Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20594
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11011
For the Fiscal Year Ended December 31, 1999
THE FINOVA GROUP INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
- -------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
4800 North Scottsdale Road
Scottsdale, AZ 85251-7623
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code - 480-636-4800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
Junior Participating Preferred Stock 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 10-K or any amendment of this
Form 10-K. [ ]
As of March 3, 2000, approximately 61,197,000 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 that date of $27.75), held by
nonaffiliates was approximately $1,665,825,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement relating to 2000 Annual Meeting of Shareowners of The FINOVA
Group Inc. (but excluding information contained in that document furnished
pursuant to items 402(k) and (I) of SEC Regulation S-K) are incorporated by
reference into Part III of this report.
Website address is www.finova.com
================================================================================
TABLE OF CONTENTS
Name of Item
------------
Part I
Item 1. Business: .......................................................... 1
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 ................................................. 11
Credit Ratings ......................................................... 11
Residual Realization Experience ........................................ 12
Business Development And Competition ................................... 13
Credit Quality ......................................................... 13
Risk Management ........................................................ 13
Portfolio Management ................................................... 14
Delinquencies And Workouts ............................................. 14
Governmental Regulation ................................................ 14
Employees .............................................................. 15
Special Note Regarding Forward-Looking Statements ...................... 15
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 .................................. 17
Part II
Item 5. Market Price of and Dividends on the Registrant's Common
Equity & Related Shareowner Matters ................................ 18
Item 6. Selected Financial Data ............................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
an Results of Operations ........................................... 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk ......... 20
Item 8. Financial Statements & Supplemental 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 .................. 21
Item 11. Executive Compensation ............................................ 21
Item 12. Security Ownership of Certain Beneficial Owners & Management ...... 21
Item 13. Certain Relationships & Related Transactions ...................... 21
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. ...................................................... 21
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 $100,000 and $35 million.
FINOVA operates in 20 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 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, lease rentals, 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 4800 North Scottsdale
Road, Scottsdale, Arizona 85251, telephone (480) 636-4800. 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, retailers, distributors, wholesalers
and service companies. Typical transaction sizes range from $1 million
to $5 million. Fremont Capital Corporation, acquired in December 1999,
was added to this line of business.
1
* COMMERCIAL 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 $2 million and $100
million. This line provides accounts receivable and inventory
financing in addition to 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 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 for manufacturers, wholesale
distributors, service companies and importers. 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 direct loan,
automobile, mortgage and premium finance companies. Typical
transaction sizes range from $1 million to $35 million.
SPECIALTY FINANCE
* COMMERCIAL EQUIPMENT FINANCE offers equipment leases and loans to a
broad range of midsize companies. Specialty markets include emerging
growth technology industries (primarily biotechnology), electronics,
telecommunications, corporate aircraft, supermarket/specialty
retailers and most heavy industries. Typical transaction sizes range
from $1 million to $20 million.
* COMMUNICATIONS FINANCE specializes in term financing to advertising
and subscriber-supported businesses, including radio and television
broadcasting, cable television, paging, outdoor advertising,
publishing and emerging technologies such as internet service
providers and competitive local exchange carriers. Typical transaction
sizes range from $3 million to $40 million.
* FRANCHISE FINANCE offers equipment, real estate and acquisition
financing for operators of established franchise concepts. Typical
transaction sizes generally range from $500,000 to $40 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 $35 million.
* PORTFOLIO SERVICES provides customized receivable servicing and
collections for resort timeshare developers and other holders of
consumer receivables.
* PUBLIC FINANCE provides tax-exempt term financing to non-profit
corporations, manufacturers and state and local governments. Typical
transaction sizes range from $2 million to $15 million.
* RESORT FINANCE focuses on construction, acquisition and receivables
financing for timeshare resorts, second home communities and
fractional interest resorts. Typical transaction sizes ranges from $5
million to $35 million.
* SPECIALTY REAL ESTATE FINANCE provides senior term acquisition and
bridge/interim loans from $5 million to $30 million or more for hotel
and resort properties in the U.S., Canada and the Caribbean. Through
this division, FINOVA also provides equity investments in
credit-oriented real estate sale leasebacks.
* TRANSPORTATION FINANCE structures equipment loans, leases and
acquisition financing 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
remarket used commercial aircraft.
2
CAPITAL MARKETS
* HARRIS WILLIAMS & CO. provides merger and acquisition advisory
services targeting middle market businesses.
* 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 servicing and subservicing of commercial
mortgages, business leases and prime and sub-prime consumer loans.
* MEZZANINE CAPITAL provides secured subordinated debt with warrants to
midsize North American companies for expansion capital, buyouts or
recapitalizations. Typical transaction sizes range from $2 million to
$15 million.
* REALTY CAPITAL provides commercial real estate bridge/interim mortgage
loans and capital markets-funded commercial real estate loans. Typical
transaction sizes range from $1 million to $25 million.
FINOVA is a Delaware corporation. The Company was incorporated in 1991 to
serve as the successor to The Dial Corp's financial services businesses. In
March 1992, Dial transferred those businesses to FINOVA in a spin-off. Since
that time, FINOVA has increased its total assets from $2.6 billion at December
31, 1992 to $14.1 billion at December 31,1999. Income from continuing operations
increased from $36.8 million in 1992 to $215.2 million in 1999. 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 serviced
by the Company. Managed assets 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, 1999, 1998, 1997, 1996 and
1995.
3
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Revenue Accruing Nonaccruing
--------------------------------------- ----------------------------------
Market Repossessed Repossessed Lease Total Carrying
Rate (1) Impaired Assets (2) Impaired Assets & Other Amount %
--------------------------------------- ---------------------------------- ---------------------
Commercial Finance Group
Rediscount Finance $ 1,059,930 $ $ 12,574 $ 1,071 $ 3,042 $ $ 1,076,617 8.2
Business Credit 953,635 4,800 29,853 905 989,193 7.5
Corporate Finance 845,778 49,792 43,169 901 939,640 7.2
Distribution & Channel
Finance 467,720 76,770 13,867 558,357 4.3
Commercial Services 217,518 2,791 1,930 222,239 1.7
Growth Finance 55,276 2,625 57,901 0.4
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
3,599,857 131,362 12,574 93,376 6,778 3,843,947 29.3
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
Specialty Finance Group
Transportation
Finance 2,424,262 64,073 2,488,335 19.0
Resort Finance 1,584,508 14,383 2,699 19,318 1,620,908 12.4
Commercial Equipment
Finance 809,456 5,090 12,000 19,657 2,725 848,928 6.5
Franchise Finance 769,162 1,917 4,953 2,770 172 778,974 5.9
Specialty Real Estate
Finance 726,788 35,807 9,042 6,151 152 777,940 5.9
Healthcare Finance 692,876 17,695 5,137 35,076 1,162 5,945 757,891 5.8
Communications Finance 674,331 3,908 10,327 688,566 5.2
Public Finance 168,778 168,778 1.3
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
7,850,161 85,676 62,334 74,097 49,058 8,994 8,130,320 62.0
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
Capital Markets Group
Realty Capital 578,808 4,614 583,422 4.4
Mezzanine Capital 386,555 21,981 34,117 442,653 3.4
Investment Alliance 25,292 25,292 0.2
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
990,655 21,981 38,731 1,051,367 8.0
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
Other (3) 71,147 1,107 24,089 96,343 0.7
----------- ---------- ---------- -------- ---------- ---------- ------------- -----
TOTAL (4) $12,511,820 $ 240,126 $ 74,908 $206,204 $ 55,836 $ 33,083 $ 13,121,977 100.0
=========== ========== ========== ======== ========== ========== ============= =====
- ----------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $5.5 million on repossessed assets
during 1999, including $2.2 million in Specialty Real Estate Finance, $1.0
million in Resort Finance, $0.5 million in Healthcare Finance, $1.4 million
in Rediscount Finance, $0.3 million in Commercial Equipment Finance and
$0.1 million in Franchise Finance.
(3) Primarily includes other assets retained from disposed or discontinued
operations.
(4) Excludes $483.4 million of assets securitized and participations sold which
the Company manages, composed of securitizations of $300.0 million in
Corporate Finance and $121.3 million in Franchise Finance and
participations of $28.8 million in Corporate Finance, $3.0 million in
Communications Finance, $12.3 million in Rediscount Finance, $4.6 million
in Transportation Finance, $6.7 million in Business Credit, $6.3 million in
Resort Finance and $0.4 million in Other.
4
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Revenue Accruing Nonaccruing
--------------------------------- ------------------------------
Market Repossessed Repossessed Lease Total Carrying
Rate (1) Impaired Assets (2) Impaired Assets & Other Amount %
--------------------------------- ------------------------------ -------------------
Commercial Finance Group
Rediscount Finance $ 766,250 $ $ 999 $ 3,762 $ $ $ 771,011 7.7
Business Credit 292,696 7,416 300,112 3.0
Corporate Finance 729,461 16,183 41,007 1,115 787,766 7.9
Distribution & Channel
Finance 561,734 6,029 567,763 5.7
Commercial Services 160,012 648 8,912 936 170,508 1.7
Growth Finance 45,901 45,901 0.5
---------- -------- ------- -------- ------- ------- ----------- -----
2,556,054 16,831 999 67,126 2,051 2,643,061 26.5
---------- -------- ------- -------- ------- ------- ----------- -----
Specialty Finance Group
Transportation Finance 2,140,541 61,895 2,202,436 22.0
Resort Finance 1,209,062 16,415 24,800 1,250,277 12.5
Commercial Equipment
Finance 712,854 1,526 4,858 10,884 17,855 4,135 752,112 7.5
Franchise Finance 597,916 1,619 1,741 1,763 2,120 274 605,433 6.0
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
Communications Finance 694,863 7,169 24,264 726,296 7.2
Public Finance 183,099 183,099 1.8
---------- -------- ------- -------- ------- ------- ----------- -----
6,771,488 89,175 64,262 52,612 52,395 5,705 7,035,637 70.1
---------- -------- ------- -------- ------- ------- ----------- -----
Capital Markets Group
Realty Capital 243,278 243,278 2.4
Investment Alliance 12,297 12,297 0.1
---------- -------- ------- -------- ------- ------- ----------- -----
255,575 255,575 2.5
---------- -------- ------- -------- ------- ------- ----------- -----
Other (3) 60,604 25,344 85,948 0.9
---------- -------- ------- -------- ------- ------- ----------- -----
TOTAL (4) $9,643,721 $106,006 $65,261 $119,738 $54,446 $31,049 $10,020,221 100.0
========== ======== ======= ======== ======= ======= =========== =====
- ----------
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) Primarily includes other assets retained from disposed or discontinued
operations.
(4) Excludes $537.6 million of assets securitized and participations sold which
the Company manages, composed of 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
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Revenue Accruing Nonaccruing
--------------------------------- ------------------------------
Market Repossessed Repossessed Lease Total Carrying
Rate (1) Impaired Assets (2) Impaired Assets & Other Amount %
--------------------------------- ------------------------------ -------------------
Commercial Finance Group
Rediscount Finance $ 609,641 $ $ $ 993 $ $ $ 610,634 7.2
Business Credit 195,897 7,559 203,456 2.4
Corporate Finance 791,733 981 26,888 819,602 9.7
Distribution & Channel
Finance 544,108 4,333 548,441 6.5
Commercial Services 196,843 30,205 227,048 2.7
---------- ------- ---------- ---------- ------- ---------- ---------- -----
2,338,222 981 69,978 2,409,181 28.5
---------- ------- ---------- ---------- ------- ---------- ---------- -----
Specialty Finance Group
Transportation
Finance 1,631,685 1,631,685 19.4
Resort Finance 1,166,199 14,450 3,974 26,240 1,210,863 14.4
Commercial Equipment
Finance 614,712 1,816 11,802 4,030 632,360 7.5
Franchise Finance 430,651 808 2,171 305 433,935 5.2
Specialty Real Estate
Finance 610,711 24,120 38,055 7,648 10,853 196 691,583 8.2
Healthcare Finance 525,846 1,515 666 528,027 6.3
Communications Finance 628,947 8,724 24,452 662,123 7.9
Public Finance 135,826 135,826 1.6
---------- ------- ---------- ---------- ------- ---------- ---------- -----
5,744,577 35,468 52,505 51,562 37,093 5,197 5,926,402 70.5
---------- ------- ---------- ---------- ------- ---------- ---------- -----
Other (3) 61,353 23,526 84,879 1.0
---------- ------- ---------- ---------- ------- ---------- ---------- -----
TOTAL (4) $8,144,152 $36,449 $ 52,505 $ 121,540 $37,093 $ 28,723 $8,420,462 100.0
========== ======= ========== ========== ======= ========== ========== =====
- ----------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.1 million on repossessed assets
during 1997, including $3.1 million in Specialty Real Estate Finance and
$1.0 million in Resort Finance.
(3) Primarily includes other assets retained from disposed or discontinued
operations.
(4) Excludes assets securitized and participations sold which the Company
manages, composed of 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.
6
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Revenue Accruing Nonaccruing
--------------------------------- ------------------------------
Market Repossessed Repossessed Lease Total Carrying
Rate (1) Impaired Assets (2) Impaired Assets & Other Amount %
--------------------------------- ------------------------------ ----------------
Commercial Finance Group
Rediscount Finance $ 421,232 $ $ $ 245 $ $ $ 421,477 5.8
Business Credit 160,006 11,963 171,969 2.4
Corporate Finance 630,399 3,211 14,695 335 648,640 8.9
Distribution & Channel
Finance 314,446 1,273 315,719 4.3
Commercial Services 220,701 3,419 224,120 3.0
---------- ------- ------- ---------- ------- ---------- ---------- -----
1,746,784 3,211 31,595 335 1,781,925 24.4
---------- ------- ------- ---------- ------- ---------- ---------- -----
Specialty Finance Group
Transportation
Finance 1,330,578 1,330,578 18.2
Resort Finance 1,124,462 2,963 13,878 77 25,136 1,166,516 15.9
Commercial Equipment
Finance 570,574 7,900 6,564 585,038 8.0
Franchise Finance 366,202 1,104 1,985 996 370,287 5.0
Specialty Real Estate
Finance 700,932 30,245 46,068 6,748 9,853 940 794,786 10.8
Healthcare Finance 497,540 1,304 1,194 500,038 6.8
Communications Finance 535,701 8,796 14,129 3,095 561,721 7.7
Public Finance 150,361 13 150,374 2.1
---------- ------- ------- ---------- ------- ---------- ---------- -----
5,276,350 43,108 59,946 32,156 38,084 9,694 5,459,338 74.5
---------- ------- ------- ---------- ------- ---------- ---------- -----
Other 73,158 4,498 77,656 1.1
---------- ------- ------- ---------- ------- ---------- ---------- -----
TOTAL(3) $7,096,292 $46,319 $59,946 $ 63,751 $38,419 $ 14,192 $7,318,919 100.0
========== ======= ======= ========== ======= ========== ========== =====
- ----------
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) Excludes assets securitized and participations sold which the Company
manages, composed of 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.
7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Revenue Accruing Nonaccruing
---------------------------------- ---------------------------------
Market Repossessed Repossessed Lease & Total Carrying
Rate (1) Impaired Assets(2) Impaired Assets Other Amount %
--------------------------------- --------------------------------- -----------------
Commercial Finance Group
Rediscount Finance $ 345,264 $ $ $ $ $ $ 345,264 5.4
Business Credit 200,365 12,685 213,050 3.3
Corporate Finance (3) 631,295 5,274 19,592 335 656,496 10.3
Distribution & Channel
Finance 202,879 430 203,309 3.2
Commercial Services 188,892 594 189,486 3.0
---------- -------- -------- ---------- -------- -------- ---------- -----
1,568,695 5,274 33,301 335 1,607,605 25.2
---------- -------- -------- ---------- -------- -------- ---------- -----
Specialty Finance Group
Transportation
Finance 929,043 929,043 14.6
Resort Finance 943,661 2,849 12,064 2,583 26,559 987,716 15.6
Commercial Equipment
Finance 345,039 69 6,079 351,187 5.5
Franchise Finance 327,356 1,462 6,408 1,850 337,076 5.3
Specialty Real Estate
Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 12.3
Healthcare Finance 451,503 81 1,231 452,815 7.1
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.8
Public Finance 121,956 47 122,003 1.9
---------- -------- -------- ---------- -------- -------- ---------- -----
4,483,767 10,711 56,585 41,222 49,653 10,195 4,652,133 73.1
---------- -------- -------- ---------- -------- -------- ---------- -----
Other 94,755 1,275 2,360 6,061 104,451 1.7
---------- -------- -------- ---------- -------- -------- ---------- -----
TOTAL (3) $6,147,217 $ 17,260 $ 56,585 $ 76,883 $ 49,988 $ 16,256 $6,364,189 100.0
========== ======== ======== ========== ======== ======== ========== =====
- ----------
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) Excludes $200 million of securitized assets which are managed by the
Company.
8
The Company's geographic portfolio diversification at December 31, 1999 was
as follows:
State Total Percent
----- ----- -------
(Dollars in Thousands)
California $ 2,014,346 14.8%
Florida 1,365,676 10.0%
Texas 1,081,933 8.0%
New York 866,821 6.4%
Illinois 477,287 3.5%
Georgia 440,981 3.2%
New Jersey 429,370 3.2%
Arizona 389,931 2.9%
Pennsylvania 339,866 2.5%
Virginia 334,518 2.5%
Nevada 318,775 2.3%
Missouri 303,266 2.2%
South Carolina 298,393 2.2%
Minnesota 274,281 2.0%
Other (1) 4,669,930 34.3%
----------- -----
Total managed assets $13,605,374 100%
=========== =====
- ----------
NOTE:
(1) Other includes all states which on an individual basis represent less than
2% of the total; and international, which represents approximately 10% of
the total.
