, including $3.2 million in Specialty Real Estate Finance, $0.6 million
in Resort Finance and $0.4 million in Communications Finance.
(3) Transportation Finance includes $144 million of aircraft financing business
booked through the London office.
(4) Excludes $200 million of securitized assets which are managed by the
Company.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
REVENUE ACCRUING NONACCRUING
------------------------------------ ----------------------------------- TOTAL
ORIGINAL REWRITTEN REPOSSESSED DELINQUENT REPOSSESSED LEASES & CARRYING
RATE CONTRACTS ASSETS(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
Distribution & Channel
Finance................ 58,595 642 59,237 1.1
Healthcare Finance....... 467,131 1,719 468,850 8.8
Franchise Finance........ 281,890 7,632 12,242 301,764 5.6
Commercial Services...... 157,090 772 157,862 3.0
Business Credit.......... 181,741 12,003 193,744 3.6
Public Finance........... 93,491 144 93,635 1.8
FINOVA Capital
Limited(3)............. 93,700 1,561 4,265 2 4,800 104,328 2.0
Other.................... 36,951 8,918 297 46,166 0.9
---------- ------- ------- ------- ------- ------- ---------- -----
Total Continuing
Operations............. $5,074,939 $63,888 $55,106 $73,519 $60,451 $15,076 $5,342,979 100.0
========== ======= ======= ======= ======= ======= ========== =====
- ---------------
NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets during
1994, including $2.0 million in Specialty Real Estate Finance, $0.8 million
in Communications Finance and $0.5 million in Resort Finance.
(2) Transportation Finance includes $66.9 million of aircraft finance business
booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also, includes $39.2 million of
Consumer Finance assets, of which $4.8 million were nonaccruing. Consumer
Finance accounts were generally considered nonaccruing after being 180 days
delinquent.
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The Company's geographic portfolio diversification at December 31, 1998 was
as follows:
STATE TOTAL PERCENT
- ----- ---------------------- -------
(DOLLARS IN THOUSANDS)
California.................................... $ 1,541,692 14.6%
Florida....................................... 1,065,801 10.1
Texas......................................... 827,422 7.9
New York...................................... 726,834 6.9
Illinois...................................... 467,083 4.4
Arizona....................................... 442,734 4.2
Georgia....................................... 370,541 3.5
New Jersey.................................... 330,958 3.1
Virginia...................................... 285,969 2.7
Nevada........................................ 283,520 2.7
Pennsylvania.................................. 274,323 2.6
Missouri...................................... 233,053 2.2
Other(1)...................................... 3,699,202 35.1
----------- -----
$10,549,132 100.0%
=========== =====
- ---------------
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:
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance, beginning of
year.................. $177,088 $148,693 $129,077 $110,903 $ 64,280
Provision for credit
losses................ 82,200 69,200 41,751 37,568 10,439
Write-offs.............. (59,037) (45,487) (32,017) (25,631) (28,109)
Recoveries.............. 2,279 2,287 3,296 2,104 1,780
Acquisitions and
other................. 5,088 2,395 6,586 4,133 62,513
-------- -------- -------- -------- --------
Balance, end of year.... $207,618 $177,088 $148,693 $129,077 $110,903
======== ======== ======== ======== ========
Included above is a specific impairment reserve of $37.1 million at
December 31, 1998, which applies to $98.7 million of the $225.7 million of
impaired loans. The remaining $170.5 million of the reserve for credit losses is
designated for general purposes and represents management's best estimate of
potential losses in the portfolio considering delinquencies, loss experience and
collateral. At December 31, 1997, the specific impairment reserve was $20.2
million, which applied to $52.3 million of the $158.0 million of impaired loans.
Additions to general and specific reserves are reflected in current operations.
Management may transfer reserves between the general and specific reserves as
appropriate.
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13
Write-offs and recoveries by line of business, during the years ended
December 31, were as follows:
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
WRITE-OFFS
Commercial Services.................. $36,286 $24,382 $ 5,098 $ 3,728 $ 1,148
Corporate Finance.................... 6,728 6,577 9,470 4,660 4,233
Commercial Equipment Finance......... 3,845 3,722 3,207 2,271 1,257
Franchise Finance.................... 3,035 696 3,267 3,448 2,247
Distribution & Channel Finance....... 2,609 1,777 201 442
Specialty Real Estate Finance........ 1,785 2,106 1,793 2,275 1,461
Rediscount Finance................... 1,500
Healthcare Finance................... 1,502 1,798 1,018 314 377
Business Credit...................... 1,253 452 774
Communications Finance............... 494 750 2,994 4,037 8,300
Resort Finance....................... 2,700 4,275 2,000 2,730
Other(1)............................. 979 895 2,245 5,140
------- ------- ------- ------- -------
Total write-offs..................... 59,037 45,487 32,017 25,631 28,109
------- ------- ------- ------- -------
RECOVERIES
Commercial Services.................. 623 1,127 1,488 482 376
Corporate Finance.................... 48 99 10 247 86
Commercial Equipment Finance......... 200 514 829 116 428
Franchise Finance.................... 255 263 422 115 66
Distribution & Channel Finance....... 33 20
Specialty Real Estate Finance........ 177 80
Healthcare Finance................... 542 94 8 52 63
Business Credit...................... 434
Communications Finance............... 250
Resort Finance....................... 26 22 10
Other(1)............................. 177 190 303 720 751
------- ------- ------- ------- -------
Total recoveries..................... 2,279 2,287 3,296 2,104 1,780
------- ------- ------- ------- -------
Total net write-offs................. $56,758 $43,200 $28,721 $23,527 $26,329
======= ======= ======= ======= =======
Net write-offs as a percentage of
average managed assets(2).......... 0.60% 0.54% 0.41% 0.40% 0.62%
======= ======= ======= ======= =======
- ---------------
NOTES:
(1) Includes FINOVA Capital Ltd. (UK).
(2) Excludes average participations sold in which FINOVA has transferred credit
risk.
------------------------
A further breakdown of the portfolio by line of business can be found in
Annex A, Notes C and D.
COST AND USE OF BORROWED FUNDS
FINOVA Capital relies on borrowed funds as well as internal cash flow to
finance its operations. It also has raised funds through the sale or
securitization of assets, but does not rely on those methods as a primary source
of capital.