The following is an analysis of the reserve for credit losses for the years
ended December 31:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance, beginning
of year $ 207,618 $ 177,088 $ 148,693 $ 129,077 $ 110,903
Provision for
credit losses 76,800 82,200 69,200 41,751 39,568
Write-offs (60,372) (59,037) (45,487) (32,017) (27,631)
Recoveries 3,518 2,279 2,287 3,296 2,104
Acquisitions and
other 37,419 5,088 2,395 6,586 4,133
--------- --------- --------- --------- ---------
Balance, end of
year $ 264,983 $ 207,618 $ 177,088 $ 148,693 $ 129,077
========= ========= ========= ========= =========
Included above is a specific impairment reserve of $146.7 million at
December 31, 1999, which applies to $298.6 million of the $446.3 million of
impaired loans. The remaining $118.3 million of the reserve for credit losses
represents management's best estimate of inherent losses in the remaining
portfolio considering delinquencies, loss experience and collateral. At December
31, 1998, the specific impairment reserve was $37.1 million, which applied to
$98.7 million of the $225.7 million of impaired loans. Additions to general and
specific reserves are reflected in current operations, and are fungible between
impairment reserves and other reserves. Included in the $37.4 million of
acquisition and other is $20.5 million in reserves for credit losses acquired
with the acquisition of Sirrom and $12.2 million in reserves acquired in the
acquisition of Fremont.
9
Write-offs and recoveries by line of business, during the years ended
December 31, were as follows:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
WRITE-OFFS
Commercial Finance Group
Corporate Finance $18,088 $ 6,728 $ 6,577 $ 9,470 $ 4,660
Commercial Services 8,385 36,286 24,382 5,098 3,728
Distribution & Channel Finance 3,996 2,609 1,777 201
Rediscount Finance 3,523 1,500
Growth Finance 2,590
Business Credit 2,367 1,253 452
------- ------- ------- ------- -------
38,949 48,376 32,736 14,568 9,041
------- ------- ------- ------- -------
Specialty Finance Group
Commercial Equipment Finance 6,030 3,845 3,722 3,207 2,271
Communications Finance 3,100 494 750 2,994 4,037
Healthcare Finance 1,327 1,502 1,798 1,018 314
Franchise Finance 1,064 3,035 696 3,267 3,448
Resort Finance 656 2,700 4,275 2,000
Specialty Real Estate Finance 500 1,785 2,106 1,793 2,275
------- ------- ------- ------- -------
12,677 10,661 11,772 16,554 14,345
------- ------- ------- ------- -------
Capital Markets Group
Mezzanine Capital 8,222
------- ------- ------- ------- -------
8,222
------- ------- ------- ------- -------
Other 524 979 895 4,245
------- ------- ------- ------- -------
Total Write-Offs 60,372 59,037 45,487 32,017 27,631
------- ------- ------- ------- -------
RECOVERIES
Commercial Finance Group
Corporate Finance 234 48 99 10 247
Commercial Services 1,007 623 1,127 1,488 482
Distribution & Channel Finance 72 33 20
Rediscount Finance 46
Business Credit 381 434
------- ------- ------- ------- -------
1,740 1,105 1,226 1,531 749
------- ------- ------- ------- -------
Specialty Finance Group
Commercial Equipment Finance 257 200 514 829 116
Communications Finance 250
Healthcare Finance 139 542 94 8 52
Franchise Finance 824 255 263 422 115
Resort Finance 26 22
Specialty Real Estate Finance 371 177 80
------- ------- ------- ------- -------
1,591 997 871 1,462 635
------- ------- ------- ------- -------
Capital Markets Group
Mezzanine Capital 68
------- ------- ------- ------- -------
68
------- ------- ------- ------- -------
Other 119 177 190 303 720
------- ------- ------- ------- -------
Total Recoveries 3,518 2,279 2,287 3,296 2,104
------- ------- ------- ------- -------
Total Net Write-Offs $56,854 $56,758 $43,200 $28,721 $25,527
======= ======= ======= ======= =======
Net write-offs as a percentage
of average managed assets
(excluding participations sold) 0.48% 0.60% 0.53% 0.41% 0.44%
------- ------- ------- ------- -------
A further breakdown of the portfolio by line of business can be
found in Consolidated Financial Statements - Annex A ("Annex A"), Notes B and C.
10
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. FINOVA also raises funds from the sale of equity from time to time.
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,
-------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Short-term and variable rate long-term debt 5.7% 6.1% 6.4% 6.5% 7.2%
Fixed-rate long-term debt 6.7% 7.0% 7.1% 7.2% 7.3%
Aggregate borrowed funds 6.1% 6.4% 6.6% 6.8% 7.2%
Rate earned on average earning assets (1) (2) 11.3% 11.9% 11.5% 11.4% 11.7%
Operating margin as a percentage of average
earning assets 5.8% 6.3% 5.9% 5.7% 5.6%
- ----------
NOTES:
(1) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(2) Earned amounts are net of depreciation.
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 fixed charges and preferred stock
dividends ("ratio") for each of the past five years:
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
1.58 1.53 1.51 1.51 1.45
==== ==== ==== ==== ====
Income for fixed charges consists of income from continuing operations
before income taxes and fixed charges. 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.
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.
MATCHED FUNDING POLICY
FINOVA Capital follows a "matched funding" policy. Under that policy, it
generally funds the 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.
11
CREDIT RATINGS
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
Commercial
Paper Senior 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-
FINOVA (Canada) Capital Corporation, a subsidiary of FINOVA Capital, has a
rating with Dominion Bond Rating Service Limited of R-1 (low) for commercial
paper.
In February 2000, FINOVA (Canada) Finance Inc., a subsidiary of FINOVA
Capital, received a rating with Dominion Bond Rating Service Limited of A (low)
for the Medium Term Note Program.
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 Service, 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.
RESIDUAL REALIZATION EXPERIENCE
Each year since its inception, FINOVA Capital has earned total proceeds
from the sale of assets upon lease termination 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
lending activities. During the five years ended December 31, 1999, the proceeds
to FINOVA Capital from sales of assets on early termination and the expiration
of leases have exceeded the carrying amounts and estimated residual values as
follows:
12
Early Terminations Terminations at End of Lease Term
- --------------------------------------------- ------------------------------------------
Carrying Proceeds Estimated Proceeds as a %
Sales Amount as a % of Sales Residual Value of Estimated
Year Proceeds of Assets Carrying Amount Proceeds of Assets Residual Value
- --------------------------------------------- ------------------------------------------
(Dollars in Thousands)
1999 $ 95,721 $81,000 118% $29,474 $23,559 125%
1998 82,671 67,650 122% 40,571 35,647 114%
1997 114,680 96,656 119% 78,419 71,914 109%
1996 87,311 75,910 115% 16,334 13,872 118%
1995 1,402 905 155% 32,509 25,566 127%
The estimated residual value of direct finance and leveraged lease assets
in the accounts of FINOVA Capital at December 31, 1999 was 34.4% of the original
cost of those assets (30.3% 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 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, 1999 for financing contracts excluding leveraged leases were
generally 7.0 and 5.1 years, respectively, and for leveraged leases were
approximately 18.4 and 10.4 years, respectively. The comparable average initial
term and remaining term at December 31, 1998 for financing contracts excluding
leveraged leases were generally 7.5 and 5.4 years, respectively, and for
leveraged leases were approximately 18.7 and 11.2 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 B.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA Capital seeks to develop 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, savings and thrift institutions, 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 competitive advantages are customer service, middle-market
and industry niche focus, structuring expertise and its broad array of financial
products. 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 due chiefly
to their lower borrowing costs, FINOVA Capital seeks to maintain the
competitiveness of the rates it offers by emphasizing strict discipline over 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.
CREDIT QUALITY
FINOVA Capital has maintained its asset base generally through the use of
defined underwriting standards, portfolio management techniques, monitoring of
covenant compliance and active collections and workout efforts.
13
RISK MANAGEMENT
FINOVA Capital generally investigates its prospective customers through a
review of historical financial statements, published credit reports, credit
references, discussion 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 other parties. 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 POSITION. 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 structure 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 dependent 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 costs 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.
Generally, 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. Generally, 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 assessments 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, if required, based
on the difference between the recorded balance of the loan ("carrying amount")
and the fair value of the collateral.
14
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 typically
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 any. 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. 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 C.
GOVERNMENTAL REGULATION
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions and mortgage
broker activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Administration, and
Communications Finance is regulated by the Federal Communication Commission.
FINOVA Capital's international activities are also subject to a variety of laws
and regulations of the countries in which the business is conducted.
EMPLOYEES
At December 31,1999, the Company had 1,465 employees compared to 1,262 at
December 31, 1998. The increase primarily included employees from companies
acquired in 1999. None of these 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," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Quantitative and
Qualitative Disclosure 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. Economic conditions
could adversely affect FINOVA's ability to realize gains from sales of
assets and investments. Those items could be particularly sensitive to
changing market conditions. Certain changes in fair market values must be
reflected in FINOVA's reported financial results.
15
* 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
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 may be more difficult, expensive or time
consuming than anticipated.
* Costs or difficulties related to integration of acquisitions.
* Other risks detailed in FINOVA's other SEC reports or filings.
FINOVA does not intend to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements. FINOVA cannot predict the risk from reliance on
forward-looking statements in light of the many factors that could affect their
accuracy.
ITEM 2. PROPERTIES
FINOVA's principal executive offices are located in Scottsdale, 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.
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 1999.
16
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 62 Chairman, President and Chief Executive
Officer of FINOVA and Chairman and Chief
Executive Officer or similar positions of
FINOVA Capital for more than five years.
Matthew M. Breyne 42 President, Chief Operating Officer and a
Director of FINOVA Capital since June 1999.
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 40 Senior Vice President - Internal Audit or
similar positions of FINOVA for more than
five years.
Glenn E. Gray 45 Senior Vice President - Corporate Finance
Business of FINOVA Capital since January
2000; Vice President of FINOVA and Senior
Vice President - Corporate Development or
similar positions of FINOVA Capital since
1997. Previously he was Vice President -
Business Development, Money Management of
Bessemer Trust Company from 1996 to 1997.
From 1994 to 1997, he was Vice President -
Marketing of FINOVA Capital. From 1985 to
1993 he held various positions with a
securities subsidiary and the corporate
banking divisions of Wells Fargo Bank.
William J. Hallinan 57 Senior Vice President - General Counsel and
Secretary of FINOVA and FINOVA Capital for
more than five years.
Bruno A. Marszowski 58 Senior Vice President - Controller and Chief
Financial Officer or similar positions of
FINOVA and FINOVA Capital for more than five
years.
William C. Roche 46 Senior Vice President - Human Resources &
Facilities Planning or similar positions of
FINOVA and FINOVA Capital for more than five
years.
Meilee Smythe 44 Senior Vice President - Treasurer of FINOVA
and FINOVA Capital since 1998. Before that
she was Vice President - Assistant Treasurer
of FINOVA and FINOVA Capital for more than
five years and a Director of FINOVA Capital
since 1998.
Stuart A. Tashlik 43 Senior Vice President - Planning &
Communications of FINOVA since 1999, and
Senior Vice President or similar positions
of FINOVA Capital for more than five years.
John J. Bonano 57 Executive Vice President or similar
positions of FINOVA Capital for more than
five years.
17
Jack Fields, III 45 Executive Vice President or similar
positions of FINOVA Capital for more than
five years.
Robert M. Korte 44 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 47 Executive Vice President - Portfolio
Management or similar positions for more
than five years and a Director of FINOVA
Capital since 1993.
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
under the symbol "FNV." 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, 1998 through December 31, 1999.
SALES PRICE RANGE OF COMMON STOCK
----------------------------------------------
1999 1998
--------------------- --------------------
Quarters: HIGH LOW HIGH LOW
--------- -------- ------- --------
First $62-7/16 $48-1/8 $60-1/4 $45-1/2
Second 53-15/16 45-5/16 63-1/2 53-5/16
Third 54-1/2 34-3/8 65-1/8 41-1/16
Fourth 44-5/8 32-1/2 56-3/8 35-9/16
DIVIDENDS DECLARED ON COMMON STOCK
-----------------------------------
1999 1998
------ ------
February $ 0.16 $ 0.14
May 0.16 0.14
August 0.18 0.16
November 0.18 0.16
------ ------
$ 0.68 $ 0.60
====== ======
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 2000, the Board of Directors declared a dividend of $0.18 per share,
payable April 3, 2000, for shareowners of record on February 29, 2000. 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.
As of March 3, 2000, there were approximately 20,700 holders of record of
The FINOVA Group Inc.'s common stock. The closing price of the common stock on
that date was $27.75.
18
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, 1999, 1998, 1997, 1996 and 1995. 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 year amounts have been
reclassified to conform to 1999 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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
OPERATIONS: (Dollars in Thousands, except per share data)
Income earned from financing
transactions $ 1,228,643 $ 1,007,773 $ 879,763 $ 756,996 $ 673,194
Interest margins earned 567,798 459,515 392,124 329,107 280,788
Volume-based fees 50,080 77,723 39,378 28,588 21,204
Provision for credit losses 76,800 82,200 69,200 41,751 39,568
Gains on disposal of assets 68,020 27,912 30,333 12,562 10,490
Income from continuing operations 215,244 160,341 137,910 117,968 95,621
Net income 215,244 160,341 137,910 118,475 97,060
Basic earnings from continuing
operations per share 3.59 2.87 2.53 2.16 1.75
Basic earnings per share 3.59 2.87 2.53 2.17 1.78
Basic adjusted weighted average
outstanding shares 59,880,000 55,946,000 54,405,000 54,508,000 54,633,000
Diluted earnings from continuing
operations per share $ 3.41 $ 2.70 $ 2.40 $ 2.10 $ 1.72
Diluted earnings per share 3.41 2.70 2.40 2.11 1.75
Diluted adjusted weighted average
shares 64,300,000 60,705,000 59,161,000 56,051,000 55,469,000
Cash earnings per diluted share
from continuing operations $ 5.06 $ 4.18 $ 3.65 $ 3.08 $ 2.64
Dividends declared per common share 0.68 0.60 0.52 0.46 0.42
Dividend payout ratio 19.0% 21.0% 20.1% 21.3% 23.4%
FINANCIAL POSITION:
Investment in financing transactions $13,121,977 $10,020,221 $ 8,420,462 $ 7,318,919 $ 6,364,189
Nonaccruing assets 295,123 205,233 187,356 155,505 143,127
Reserve for credit losses 264,983 207,618 177,088 148,693 129,077
Total assets 14,050,293 10,441,236 8,724,626 7,538,456 7,045,547
Deferred income taxes 439,518 342,268 275,972 246,218 210,530
Total debt 11,407,767 8,394,578 6,764,581 5,850,223 5,649,368
Company-obligated mandatory
redeemable convertible preferred
of subsidiary trust solely
holding convertible debentures
of FINOVA ("TOPrS") 111,550 111,550 111,550 111,550
Shareowners' equity 1,663,381 1,167,231 1,092,254 936,085 829,040
19
December 31,
-------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
RATIOS:
Reserve for credit losses/managed
assets (1) (2) 2.0% 2.0% 2.0% 2.0% 2.0%
Nonaccruing assets/managed assets (1) 2.2% 2.0% 2.1% 2.0% 2.2%
Total debt to equity (3) 6.4x 6.6x 5.6x 5.6x 6.8x
Return on average common equity 14.4% 14.1% 14.1% 13.5% 12.0%
Return on average funds employed (4) 2.0% 1.8% 1.8% 1.8% 1.7%
Equity to assets (3) 12.6% 12.2% 13.8% 13.9% 11.8%
- ----------
NOTES:
(1) Managed assets exclude participations.
(2) Managed assets exclude financing contracts held for sale.
(3) Equity in 1999, 1998, 1997 and 1996 includes the TOPrS noted above.
(4) 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 DISCLOSURE ABOUT MARKET RISK.
See page 13 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTAL 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.
See Recent Developments and Business Outlook on page 11-12 of Annex A.
20
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 2000 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.
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.
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 Disclosure about Market Risk 13
Report of Management, Report of Independent Auditors
and Independent Auditors' Report 14-16
Consolidated Balance Sheets 17
Statements of Consolidated Income 18
Statements of Consolidated Shareowners' Equity 19
Statements of Consolidated Cash Flows 20
Notes to Consolidated Financial Statements 21-42
Supplemental Selected Financial Data 43
2. All Schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or related
notes.
21
3. Exhibits.
Exhibit No.
-----------
(3.A) Amended and Restated Certificate of Incorporation through
the date of this filing (incorporated by reference from
FINOVA's Registration Statement on Form S-3/A, SEC File
No. 333-74473, filed on May 28, 1999, Exhibit 4.1).
(3.B) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on Form
10-K for the year ended December 31, 1995 (the "1995
10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate (incorporated
by reference from the 1994 10-K, Exhibit 4.B).
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and 3.
B above are incorporated by reference.
(4.C) Rights Agreement dated as of February 15, 1992 between
FINOVA and the Rights Agent named therein, as amended
(incorporated by reference from FINOVA's report on Form
8-K dated September 21, 1995, Exhibit 4.1).
(4.C.1) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4-C above (incorporated by
reference from FINOVA's report on Form 8-K, dated
November 30, 1995, Exhibit 4).
(4.D) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets are
not filed as exhibits to this report. FINOVA will furnish
a copy of those agreements to the SEC upon its request.
(4.E) Form of Indenture dated as of September 1, 1992 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from the Greyhound Financial
Corporation Registration Statement on Form S-3,
Registration No. 33-51216, Exhibit 4).
(4.F) Form of Indenture dated as of October 1, 1995 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from FINOVA Capital's report
on Form 8-K dated October 24, 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) Indenture, dated as of May 15, 1999, between FINOVA
Capital and Norwest Bank Minnesota, National Association
(incorporated by reference from FINOVA's Registration
Statement on Form S-3/A, SEC File No. 333-74473, filed on
May 28, 1999, Exhibit 4.8.B).
(4.G.2) Indenture, dated as of May 15, 1999, between FINOVA
Capital and FMB Bank (incorporated by reference from
FINOVA's Registration Statement on Form S-3/A, SEC File
No. 333-74473, filed on May 28, 1999, Exhibit 4.8.C).
(4.G.3) Indenture, dated as of May 15, 1999 between FINOVA
Capital and The First National Bank of Chicago
(incorporated by reference from FINOVA's Registration
Statement on Form S-3/A, SEC File No. 333-74473, filed on
May 28, 1999, Exhibit 4.8.A).
22
Exhibit No.
-----------
(4.G.4) Form of Trust Indenture among FINOVA (Canada) Finance
Inc., FINOVA Capital Corporation and CIBC Mellon Trust
Company made as of February 25, 2000.
(4.G.5) 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.6) 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.7) Form of 5 1/2% Convertible Subordinated Debenture
(incorporated by reference from the December 1996 8-K,
Exhibit 4.4).
(4.G.8) 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 (incorporated by reference from
FINOVA's report on Form 10-K/A for the year ended
December 31, 1998 (the "1998 10-K/A") Exhibit 4.K).
(4.L) Sirrom Capital Corporation Amended and Restated Stock
Option Plan for Non-employee Directors (incorporated by
reference from the 1998 10-K/A, Exhibit 4.L).
(4.M) Director resolutions dated February 11, 1999, regarding
adoption of the Sirrom stock option plans (incorporated
by reference from the 1998 10-K/A, Exhibit 4.N).
(4.N) Sirrom Capital Corporation Amended and Restated 1996
Incentive Stock Option Plan (incorporated by reference
from the 1998 10-K, Exhibit 4.M).
23
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
Westminister Bank USA, as agents (the "Agents") and
Citibank, N.A., as Administrative Agent (incorporated by
reference from FINOVA's report on Form 8-K dated May 23,
1994, Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to the
Sixth Amendment and Restatement, noted in 10.A above
(incorporated by reference from the 1994 10-K, Exhibit
10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the Sixth
Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly Report
on Form 10-Q for the period ending September 30, 1995
(the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by reference
from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to Sixth
Amendment noted in 10.A above (incorporated by reference
from the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1997 to Sixth
Amendment noted in 10.A above (incorporated by reference
from the 1997 10-K, Exhibit 10.A.5).
(10.A.6) Sixth Amendment dated as of May 17 1999 to Sixth
Amendment and Restatement of Credit Agreement dated as of
May 16, 1994. *
(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.B.6) Sixth Amendment to Short-Term Facility noted in 10.B
above. *
(10.C) 1999 Management Incentive Plan (incorporated by reference
from the 1998 10-K/A, Exhibit 10.D). +
(10.D) 2000 Management Incentive Plan.*+
24
Exhibit No.
-----------
(10.E.1) 1997-1999 Performance Share Incentive Plan
(incorporated by reference from the 1997 10-K, Exhibit
10.E.3).+
(10.E.2) 1998-2000 Performance Share Incentive Plan
(incorporated by reference from the 1997 10-K, Exhibit
10.E.4).+
(10.E.3) 1999-2001 Performance Share Incentive Plan
(incorporated by reference from the 1998 10-K, Exhibit
10.E.4). +
(10.E.4) 2000-2002 Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield dated
March 16, 1996 (incorporated by reference from the 1995
10-K, Exhibit 10.F.3).+
(10.F.1) Amendment to Employment Agreement referenced in 10.G
above (incorporated by reference from the 1996 10-K,
Exhibit 10.F.2).+
(10.F.2) Second Amendment to Employment Agreement referenced in
10.G 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 2000
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.O.1) FINOVA's Executive Severance Plan for Tier 1 Employees
(incorporated by reference from the 1995 10-K, Exhibit
10.C.1).+
25
Exhibit No.
-----------
(10.O.2) FINOVA's Executive Severance Plan for Tier 2 Employees
(incorporated by reference from the 1995 10-K, Exhibit
10.C.2).+
(10.P.1) Value Sharing Plan for the Chief Executive Officer
(incorporated by reference from the 3Q95 10-Q, Exhibit
10.L).+
(10.P.2) Value Sharing Plan for Executive Officers and Key
Employees (incorporated by reference from the 3Q95 10-Q,
Exhibit 10-K).+
(12) Computation of ratio of Income to Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Consent of Independent Auditors from Ernst & Young LLP.*
(23.1) Independent Auditors' Consent from Deloitte & Touche
LLP.*
(24) Powers of Attorney.*
(27) Financial Data Schedule for the year ended December 31,
1999.*
- ----------
* Filed with this report.
+ Relating to management compensation
(b) Reports on Form 8-K.
A report on Form 8-K, dated January 20, 2000, was filed by FINOVA which
reported under Items 5 and 7 the revenues, net income and selected Financial and
ratios for fourth quarter and year ended December 31, 1999.
26
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in the capacities indicated, in
Scottsdale, Arizona on March 7, 2000.
THE FINOVA GROUP INC.
By /s/ Samuel L. Eichenfield
----------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief
Executive Officer
(Chief Executive Officer)
By: /s/ Bruno A. Marszowski
----------------------------------------
Bruno A. Marszowski
Senior Vice President - Controller and
Chief Financial Officer
(Chief Accounting and Financial Officer)
27
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
* *
- -------------------------------- ------------------------------
Robert H. Clark, Jr. (Director) G. Robert Durham (Director)
/s/ Samuel L. Eichenfield *
- -------------------------------- ------------------------------
Samuel L. Eichenfield (Chairman) James L. Johnson (Director)
* *
- -------------------------------- ------------------------------
Kenneth R. Smith (Director) Shoshana B. Tancer (Director)
* *
- -------------------------------- ------------------------------
John W. Teets (Director) Constance R. Curran (Director)
* Signed on March 7, 2000, pursuant to Powers of Attorney
dated February 10, 2000.
/s/ Bruno A. Marszowski
-----------------------
Bruno A. Marszowski
Attorney-in-Fact
28
ANNEX A
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-13
Management's Report on Responsibility for Financial Reporting ............ A-14
Report of Independent Auditors ........................................... A-15
Independent Auditors' Report ............................................. A-16
Consolidated Balance Sheet ............................................... A-17
Statements of Consolidated Income ........................................ A-18
Statements of Consolidated Shareowners' Equity ........................... A-19
Statements of Consolidated Cash Flows .................................... A-20
Notes to Consolidated Financial Statements ............................... A-21
Supplemental Selected Financial Data ..................................... A-43
A-i
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ---- ---- ----
OPERATIONS:
Interest margins earned $ 567,798 $ 459,515 $ 392,124
Volume-based fees 50,080 77,723 39,378
Operating expenses 253,754 216,653 168,444
Net income 215,244 160,341 137,910
FINANCIAL POSITION:
Ending funds employed 13,121,977 10,020,221 8,420,462
Ending managed assets (1) 13,605,374 10,557,817 8,878,429
Average managed assets (2) 11,845,460 9,502,823 8,156,242
Average earning assets (3) 10,718,941 8,546,715 7,360,012
Reserve for credit losses 264,983 207,618 177,088
Nonaccruing assets 295,123 205,233 187,356
Funded new business 4,865,746 3,979,265 3,311,105
Fee-based volume 6,315,296 7,257,003 4,532,494
Net write-offs 56,854 56,758 43,200
CAPITALIZATION:
Total debt 11,407,767 8,394,578 6,764,581
Company-obligated mandatory redeemable
convertible preferred securities of
a subsidiary trust solely holding
convertible debentures of FINOVA
("TOPrS") 111,550 111,550 111,550
Shareowners' equity 1,663,381 1,167,231 1,092,254
PORTFOLIO QUALITY:
Net write-offs as a % of average
managed assets (4) 0.48% 0.60% 0.53%
Nonaccruing assets as a % of ending
managed assets (4) 2.2% 2.0% 2.1%
Reserve for credit losses as a % of:
Ending managed assets (4) (5) 2.0% 2.0% 2.0%
Nonaccruing assets 89.8% 101.2% 94.5%
As a multiple of net write-offs 4.7x 3.7x 4.1x
A-1
FINANCIAL HIGHLIGHTS Continued
1999 1998 1997
---- ---- ----
PERFORMANCE HIGHLIGHTS:
Return as a % of average funds
employed (6) 2.0% 1.8% 1.8%
Operating margin earned as a % of
average earning assets (3) 5.8% 6.3% 5.9%
Interest margins earned as a % of
average earning assets (3) 5.3% 5.4% 5.3%
Operating expenses as a % of operating
margin 41.1% 40.3% 39.0%
Operating expenses as a % of operating
margin plus gains 37.0% 38.3% 36.5%
Aggregate cost of funds 6.1% 6.4% 6.6%
Ratio of income to fixed
charges and preferred stock
dividends 1.58x 1.53x 1.51x
Return from continuing operations on
average equity 14.4% 14.1% 14.1%
Basic earnings per common share:
Net income $ 3.59 $ 2.87 $ 2.53
Adjusted weighted average shares 59,880,000 55,946,000 54,405,000
Diluted earnings per share:
Net income $ 3.41 $ 2.70 $ 2.40
Adjusted weighted average shares 64,300,000 60,705,000 59,161,000
Cash earnings per diluted share (7) $ 5.06 $ 4.18 $ 3.65
Book value per share outstanding $ 27.16 $ 20.95 $ 19.41
Shares outstanding 61,252,000 55,721,000 56,282,000
- ----------
(1) Includes assets sold under securitization and participation agreements that
are serviced by the Company.
(2) Includes average securitizations and participations of $520.7 million,
$484.5 million and $388.9 million for 1999, 1998 and 1997, respectively.
(3) Represents average funds employed excluding average deferred taxes on
leveraged leases of $356.4 million, $275.9 million and $234.4 million for
1999, 1998 and 1997, respectively and average nonaccruing assets.
(4) Excludes participations sold of $62.1 million, $101.5 million and $121.4
million for 1999, 1998 and 1997, respectively, in which the Company has
transferred credit risk.
(5) Excludes financing contracts held for sale of $168.0 million and $220.1
million for 1999 and 1998, respectively.
(6) Average funds employed excludes average deferred taxes on leveraged leases.
(7) Cash earnings exclude goodwill amortization, non-cash loss provisions and
non-cash taxes.
A-2
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, 1999, 1998 and 1997:
Percent Percent
(Dollars in Millions) 1999 1998 Change 1998 1997 Change
- --------------------- ---- ---- ------ ---- ---- ------
Interest margins earned $ 567.8 $ 459.5 23.6% $ 459.5 $ 392.1 17.2%
Volume-based fees 50.1 77.7 (35.5%) 77.7 39.4 97.4%
-------- -------- -------- --------
Operating margin 617.9 537.2 15.0% 537.2 431.5 24.5%
Provision for credit losses (76.8) (82.2) (6.6%) (82.2) (69.2) 18.8%
Gains on disposal of assets 68.0 27.9 143.7% 27.9 30.3 (8.0%)
Operating expenses (253.8) (216.7) 17.1% (216.7) (168.4) 28.6%
Income taxes (136.3) (102.2) 33.4% (102.2) (82.3) 24.2%
Preferred dividends, net (3.8) (3.8) 0.0% (3.8) (4.0) (5.3%)
-------- -------- -------- --------
Net Income $ 215.2 $ 160.3 34.2% $ 160.3 $ 137.9 16.3%
======== ======== ======== ========
1999 COMPARED TO 1998
Net income for 1999 increased 34% to $215.2 million from $160.3 million in
1998. The increase was due to 25% growth in average earning assets, higher gains
on disposal of assets and a lower provision for credit losses, partially offset
by lower volume-based fees and higher operating expenses in 1999. Net income in
1999 included activity from the Sirrom Capital Corporation ("Sirrom") and
Preferred Business Credit acquisitions, which were acquired during the first
quarter of 1999 and to a much lesser extent, the Fremont Financial Corporation
acquisition, which occurred late in the fourth quarter of 1999. See Note R 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 24%
to $567.8 million in 1999 from $459.5 million in 1998, due primarily to the
growth in average earning assets.
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 $10.72 billion in 1999 from $8.55 billion in
1998. The increase was primarily due to an increase in funded new business to
$4.87 billion from $3.98 billion in 1998 and $453.7 million of average earning
assets added through acquisitions in 1999, partially offset by normal
amortization of the portfolio and prepayments during the year.
VOLUME-BASED FEES. Volume-based fees are generated by FINOVA's Distribution
& Channel Finance, Commercial Services and Realty Capital lines of business on
the volume of purchased accounts receivable and mortgage loan originations
transacted during the year. Due to the short-term nature of volume-originated
business, these fees are recognized as income in the period of origination.
A majority of Realty Capital's mortgage loan originations are funded by
other lenders and, therefore, are not recorded on FINOVA's balance sheet. FINOVA
took steps to eliminate balance sheet exposure in 2000 from the commercial
mortgage backed securities ("CMBS") product by entering into a Preferred Partner
Program with a prominent investment banking firm during the fourth quarter of
1999. See the Recent Developments and Business Outlook section for a further
discussion.
Volume-based fees were down by $27.6 million to $50.1 million in 1999 from
$77.7 million in 1998 due to lower fee-based volume in 1999 and returns on that
volume that were lower by 0.27% (0.80% in 1999 vs 1.07% in 1998). Fee-based
volume was down by $942 million to $6.32 billion in 1999 from $7.26 billion in
1998 primarily due to lower volume originated by Realty Capital. Realty Capital
curtailed its CMBS volume in 1999, which declined to $757.8 million from $1.76
billion in 1998; while its structured finance volume increased to $1.31 billion
A-3
THE FINOVA GROUP INC.
from $1.05 billion in 1998. The shift in product mix resulted in a decline in
Realty Capital's commission rate to 0.50% from 0.88% in 1998. Structured finance
deals carry a lower net rate than CMBS transactions.
OPERATING MARGIN. Lower volume-based fees in 1999 was the major reason for
the decrease in FINOVA's operating margin as a percentage of average earning
assets to 5.8% in 1999 from 6.3% in 1998. The interest rate spread portion of
this margin decreased slightly to 5.3% in 1999 from 5.4% in 1998 primarily due
to the effects of competitive pricing pressures and increased debt costs related
to the strategic decisions to utilize a global debt offering, which increased
debt costs in the short-term, but is anticipated to help control costs in future
periods and the extension of maturities on commercial paper over year end 1999,
thereby avoiding potential liquidity issues associated with Year 2000 concerns.
The liquidity issues anticipated ultimately did not materialize in the
marketplace. The proceeds from the global debt offering were used to pay down
lower costing commercial paper. FINOVA expects competitive pressures on pricing
to continue, which may offset any cost of funds benefits realized from the
global debt offering and by reducing maturities on commercial paper to an
average term of 30 to 60 days in 2000.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was $76.8
million in 1999 compared to $82.2 million in 1998. Provision for credit losses
is taken to maintain the reserve for credit losses at a level deemed by
management to be adequate to cover inherent losses in the portfolio. During
1999, it was determined that the Company did not need to record as large a
provision for credit losses as was necessary in 1998 to maintain the reserve for
credit losses at an appropriate level.
The provision for credit losses was affected by net write-offs. Net
write-offs in 1999 of $56.9 million were comparable to 1998 levels of $56.8
million. As a percent of average managed assets, net write-offs in 1999 were
0.48% compared to 0.60% in 1998. The decline in the write-off percentage was
primarily due to the Commercial Services line of business, which experienced
problems in 1998 with its wholesale textile customers. As a result of refocusing
its portfolio toward more retail customers in 1999, net write-offs in this
business unit decreased to $7.4 million from $35.7 million in 1998. Conversely,
Corporate Finance experienced a higher level of problem accounts resulting in
$17.9 million of net write-offs in 1999 compared to $6.7 million in 1998,
accompanied by $8.2 million of net write-offs for the Mezzanine Capital (Sirrom)
portfolio which was acquired in the first quarter of 1999.
GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $68.0 million
in 1999 compared to $27.9 million in 1998. Gains in 1999 included $20.6 million
from the sale of residuals coming off lease, $35.6 million from the sale of
investments and $11.8 million of CMBS gains as compared to 1998 gains which were
predominately related to residual sales and included a net loss of $7.2 million
on CMBS transactions. This shift in the composition of gain activity is expected
to continue due to FINOVA's expansion into capital market activities.
While in the aggregate, FINOVA has historically recognized gains on the
disposal of assets it holds, the timing and amount of these gains are sporadic
in nature. There can be no assurance FINOVA will recognize such gains in the
future, depending in part on market conditions at the time of disposal. The
range of gain activity is dependent upon the level of residuals coming off lease
and the level of capital market activity which will fluctuate with market
conditions and management's discretion whether to sell marketable investments.
FINOVA generally anticipates gains on disposal of assets to range from 15% to
25% of pretax income.
OPERATING EXPENSES. Operating expenses, which include selling,
administrative and other expenses, were generally higher in all major categories
and increased to $253.8 million in 1999 compared to $216.7 million in 1998.
Personnel costs increased due to the acquisitions of Preferred Business Credit
(included in Growth Finance) in February 1999, Sirrom Capital Corporation
(included in Mezzanine Capital and Harris Williams & Co.) in March 1999 and
Fremont Financial Corporation (included in Business Credit) in December 1999 and
due to higher sales incentive compensation related to the increased new business
levels in 1999. Problem accounts costs increased in 1999 due to increases in
nonearning and impaired accounts. Additions to deferred acquisition costs
increased in 1999 due to acquisitions and the deferral of expenses incurred to
book new business. Operating expenses as a percentage of operating margin plus
gains was 37.0% in 1999, an improvement from 38.3% in 1998. See Note O of Notes
to Consolidated Financial Statements for additional detail.
INCOME TAXES. Income taxes were $136.3 million in 1999 compared to $102.2
million in 1998. The increase was primarily due to higher pre-tax income in
1999. See Note J of Notes to Consolidated Financial Statements for further
discussion of income taxes.