11
14
The following table reflects the approximate average pre-tax effective cost
of borrowed funds and pre-tax equivalent rate earned on accruing assets for
FINOVA Capital for each of the periods listed:
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Short-term and variable rate long-term
debt(1)..................................... 6.1% 6.4% 6.5% 7.2% 5.5%
Fixed-rate long-term debt(1).................. 7.0% 7.1% 7.2% 7.3% 8.1%
Aggregate borrowed funds(1)................... 6.4% 6.6% 6.8% 7.2% 6.3%
Rate earned on average earning assets(2)(3)... 12.1% 11.9% 11.6% 11.9% 11.3%
Operating margin percentage(4)................ 6.4% 6.2% 5.8% 5.7% 5.9%
- ---------------
NOTES:
(1) Includes the effects of interest rate swap and hedge agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation.
(4) Represents operating margin as a percentage of average earning assets.
------------------------
The effective costs presented above include costs of commitment fees and
related borrowing costs. They do not necessarily predict future costs of funds.
For further information on FINOVA Capital's cost of funds, refer to Annex A,
Notes E and F.
Following are the ratios of income to combined fixed charges and preferred
stock dividends ("ratio") for each of the past five years:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
1.56.. 1.52 1.50 1.44 1.58
==== ==== ==== ==== ====
Variations in interest rates generally do not have a substantial impact on
the ratio because fixed-rate and floating-rate assets are generally matched with
liabilities of similar rate and term.
Income for combined fixed charges, for purposes of the computation of the
above ratio, consists of income from continuing operations before income taxes
and fixed charges. Combined fixed charges include interest and related debt
expense, a portion of rental expense representative of interest, and preferred
stock dividends grossed up to a pre-tax basis.
MATCHED FUNDING POLICY
FINOVA Capital follows a "matched funding" policy. Under that policy, it
funds its floating-rate assets (loans and leases to FINOVA's borrowers) with
floating-rate liabilities (FINOVA's debt) and fixed-rate assets with fixed-rate
liabilities, to the extent feasible. This policy helps protect FINOVA from
changes in interest rates. For further discussion on FINOVA Capital's debt and
matched funding policy, see Annex A, Notes E and F.
12
15
CREDIT RATINGS
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
COMMERCIAL SENIOR
PAPER DEBT
---------- ------
Duff & Phelps Credit Rating Co. ........................ D1 A
Fitch Investors Services, Inc. ......................... F1 A
Moody's Investors Service, Inc. ........................ P2 Baa1
Standard & Poor's Ratings Group......................... A2 A-
In addition, FINOVA Finance Trust, a subsidiary trust of the Company,
issued mandatory redeemable convertible preferred securities ("TOPrS") in
December 1996 having investment-grade ratings as follows:
Duff & Phelps Credit Rating Co. ............................ BBB+
Fitch Investors Services, Inc. ............................. A-
Moody's Investors Services, Inc. ........................... Baa2
Standard & Poor's Ratings Group............................. BBB
For further information relating to the TOPrS, refer to Annex A, Note G.
Standard & Poor's Ratings Group changed on February 26, 1999 its rating of
the TOPrS from BBB+ to BBB. The rating change was not a downgrade, but resulted
from the new rating scale under which Standard & Poor's Ratings Group rates
preferred stock two notches below the corporate or counter party credit rating
of an investment-grade issuer such as FINOVA.
There can be no assurance that these ratings will be maintained. The
ratings can be modified at any time. A credit rating is not a recommendation to
buy, sell or hold securities. Each rating should be evaluated independently of
any other rating. None of FINOVA Capital's subsidiaries have applied for credit
ratings.
RESIDUAL REALIZATION EXPERIENCE
Each year since its inception, FINOVA Capital and its predecessors have
earned total proceeds from the sale of assets upon lease termination (other than
foreclosures) in excess of carrying amounts. There can be no assurance, however,
that those results can be achieved in future years. Actual proceeds will depend
on current market values for those assets at the time of sale. While market
values are generally beyond the control of FINOVA, the Company has some
discretion in the timing of sales of the assets. Sales proceeds on lease
terminations in excess of carrying amounts are reported as gains on disposal of
assets when the assets are sold.
Income from leasing transactions is affected by gains from asset sales on
lease termination and, hence, can be somewhat less predictable than income from
non-leasing activities. During the five years ended December 31, 1998, the
proceeds to FINOVA Capital from sales of assets on early
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16
termination of leases and at the expiration of leases have exceeded the carrying
amounts and estimated residual values as follows:
EARLY TERMINATIONS (1) TERMINATIONS AT END OF LEASE TERM
---------------------------------- ----------------------------------
PROCEEDS
PROCEEDS ESTIMATED AS A % OF
CARRYING AS A % OF RESIDUAL ESTIMATED
SALES AMOUNT CARRYING SALES VALUE OF RESIDUAL
YEAR PROCEEDS OF ASSETS AMOUNT PROCEEDS ASSETS VALUE
- ---- -------- --------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
1998................. $ 82,671 $67,650 122% $40,571 $35,647 114%
1997................. 114,680 96,656 119% 63,733 58,127 110%
1996................. 87,311 75,910 115% 15,634 13,872 113%
1995................. 1,402 905 155% 44,395 37,053 120%
1994................. 6,477 5,865 110% 15,287 14,164 108%
- ---------------
NOTE:
(1) Excludes foreclosures for credit reasons, which are immaterial.
The estimated residual value of direct finance and leveraged lease assets
in the accounts of FINOVA Capital at December 31, 1998 was 37.3% of the original
cost of those assets (30.1% excluding the original costs of the assets and
residuals applicable to real estate leveraged leases, which typically have
higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1998 for financing contracts excluding leveraged
leases were 7.5 and 5.4 years, respectively, and for leveraged leases were
approximately 18.9 and 11.4 years, respectively. The comparable average initial
term and remaining term at December 31, 1997 for financing contracts excluding
leveraged leases were 7.6 and 5.1 years, respectively, and for leveraged leases
were approximately 17.5 and 11.9 years, respectively. FINOVA Capital uses either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from those appraised
values.
For a discussion of accounting for lease transactions, refer to Annex A,
Notes A and C.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA Capital develops business primarily through direct solicitation by
its own sales force. Customers are also introduced by independent brokers and
referred by other financial institutions and other sources.
FINOVA Capital is engaged in an extremely competitive activity. It competes
with banks, insurance companies, leasing companies, the credit units of
equipment manufacturers and other finance companies. Some of these competitors
have substantially greater financial resources and are able to borrow at costs
below those of FINOVA Capital. FINOVA Capital's principal means of competition
is through a combination of service, structure and innovation in transactions,
the interest rate charged for money and concentration in focused market niches.
The interest rate FINOVA Capital charges for money is a function of its
borrowing costs, its operating costs and other factors. While many of FINOVA
Capital's larger competitors are able to offer lower interest rates based upon
their lower borrowing costs, FINOVA Capital seeks to maintain the
competitiveness of the interest rates it offers by emphasizing strict control of
its operating costs. FINOVA's ability to manage costs is, in part, dependent on
factors beyond the Company's control, such as the cost of funds, outside
litigation expenses and competitive salaries.
14
17
CREDIT QUALITY
FINOVA Capital has maintained a high-quality asset base through the use of
clearly defined underwriting standards, portfolio management techniques,
monitoring of covenant compliance and active collections and workout efforts.
RISK MANAGEMENT
FINOVA Capital generally investigates its prospective customers through a
review of historical financial statements, published credit reports, credit
references, discussions with management, analysis of location feasibility,
personal visits and collateral appraisals and inspections. In many cases,
depending upon the results of its credit investigations and the nature of the
financing being provided, FINOVA Capital obtains additional collateral or
guarantees from others. As part of its underwriting process, FINOVA Capital
considers the management, industry, financial position and collateral being
provided by a proposed borrower or lessee. The purpose, term, amortization and
amount of any proposed transaction generally must be clearly defined and within
established corporate guidelines. In addition, FINOVA attempts to avoid undue
concentrations in any one customer, industry or geographic region.
- Management. FINOVA Capital considers the reputation, experience and
depth of management; quality of product or service; adaptability to
changing markets and demand; and prior banking, finance and trade
relationships.
- Industry. FINOVA Capital evaluates critical aspects of each industry to
which it lends, including general trend, seasonality and cyclicality;
governmental regulation; the effects of taxes; the economic value of
goods or services provided; and potential environmental or other
liabilities.
- Financial. FINOVA Capital's review of a prospective borrower normally
includes a thorough analysis of the borrower's financial performance.
Items considered include net worth; composition of assets and
liabilities; debt service coverage; liquidity; sales growth and earning
power; and cash flow generation and reliability.
- Collateral. FINOVA Capital regards collateral as an important factor in
a credit evaluation and, for collateral dependent transactions, has
established maximum loan to value ratios, normally ranging from 60%-90%,
for each of its lines of business.
The underwriting process includes, in addition to the analysis of the
factors noted above, the design and implementation of transaction structures and
strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors portfolio concentrations in the areas of total
exposure to a single borrower and related entities, within a given geographical
area and with respect to an industry and/or product type within an industry.
FINOVA Capital has established concentration guidelines for each line of
business. Geographic concentrations are reviewed periodically and evaluated
based on historic loan experience and prevailing market and economic conditions.
FINOVA Capital's financing contracts and leases generally require the
customer to pay taxes, license fees and insurance premiums and to perform
maintenance and repairs at the customer's expense. Contract payment rates are
based on several factors, including the cost of borrowed funds, term of
contract, 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
15
18
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
In addition to the review at the time of original underwriting, FINOVA
Capital attempts to preserve and enhance the earnings quality of its portfolio
through proactive management of its financing relationships with its clients.
This process includes the periodic appraisal or verification of the collateral
to determine loan exposure and residual values; sales of residuals and warrants
to generate supplemental income; and review and management of covenant
compliance. The Portfolio Management department or dedicated personnel within
the business units regularly review financial statements to assess customer cash
flow performance and trends; periodically confirm operations of the customer;
conduct periodic reappraisals of the underlying collateral; seek to identify
issues concerning the vulnerabilities of the customer; seek to resolve
outstanding issues with the borrower; periodically review and address covenant
compliance issues; and prepare periodic summaries of the aggregate portfolio
quality and concentrations for management review.
Evaluation for loan impairment is performed as a part of the portfolio
management review process. When a loan is determined to be impaired, a
write-down is taken or an impairment reserve is established based on the
difference between the recorded balance of the loan ("carrying amount") and the
fair value of the asset.
DELINQUENCIES AND WORKOUTS
FINOVA Capital monitors the timing of payments on its accounts. For term
loans and leases, when an invoice is 10 days past due, the customer is generally
contacted, and a determination is made as to the extent of the problem, if any.
A commitment for immediate payment is pursued and the account is observed
closely. If satisfactory results are not obtained in communication with the
customer, the guarantor(s) are usually contacted to advise them of the situation
and the potential obligation under the guarantee agreement. If an invoice
becomes 31 days past due, it is reported as delinquent. A notice of default is
generally sent prior to an invoice becoming 45 days past due and, between 60 and
90 days past the due date, if satisfactory negotiations are not underway,
outside counsel generally is retained to help protect FINOVA Capital's rights
and to pursue its remedies.
When accounts become more than 90 days past due income recognition is
usually suspended, and FINOVA Capital vigorously pursues its legal remedies.
Foreclosed or repossessed assets are considered to be nonperforming, and are
reported as such unless the assets generate sufficient cash to result in a
reasonable rate of return. Those accounts are continually reviewed, and write-
downs are taken as deemed necessary. While pursuing collateral and obligors,
FINOVA Capital generally continues to negotiate the restructuring or other
settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for credit losses is adequate. For additional
information regarding the reserve for credit losses, see Annex A, Note D.
GOVERNMENTAL REGULATION
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions and mortgage
broker activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Administration , and
16
19
Communications Finance is regulated by the Federal Communication Commission.
FINOVA Capital's international activities are also subject to a variety of laws
and regulations of the countries in which the business is conducted.
EMPLOYEES
At December 31, 1998, the Company had 1,262 employees compared to 958 at
December 31, 1997. The increase primarily included employees from FINOVA Realty
Capital ("FRC"), which was not consolidated until 1998, and employees from
companies acquired in 1998. None of the employees were covered by collective
bargaining agreements. FINOVA believes its employee relations are satisfactory.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking," in that they do
not discuss historical fact but instead note future expectations, projections,
intentions or other items. These forward-looking statements include matters in
the sections of this report captioned "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Quantitative
and Qualitative Disclosures About Market Risk". They are also made in documents
incorporated in this report by reference, or in which this report may be
incorporated, such as a prospectus.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause FINOVA's actual results or
performance to differ materially from those contemplated by the forward-looking
statements. Many of those factors are noted in conjunction with the
forward-looking statements in the text. Other important factors that could cause
actual results to differ include:
- The results of FINOVA's efforts to implement its business strategy.