A-4
THE FINOVA GROUP INC.
PREFERRED DIVIDENDS. Dividends, net of tax, paid on $111.6 million of
outstanding Company-obligated mandatory redeemable convertible preferred
securities ("TOPrS") was $3.8 million in 1999 and in 1998.
1998 COMPARED TO 1997
Net income for 1998 increased 16.3% to $160.3 million from $137.9 million
in 1997. The increase was due to the growth in average earning assets and the
expansion of the fee-related businesses, partially offset by a $10.0 million
loss on the sale of commercial mortgage-backed securities (CMBS) through
mini-CMBS transactions. See Note B of Notes to Consolidated Financial Statements
for a further discussion. Other offsetting items included a higher provision for
credit losses, increased operating expenses and a higher effective tax rate. Net
income in 1998 included a full year of Realty Capital and AT&T Capital's
Inventory Finance unit, both of which were acquired in the fourth quarter of
1997.
INTEREST MARGINS EARNED. Interest margins earned increased 17.2% to $459.5
million in 1998 from $392.1 million in 1997, due primarily to a 16.1% increase
in average earning assets in 1998.
Average earning assets increased to $8.55 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.
VOLUME-BASED FEES. The 97.4% increase in volume-based fees to $77.7 million
in 1998 from $39.4 million in 1997 was primarily due to fee-based volume
increasing by 60.1% to $7.26 billion in 1998 compared to $4.53 billion in 1997.
The increased volume was attributable to the addition of Realty Capital and AT&T
Capital's Inventory Finance unit.
The increase in volume-based fees in 1998 was the major reason for the
growth of FINOVA's operating margin as a percentage of average earning assets to
6.3% in 1998 from 5.9% in 1997. The interest rate spread portion of this margin
increased slightly to 5.4% in 1998 from 5.3% in 1997.
PROVISION FOR CREDIT LOSSES. The provision for credit losses increased
18.8% to $82.2 million in 1998 compared to $69.2 million in 1997. The increase
in the provision reflected the growth in managed assets of 18.9% to $10.56
billion in 1998 from $8.88 billion in 1997 and an increase in net write-offs in
1998 to $56.8 million compared to $43.2 million in 1997. The higher level of
write-offs in 1998 was primarily due to prior credit problems experienced in
FINOVA's Commercial Services line of business which had net write-offs of $35.7
million in 1998 principally related to the business' wholesale textile
customers. The 1998 Commercial Services write-offs represented problems
identified in 1997 that the Company believed could be worked out. Unfortunately,
the results of those efforts were unsuccessful, resulting in increased
write-offs for 1998. Net write-offs by line of business and other changes in the
reserve for credit losses can be found in Note C of Notes to Consolidated
Financial Statements.
GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $27.9 million
in 1998 compared to $30.3 million in 1997. Gains on disposal of assets included
the sale of loans via the CMBS market, the sale of assets coming off lease and
the sale of other assets. Sales of CMBS transactions (permanent and mini-CMBS
structures) resulted in a net loss of $7.2 million in 1998 and consisted of
gross gains of $25.0 million offset by hedge losses, commissions, expenses and
recourse obligations of $32.2 million. The total net loss on CMBS transactions
of $7.2 million included a net mini-CMBS loss of $10.0 million from the
utilization of the mini-CMBS structure to sell loans warehoused by FINOVA Realty
Capital and gains of $2.8 million from other CMBS securitizations. The other
$35.1 million of net gains in 1998 resulted from the sale of assets coming off
lease, Franchise Finance loans and other assets. In April 1999, approximately
70% of the assets within the mini-CMBS structure were sold into a permanent CMBS
structure. See Note B of Notes to the Consolidated Financial Statements for a
further discussion of the mini-CMBS transactions.
OPERATING EXPENSES. Operating expenses were generally higher in all major
categories and increased to $216.7 million in 1998 compared to $168.4 million in
1997. This increase was partially attributable to the growth in managed assets
during the year and to incentives paid to employees based on performance
criteria such as profitability and the increased value of FINOVA's stock. Also
contributing to the increase was the addition of Realty Capital, which had a
higher operating cost structure than other FINOVA lines of business, including
over 80 business development officers and support staff. Operating expenses were
38.3% of operating margin plus gains for 1998 compared to 36.5% in 1997. See
Note O of Notes to Consolidated Financial Statements for additional data.
INCOME TAXES. Income taxes were $102.2 million in 1998 compared to $82.3
million in 1997. The increase was primarily due to higher pre-tax income and a
higher effective tax rate in 1998 due to the realization of certain tax credits
in 1997.
A-5
THE FINOVA GROUP INC.
PREFERRED DIVIDENDS. Dividends, net of tax, paid on $111.6 million of
outstanding TOPrS were $3.8 million in 1998 compared to $4.0 million in 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets at December 31, 1999 increased 29% to $13.61 billion from
$10.56 billion at December 31, 1998. The increase was due to funded new business
of $4.9 billion in 1999 compared to $4.0 billion in 1998, plus $1.1 billion of
assets acquired in 1999, partially offset by normal loan and lease amortization,
asset sales and prepayments. Excluding acquired assets, managed assets grew by
$1.9 billion or 18% during 1999. See Note R of Notes to Consolidated Financial
Statements for a further discussion of acquisitions.
FINOVA's reserve for credit losses increased to $265.0 million at December
31, 1999 from $207.6 million at year-end 1998. The increase primarily consisted
of provisions of $76.8 million and acquired reserves of $37.4 million, partially
offset by net write-offs totaling $56.9 million. At December 31, 1999, the
reserve represented 2.0% of managed assets (excluding participations sold and
financing contracts held for sale); the same level as one year ago. Nonaccruing
assets increased to $295.1 million at December 31, 1999 representing 2.2% of
ending managed assets (excluding participations sold) compared to $205.2 million
in nonaccruing assets as of December 31, 1998, which constituted 2.0% of ending
managed assets. The increase in nonaccruing assets was primarily due to the
transition of FINOVA's $33 million share of a large syndicated credit facility
held by its Healthcare Finance line of business to nonaccruing status in the
third quarter and the addition of nonaccruing assets in the acquired Sirrom
portfolio. At December 31, 1999, the reserve represented 89.8% of nonaccruing
assets compared to 101.2% at December 31, 1998. See Note C of Notes to
Consolidated Financial Statements for more information on the reserves, net
write-offs and nonaccruing assets.
Revenue accruing impaired assets increased to $240.1 million in 1999, from
$106.0 million in 1998. This increase was primarily due to the addition of a
large computer and computer components distribution account ($69.6 million) in
Distribution & Channel Finance, the addition of 9 accounts included in the
acquired Sirrom portfolio ($22.0 million), the addition of a home health
services account ($17.7 million) in Healthcare Finance and the addition of a
trucking company account ($17.1 million) in Corporate Finance.
The Company had total debt outstanding of $11.41 billion at December 31,
1999 or 6.4 times its equity base (shareowners' equity plus convertible
preferred securities) of $1.77 billion (FINOVA Capital's leverage as of December
31, 1999 was 6.5 to 1). At December 31, 1998, the Company had debt leverage of
6.6 times its equity base ($8.39 billion debt outstanding to $1.28 billion of
equity). Deferred income taxes, which are used to finance a portion of FINOVA's
assets, grew 28.4% during 1999 to $439.5 million from $342.3 million at year-end
1998.
Growth in managed assets is generally financed by internally generated cash
flows and borrowings. During 1999, FINOVA Capital issued $3.4 billion in new
senior debt. These funds were used to finance new business and to redeem or
retire $809 million of debt. During 1999, the Company also issued approximately
6.1 million and 0.2 million shares of its common stock as the primary
consideration for the acquisitions of Sirrom and Preferred Business Credit,
respectively. See Note R of Notes to Consolidated Financial Statements for
further detail.
FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent on any one
lender. FINOVA also relies on the issuance of commercial paper as a major
funding source. During 1999, FINOVA Capital issued $19.0 billion of commercial
paper, at a weighted average cost of 5.4% (with an average of $4.1 billion
outstanding during the year) and raised $3.4 billion, as noted above, through
new long-term financings of one to ten year maturities. Commercial paper and
short-term bank borrowings totaled $3.9 billion at December 31, 1999 and 1998,
and were supported by available unused revolving credit lines which, if not
renewed, are convertible to long-term debt at FINOVA's option. During 1999,
FINOVA extended maturities on commercial paper over year end, beyond the average
58-day maturity, thereby avoiding potential liquidity issues associated with
Year 2000 concerns. The liquidity issues anticipated ultimately did not
materialize.
At December 31, 1999, FINOVA Capital maintained a multi-year revolving
credit facility and a 364-day facility with numerous lenders, in the aggregate
principal amount of $2.0 billion. Separately, FINOVA Capital also had two
multi-year facilities with numerous lenders for $700 million each and two
364-day facilities with numerous lenders for $600 million and $500 million,
respectively. These credit facilities, aggregating $4.5 billion, support
FINOVA's outstanding commercial paper and short-term borrowings. The Company
does not intend to borrow under the domestic revolving credit agreements to
refinance commercial paper and short-term bank loans unless it encounters
significant difficulties in rolling over its outstanding commercial paper and
short-term bank loans. The 364-day $1.0 billion, $600 million and $500 million
A-6
THE FINOVA GROUP INC.
revolving credit agreements are subject to renewal in 2000, while the two $700
million and the other $1.0 billion credit facilities are subject to renewal in
2002. In addition to the above, FINOVA has a 364-day revolving credit facility
with one lender for $25 million, which is subject to renewal in 2000.
The Company, through one subsidiary, utilizes a multi-year multi-currency
facility with a small group of lenders for $100 million. Through another
subsidiary, the Company maintains a 364-day revolving credit facility with three
lenders in Canada for C$150 million. FINOVA Capital is the guarantor of these
credit facilities, which are subject to renewal in 2002 and 2000, respectively.
The Company, through the acquisition of Fremont Financial Corporation in
December 1999, assumed a trust financed with floating-rate debt and commercial
paper. The commercial paper program is backed by a 364-day facility with a small
group of lenders for $150 million. The facility is drawn upon to fund assets in
the trust. As of December 31, 1999, $46 million of commercial paper was
outstanding under this program.
In 1998, FINOVA Capital commenced a Euro Medium-Term Note Program allowing
for the issuance of up to $1.0 billion of debt securities. In 1999, FINOVA
Capital plc, FINOVA's U.K. subsidiary, was added to the program. As of December
31, 1999, there was $581 million available to issue under the program.
In 1999, FINOVA and FINOVA Capital jointly filed a universal shelf
registration statement with the SEC allowing for the issuance of $3.0 billion of
senior debt securities, common stock, preferred stock, depositary shares and
warrants to purchase common stock or debt securities. Under this shelf, the
Company issued an aggregate $2.35 billion of debt in 1999 including a global
debt offering of $1.5 billion in November 1999. At December 31, 1999, $645
million remained available under the shelf registration, of which $120 million
had been designated for the issuance of medium term notes.
The agreements pertaining to long-term debt include various restrictive
covenants and require the maintenance of certain defined financial ratios with
which FINOVA, FINOVA Capital and FINOVA Capital plc have complied, as
applicable.
FINOVA Capital's aggregate cost of funds decreased to 6.1% for 1999 from
6.4% for 1998 as a result of a decline in market rates, partially offset by the
additional cost related to the extension of maturities on commercial paper over
year end 1999 to avoid potential liquidity issues associated with Year 2000
concerns. FINOVA's cost of and access to capital is dependent, in large part, on
its credit ratings. FINOVA Capital has maintained investment-grade ratings since
1976. FINOVA Capital currently has investment-grade ratings from the following
agencies:
Senior
Commercial 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-
FINOVA (Canada) Capital Corporation, a subsidary of FINOVA Capital, has a
rating with Dominion Bond Rating Service Limited of R-1 (low) for commercial
paper.
In February 2000, FINOVA (Canada) Finance Inc., a subsidiary of FINOVA
Capital, received a rating with Dominion Bond Rating Service Limited of A (low)
for the Medium Term Note Program.
In addition, FINOVA Finance Trust, a subsidiary trust of FINOVA, has issued
TOPrS with investment-grade ratings as follows:
TOPrS
-----
Duff & Phelps Credit Rating Co. BBB+
Fitch Investors Services, Inc. A-
Moody's Investors Service, Inc. Baa2
Standard & Poor's Ratings Group BBB
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 counterparty credit rating of
an investment-grade issuer such as FINOVA.
A-7
THE FINOVA GROUP INC.
FINOVA periodically repurchases its securities on the open market to fund
its obligations pursuant to employee stock options, benefit plans and similar
obligations. During the years 1999 and 1998, FINOVA repurchased 1,833,200 and
1,299,200 shares, respectively. This program may be discontinued at any time.
DERIVATIVE FINANCIAL INSTRUMENTS
FINOVA enters into derivative transactions as part of its interest rate
risk management policy of match funding its assets and liabilities. The
derivative instruments used are straightforward. FINOVA continually monitors its
derivative position and uses derivative instruments for non-trading and
non-speculative purposes only.
At December 31, 1999, FINOVA Capital had outstanding interest rate
conversion agreements with notional principal amounts totaling $2.4 billion.
Agreements with notional principal amounts of $200 million were arranged to
effectively convert certain floating interest rate obligations into fixed
interest rate obligations. These agreements require interest payments on the
stated principal amount at rates ranging from 6.67% to 8.09% (remaining terms of
one to two years) in return for receipts calculated on the same notional amounts
of floating interest rates. Agreements with notional principal amounts of $1.93
billion were arranged to effectively convert certain fixed interest rate
obligations into floating interest rate obligations. They require interest
payments on the stated principal amount at the three month or six month London
interbank offered rates ("LIBOR") (remaining terms of one to ten years) in
return for receipts calculated on the same notional amounts at fixed interest
rates of 5.70% to 7.71%. FINOVA has also entered into a fixed-rate foreign
currency-denominated transaction (Japanese Yen ("JPY") 5 billion) maturing in
2002. Two derivatives are associated with this transaction, a receive fixed-rate
swap (JPY 5 billion) versus 3-month JPY LIBOR and a basis swap, converting JPY
LIBOR to US Dollar ("USD") LIBOR, both of which mature in 2002. The receive side
of the basis swap has a notional of JPY 5 billion paying 3-month JPY LIBOR and
the pay side has a notional of USD 43.6 million paying 3-month USD LIBOR. See
Note F of Notes to Consolidated Financial Statements for further discussion of
FINOVA's derivatives.
FINOVA also enters into short-term treasury rate locks, options, swaptions
and other derivative instruments to hedge interest rate risks associated with
the warehousing of CMBS loans primarily for FINOVA Realty Capital. FINOVA
entered into a partnership with a prominent investment banking firm which will
reduce the hedging activity previously associated with the CMBS program. See the
Recent Developments and Business Outlook section for a further discussion.
A-8
THE FINOVA GROUP INC.
SEGMENT REPORTING
Information for FINOVA's reportable segments reconciles to FINOVA's
consolidated totals as follows:
Dollars in Thousands 1999 1998
- -------------------- ---- ----
TOTAL NET REVENUE:
Commercial Finance $ 216,083 $ 187,461
Specialty Finance 384,789 344,541
Capital Markets 101,414 24,170
Corporate and other (16,388) 8,978
----------- -----------
Consolidated total $ 685,898 $ 565,150
=========== ===========
INCOME (LOSS) BEFORE ALLOCATIONS:
Commercial Finance $ 87,406 $ 67,013
Specialty Finance 307,377 273,674
Capital Markets 31,235 (2,775)
Corporate and other, overhead and unallocated
provision for credit losses (70,674) (71,615)
----------- -----------
Income before income taxes and preferred dividends $ 355,344 $ 266,297
=========== ===========
MANAGED ASSETS:
Commercial Finance $ 4,195,237 $ 3,005,130
Specialty Finance 8,265,497 7,211,164
Capital Markets 1,051,367 255,575
Corporate and other 93,273 85,948
----------- -----------
Consolidated total $13,605,374 $10,557,817
Less securitizations and participations sold (483,397) (537,596)
----------- -----------
Investment in financing transactions $13,121,977 $10,020,221
=========== ===========
FINOVA's business is organized into three market groups, which are also its
reportable segments: Commercial Finance, Specialty Finance and Capital Markets.
Management principally relies on total net revenue, income before allocations
and managed assets in evaluating the business performance of each reportable
segment. See Note Q of Notes to Consolidated Financial Statements for additional
detail.
Total net revenue is the sum of operating margin and gains on disposal of
assets. Income before allocations is income before income taxes, preferred
dividends, corporate overhead expenses and the unallocated portion of the
provision for credit losses. Managed assets include each segment's investment in
financing transactions plus securitizations and participations sold.
COMMERCIAL FINANCE. Commercial Finance includes traditional asset-based
businesses that provide financing through revolving credit facilities and term
loans secured by assets such as receivables and inventories, as well as
providing factoring and management services. This segment includes the following
lines of business: Business Credit, Commercial Services, Corporate Finance,
Distribution & Channel Finance, Growth Finance and Rediscount Finance. In
December 1999, the Company acquired Fremont Financial Corporation, which was
added to Business Credit.
Total net revenue was $216.1 million in 1999 compared to $187.5 million in
1998, an increase of 15.3%. The increase was primarily due to 24.1% growth in
average earnings assets in 1999, partially offset by the effects of competitive
pricing pressures, a 4.5% decrease in fee-based volume, which fell to $4.24
billion from $4.45 billion in 1998, and a reduction in the rate earned on the
volume in 1999. Distribution & Channel Finance had fee-based volume of $2.87
billion in 1999 compared to $3.21 billion in 1998. The rate earned on the volume
declined from 1.27% to 0.99%. Commercial Services fee-based volume rose to $1.37
billion from $1.24 billion in 1998, an increase of $136.7 million; however, the
rate earned on that volume declined to 0.82% from 0.94% in 1998.