Failure to fully implement its business strategy might result in
decreased market penetration, adverse effects on results of operations
and other adverse results.
- The effect of economic conditions and the performance of FINOVA's
borrowers. Economic conditions in general or in particular market
segments could impact the ability of FINOVA's borrowers to operate or
expand their businesses, which might result in decreased performance for
repayment of their obligations or reduce demand for additional financing
needs. The rate of borrower defaults or bankruptcies may increase.
- Actions of FINOVA's competitors and FINOVA's ability to respond to those
actions. As noted in "Business Development and Competition," FINOVA seeks
to remain competitive without sacrificing prudent lending standards.
Doing business under those standards becomes more difficult, however,
when competitors offer financing with lower pricing or less stringent
criteria. FINOVA may not be successful in maintaining and continuing
asset growth at historic levels.
- The cost of FINOVA's capital. That cost depends on many factors, some of
which are beyond FINOVA's control, such as its portfolio quality,
ratings, prospects and outlook. Changes in the interest rate environment
may reduce or eliminate profit margins.
- Changes in government regulations, tax rates and similar matters. For
example, government regulations could significantly increase the cost of
doing business or could eliminate certain tax advantages of some of
FINOVA's financing products.
- Necessary technological changes (including those addressing "Year 2000"
data systems issues) may be more difficult, expensive or time consuming
than anticipated.
- Costs or difficulties related to integration of acquisitions.
- Other risks detailed in FINOVA's other SEC reports or filings.
17
20
FINOVA does not intend to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements. FINOVA cannot predict the risk from reliance on
forward-looking statements in light of the many factors that could affect their
accuracy.
ITEM 2. PROPERTIES.
FINOVA's principal executive offices are located in premises leased from FP
Arizona, Inc. in Phoenix, Arizona. FINOVA Capital operates various additional
offices in the United States, one in Canada and one in Europe. All these
properties are leased. Alternative office space could be obtained without
difficulties in the event leases are not renewed. FINOVA has entered into a
lease agreement for new executive offices which are presently under
construction. Those facilities are expected to be completed in the fourth
quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS.
FINOVA is a party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts.
Litigation often results from FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties. It is possible that some of the legal actions,
proceedings or claims could be decided against FINOVA. Although the ultimate
amount for which FINOVA may be held liable, if any, is not ascertainable, FINOVA
believes that any resulting liability would not materially affect its financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
18
21
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who serve
as executive officers of FINOVA, including those officers of FINOVA Capital who
are responsible for its principal business units.
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................. 41 Executive Vice President of FINOVA since 1998. Before
that he was Group Vice President -- Communications
Finance and Franchise Finance or similar positions of
FINOVA Capital for more than five years.
Derek C. Bruns.................... 39 Senior Vice President -- Internal Audit or similar
positions of FINOVA for more than five years.
William J. Hallinan............... 56 Senior Vice President -- General Counsel and Secretary
or similar positions of FINOVA and FINOVA Capital for
more than five years.
Bruno A. Marszowski............... 57 Senior Vice President -- Controller and Chief
Financial Officer of FINOVA and FINOVA Capital since
1994. Before that he was Vice President -- Controller
of FINOVA and FINOVA Capital for more than five years.
William C. Roche.................. 45 Senior Vice President -- Human Resources & Facilities
Planning of FINOVA and FINOVA Capital for more than
five years.
Meilee Smythe..................... 43 Senior Vice President -- Treasurer of FINOVA and
FINOVA Capital since 1998. Before that she was Vice
President -- Assistant Treasurer for FINOVA and FINOVA
Capital for more than five years.
John J. Bonano.................... 56 Executive Vice President or similar positions of
FINOVA Capital for more than five years.
Jack Fields, III.................. 44 Executive Vice President or similar positions of
FINOVA Capital for more than five years.
Robert M. Korte................... 43 Executive Vice President of FINOVA Capital since 1998.
Before that he was Senior Vice President -- Strategy
and Technology of FINOVA since 1994 and Vice
President-Human and Corporate Development of FINOVA
and FINOVA Capital since 1991.
Gregory C. Smalis................. 46 Executive Vice President -- Portfolio Management or
similar positions for more than five years and a
Director of FINOVA Capital since 1993.
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22
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY &
RELATED SHAREOWNER MATTERS.
The FINOVA Group Inc.'s common stock trades on the New York Stock Exchange.
The following tables summarize the high and low market prices as reported on the
New York Stock Exchange Composite Tape and the cash dividends declared from
January 1, 1997 through December 31, 1998. Amounts have been restated to give
effect to a stock split effective October 1, 1997.
SALES PRICE RANGE OF COMMON STOCK
---------------------------------
1998 1997
-------------- --------------
QUARTERS: HIGH LOW HIGH LOW
- --------- ----- ---- ----- ----
First................................................ $60 1/4 $45 1/2 $39 1/2 $31 7/8
Second............................................... 63 1/2 53 5/16 38 7/8 32 1/16
Third................................................ 65 1/8 41 1/16 48 1/4 37 7/8
Fourth............................................... 56 3/8 35 9/16 50 40 1/4
DIVIDENDS
DECLARED ON
COMMON STOCK
--------------
1998 1997
----- -----
February.................................................... $0.14 $0.12
May......................................................... 0.14 0.12
August...................................................... 0.16 0.14
November.................................................... 0.16 0.14
----- -----
$0.60 $0.52
===== =====
Quarterly dividends have been paid on the first business day of each
calendar quarter. FINOVA anticipates it will continue to pay regular quarterly
dividends on the first business day of January, April, July and October. In
February 1999, the Board of Directors declared a dividend of $0.16 per share,
payable April 1, 1999, for shareowners of record on February 26, 1999. The
declaration of dividends and their amounts are at the discretion of the Board of
Directors of FINOVA, and there can be no assurance that additional dividends
will be declared.
FINOVA Capital is restricted in its ability to pay dividends to The FINOVA
Group Inc. The agreements pertaining to long-term debt include various
restrictive covenants and require the maintenance of certain defined financial
ratios with which FINOVA and FINOVA Capital have complied. Under one of these
covenants, dividend payments from FINOVA Capital to FINOVA Group are limited to
50 percent of accumulated earnings after December 31, 1991.
As of February 26, 1999, there were approximately 22,200 holders of record
of The FINOVA Group Inc.'s common stock. The closing price of the common stock
on that date was $50 13/16.
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23
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA, which
have been derived from the audited Consolidated Financial Statements of FINOVA
for each of the years ended December 31, 1998, 1997, 1996, 1995 and 1994. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of FINOVA and the Notes included in Annex A,
as well as the remainder of this report. Prior years have been reclassified to
conform to 1998 presentation and restated to exclude operations which were
discontinued in 1996 and to reflect a two-for-one stock split in 1997; for
further detail, see Annex A, Note H.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATIONS:
Income earned from
financing
transactions............ $ 1,021,977 $ 897,996 $ 769,346 $ 680,912 $ 463,404
Interest margins earned... 472,536 408,914 340,517 287,880 216,667
Volume-based fees......... 77,723 46,728 28,588 21,204 10,796
Provision for credit
losses.................. 82,200 69,200 41,751 37,568 10,439
Gains on disposal of
assets.................. 55,024 30,261 12,949 10,889 3,877
Income from continuing
operations.............. 169,737 139,098 116,493 93,798 73,770
Net income................ 169,737 139,098 117,000 97,629 74,313
Basic earnings from
continuing operations
per share............... 3.03 2.56 2.14 1.72 1.48
Basic earnings per share.. 3.03 2.56 2.15 1.79 1.49
Basic adjusted weighted
average outstanding
shares.................. 55,946,000 54,405,000 54,508,000 54,633,000 49,765,000
Diluted earnings from
continuing operations
per share............... $ 2.86 $ 2.42 $ 2.08 $ 1.69 $ 1.46
Diluted earnings per
share................... 2.86 2.42 2.09 1.76 1.47
Diluted adjusted weighted
average shares.......... 60,705,000 59,161,000 56,051,000 55,469,000 50,436,000
Dividends declared per
common share............ $ 0.60 $ 0.52 $ 0.46 $ 0.42 $ 0.37
Dividend payout ratio..... 19.9% 20.5% 21.7% 24.6% 26.3%
FINANCIAL POSITION:
Investment in financing
transactions............ $10,011,536 $ 8,399,456 $ 7,298,759 $ 6,348,079 $ 5,342,979
Nonaccruing assets........ 205,233 187,356 155,505 143,127 149,046
Reserve for credit
losses.................. 207,618 177,088 148,693 129,077 110,903
Total assets.............. 10,450,314 8,719,840 7,526,734 7,036,514 5,821,343
Deferred income taxes..... 347,373 274,761 244,208 209,512 188,887
Total debt................ 8,394,578 6,764,581 5,850,223 5,649,368 4,573,354
Company-obligated
mandatory redeemable
convertible preferred
securities of subsidiary
trust solely holding
convertible debentures
of FINOVA ("TOPrS")..... 111,550 111,550 111,550
Shareowners' equity....... 1,177,345 1,090,454 929,591 825,184 770,252
21
24
DECEMBER 31,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
RATIOS:
Reserve for credit losses/managed assets(1)(2).............. 2.0% 2.0% 2.0% 2.0% 2.1%
Nonaccruing assets/managed assets(1)........................ 2.0% 2.1% 2.0% 2.2% 2.8%
Total debt to equity(3)..................................... 6.5x 5.6x 5.6x 6.8x 5.9x
Return on average common equity(4).......................... 14.9% 14.3% 13.3% 11.8% 11.1%
Return on average funds employed(4)(5)...................... 1.9% 1.8% 1.8% 1.7% 1.8%
Equity to assets(3)......................................... 12.3% 13.8% 13.8% 11.7% 13.2%
- ---------------
NOTES:
(1) Managed assets exclude participations.
(2) Managed assets exclude financing contracts held for sale.
(3) Equity in 1998, 1997 and 1996 includes the TOPrS noted above.
(4) Return represents income from continuing operations.
(5) Average funds employed excludes deferred taxes applicable to leveraged
leases.
------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See pages 3 -- 12 of Annex A.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See pages 12 -- 13 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements -- See Item 14 hereof and Annex A.
2. Supplementary Data -- See Condensed Quarterly Results included in
Supplemental Selected Financial Data of Notes to Consolidated Financial
Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL
DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning FINOVA's directors is incorporated by reference
from FINOVA's Proxy Statement issued in connection with its 1999 Annual Meeting
of Shareowners (the "Proxy Statement").
For information regarding FINOVA's executive officers, see the Optional
Item in Part I, following Item 4.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Proxy Statement.
22
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
ANNEX A
PAGE
-------
Financial Highlights............................... 1-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 3-12
Quantitative and Qualitative Disclosures about
Market Risk...................................... 12-13
Report of Management and Independent Auditors'
Report........................................... 14-15
Consolidated Balance Sheets........................ 16
Statements of Consolidated Income.................. 17
Statements of Consolidated Shareowners' Equity..... 18
Statements of Consolidated Cash Flows.............. 19
Notes to Consolidated Financial Statements......... 20-43
Supplemental Selected Financial Data............... 44-45
2. All Schedules have been omitted because they are not applicable or
the required information is shown in the financial statements or
related notes.
3. Exhibits.
EXHIBIT NO.
- -----------
(3.A) Certificate of Incorporation, as amended through the date of
this filing (incorporated by reference from FINOVA's report
on Form 10-K for the year ended December 31, 1994 (the "1994
10-K"), Exhibit 3.A).
(3.B) Proposed amendment to the Certificate of Incorporation to
increase the number of authorized shares, which is subject
to shareowner approval (incorporated by reference from the
1999 Proxy Statement).
(3.C) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on Form 10-K
for the year ended December 31, 1995 (the "1995 10-K")
Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate (incorporated by
reference from the 1994 10-K, Exhibit 4.B).
(4.B) Relevant portions of FINOVA's Certificate of Incorporation
and Bylaws included in Exhibits 3.A, 3.B and 3.C above are
incorporated by reference.
23
26
EXHIBIT NO.
- -----------
(4.C) Rights Agreement dated as of February 15, 1992 between
FINOVA and the Rights Agent named therein, as amended
(incorporated by reference from FINOVA's report on Form 8-K
dated September 21, 1995, Exhibit 4.1).
(4.C.1) Acceptance of Successor Trustee to Appointment under Rights
Agreement noted in 4.C above (incorporated by reference from
FINOVA's report on Form 8-K, dated November 30, 1995,
Exhibit 4).
(4.D) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets are not
filed as exhibits to this report. FINOVA will furnish a copy
of those agreements to the SEC upon its request.