Income before allocations was $87.4 million in 1999 compared to $67.0
million in 1998. The increase in 1999, which was twice the increase in revenue,
was primarily due to lower net write-offs ($37.2 million in 1999 as compared to
$47.3 million for 1998) and to a lesser extent to the growth in earning assets
noted above, partially offset by higher operating expenses. The Commercial
A-9
THE FINOVA GROUP INC.
Services line of business, which experienced problems in 1998 with its wholesale
textile customers, refocused its portfolio toward more retail customers in 1999.
As a result, the net write-offs decreased to $7.4 million from $35.7 million in
1998. Conversely, Corporate Finance experienced a higher level of problem
accounts resulting in $17.9 million of net write-offs in 1999 compared to $6.7
million in 1998. Net write-offs as a percentage of average managed assets for
the Commercial Finance Group declined to 1.2% compared to 1.8% in 1998.
Managed assets grew to $4.20 billion in 1999 from $3.01 billion in 1998, an
increase of 39.6%. The growth in managed assets was primarily due to the
addition of $661.9 million of managed assets acquired in connection with the
acquisition of Fremont Financial Corporation and strong growth in the Rediscount
Finance operation, which grew to $1.09 billion from $777.9 million, an increase
of 40.0%. Excluding the acquired assets, managed assets for the group grew by
$528.2 million, or 17.6% during 1999. This internal growth was driven by new
loan business of $1.12 billion in 1999 compared to $792.8 million in 1998.
SPECIALTY FINANCE. Specialty Finance provides a wide variety of lending
products such as leases, loans, accounts receivable and cash flow based
financing, as well as servicing and collection services to a number of highly
focused industry specific niches. This segment includes the following lines of
business: Commercial Equipment Finance, Communications Finance, Franchise
Finance, Healthcare Finance, Portfolio Services, Public Finance, Resort Finance,
Specialty Real Estate Finance and Transportation Finance.
Total net revenue increased 11.7% to $384.8 million in 1999 compared to
$344.5 million in 1998, while income before allocations grew 12.3% to $307.4
million in 1999 compared to $273.7 million in 1998. Both increases were
primarily due to 18.1% growth in average earning assets, partially offset by the
effects of competitive pricing pressures in certain of the business units and a
lower level of prepayment related penalties and fees. The lower amount of
prepayment income was not based solely on the level of prepayments, since $538.1
million of contracts prepaid in 1999 compared to $560.0 million in 1998. Income
will vary depending on where the deal is in its life cycle at time of prepayment
and which businesses are experiencing the prepayments because only certain lines
of business can structure prepayment penalties into their transactions.
Managed assets grew to $8.27 billion in 1999 from $7.21 billion in 1998, an
increase of 14.6%. The growth in managed assets was driven by new business of
$3.33 billion in 1999 compared to $3.08 billion in 1998. The growth in managed
assets was spread across most business units with Resort Finance, Healthcare
Finance and Franchise Finance contributing the most to the growth in managed
assets, while Communications Finance and Public Finance experienced declines.
The Communications Finance line of business experienced a greater amount of
prepayments in 1999 than 1998, which partially offset the growth in managed
assets for the segment as a whole. Communications' higher prepayments primarily
resulted from customers opting to seek capital infusion from the equity markets
and continued consolidation in the industry.
CAPITAL MARKETS. Capital Markets, in conjunction with institutional
investors, provides commercial mortgage banking services and debt and equity
capital funding. The Capital Markets Group expanded its product base to include
mezzanine debt with associated warrant positions and merger and acquisition
advisory services through the acquisition of Sirrom Capital Corporation and
Harris Williams & Co. in the first quarter of 1999. This segment now includes
Realty Capital, Investment Alliance, Loan Administration, Mezzanine Capital and
Harris Williams & Co.
Total net revenue was $101.4 million in 1999 compared to $24.2 million in
1998. The increase in 1999 was primarily due to the addition of Mezzanine
Capital and Harris Williams & Co. to this segment. Also contributing to the
increase in net revenue was the continued growth of Realty Capital's bridge and
mezzanine financing activities.
The Mezzanine Capital and Harris Williams & Co. units provided $59.9
million of net revenue during 1999, of which $16.9 million related to gains from
the sale of equity and warrant positions. Included in this amount was $4.6
million of gains generated from the sale of 140,000 shares of Healtheon/WebMD
stock. FINOVA recorded a pretax unrealized gain of $36.9 million through other
comprehensive income on the balance sheet related to 1,246,332 shares of
Healtheon/WebMD stock in its portfolio at December 31, 1999.
Mezzanine Capital provides mezzanine financing with the intent of receiving
stock warrants or other equity instruments in anticipation that the customers
will ultimately seek equity capital. As such, FINOVA periodically assesses its
position in this unit's investment portfolio and will exercise its position
based on various factors, including management's discretion.
Realty Capital increased its net revenue over 1998 primarily due to a
higher level of average earning assets related to the expansion of their bridge
and mezzanine financing products and higher CMBS gains, partially offset by a
reduction in volume-based fees. Realty Capital had $11.8 million of CMBS gains
in 1999, compared to a net loss on CMBS transactions of $7.2 million in 1998.
A-10
THE FINOVA GROUP INC.
Realty Capital curtailed its CMBS volume in 1999, which declined to $757.8
million from $1.76 billion in 1998; while its structured finance volume
increased to $1.31 billion from $1.05 billion in 1998. The shift in product mix
resulted in a decline in Realty Capital's commission rate to 0.50% from 0.88% in
1998. Structured finance deals carry a lower net rate than CMBS transactions.
FINOVA took steps to eliminate the balance sheet exposure from the CMBS product
entirely in 2000 by entering into a Preferred Partner Program with a prominent
investment banking firm during the fourth quarter of 1999. See the Recent
Developments and Business Outlook section for a further discussion.
Income before allocations grew to $31.2 million in 1999 from a loss of $2.8
million in 1998 for the segment. This increase was primarily attributable to the
addition of Mezzanine Capital and Harris Williams & Co. and the turnaround in
gain activity for Realty Capital, all of which was partially offset by $8.2
million of net write-offs in the Mezzanine Capital portfolio and increased
operating expenses associated with the acquired operations.
Capital Markets was able to grow its managed asset base to $1.05 billion
from $255.6 million in 1998. This growth was primarily due to the addition of
$469.3 million of acquired assets combined with $339.1 million of new business
related to Realty Capital's bridge and mezzanine financing products. The
acquired assets of Mezzanine Capital declined to $442.7 million by year end.
FINOVA expects this portfolio to further compress during the first part of 2000
as it transitions to originating new business using FINOVA's underwriting
standards.
YEAR 2000 COMPLIANCE
FINOVA successfully completed all work necessary to make its
mission-critical systems Year 2000 compliant in 1999 and experienced no
significant problems during the transition to the new year. The Company incurred
expenses of $207,000 and capital costs of $1.7 million related to its Year 2000
compliance efforts. No material expenditures related to the Year 2000 issue are
expected to be incurred in the future.
FINOVA's estimate of future costs does not include time and costs that may
be incurred as a result of the failure of any third parties to become Year 2000
compliant. FINOVA is monitoring activity with customers and others during the
first quarter of 2000 to determine if their applications are Year 2000 compliant
and to assess the potential impact on FINOVA related to this issue. At the date
of this filing, no significant impact has been noted.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
In December 1999, FINOVA acquired Fremont Financial Corporation, the
commercial lending subsidiary of Fremont General Corporation. Fremont Financial
Corporation was headquartered in Santa Monica, Calif., had account management
and operations in Santa Monica and Atlanta and provided secured working capital
and term loans averaging $2 million to $4 million to midsize businesses
throughout the U.S. Those operations were integrated into the Business Credit
line of business.
In December 1999, FINOVA entered into a formal partnership with a prominent
investment banking firm known as the "Preferred Partner Program." Under the
program, FINOVA Realty Capital will originate and close CMBS loans; the
investment banking firm will fund and warehouse the loans, then securitize them
in pools mixed with other similar loans originated by the investment banking
firm. FINOVA and the investment banking firm will share in all aspects of the
transactions (fees, commissions, interest margin, hedge costs and gains). FINOVA
is contractually exposed to losses from sales only up to its share of fees,
margin and commissions related to the transactions; therefore, FINOVA expects to
maintain no balance sheet exposure or additional downside risk to the CMBS
product.
FINOVA and FINOVA Capital dismissed their independent auditors, Deloitte &
Touche LLP, effective July 15, 1999 and appointed Ernst & Young LLP as
independent auditors. These actions were approved by FINOVA's Board of Directors
upon recommendation of its Audit Committee. The change was also approved by
FINOVA Capital's Board of Directors.
The selection of Ernst & Young was approved by FINOVA and FINOVA Capital
after an extended evaluation process initiated by FINOVA's Audit Committee.
Neither company sought the advice of Ernst & Young on specific audit issues
relating to their financial statements prior to engagement of that firm.
The change in independent auditors did not occur due to any existing or
previous accounting disagreements with Deloitte & Touche. Deloitte & Touche has
expressed no disclaimer of opinion, adverse opinion, qualification or limitation
regarding the financial statements of FINOVA or FINOVA Capital or the audit
process, for the years ended December 31, 1998 or 1997, or the interim periods
ended March 31, 1999 or June 30, 1999. Neither have there been any accounting
disagreements or reportable events within the meaning of Item 304 of SEC
Regulation S-K for those periods. Deloitte & Touche has stated in a letter
addressed to the SEC its concurrence with the foregoing statements in this
paragraph.
A-11
THE FINOVA GROUP INC.
In February 2000, FINOVA Capital commenced a Canadian Medium-Term Note
Program through a newly formed subsidiary, FINOVA (Canada) Finance Inc.,
allowing for the issuance of up to C$300 million of debt securities.
On February 15, 2000, FINOVA terminated all agreements and paid all amounts
associated with Corporate Finance's $300 million securitization.
On February 23, 2000, FINOVA Capital began seeking consents from security
holders of the Fremont Small Business Loan Master Trust ("Trust") to accelerate
the first date on which FINOVA Capital can cause an optional redemption of the
Trust's Series D Securities. A proposed amendment to the Trust would accelerate
the first optional redemption date to March 15, 2000 from April 16, 2001. The
Trust was acquired with Fremont Financial Corporation in December 1999. Approval
of the amendment would permit FINOVA to redeem or retire the debt in the trust
and to terminate its activities during the first half of 2000.
NEW ACCOUNTING STANDARDS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
This statement defers the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by recognition of those
items as assets or liabilities in the statement of financial position and
measurement at fair value. The impact of SFAS No. 133 on the Company's financial
position and results of operations has not yet been determined.
A-12
THE FINOVA GROUP INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FINOVA's primary market risk exposure is the volatility of interest rates.
FINOVA seeks to manage interest rate risk and preserve income through a
diversified borrowing base and a matched-funding policy. A diversified borrowing
base consists of short and long-term debt with a fixed or variable rate.
FINOVA's matched funding policy, approved by the Board of Directors or Audit
Committee and administered by the Finance Committee, requires that floating-rate
assets be financed with similar floating-rate liabilities and fixed-rate assets
be financed with similar fixed-rate liabilities. Under the matched-funding
policy, the difference between floating-rate assets and floating-rate
liabilities should not exceed 3% of total assets for any extended period.
FINOVA engages in hedging transactions using primarily interest rate swaps,
and to a lesser extent, other derivative instruments to lower its interest costs
and to manage its interest rate risk. Derivative instruments are used for
non-trading and non-speculative purposes only. A hedge consists of a position
that is substantially equal and opposite of the asset or liability being hedged.
It is structured to provide a high degree of correlation at the inception of the
hedge and throughout the hedge period so that hedging results will substantially
offset the effects of interest rate changes on the exposed item during the term
of the hedge.
Hedge transactions are authorized to be executed with financial
institutions rated "A" or better by Standard & Poor's Rating Group or Moody's
Investors Service, Inc. The notional principal amount of aggregate hedges on a
net basis with a given counterparty cannot exceed 10% of FINOVA's total debt
outstanding as of the time of entering into the derivative transaction.
FINOVA uses various sensitivity analysis models to measure the exposure of
net income to increases or decreases in interest rates. These models measure the
change in annual net income if interest rates on floating-rate assets,
liabilities and derivative instruments increase or decrease, assuming no
prepayments. Based on models used, a 100 basis point shift in interest rates
would affect net income by less than 1%.
Certain limitations are inherent in the models used for interest rate risk
measurements. Modeling changes require certain assumptions that may oversimplify
the manner in which actual yields and costs respond to changes in market
interest rates. For example, the models assume a more static composition of
FINOVA's interest sensitive assets, liabilities and derivative instruments than
would actually exist over the period being measured. The models also assume that
a particular change in interest rates is reflected uniformly across the yield
curve regardless of the maturity or repricing of specific assets and
liabilities. Although the sensitivity analysis models provide an indication of
FINOVA's interest rate risk exposure at a particular point in time, the models
are not intended to and do not provide a precise forecast of the effects of
changes in market interest rates on FINOVA's net income and will likely differ
from actual results.
A-13
THE FINOVA GROUP INC.
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The FINOVA Group Inc. is responsible for the preparation,
integrity and objectivity of the financial statements and other financial
information included in this Annual Report. The financial statements are
presented in accordance with generally accepted accounting principles
reflecting, where applicable, management's best estimates and judgments.
FINOVA's management has established and maintains a system of internal
controls to reasonably assure the fair presentation of the financial statements,
the safeguarding of FINOVA's assets and the prevention or detection of
fraudulent financial reporting. The internal control structure is supported by
careful selection and training of personnel, policies and procedures and regular
review by both internal auditors and the independent auditors.
The Board of Directors, through its Audit Committee, also oversees the
financial reporting of FINOVA and its adherence to established procedures and
controls. Periodically, the Audit Committee meets, jointly and separately, with
management, the internal auditors and the independent auditors to review
auditing, accounting and financial reporting matters.
FINOVA's financial statements have been audited by Ernst & Young LLP,
independent auditors. Management has made available to Ernst & Young LLP all of
FINOVA's financial records and related data and has made valid and complete
written and oral representations and disclosures in connection with the audit.
Management believes it is essential to conduct its business in accordance
with the highest ethical standards, which are characterized and set forth in
FINOVA's written Code of Conduct. These standards are communicated to and
acknowledged by all of FINOVA's employees.
/s/ Samuel L. Eichenfield
- -------------------------
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
/s/ Bruno A. Marszowski
- -------------------------
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/ Derek C. Bruns
- -------------------------
Derek C. Bruns
Senior Vice President - Internal Audit
A-14
THE FINOVA GROUP INC.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners of The FINOVA Group Inc.
We have audited the accompanying consolidated balance sheet of The FINOVA Group
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of income, shareowners' equity, and cash flows for the year then
ended. These financial statements are the responsibility of The FINOVA Group
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with accounting standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The FINOVA Group
Inc. and subsidiaries at December 31, 1999 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Phoenix, Arizona
January 19, 2000
A-15
THE FINOVA GROUP INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners of The FINOVA Group Inc.
We have audited the accompanying consolidated balance sheet of The FINOVA Group
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, shareowners' equity and cash flows for each of the two
years in the period then ended. These financial statements are the
responsibility of The FINOVA Group Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The FINOVA Group Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Phoenix, Arizona
April 23, 1999
A-16
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 100,344 $ 49,518
Investment in financing transactions:
Loans and other financing contracts 10,446,356 7,354,736
Leveraged leases 837,083 773,942
Operating leases 592,495 648,185
Fee-based receivables 583,885 626,499
Direct financing leases 494,175 396,759
Financing contracts held for sale 167,983 220,100
------------ ------------
13,121,977 10,020,221
Less reserve for credit losses (264,983) (207,618)
------------ ------------
Net investment in financing transactions 12,856,994 9,812,603
Investments 446,489 173,977
Goodwill, net of accumulated amortization 367,241 286,042
Other assets 279,225 119,096
------------ ------------
$ 14,050,293 $ 10,441,236
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 167,073 $ 154,137
Due to clients 146,607 205,655
Interest payable 114,397 65,817
Senior debt 11,407,767 8,394,578
Deferred income taxes 439,518 342,268
------------ ------------
12,275,362 9,162,455
------------ ------------
Commitments and contingencies
Company-obligated mandatory redeemable
convertible preferred securities of
subsidiary trust solely holding
convertible debentures of FINOVA,
net of expenses ("TOPrS") 111,550 111,550
Shareowners' equity:
Common stock, $0.01 par value, 400,000,000
shares authorized, 64,849,000 and
58,555,000 shares issued, respectively 648 585
Additional capital 1,109,521 765,050
Retained income 689,466 515,057
Accumulated other comprehensive income 33,812 686
Common stock in treasury, 3,597,000 and
2,834,000 shares, respectively (170,066) (114,147)
------------ ------------
1,663,381 1,167,231
------------ ------------
$ 14,050,293 $ 10,441,236
============ ============
See notes to consolidated financial statements.
A-17
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in Thousands, except per share data)
Years Ended December 31, 1999 1998 1997
- ------------------------ ----------- ----------- -----------
Interest, fees and other income $ 1,017,940 $ 795,790 $ 691,565
Financing lease income 96,241 95,781 71,278
Operating lease income 114,462 116,202 116,920
----------- ----------- -----------
Income earned from financing transactions 1,228,643 1,007,773 879,763
Interest expense 592,858 478,177 414,650
Operating lease depreciation 67,987 70,081 72,989
----------- ----------- -----------
Interest margins earned 567,798 459,515 392,124
Volume-based fees 50,080 77,723 39,378
----------- ----------- -----------
Operating margin 617,878 537,238 431,502
Provision for credit losses 76,800 82,200 69,200
----------- ----------- -----------
Net interest margins earned 541,078 455,038 362,302
Gains on disposal of assets 68,020 27,912 30,333
----------- ----------- -----------
609,098 482,950 392,635
Operating expenses 253,754 216,653 168,444
----------- ----------- -----------
Income before income taxes and preferred dividends 355,344 266,297 224,191
Income taxes 136,318 102,174 82,289
----------- ----------- -----------
Income before preferred dividends 219,026 164,123 141,902
Preferred dividends, net of tax 3,782 3,782 3,992
----------- ----------- -----------
NET INCOME $ 215,244 $ 160,341 $ 137,910
=========== =========== ===========
Basic earnings per share $ 3.59 $ 2.87 $ 2.53
=========== =========== ===========
Adjusted weighted average shares outstanding 59,880,000 55,946,000 54,405,000
=========== =========== ===========
Diluted earnings per share $ 3.41 $ 2.70 $ 2.40
=========== =========== ===========
Adjusted weighted average shares outstanding 64,300,000 60,705,000 59,161,000
=========== =========== ===========
Dividends per common share $ 0.68 $ 0.60 $ 0.52
=========== =========== ===========
See notes to consolidated financial statements.