(4.E) Form of Indenture dated as of September 1, 1992 between
FINOVA Capital and the Trustee named therein (incorporated
by reference from the Greyhound Financial Corporation
Registration Statement on Form S-3, Registration No.
33-51216, Exhibit 4).
(4.F) Form of Indenture dated as of October 1, 1995 between FINOVA
Capital and the Trustee named therein (incorporated by
reference from FINOVA Capital's report on Form 8-K dated
October 25, 1995, Exhibit 4.1).
(4.G) Indenture, dated as of December 11, 1996, between FINOVA and
Fleet National Bank as trustee (incorporated by reference
from FINOVA's report on Form 8-K dated December 20, 1996,
(the "December 1996 8-K"), Exhibit 4.1).
(4.G.1) Amended and Restated Declaration of Trust, dated as of
December 11, 1996, among Bruno A. Marszowski and Robert J.
Fitzsimmons, as Regular Trustees, First Union Bank of
Delaware, as Delaware Trustee, Fleet National Bank, as
Property Trustee, and FINOVA (incorporated by reference from
the December 1996 8-K, Exhibit 4.2).
(4.G.2) Preferred Security Guarantee, dated as of December 11, 1996,
between FINOVA and Fleet National Bank, as trustee
(incorporated by reference from the December 1996 8-K,
Exhibit 4.3).
(4.G.3) Form of 5 1/2% Convertible Subordinated Debenture
(incorporated by reference from the December 1996 8-K,
Exhibit 4.4).
(4.G.4) Form of Preferred Security (TOPrS) (incorporated by
reference from the December 1996 8-K, Exhibit 4.5).
(4.H) Form of Indenture, dated as of March 20, 1998, between
FINOVA, FINOVA Capital and The First National Bank of
Chicago as Trustee (incorporated by reference from FINOVA
and FINOVA Capital's registration statement on Form S-3,
Registration No. 333-38171, Exhibit 4.8).
(4.I) Announcement of 2-for-1 Stock Split (incorporated by
reference from FINOVA's August 14, 1998 8-K, Exhibit 28).
(4.I.1) Letter to shareowners regarding FINOVA's 2-for-1 Stock Split
(incorporated by reference from FINOVA's October 1, 1998
8-K, Exhibit 28.A).
(4.I.2) Letter to holders of Preferred Securities regarding the
2-for-1 common stock split and resulting adjustment in
conversion price applicable to the Convertible Trust
Originated Preferred Securities of FINOVA Finance Trust
(incorporated by reference from FINOVA's October 1, 1998
8-K, Exhibit 28.B).
(4.J) 1992 Stock Incentive Plan, as amended through the date of
this filing (incorporated by reference from the 1997 10-K,
Exhibit 4.J).+
(4.K) Sirrom Capital Corporation Amended and Restated 1994 Stock
Option Plan.*
(4.L) Sirrom Capital Corporation Amended and Restated 1995 Stock
Option Plan for Non-employee Directors.*
24
27
EXHIBIT NO.
- -----------
(4.M) Sirrom Capital Corporation Amended and Restated 1996
Incentive Stock Option Plan.*
(4.N) Director resolutions dated February 11, 1999, regarding
adoption of the Sirrom stock option plans.*
(10.A) Sixth Amendment and Restatement dated as of May 16, 1994 of
the Credit Agreement dated as of May 31, 1976 among FINOVA
Capital and the lender parties thereto, and Bank of America
National Trust and Savings Association, Bank of Montreal,
Chemical Bank, Citibank, N.A. and National Westminister Bank
USA, as agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994, Exhibit
10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to the Sixth
Amendment and Restatement, noted in 10.A above (incorporated
by reference from the 1994 10-K, Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the Sixth
Amendment and Restatement noted in 10.A above (incorporated
by reference from FINOVA's Quarterly Report on Form 10-Q for
the period ending September 30, 1995 ( the "3Q95 10-Q"),
Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by reference
from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to Sixth
Amendment noted in 10.A above (incorporated by reference
from the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1998 to Sixth Amendment
noted in 10.A above (incorporated by reference from the 1997
10-K, Exhibit 10.A.5).
(10.B) Credit Agreement (Short-Term Facility) dated as of May 16,
1994 among FINOVA Capital, the Lender parties thereto, the
Agents and Citibank, N.A., as Administrative Agent
(incorporated by reference from FINOVA's report on Form 8-K
dated May 23, 1994, Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the Credit
Agreement noted in 10.B above (incorporated by reference
from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the 3Q95 10-Q, Exhibit
10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the 3Q95 10-Q, Exhibit
10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from 1996 10-K, Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the 1997 10-K, Exhibit
10.B.5).+
(10.C) 1998 Management Incentive Plan (incorporated by reference
from the 1997 10-K, Exhibit 10.C.)+
(10.D) 1999 Management Incentive Plan.*+
(10.E.1) 1996 -- 1998 Performance Share Incentive Plan (incorporated
by reference from 1996 10-K, Exhibit 10.E.3).+
(10.E.2) 1997 -- 1999 Performance Share Incentive Plan (incorporated
by reference from the 1997 10-K, Exhibit 10.E.3).+
(10.E.3) 1998 -- 2000 Performance Share Incentive Plan (incorporated
by reference from the 1997 10-K, Exhibit 10.E.4).+
(10.E.4) 1999 -- 2001 Performance Share Incentive Plan.*+
25
28
EXHIBIT NO.