A-18
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY
(Dollars in Thousands)
Accumulated
Other
Comprehensive Common
Common Additional Retained Income/ Stock in Shareowners' Comprehensive
Stock Capital Income (Deficit) Treasury Equity Income
----- ------- ------ --------- -------- ------ ------
BALANCE, JANUARY 1, 1997 $568 $ 687,767 $ 279,139 $ 1,008 $ (32,397) $ 936,085
---- ----------- --------- -------- --------- -----------
Comprehensive income:
Net income 137,910 137,910 $ 137,910
---------
Foreign currency translation (1,018)
---------
Other comprehensive income (1,018) (1,018) (1,018)
---------
Comprehensive income $ 136,892
=========
Issuance of common stock 17 77,521 77,538
Net change in unamortized amount
of restricted stock (5,064) (5,064)
Dividends (28,584) (28,584)
Purchase of shares (37,296) (37,296)
Shares issued in connection with
employee benefit plans 4,301 8,382 12,683
---- ----------- --------- -------- --------- -----------
BALANCE, DECEMBER 31, 1997 585 764,525 388,465 (10) (61,311) 1,092,254
---- ----------- --------- -------- --------- -----------
Comprehensive income:
Net income 160,341 160,341 $ 160,341
---------
Net Unrealized holding gains 904
Foreign currency translation (208)
---------
Other comprehensive income 696 696 696
---------
Comprehensive income $ 161,037
=========
Net change in unamortized amount
of restricted stock (1,053) (1,053)
Dividends (33,749) (33,749)
Purchase of shares (63,271) (63,271)
Shares issued in connection with
employee benefit plans 1,578 10,435 12,013
---- ----------- --------- -------- --------- -----------
BALANCE, DECEMBER 31, 1998 585 765,050 515,057 686 (114,147) 1,167,231
---- ----------- --------- -------- --------- -----------
Comprehensive income:
Net income 215,244 215,244 $ 215,244
---------
Net Unrealized holding gains 37,054
Foreign currency translation (3,928)
---------
Other comprehensive income 33,126 33,126 33,126
---------
Comprehensive income $ 248,370
=========
Net change in unamortized amount
of restricted stock (4,825) (4,825)
Issuance of common stock 63 354,960 355,023
Dividends (40,835) (40,835)
Purchase of shares (89,272) (89,272)
Shares issued in connection with
employee benefit plans (5,664) 33,353 27,689
---- ----------- --------- -------- --------- -----------
BALANCE, DECEMBER 31, 1999 $648 $ 1,109,521 $ 689,466 $ 33,812 $(170,066) $ 1,663,381
==== =========== ========= ======== ========= ===========
See notes to consolidated financial statements.
A-19
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
Years Ended December 31, 1999 1998 1997
- ------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
Net income $ 215,244 $ 160,341 $ 137,910
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 76,800 82,200 69,200
Depreciation and amortization 99,847 93,150 90,010
Deferred income taxes 118,538 66,296 29,754
Net deferred acquisition costs (12,232) (8,126) (5,718)
Change in assets and liabilities, net of
effects from acquisitions:
Increase in other assets (46,895) (31,817) (17,576)
(Decrease) increase in accounts payable
and accrued expenses (46,403) 4,369 20,800
Increase (decrease) in interest payable 46,564 11,399 (1,477)
Other (12,037) 1,819 (603)
----------- ----------- -----------
Net cash provided by operating activities 439,426 379,631 322,300
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of investments, net of gains 26,711
Proceeds from sales of residual positions,
net of gains 104,559 99,647 165,890
Proceeds from sales of securitized assets, net
of gains 99,967 36,565
Proceeds from sales of commercial mortgage backed
securities ("CMBS"), net of gains or losses 511,024 869,296
Expenditures for investments and other
income-producing activities (126,999) (85,659) (15,200)
Expenditures for CMBS transactions (529,232) (1,005,373)
Principal collections on financing transactions 1,925,796 1,656,320 1,675,186
Expenditures for financing transactions (3,961,705) (3,282,348) (2,507,822)
Net change in fee-based receivables 42,614 123,900 (64,169)
Net change in revolving credit facilities (467,460) (252,612) (392,020)
Acquisitions, net of cash received (85,278) (61,164) (120,883)
Other 3,519 2,307 2,399
----------- ----------- -----------
Net cash used for investing activities (2,556,451) (1,835,719) (1,220,054)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net (repayments)/ borrowings under commercial
paper and short-term loans (305,030) 739,515 649,653
Long-term borrowings 3,443,592 1,580,000 1,080,625
Repayment of long-term borrowings (809,245) (689,176) (817,892)
Proceeds from exercise of stock options 27,689 12,013 12,683
Common stock purchased for treasury (89,272) (63,271) (37,296)
Dividends (40,835) (33,749) (28,584)
Net change in due to clients (59,048) (72,916) 40,495
----------- ----------- -----------
Net cash provided by financing activities 2,167,851 1,472,416 899,684
----------- ----------- -----------
Increase in cash and cash equivalents 50,826 16,328 1,930
Cash and cash equivalents, beginning of year 49,518 33,190 31,260
----------- ----------- -----------
Cash and cash equivalents, end of year $ 100,344 $ 49,518 $ 33,190
=========== =========== ===========
See notes to consolidated financial statements.
A-20
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in Thousands in Tables, except per share data)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - The consolidated
financial statements present the financial position, results of operations and
cash flows of The FINOVA Group Inc. and its subsidiaries (collectively, "FINOVA"
or the "Company"), including FINOVA Capital Corporation and its subsidiaries
(collectively, "FINOVA Capital").
The FINOVA Group Inc. is a financial services company engaged principally
in providing collateralized financing products to commercial enterprises
focusing on mid-size businesses in various market niches, primarily in the
United States.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
have been eliminated in consolidation. Described below are those accounting
policies particularly significant to FINOVA, including those selected from
acceptable alternatives:
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - For loans and other financing contracts, earned
income is recognized over the life of the contract, using the interest method.
Leases that are financed by nonrecourse borrowings and meet certain other
criteria are classified as leveraged leases. For leveraged leases, aggregate
rental receivables are reduced by the related nonrecourse debt service
obligation including interest ("net rental receivables"). The difference between
(a) the net rental receivables and (b) the cost of the asset less estimated
residual value at the end of the lease term is recorded as unearned income.
Earned income is recognized over the life of the lease at a constant rate of
return on the positive net investment, which includes the effects of deferred
income taxes.
For operating leases, earned income is recognized on a straight-line basis
over the lease term and depreciation is taken on a straight-line basis over the
estimated useful lives of the leased assets.
Origination fees net of direct origination costs are deferred and amortized
over the life of the originated asset as an adjustment to yield.
Original issue discounts are established when equity interests are received
in connection with a funded loan based on the fair value of the equity interest.
The assigned value is amortized to income over the term of the loan as an
adjustment to yield.
Fees received in connection with loan commitments are deferred in accounts
payable and accrued expenses until the loan is advanced and are then recognized
over the term of the loan as an adjustment to the yield. Fees on commitments
that expire unused are recognized at expiration.
Fees are also generated on the volume of purchased accounts receivable and
mortgage loan originations. Fees on the volume of purchased accounts receivable
represent discounts or commissions to FINOVA in return for handling the accounts
receivable collection process. These fees are recognized as income in the period
the receivables are purchased due to the short-term nature of the accounts
receivable, which are generally collected from one to three months after
purchase. FINOVA's commercial mortgage operation originates and sells loans and
typically would only retain assets on the balance sheet for a short period of
time. Fees on mortgage loan originations represent broker commissions on the
loan originations and are recognized as income in the period of origination.
Income recognition is generally suspended for leases, loans and other
financing contracts at the earlier of the date at which payments become 90 days
past due or when, in the opinion of management, a full recovery of income and
principal becomes doubtful. Income recognition is resumed when the loan, lease
or other financing contract becomes contractually current and performance is
demonstrated to be resumed or when foreclosed or repossessed assets generate a
reasonable rate of return.
A-21
THE FINOVA GROUP INC.
CASH EQUIVALENTS - FINOVA classifies highly liquid investments with
original maturities of three months or less from date of purchase as cash
equivalents.
FINANCING CONTRACTS HELD FOR SALE - Financing contracts held for sale are
composed of assets held for sale and retained interests from sales to a private
CMBS ("mini-CMBS") structure that are available for sale. Assets held for sale
are carried at the lower of cost or market with adjustment, if any, recorded in
operations. Assets available for sale are carried at fair value using the
specific identification method with unrealized gains and losses being recorded
as a component of accumulated other comprehensive income within the equity
section of the balance sheet. FINOVA had no retained interest available for sale
at December 31, 1999.
Since FINOVA is exposed to losses from asset sales under the Preferred
Partner Program with a prominent investment banking firm up to its share of
fees, margin and commissions related to the transactions, revenues and expenses
associated with the origination of CMBS loans under this program are deferred
until a determination of the gain or loss on sale of the loans has been
finalized.
FINOVA anticipates that the investment banking firm will execute
securitizations every four months on average. The timing of those
securitizations could vary, depending on market conditions, available volume for
securitization and other factors. See Notes B and P.
RESERVE FOR CREDIT LOSSES - The reserve for credit losses is available to
absorb credit losses and is not provided for financing contracts held for sale
and other owned assets, including assets on operating lease. The provision for
credit losses is the charge to income to increase the reserve for credit losses
to the level that management estimates to be adequate considering delinquencies,
loss experience and collateral. Other factors considered include changes in
geographic and product diversification, size of the portfolio and current
economic conditions. Accounts are either written off or written down when the
loss is considered probable and determinable, after giving consideration to the
customer's financial condition and the value of the underlying collateral,
including any guarantees. Any deficiency between the carrying amount of an asset
and the net sales price of repossessed collateral is charged to the reserve for
credit losses. Recoveries of amounts previously written off as uncollectible are
credited to the reserve for credit losses.
IMPAIRED LOANS - Impaired loans represent loans with probable significant
delays in collection of all of the scheduled principal and interest payments in
accordance with the original contractual terms or a deterioration of the
collateral net present value position below FINOVA's loan balance. The amount of
the specific impairment reserve is equal to the difference between the current
carrying amount of a loan and the greater of (a) the net present value of
expected cash flows from the borrower, discounted at the original effective
interest rate of the transaction, or (b) the net fair value of collateral.
Accruing impaired loans are paying in accordance with the current modified loan
agreement or have adequate collateral protection.
REPOSSESSED ASSETS - Repossessed assets are carried at the lower of cost or
fair value less estimated selling expenses.
RESIDUAL VALUES - FINOVA has a significant investment in residual values in
its leasing portfolios. These residual values represent estimates of the value
of leased assets at the end of the contract terms and are initially recorded
based upon appraisals and estimates. Residual values are periodically reviewed
to determine that recorded amounts are appropriate. Actual residual values
realized could differ from these estimates and updates.
INVESTMENTS - The Company's investments include government debt securities,
equity securities and partnership interests. The Company's investments have
increased significantly in connection with the acquisition of Sirrom Capital
Corporation ("Sirrom") in March 1999.
Certain marketable securities, as discussed in Notes D and K, are
considered trading securities and are stated at fair value with gains or losses
recorded in income in the period they occur.
Debt and equity securities that are being held for an indefinite period of
time are designated as available for sale and carried at fair value using the
specific identification method.
Partnership interests are accounted for under either the cost or equity
method depending on the Company's level of influence in the investee. Under the
equity method, the Company recognizes its share of income or losses of the
partnership in the period in which they are earned. Under the cost method, the
Company recognizes income based on distributions received.
The carrying value of debt and equity securities and partnership interests
are periodically reviewed for impairment which, if identified, is recorded as a
change to current operations.
A-22
THE FINOVA GROUP INC.
GOODWILL - FINOVA amortizes the excess of cost over the fair value of net
assets acquired ("goodwill") on a straight-line basis primarily over 20 to 25
years. Amortization totaled $20.4 million ($13.2 million after-tax), $14.5
million ($10.6 million after-tax) and $9.7 million ($6.1 million after tax) for
the years ended December 31, 1999, 1998 and 1997, respectively. FINOVA
periodically evaluates the carrying value of its intangible assets for
impairment. This evaluation is based on projected, undiscounted cash flows
generated by the underlying assets. No portion of the Company's goodwill was
considered impaired at December 31, 1999 and 1998. At December 31, 1999,
approximately $289.8 million of goodwill (net of amortization), or 81% of the
original goodwill balance, was deductible for federal income tax purposes over
15 years.
PENSION AND OTHER BENEFITS - Trusteed, noncontributory pension plans cover
substantially all employees. Benefits are based primarily on final average
salary and years of service. Funding policies provide that payments to pension
trusts shall be at least equal to the minimum funding required by applicable
regulations.
Other post-retirement benefit costs are recorded during the period the
employees provide service to FINOVA. Post-retirement benefit obligations are
funded as benefits are paid.
Post-employment benefits are any benefits other than retirement benefits.
FINOVA records post-employment benefit costs at the time employees leave active
service.
SAVINGS PLAN - FINOVA maintains The FINOVA Group Inc. Savings Plan (the
"Savings Plan"), a qualified 401(k) program. The Savings Plan is available to
substantially all employees. The employee may elect voluntary wage reductions
ranging from 0% to 15% of taxable compensation. The Company's matching
contributions are based on employee pre-tax salary reductions, up to a maximum
of 100% of the first 6% of salary contributions, the first 3% of which are
matched in FINOVA stock through the Employee Stock Ownership Plan, discussed
below.
EMPLOYEE STOCK OWNERSHIP PLAN - Employees of FINOVA are eligible to
participate in the Employee Stock Ownership Plan in the month following the
first 12 consecutive month period during which they have at least 1,000 hours of
service with FINOVA. Company contributions are made in the form of matching
stock contributions of 100% of the first 3% of salary reduction contributions
made by participants of the Savings Plan.
Expenses under the Savings Plan and Employee Stock Ownership Plan were $4.0
million, $3.1 million and $2.5 million in 1999, 1998 and 1997, respectively.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
estimated future tax effects attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax law.
EARNINGS PER SHARE - Basic earnings per share exclude the effects of
dilution and are computed by dividing income available to common shareowners by
the weighted average amount of common stock outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if options,
convertible preferred stock or other contracts to issue stock were exercised or
converted into common stock. These calculations are presented for the years
ended December 31, 1999, 1998 and 1997 on the Statements of Consolidated Income
and are more fully discussed in Note L.
DERIVATIVE FINANCIAL INSTRUMENTS - As more fully described in Note F,
FINOVA uses derivative financial instruments as part of its interest rate risk
management policy of match funding its assets and liabilities. The derivative
instruments used include interest rate swaps, and to a lesser extent treasury
locks, options, futures and swaptions which are subject to hedge accounting
determination.
Each derivative used as a hedge is matched with an asset or liability with
which it has a high correlation. The swap agreements are generally held to
maturity and FINOVA does not use derivative financial instruments for trading or
speculative purposes. Upon early termination of the designated matched asset or
liability, the related derivative is matched to another appropriate item or
marked to fair market value. Any gain or loss is not recognized immediately but
is amortized to operations over the remaining life of the hedged transaction.
SECURITIZATIONS - In accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
receivable transfers are accounted for as sales when legal and effective control
over the transferred receivables is surrendered.
A-23
THE FINOVA GROUP INC.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
years financial statements to conform to the 1999 presentation.
NOTE B INVESTMENT IN FINANCING TRANSACTIONS
FINOVA provides secured financing to commercial and real estate enterprises
principally under financing contracts (such as loans and other financing
contracts, direct financing leases, operating leases, leveraged leases,
fee-based receivables and financing contracts held for sale). At December 31,
1999 and 1998, the carrying amount of the investment in financing transactions,
including the estimated residual value of leased assets upon lease termination,
was $13.1 billion and $10.0 billion (before reserve for credit losses),
respectively, and consisted of the following percentage of carrying amount by
segment and line of business:
Percent of Total
Carrying Amount
---------------
1999 1998
---- ----
Commercial Finance Group
Rediscount Finance 8.2% 7.7%
Business Credit 7.5 3.0
Corporate Finance 7.2 7.9
Distribution & Channel Finance 4.3 5.7
Commercial Services 1.7 1.7
Growth Finance 0.4 0.5
----- -----
29.3% 26.5%
----- -----
Specialty Finance Group
Transportation Finance 19.0 22.0
Resort Finance 12.4 12.5
Commercial Equipment Finance 6.5 7.5
Franchise Finance 5.9 6.0
Specialty Real Estate Finance 5.9 7.0
Healthcare Finance 5.8 6.1
Communications Finance 5.2 7.2
Public Finance 1.3 1.8
----- -----
62.0% 70.1%
----- -----
Capital Markets Group
Realty Capital 4.4 2.4
Mezzanine Capital 3.4
Investment Alliance 0.2 0.1
----- -----
8.0% 2.5%
----- -----
Other 0.7 0.9
----- -----
100.0% 100.0%
===== =====
A-24
THE FINOVA GROUP INC.
Aggregate installments on investments in financing transactions at December
31,1999 (excluding nonaccruing repossessed assets of $55.8 million and estimated
residual values of $998.7 million) are contractually due or anticipated during
each of the years during December 31, 2000 to 2004 and thereafter as follows:
2000 2001 2002 2003 2004 Thereafter
---- ---- ---- ---- ---- ----------
Loans and other financing contracts:
Fixed interest rate $ 961,915 $ 765,171 $ 606,896 $341,873 $ 253,564 $ 830,205
Floating interest rate 2,624,654 2,123,244 1,052,339 237,353 329,092 269,091
Leases, primarily at fixed interest
rate:
Operating leases 105,755 93,346 73,664 59,021 22,799 47,519
Leveraged leases 34,835 10,684 2,427 18,064 16,371 387,057
Direct financing leases 87,611 83,119 70,636 58,441 49,812 225,815
Fee-based receivables 583,885
Financing contracts held for sale 167,983
---------- ---------- ---------- -------- ---------- ----------
$4,566,638 $3,075,564 $1,805,962 $714,752 $ 671,638 $1,759,687
========== ========== ========== ======== ========== ==========
The investment in operating leases at December 31 consisted of the
following:
1999 1998
---- ----
Cost of assets $ 725,829 $ 757,921
Accumulated depreciation (133,334) (109,736)
--------- ---------
Investment in operating leases $ 592,495 $ 648,185
========= =========
The net investment in leveraged leases at December 31 consisted of the
following:
1999 1998
---- ----
Rental receivables $ 2,987,277 $ 2,885,352
Less principal and interest payable on
nonrecourse debt (2,517,839) (2,403,623)
----------- -----------
Net rental receivables 469,438 481,729
Estimated residual values 848,236 794,112
Less unearned income (480,591) (501,899)
----------- -----------
Investment in leveraged leases 837,083 773,942
Less deferred taxes from leveraged leases (411,642) (314,243)
----------- -----------
Net investment in leveraged leases $ 425,441 $ 459,699
=========== ===========
The components of income from leveraged leases, after the effects of
interest on nonrecourse debt and other related expenses, for the years ended
December 31 were as follows:
1999 1998 1997
---- ---- ----
Lease and other income, net $60,936 $60,484 $35,834
Income tax expense 24,136 24,063 17,156
The investment in direct financing leases at December 31 consisted of the
following:
1999 1998
---- ----
Rental receivables $ 575,434 $ 398,303
Estimated residual values 150,483 126,095
Unearned income (231,742) (127,639)
--------- ---------
Investment in direct financing leases $ 494,175 $ 396,759
========= =========
A-25
THE FINOVA GROUP INC.
FINOVA has a substantial number of loans and leases with payments that
fluctuate with changes in index rates, primarily prime interest rates and the
London interbank offered rates ("LIBOR"). The investment in loans and leases
with floating interest rates (excluding nonaccruing contracts and repossessed
assets) was $7.10 billion and $4.75 billion at December 31, 1999 and 1998,
respectively.
FINOVA had loans and leases of $1.87 billion in 1999 and $1.65 billion in
1998 collateralized by real estate.
Income earned from financing transactions with floating interest rates was
approximately $655 million in 1999, $562 million in 1998 and $491 million in
1997. The adjustments which arise from changes in index rates can have a
significant effect on income earned from financing transactions; however, the
effects on interest margins earned and net income are substantially offset by
related interest expense changes on debt obligations with floating interest
rates. FINOVA's matched funding policy is more fully described in Note F.
At December 31,1999, FINOVA had a committed backlog of new business of
approximately $2.0 billion compared to $1.9 billion at December 31, 1998. The
committed backlog includes unused lines of credit totaling $710 million and $549
million at December 31, 1999 and 1998, respectively. Historically, FINOVA has
booked a substantial portion of its backlog, although there can be no assurance
that the trend will continue. Loan commitments and lines of credit have
generally the same credit risk as extending loans to borrowers. These
commitments are generally subject to the same credit quality and collateral
requirements involved in lending transactions. Commitments generally have a
fixed expiration and usually require payment of a fee.
SECURITIZATIONS - In the later part of 1998, the Company used for the first
time a private CMBS structure ("mini-CMBS") to sell loans originated by FINOVA
Realty Capital ("FRC"). Under this structure, the Company sold $724.3 million of
loans originated by FRC to a trust with limited recourse. The trust held those
loans with plans to resell them to the permanent CMBS market. The trust paid
cash to the Company upon acquisition of the assets, issued a senior security
interest to an investment banking firm and a subordinated residual interest to
the Company. The Company retained the servicing rights and obligations related
to the assets transferred to the trust. FINOVA maintained no retained interest
in CMBS transactions at December 31, 1999 compared to a retained interest at
December 31, 1998 that was valued at $65.4 million.
In April 1999, approximately 70% of the mini-CMBS assets were sold into a
permanent CMBS structure and in June 1999 the remaining 30% were sold, resulting
in the elimination of the trust. The majority of the remaining assets were sold
to an investment banking firm, with an amount below cleanup call provisions
being repurchased by the Company.
In December 1999, FINOVA took steps to eliminate the balance sheet exposure
from the CMBS product entirely by entering into a formal partnership with a
prominent investment banking firm known as the "Preferred Partner Program."
Under the program, FRC will originate and close CMBS loans; the investment
banking firm will fund and warehouse the loans, then securitize them in pools
mixed with other similar loans originated by the investment banking firm. FINOVA
and the investment banking firm will share in all aspects of the transactions
(fees, commissions, interest margin, hedge costs and gains). FINOVA will only
have contractual liability for losses from sales up to its share of fees, margin
and commissions related to the transactions; therefore, FINOVA expects to
maintain no balance sheet exposure or additional downside risk to the CMBS
product.
In 1998 and 1997, under a separate securitization agreement, FINOVA sold
receivables totaling $103.2 million and $36.8 million, respectively with limited
recourse. Outstanding securitized assets under this agreement were $123.2
million at December 31, 1999. FINOVA will service these loan contracts for the
transferee and has defined a portion of the proceeds to be recognized as service
fee income over the term of the agreements.
In 1996 and 1995, FINOVA, under securitization agreements, sold a total of
$300 million in undivided proportionate interests in a revolving loan portfolio
totaling approximately $717.9 million as of December 31, 1999. Under this
agreement, there was limited recourse to FINOVA based on the outstanding balance
of the proportionate interest sold. This securitization was paid off in
February 2000.
In general, the servicing fees earned on securitizations are approximately
equal to the cost of servicing; therefore, no material servicing assets or
liabilities have been recognized in those transactions.
A-26
THE FINOVA GROUP INC.
NOTE C RESERVE FOR CREDIT LOSSES
The following is an analysis of the reserve for credit losses for the
years ended December 31:
1999 1998 1997
---- ---- ----
Balance, beginning of year $ 207,618 $ 177,088 $ 148,693
Provision for credit losses 76,800 82,200 69,200
Write-offs (60,372) (59,037) (45,487)
Recoveries 3,518 2,279 2,287
Acquisitions and other 37,419 5,088 2,395
--------- --------- ---------
Balance, end of year $ 264,983 $ 207,618 $ 177,088
========= ========= =========
Net write-offs by segment and line of business for the years ended December
31 are as follows:
1999 1998 1997
---- ---- ----
Commercial Finance Group
Corporate Finance $17,854 $ 6,680 $ 6,478
Commercial Services 7,378 35,663 23,255
Distribution & Channel Finance 3,924 2,609 1,777
Rediscount Finance 3,477 1,500
Growth Finance 2,590
Business Credit 1,986 819
------- -------- -------
37,209 47,271 31,510
------- -------- -------
Specialty Finance Group
Commercial Equipment Finance 5,773 3,645 3,208
Communications Finance 3,100 494 750
Healthcare Finance 1,188 960 1,704
Resort Finance 656 2,700
Franchise Finance 240 2,780 433
Specialty Real Estate Finance 129 1,785 2,106
------- -------- -------
11,086 9,664 10,901
------- -------- -------
Capital Markets Group
Mezzanine Capital 8,154
------- -------- -------
8,154
------- -------- -------
Other 405 (177) 789
------- -------- -------
Total net write-offs by segment and
line of business $56,854 $ 56,758 $43,200
======= ======== =======
Net write-offs as a percentage of average
managed assets (excluding average
participations) 0.48% 0.60% 0.53%
======= ======== =======
An analysis of nonaccruing assets included in the investment in financing
transactions at December 31 is as follows:
1999 1998
---- ----
Contracts $239,287 $150,787
Repossessed assets 55,836 54,446
-------- --------
Total nonaccruing assets $295,123 $205,233
======== ========
Nonaccruing assets as a percentage of managed assets
(excluding participations) 2.2% 2.0%
======== ========
In addition to the repossessed assets included in the above table, FINOVA
had repossessed assets with a total carrying amount of $74.9 million and $65.3
million at December 31, 1999 and 1998, respectively, which earned income of $5.5
million and $4.7 million during 1999 and 1998, respectively.
A-27
THE FINOVA GROUP INC.
At December 31, 1999, the total carrying amount of impaired loans was
$446.3 million, of which $240.1 million were revenue accruing. A reserve for
credit losses of $78.2 million has been established for $153.7 million of
nonaccruing impaired loans and $68.5 million has been established for $144.9 of
accruing impaired loans. At December 31, 1998, the total carrying amount of
impaired loans was $225.7 million, of which $106.0 million were revenue
accruing. A reserve for credit losses of $30.9 million was established for $74.3
million of nonaccruing impaired loans and $6.2 million was established for $24.4
million of accruing impaired loans. For the three years ended December 31, 1999,
1998 and 1997, the average carrying amount of impaired loans was $341.7 million,
$172.0 million and $130.3 million, respectively. Income earned on accruing
impaired loans was approximately $13.9 million in 1999, $4.0 million in 1998 and
$4.0 million in 1997. Income earned on impaired loans is recognized in the same
manner as it is on other accruing loans. Cash collected on all nonaccruing loans
is applied to the carrying amount.
Had all nonaccruing assets outstanding at December 31, 1999, 1998 and 1997
remained accruing, pre-tax income earned would have increased by approximately
$26 million, $19 million and $22 million, respectively.
NOTE D INVESTMENTS
Debt and equity securities that are being held for an indefinite period of
time, including those securities which may be sold in response to needs for
liquidity are classified as securities available for sale and are carried at
fair value using the specific identification method with unrealized gains and
losses, net of deferred taxes, reported as a component of accumulated other
comprehensive income in the equity section of the balance sheet. A summary of
securities classified as available for sale at December 31 is as follows:
1999 1998
---- ----
Debt securities $ 54,553 $ 1,311
Equity securities 183,622 32,415
Partnership interests 121,995 63,909
Other 15,798 27,157
-------- --------
$375,968 $124,792
======== ========
The net unrealized holding gains were $37.1 million and net unrealized
holding losses were $0.9 million (net of deferred tax liability of $26.1 million
and $0.6 million, respectively) at December 31, 1999 and 1998, respectively. The
increase in the unrealized gains during 1999 was due primarily to $36.9 million
of pretax unrealized gains on Healtheon/WebMD stock. Net gains of $35.6 million
and $0.2 million were recognized on sales of marketable investments in 1999 and
1998, respectively. Scheduled maturities of debt securities range from 2012 to
2014.
FINOVA also carried investments held for trading of $71 million and $49
million at December 31, 1999 and 1998, respectively, in a trust for nonqualified
compensation plans. The Company's investments in trading securities are marked
to market on a quarterly basis through current operations.
FINOVA currently maintains no assets that are classified as held to
maturity.
NOTE E DEBT
The Company satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank loans
and public notes. The Company's commercial paper borrowings are supported by
unused revolving bank credit agreements totaling $4.5 billion. FINOVA Capital
currently maintains a multi-year revolving credit facility and a 364-day
facility with numerous lenders, in the aggregate principal amount of $2.0
billion. Separately, FINOVA Capital also has two multi-year facilities with
numerous lenders for $700 million each and two 364-day facilities with numerous
lenders for $600 million and $500 million, respectively. The Company does not
intend to borrow under the domestic revolving credit agreements to refinance
commercial paper and short-term bank loans unless it encounters significant
difficulties in rolling over its outstanding commercial paper and short-term
bank loans. Under the terms of these agreements, the Company has the option to
periodically select either domestic dollars or Eurodollars as the basis of
borrowings. Interest is based on the lenders' prime rate for domestic dollar
advances or London interbank offered rates ("LIBOR") for Eurodollar advances.
The agreements also provide for a commitment fee, approximately 10 basis points,
on the unused credit. The 364-day $1.0 billion, $600 million and $500 million
revolving credit agreements are subject to renewal in 2000, while the two $700
A-28
THE FINOVA GROUP INC.
million and the other $1.0 billion credit facilities are subject to renewal in
2002. In addition to the above, FINOVA has a 364-day revolving credit facility
with one lender for $25 million, which is subject to renewal in 2000.
The Company, through one subsidiary, utilizes a multi-year multi-currency
facility with a small group of lenders for $100 million. Under the terms of this
agreement, the subsidiary has the option to periodically select multiple
currencies as the basis of borrowings. Interest is based on the Eurocurrency
rate per annum for deposits in the relevant designated currency. Through another
subsidiary, the Company maintains one 364-day revolving credit facility with
three lenders in Canada for C$150 million, supporting the issuance of Canadian
commercial paper. Under the terms of this agreement, the subsidiary has the
option to borrow Canadian dollars through either bankers' acceptances or a prime
rate advance. Interest is based on the lenders' prime rate for prime advances or
bankers' acceptance rates. FINOVA Capital is the guarantor of these credit
facilities, which are subject to renewal in 2002 and 2000, respectively.
The Company, through the acquisition of Fremont Financial Corporation in
December 1999, assumed a trust financed with floating-rate debt and commercial
paper. The commercial paper program is backed by a 364-day facility with a small
group of lenders for $150 million. The facility is drawn upon to fund assets in
the trust. As of December 31, 1999, $46 million of commercial paper was
outstanding.
In 1998, FINOVA Capital commenced a Euro Medium-Term Note Program allowing
for the issuance of up to $1 billion of debt securities. In 1999, FINOVA Capital
plc, FINOVA's U.K subsidiary, was added to the program. As of December 31, 1999
there was $581 million available under the program.
The following information pertains to all short-term financing, primarily
commercial paper, issued by FINOVA Capital for the years ended December 31:
1999 1998 1997
---- ---- ----
Maximum amount of short-term debt outstanding during year $4,708,392 $4,006,576 $3,284,118
Average short-term debt outstanding during year 4,080,529 3,529,528 2,886,668
Weighted average interest rate on short-term debt
outstanding at year end* 6.1% 5.7% 5.7%
Weighted average interest rate on short-term debt
outstanding during year* 5.5% 5.7% 5.7%
- ----------
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements. The
Company uses various mechanisms to manage interest rate risks. See Note F for
further discussions.
Senior debt at December 31 was as follows:
1999 1998
---- ----
Commercial paper and short-term bank loans supported
by unused bank revolving credit agreements, less
unamortized discount $ 3,876,955 $3,871,350
Medium term notes due to 2010, 5.7% to 10.2% 2,353,091 1,717,544
Term loans payable to banks due to 2000, 6.2% 250,000 190,000
Senior notes due to 2009, 5.9% to 16.0%, less
unamortized discount 4,919,218 2,604,762
Nonrecourse installment notes due to 2002, 10.6%
(assets of $21,877 and $22,838 respectively,
pledged as collateral) 8,503 10,922
----------- ----------
$11,407,767 $8,394,578
=========== ==========
Annual maturities of senior debt outstanding at December 31, 1999 due
through 2010 (excluding the amount supported by the revolving credit agreements
expected to be renewed) were approximately $1.17 billion (2000), $1.00 billion
(2001), $1.32 billion (2002), $893.5 million (2003), $1.80 billion (2004) and
$1.08 billion (thereafter).
The agreements pertaining to senior debt and revolving credit agreements
include various restrictive covenants and require the maintenance of certain
defined financial ratios with which FINOVA and FINOVA Capital have complied.
Total interest paid is not significantly different from interest expense.
A-29
THE FINOVA GROUP INC.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
FINOVA enters into interest rate swap, basis swap, foreign currency
exchange, swaption and futures agreements as part of its interest rate risk
management policy. Interest rate swap, basis swap, and swaption agreements are
primarily used to match fund assets and liabilities. Currency swaps are used to
convert both principal and interest payments on debt issued from one currency to
the appropriate functional currency. Futures contracts are used to target index
returns, lock funding costs, and for portfolio hedging. The Company continually
monitors its derivative position and uses derivative instruments for non-trading
and non-speculative purposes only.
FINOVA uses derivative instruments to minimize its exposure to fluctuations
in interest rates, reduce debt expense and lock funding costs over predetermined
periods of time. FINOVA strives to minimize its overall debt costs while
limiting the short-term variability of interest expense and funds required for
debt service. To achieve this objective, FINOVA diversifies its borrowing
sources (short- and long-term debt with a fixed or a variable rate) and seeks to
maintain a portfolio that is match funded. FINOVA's matched funding policy
generally requires that floating-rate assets be financed with floating-rate
liabilities and fixed-rate assets be financed with fixed-rate liabilities,
measured as a percent of total assets, which should not vary by more than 3% for
any extended period.
The notional amounts of derivatives do not represent amounts exchanged by
the parties and, thus, are not a measure of FINOVA's exposure through its use of
derivatives. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the derivatives.
Under interest rate swap agreements, FINOVA agrees to exchange with the
other party, at specified intervals, the payment streams calculated on a
specified notional amount, with at least one stream based on a floating interest
rate. Generic swap notional amounts do not change for the life of the contract.
Basis swaps involve the exchange of floating-rate indices, such as the prime
rate, the commercial paper composite rate and LIBOR and are used primarily to
protect FINOVA's margins on floating-rate transactions by locking in the spread
between FINOVA's lending and borrowing rates.