- -----------
(10.F) Employment Agreement with Samuel L. Eichenfield dated March
16, 1996 (incorporated by reference from the 1995 10-K,
Exhibit 10.F.3).+
(10.F.1) Amendment to Employment Agreement referenced in 10.F above
(incorporated by reference from the 1996 10-K, Exhibit
10.F.2).+
(10.F.2) Second Amendment to Employment Agreement referenced in 10.F
above (incorporated by reference from the 2Q97 10-Q, Exhibit
10).+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the 1992
10-K, Exhibit 10.1).+
(10.H) Amended and Restated Supplemental Pension Plan,
(incorporated by reference from the 1996 10-K, Exhibit
10.1).+
(10.I) A description of FINOVA's policies regarding compensation of
directors is incorporated by reference from the 1999 Proxy
Statement.+
(10.J) Directors Deferred Compensation Plan (incorporated by
reference from the 1992 10-K, Exhibit 10.O).+
(10.K) Directors' Retirement Benefit Plan (incorporated by
reference from FINOVA's report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K"), Exhibit 10.OO).+
(10.L) Directors' Charitable Awards Program (incorporated by
reference from the 1994 10-K, Exhibit 10.CC).+
(10.M) Deferred Compensation Plan (incorporated by reference from
the 1995 10-K, Exhibit 10.N).+
(10.N) Bonus KEYSOP Plan (incorporated by reference from the 1997
10-K, Exhibit 10.N).+
(10.N.1) Bonus KEYSOP Trust Agreement (incorporated by reference from
the 1997 10-K, Exhibit 10.N.1).+
(10.O) FINOVA's Executive Officer Loan Program Policies and
Procedures, (incorporated by reference from the 1996 10-K,
Exhibit 10.U).+
(10.P.1) FINOVA's Executive Severance Plan for Tier 1 Employees
(incorporated by reference from the 1995 10-K, Exhibit
10.C.1).+
(10.P.2) FINOVA's Executive Severance Plan for Tier 2 Employees
(incorporated by reference from the 1995 10-K, Exhibit
10.C.2).+
(10.Q.1) Value Sharing Plan for the Chief Executive Officer
(incorporated by reference from the 3Q95 10-Q, Exhibit
10.L).+
(10.Q.2) Value Sharing Plan for Executive Officers and Key Employees
(incorporated by reference from the 3Q95 10-Q, Exhibit
10.K).+
(10.R) Tax Sharing Agreement dated February 19, 1992 among FINOVA,
The Dial Corp and others (incorporated by reference from the
1992 10-K, Exhibit 10.KK).
(10.S) 1992 Stock Incentive Plan (incorporated by reference from
the 1997 10-K, Exhibit 4.J).+
(10.T) Documents relating to the mini-CMBS Program:
FINOVA Commercial Mortgage Loan Owner Trust 1998-1.
Commercial Mortgage Loan Asset Backed Certificates 1998-1.*
(10.T.1) Certificate Purchase Agreement dated as of September 29,
1998.*
(10.T.2) Trust and Servicing Agreement dated as of September 1,
1998.*
(10.T.3) Loan Purchase Agreement dated as of September 1, 1998.*
(10.T.4) Amendment No. 1 to the Trust and Servicing Agreement dated
as of December 8, 1998.*
(10.T.5) Amendment No. 2 to the Trust and Servicing Agreement dated
as of December 29, 1998.*
(10.T.6) Custodial Agreement dated as of September 1, 1998.*
(10.T.7) Administration Agreement dated as of September 1, 1998.*
26
29
EXHIBIT NO.
- -----------
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27) Financial Data Schedule for the year ended December 31,
1998.*
- ---------------
* Filed with this report.
+ Relating to management compensation.
(b) Reports on Form 8-K.
A report on Form 8-K, dated January 14, 1999, was filed by FINOVA which
reported under Items 5 and 7 the revenues, net income and selected financial
data and ratios for the fourth quarter and year ended December 31, 1998
(unaudited).
A report on Form 13-D, dated January 6, 1999, was filed by FINOVA which
reported under Item 4 the Agreement and Plan of Merger between FINOVA and Sirrom
Capital Corporation.
27
30
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in the capacities indicated, in
Phoenix, Arizona on March 1, 1999.
THE FINOVA GROUP INC.
By: /s/ SAMUEL L. EICHENFIELD
------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief
Executive Officer
(Chief Executive Officer)
By: /s/ BRUNO A. MARSZOWSKI
------------------------------------
Bruno A. Marszowski
Senior Vice President -- Controller
and
Chief Financial Officer
(Chief Accounting and Financial
Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
* *
--------------------------------------------------- -----------------------------------------------------
Robert H. Clark, Jr. (Director) G. Robert Durham (Director)
March 1, 1999 March 1, 1999
/s/ SAMUEL L. EICHENFIELD *
- ----------------------------------------------------- -----------------------------------------------------
Samuel L. Eichenfield (Chairman) James L. Johnson (Director)
March 1, 1999 March 1, 1999
* *
- ----------------------------------------------------- -----------------------------------------------------
Kenneth R. Smith (Director) Shoshana B. Tancer (Director)
March 1, 1999 March 1, 1999
* *
- ----------------------------------------------------- -----------------------------------------------------
John W. Teets (Director) Constance R. Curran (Director)
March 1, 1999 March 1, 1999
- ---------------
* Signed pursuant to Powers of Attorney dated February 11, 1999.
/s/ BRUNO A. MARSZOWSKI
- -----------------------------------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 1, 1999
28
31
ANNEX A
32
THE FINOVA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Highlights........................................ A-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. A-3
Quantitative and Qualitative Disclosure about Market Risk... A-12
Management's Report on Responsibility for Financial
Reporting................................................. A-14
Independent Auditors' Report................................ A-15
Consolidated Balance Sheets................................. A-16
Statements of Consolidated Income........................... A-17
Statements of Consolidated Shareowners' Equity.............. A-18
Statements of Consolidated Cash Flows....................... A-19
Notes to Consolidated Financial Statements.................. A-20
Supplemental Selected Financial Data........................ A-44
A-ii
33
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
OPERATIONS:
Interest margins earned.................................. $ 472,536 $ 408,914 $ 340,517
Volume-based fees........................................ 77,723 46,728 28,588
Operating expenses....................................... 241,074 190,525 154,481
Income from continuing operations........................ 169,737 139,098 116,493
Net income............................................... 169,737 139,098 117,000
FINANCIAL POSITION:
Ending funds employed.................................... 10,011,536 8,399,456 7,298,759
Ending managed assets(1)................................. 10,549,132 8,857,423 7,663,305
Average managed assets(2)................................ 9,500,539 8,153,076 7,041,708
Average earning assets(3)................................ 8,544,431 7,356,845 6,324,545
Reserve for credit losses................................ 207,618 177,088 148,693
Nonaccruing assets(4).................................... 205,233 187,356 155,505
Funded new business...................................... 3,979,265 3,311,105 2,740,353
Fee-based volume......................................... 7,257,003 4,532,494 2,937,311
Net write-offs........................................... 56,758 43,200 28,721
CAPITALIZATION:
Total debt............................................... 8,394,578 6,764,581 5,850,223
Company-obligated mandatory redeemable convertible
preferred securities of subsidiary trust solely holding
convertible debentures of FINOVA ("TOPrS")............. 111,550 111,550 111,550
Shareowners' equity...................................... 1,177,345 1,090,454 929,591
PORTFOLIO QUALITY:
Net write-offs as a % of average managed assets(5)....... 0.60% 0.54% 0.41%
Nonaccruing assets as a % of ending managed assets(5).... 2.0% 2.1% 2.0%
Reserve for credit losses as a % of:
Ending managed assets(5)(6)............................ 2.0% 2.0% 2.0%
Nonaccruing assets..................................... 101.2% 94.5% 95.6%
As a multiple of net write-offs........................ 3.7x 4.1x 5.2x
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of average funds
employed(7)............................................ 1.9% 1.8% 1.8%
Operating margin earned as a % of average earning
assets(3).............................................. 6.4% 6.2% 5.8%
Interest margins earned as a % of average earning
assets(3).............................................. 5.5% 5.6% 5.4%
Operating expenses as a % of operating margin............ 43.8% 41.8% 41.9%
Operating expenses as a % of operating margin plus
gains.................................................. 39.8% 39.2% 40.4%
Aggregate cost of funds.................................. 6.4% 6.6% 6.8%
Ratio of income to combined fixed charges and preferred
stock dividends........................................ 1.56x 1.52x 1.50x
Return from continuing operations on average equity...... 14.9% 14.3% 13.3%
Basic earnings per common share:
Continuing operations.................................. $3.03 $2.56 $2.14
Net income............................................. $3.03 $2.56 $2.15
Adjusted weighted average shares(8).................... 55,946,000 54,405,000 54,508,000
Diluted earnings per share(9):
Continuing operations.................................. $2.86 $2.42 $2.08
Net income............................................. $2.86 $2.42 $2.09
Adjusted weighted average shares(8).................... 60,705,000 59,161,000 56,051,000
Cash earnings per share(10).............................. $4.40 $3.68 $3.06
Book value per share outstanding......................... $21.13 $19.37 $16.88
Shares outstanding(8).................................... 55,721,000 56,282,000 55,058,000
=========== =========== ===========
A-1
34
- ---------------
(1) Includes assets sold under securitization and participation agreements that
are managed by the Company; however, excludes managed assets serviced under
the mini-CMBS structure due to the expected short-term nature of the
servicing rights.
(2) Includes average securitizations and participations of $484.5 million,
$388.9 million and $327.4 million for 1998, 1997 and 1996, respectively.
(3) Represents average funds employed excluding average deferred taxes on
leveraged leases of $275.9 million, $234.4 million and $237.8 million for
1998, 1997 and 1996, respectively, and average nonaccruing assets.
(4) Includes nonaccruing assets classified as discontinued operations at
December 31, 1996.
(5) Excludes participations sold of $101.5 million, $121.4 million and $64.5
million for 1998, 1997 and 1996, respectively, in which the Company has
transferred credit risk.
(6) Excludes financing contracts held for sale of $241.9 million for 1998.
(7) Average funds employed excludes average deferred taxes on leveraged leases.
(8) Shares for 1997 and 1996 have been adjusted to reflect a two-for-one stock
split on October 1, 1997.
(9) Diluted earnings per share include the dilutive potential of options,
restricted stock and convertible preferred stock.
(10) Represents net income before preferred dividends plus non-cash taxes, loss
provision and goodwill amortization. Excluding non-cash mini-CMBS
transactions, cash earnings per share were $4.24 for 1998. See Note C of
Notes to Consolidated Financial Statements for a further discussion of the
mini-CMBS transactions.
A-2
35
THE FINOVA GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively, "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries (collectively, "FINOVA Capital").
RESULTS OF OPERATIONS
The following table summarizes FINOVA's operating results for the years
ended December 31, 1998, 1997 and 1996:
PERCENT PERCENT
1998 1997 CHANGE 1997 1996 CHANGE
------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
Interest margins earned... $ 472.5 $ 408.9 15.6% $ 408.9 $ 340.5 20.1%
Volume-based fees......... 77.7 46.7 66.3% 46.7 28.6 63.5%
------- ------- ------- -------
Operating margin.......... 550.3 455.6 20.8% 455.6 369.1 23.4%
Provision for credit
losses.................. (82.2) (69.2) 18.8% (69.2) (41.8) 65.7%
Gains on disposal of
assets.................. 55.0 30.3 81.8% 30.3 12.9 133.7%
Operating expenses........ (241.1) (190.5) 26.5% (190.5) (154.5) 23.3%
Income taxes.............. (108.5) (83.1) 30.6% (83.1) (69.3) 19.8%
Preferred dividends,
net..................... (3.8) (4.0) (5.3%) (4.0) n/a
------- ------- ------- -------
Income from continuing
operations.............. 169.7 139.1 22.0% 139.1 116.5 19.4%
Income and gain from
discontinued
operations.............. n/a 0.5 n/a
------- ------- ------- -------
Net Income................ $ 169.7 $ 139.1 22.0% $ 139.1 $ 117.0 18.9%
======= ======= ======= =======
1998 COMPARED TO 1997
Net income for 1998 increased 22.0% to $169.7 million from $139.1 million
in 1997. The increase was due to the growth in average earning assets, the
expansion of the fee-related businesses and higher gains on disposal of assets.
Partially offsetting these increases were a higher provision for credit losses,
increased operating expenses and a higher effective tax rate. Net income in 1998
included a full year of FINOVA Realty Capital ("FRC") and AT&T Capital's
Inventory Finance unit, both of which were acquired in the fourth quarter of
1997. See Note B of Notes to Consolidated Financial Statements for further
discussion.
INTEREST MARGINS EARNED. The net spread from the portfolio is represented
by interest margins earned, which is the difference between (a) income earned
from financing transactions and (b) interest expense and depreciation on
operating leases and other owned assets. Interest margins earned increased 15.6%
to $472.5 million in 1998 from $408.9 million in 1997, due primarily to a 16.1%
increase in average earning assets in 1998.
Average earning assets, which represents the average of FINOVA's investment
in financing transactions less nonaccruing assets and deferred taxes related to
leveraged leases, increased to $8.54 billion in 1998 from $7.36 billion in 1997.
The increase was primarily due to a 20.2% increase in funded new business of
$3.98 billion compared to $3.31 billion in 1997, partially offset by normal
amortization of the portfolio and prepayments during the year.
A-3
36
VOLUME-BASED FEES. Volume-based fees are generated by FINOVA's
Distribution & Channel Finance (formerly Inventory Finance), Commercial Services
(formerly Factoring Services) and FRC lines of business. These fees are
predominantly based on volume-originated business rather than the balance of
outstanding financing transactions during the year. The 66.3% increase in
volume-based fees to $77.7 million in 1998 from $46.7 million in 1997