FINOVA's off-balance sheet derivative instruments involve credit and
interest rate risks. Credit risk includes the nonperformance by counterparties
to the financial agreements. All financial agreements have been executed with
major financial institutions to mitigate the credit risk from transactions.
There can be no assurance that any such institution will perform under its
agreement. FINOVA's derivative policy stipulates that the maximum exposure to
any one counterparty relative to the derivative products is limited on a net
basis to 10% of FINOVA's outstanding debt at the time of that transaction.
Interest rate risks relate to changes in interest rates and the impact on
earnings.
The use of derivatives decreased interest expense by $5.1 million in 1999,
a decrease in the aggregate cost of funds of 0.07%. The use of derivatives in
1998 decreased interest expense by $5.3 million, a decrease in the aggregate
cost of funds of 0.07%, and the use of derivatives in 1997 decreased interest
expense by $1.0 million, a decrease in the aggregate cost of funds of 0.03%.
Premiums on swaptions sold during 1999 were $4.1 million and are amortized on a
straight line basis through 2009. Market values received on swap terminations in
1999 of $3.2 million were deferred and are being amortized on a straight line
basis through 2003. These changes in interest expense from off-balance sheet
derivatives effectively alter on-balance sheet costs and must be viewed as total
interest rate management.
FINOVA also enters into short-term treasury rate locks, options, swaptions
and other derivative investments to hedge interest rate risks associated with
the warehousing of loans, primarily for FRC. FINOVA took steps to remove balance
sheet exposure from the CMBS product in 2000 by entering into a Preferred
Partner Program with a prominent investment banking firm. See Note B of Notes to
Consolidated Financial Statements for additional discussion.
In a treasury rate lock, FINOVA agrees to lock in an interest rate on a
U.S. Treasury security until a specified date in the future. Prior to the
expiration date, if treasury rates decrease, there is an associated loss on the
hedge. If treasury rates increase, FINOVA will immediately benefit from an
increase in the hedge value.
In a treasury put option, FINOVA pays an up-front fee (premium) to have the
right, but not the obligation to sell a pre-determined treasury security at an
agreed-upon strike rate. Prior to the expiration date of the option, if treasury
rates decrease, the option expires worthless and there is no additional hedge
loss. If treasury rates increase and surpass the strike rate, the value of the
A-30
THE FINOVA GROUP INC.
option will increase. In addition to the level of interest rates, the option
value also depends on other variables including volatility and the time to
maturity.
A swaption gives FINOVA the right, but not the obligation, to enter into a
swap on the exercise date. An up-front premium is the only cost incurred by
FINOVA. If swap rates rise above the strike rate, the option value will
increase. If swap rates decrease, the option will not be exercised and will
expire worthless. In addition to the level of the swap rates, the option value
also depends on other variables including volatility and time to maturity.
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type in place at December
31,1999. The rates presented are as of December 31, 1999. To the extent that
rates change, variable interest information will change:
Outstanding
at
December 31, Maturities of Derivative Products
------------ ---------------------------------------------
(Dollars in Millions) 1999 2000 2001 2002 2003 Thereafter
- --------------------- ---- ---- ---- ---- ---- ----------
RECEIVE FIXED-RATE SWAPS:
Notional value $1,925 $ 150 $ 150 $ 300 $ 100 $1,225
Weighted average receive rate 6.73% 7.24% 6.66% 6.20% 6.54% 6.82%
Weighted average pay rate 6.14% 6.07% 5.89% 6.18% 6.01% 6.19%
PAY FIXED-RATE SWAPS:
Notional value $ 200 $ 100 $ 100
Weighted average receive rate 5.64% 5.59% 5.69%
Weighted average pay rate 7.04% 7.38% 6.70%
INTEREST RATE HEDGES:
Notional value $ 131 $ 131
Weighted average rate 6.89% 6.89%
------ ----- ----- ----- ----- ------
TOTAL NOTIONAL VALUE $2,256 $ 381 $ 250 $ 300 $ 100 $1,225
====== ===== ===== ===== ===== ======
Total weighted average rates on Swaps:
Receive rate 6.63% 6.58% 6.27% 6.20% 6.54% 6.82%
====== ===== ===== ==== ===== ======
Pay rate 6.23% 6.59% 6.21% 6.18% 6.01% 6.19%
====== ===== ===== ==== ===== ======
For the benefit of its customers, FINOVA enters into interest rate cap
agreements. The total notional amount of these agreements at December 31, 1999
was $35.1 million, none of which was in a pay or receive position. These
agreements will mature as follows: $1.5 million in 2000, $7.6 million in 2001,
$21.0 million in 2002 and $5.0 million in 2003. FINOVA has also entered into a
fixed-rate foreign currency-denominated transaction (Japanese Yen ("JPY") 5
billion) maturing in 2002. Two derivatives are associated with this transaction,
a receive fixed-rate swap (JPY 5 billion) versus 3-month JPY LIBOR and a basis
swap, converting JPY LIBOR to US Dollar ("USD") LIBOR , both of which mature in
2002. The receive side of the basis swap has a notional of JPY 5 billion paying
3-month JPY LIBOR and the pay side has a notional of USD 43.6 million paying
3-month USD LIBOR. In addition, FINOVA has another $75 million basis swap
maturing in 2000. These derivatives are not reflected in the table above.
A-31
Derivative product activity for the three years ended December 31, 1999 is
as follows:
Interest
Receive Pay Rate
Fixed-Rate Fixed-Rate Basis Hedge
(Dollars in Millions) Swaps Swaps Swaps Agreements TOTAL
- --------------------- ----- ----- ----- ---------- -----
Balance, January 1, 1997 $ 1,350 $ 825 $ 878 $ $ 3,053
Expired (275) (275) (250) (800)
Additions 327 327
------- ----- ----- ------- -------
Balance December 31, 1997 1,402 550 628 2,580
Expired (325) (200) (628) (1,153)
Additions 350 217 567
------- ----- ----- ------- -------
Balance December 31, 1998 1,077 700 217 1,994
Expired (427) (500) (1,254) (2,181)
Additions 1,275 75 1,168 2,518
------- ----- ----- ------- -------
Balance December 31, 1999 $ 1,925 $ 200 $ 75 $ 131 $ 2,331
======= ===== ===== ======= =======
The table above does not include a JPY 5 billion receive fixed-rate swap or
a basis swap converting JPY LIBOR to US Dollar LIBOR. The receive side of the
basis swap has a notional of JPY 5 billion and the pay side has a notional of
USD 43.6 million.
NOTE G COMPANY-OBLIGATED MANDATORY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST SOLELY HOLDING CONVERTIBLE DEBENTURES
OF FINOVA ("TOPrS")
In December 1996, FINOVA Finance Trust, a subsidiary trust sponsored and
wholly-owned by FINOVA, issued (a) 2,300,000 shares of convertible trust
originated preferred securities (the "Preferred Securities" or "TOPrS") to the
public for gross proceeds of $115 million (before transaction costs of $3.5
million) and (b) 71,135 shares of common securities to FINOVA. The gross
proceeds from these transactions were invested by the trust in $118.6 million
aggregate principal amount of 5 1/2% convertible subordinated debentures due
2016 (the "Debentures") newly issued by FINOVA. The Debentures represent all of
the assets of the trust. The proceeds from the issuance of the Debentures were
contributed by FINOVA to FINOVA Capital, which used the proceeds to repay
commercial paper and other indebtedness.
The Preferred Securities accrue and pay cash distributions quarterly when
declared by FINOVA at a rate of 5 1/2% per annum of the stated liquidation
amount of $50 per preferred security. FINOVA has guaranteed, on a subordinated
basis, distributions and other payments due on the Preferred Securities (the
"Guarantee"). The Guarantee, when taken together with FINOVA's obligations under
the Debentures, the indenture under which the Debentures were issued and
FINOVA's obligations under the Amended and Restated Declaration of Trust
governing the trust, provides a full and unconditional guarantee on a
subordinated basis of amounts due on the Preferred Securities. FINOVA can defer
making distributions on the Debentures for up to 20 consecutive quarters, but
does not anticipate doing so. The Preferred Securities are mandatorily
redeemable upon the maturity of the Debentures on December 31, 2016, or earlier
to the extent of any redemption by FINOVA of any Debentures. The redemption
price in either case will be $50 per share plus accrued and unpaid distributions
to the date fixed for redemption.
Prior to their maturity, the Preferred Securities are convertible into
FINOVA's common stock at the election of the holders of the Preferrred
Securities individually. Each debenture is convertible into 1.2774 shares of
FINOVA's common stock (equivalent to a conversion price of $39.14 per share),
subject to adjustment in specified circumstances. FINOVA can terminate the
conversion rights noted above on 30 days notice on or after December 31,1999 if
it is current on its payments for the Debentures and the closing prices of its
common stock trade at or above 120% of the conversion price of the Preferred
Securities ($46.97, assuming no adjustments).
NOTE H SHAREOWNERS' EQUITY
On August 14, 1997, the Board of Directors declared a two-for-one stock
split of FINOVA's common stock effected as a stock distribution on October 1,
1997 to shareowners of record as of September 1, 1997. All share and per share
data have been restated to reflect the split.
A-32
THE FINOVA GROUP INC.
At December 31, 1999, 1998 and 1997, FINOVA had 64,849,000, 58,555,000 and
58,555,000 shares of common stock issued, with 61,252,000, 55,721,000 and
56,282,000 shares of common stock outstanding, respectively. Approximately
5,926,000, 6,917,000 and 7,972,000 common shares were reserved for issuance
under the 1992 Stock Incentive Plan at December 31, 1999, 1998 and 1997,
respectively.
In addition to the convertible preferred securities issued by FINOVA
Finance Trust in 1996, FINOVA has 20,000,000 shares of preferred stock
authorized, none of which was issued at December 31, 1999. The Board of
Directors is authorized to provide for the issuance of shares of preferred stock
in series, to establish the number of shares to be included in each series and
to fix the designation, powers, preferences and rights of the shares of each
series. In connection with FINOVA's stock incentive plan, 250,000 shares of
preferred stock are reserved for issuance of awards under that plan.
Each outstanding share of FINOVA's common stock has a tandem junior
participating preferred stock purchase right ("Right") attached to it. The
Rights contain provisions to protect shareowners in the event of an unsolicited
acquisition or attempted acquisition of 20% or more of FINOVA's common stock
that is not believed by the Board of Directors to be in the best interest of
shareowners. The Rights are represented by the common share certificates and are
not exercisable or transferable apart from the common stock until such a
situation arises. The Rights may be redeemable by FINOVA at $0.01 per right
prior to the time any person or group has acquired 20% or more of FINOVA's
shares. FINOVA has reserved 600,000 shares of Junior Participating Preferred
Stock for issuance in connection with the Rights.
FINOVA periodically repurchases its securities on the open market to fund
its obligations pursuant to employee stock options, benefit plans and similar
obligations. During the years ended December 31, 1999, 1998 and 1997, FINOVA
repurchased 1,833,200, 1,299,200 and 1,035,800 shares, respectively. The program
may be discontinued at any time.
In 1999 the shareowners approved an amendment to FINOVA's certificate of
incorporation that increased the authorized common stock from 100 million to 400
million shares and the preferred stock from 5 million to 20 million shares.
NOTE I STOCK OPTIONS
During 1992, the Board of Directors of FINOVA adopted The FINOVA Group Inc.
1992 Stock Incentive Plan (the "Plan") for the grant of options, restricted
stock and stock appreciation rights to officers, directors and employees. The
Plan provides for the following types of awards: (a) stock options (both
incentive and non-qualified stock options), (b) stock appreciation rights and
(c) restricted stock. The Plan generally authorizes the issuance of awards for
up to 2 1/2% of the total number of shares of common stock outstanding as of the
first day of each year, with some modifications. In addition, 250,000 shares of
preferred stock are reserved for awards under the Plan.
The stock options outstanding at December 31, 1999 were granted for terms
of 10 years and generally become exercisable between one month to five years
from the date of grant. Stock options are issued at market value at the date of
grant, unless a higher exercise price is established. Since 1993, the Board has
issued multi-year, multi-priced stock options to senior executives. The exercise
price of those option grants range in price from the fair market value on the
grant date to prices up to 58.7% in excess of the grant date value. Those option
grants are intended to cover anticipated grants during the years the grants are
scheduled to vest, although the Board may issue additional grants at its
discretion. In 1999, premium-priced options were granted with exercise prices
ranging from $41.56 to $50.29.
A-33
THE FINOVA GROUP INC.
Information with respect to options granted and exercised under the Plan
for the three years ended December 31, 1999 is as follows:
Average Option
Shares Price Per Share
------ ---------------
Options outstanding at January 1, 1997 3,437,178 $19.17
Granted 781,108 43.57
Exercised (442,049) 15.57
Canceled (191,094) 28.05
--------- ------
Options outstanding at December 31, 1997 3,585,143 24.45
Granted 1,197,032 58.22
Exercised (626,853) 18.13
Canceled (197,680) 42.00
--------- ------
Options outstanding at December 31, 1998 3,957,642 34.79
Granted 1,125,443 42.81
Exercised (258,004) 21.35
Canceled (248,335) 51.86
--------- ------
Options outstanding at December 31, 1999 4,576,746 $36.56
========= ======
At December 31, 1999, stock options with respect to 4,576,746 common shares
were outstanding at exercise prices ranging from $6.35 to $83.21 per share.
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1999:
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/99 Life Price at 12/31/99 Price
------ ----------- ---- ----- ----------- -----
$ 6.35 - $18.44 933,512 3.20 $13.52 933,512 $13.52
18.50 - 32.75 990,772 5.71 24.85 988,660 24.83
32.84 - 41.56 1,006,271 9.38 40.45 76,976 35.90
42.75 - 54.47 1,224,067 8.20 50.10 537,152 48.07
54.97 - 83.21 422,124 8.16 66.48 129,911 60.91
-------------- --------- ---- ------ --------- ------
$6.35 - $83.21 4,576,746 6.90 $36.56 2,666,211 $27.63
============== ========= ==== ====== ========= ======
Since April 1992, the Board of Directors has only granted performance based
restricted stock to employees. Performance based restricted stock awards
(113,500 shares in 1999, 78,985 shares in 1998 and 90,100 shares in 1997), vest
generally over five years from the date of grant. The holder of the performance
based restricted stock, like restricted stock, has the right to receive
dividends and vote the target number of shares but may not sell, assign,
transfer, pledge or otherwise encumber the performance based restricted stock.
All performance based restricted stock grants since 1992 were based on FINOVA
share performance and may result in greater or lesser numbers of shares
ultimately being delivered to the holder, depending on that performance. The
target number of shares are deemed received on the grant date. Additional
vesting over the target are reported as new grants as of the vesting dates.
Vestings below target would be reported as a forfeiture of amounts below the
target number of shares. The balance of unamortized restricted stock was $12.3
million at December 31, 1999.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. No compensation cost has been recognized for its fixed
stock option plans because FINOVA grants options at or above market price on the
date of grant. Vesting criteria for restricted stock was not met in 1999.
A-34
THE FINOVA GROUP INC.
Therefore, no compensation expense was charged against income in 1999. The
compensation cost charged against income for performance-based plans in 1998 and
1997 was $5.5 million and $7.9 million, respectively. Had compensation cost for
the Company's stock based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the fair
market value method, FINOVA's net income would have been $212.9 million, $153.4
million and $134.4 million for 1999, 1998 and 1997, respectively. Basic earnings
per share would have been $3.56, $2.74 and $2.47 and diluted earnings per share
would have been $3.37, $2.59 and $2.34 for 1999, 1998 and 1997, respectively.
The fair value of the options was estimated on the date of grant using the
Black Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of 2.12%, 1.75% and 1.92%, expected volatility of 27%, 26% and 43%, risk-free
interest rates on options with expected lives of five years of 5.4%, 5.7% and
6.2% and risk-free interest rates on options with expected lives of seven years
of 5.5%, 5.8% and 6.3%. The weighted average grant date fair value of options
issued for 1999, 1998 and 1997 were $13.25, $17.45 and $17.51, respectively.
With the acquisition of Sirrom Capital Corporation in March 1999, the Board
of Directors of FINOVA adopted Sirrom's three existing stock option plans (the
"Sirrom Plans"). Each option outstanding under the Sirrom Plans at the time of
the acquisition was converted into an option exercisable for 0.1634 shares of
FINOVA common stock. No new options are expected to be issued under these plans.
Options from the Sirrom Plans were not included in the tables above.
The following table summarizes information about stock options outstanding
under the Sirrom Plans at December 31, 1999:
Number Weighted Average Number
Outstanding Remaining Exercisable
Exercise Prices at 12/31/99 Contractual Life at 12/31/99
--------------- ----------- ---------------- -----------
$ 15.30 5,237 8.76 5,237
21.80 158,402 6.75 158,402
32.51 1,634 8.88 1,634
85.49 1,960 0.22 1,960
--------------- ------- ---- -------
$15.30 - $85.49 167,233 6.76 167,233
--------------- ------- ---- -------
NOTE J INCOME TAXES
The consolidated provision for income taxes consists of the following for
the years ended December 31:
1999 1998 1997
-------- -------- --------
Current:
United States:
Federal $ 11,498 $ 25,308 $ 34,936
State 341 8,700 13,973
Foreign 5,941 1,870 3,626
-------- -------- --------
17,780 35,878 52,535
-------- -------- --------
Deferred:
United States:
Federal 94,878 51,491 30,869
State 19,193 6,855 (1,115)
Foreign 4,467 7,950
-------- -------- --------
118,538 66,296 29,754
-------- -------- --------
Provision for income taxes $136,318 $102,174 $ 82,289
======== ======== ========
Income taxes paid in 1999, 1998 and 1997 were approximately $11.5 million,
$26.0 million and $30.3 million, respectively.
A-35
THE FINOVA GROUP INC.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1999 and 1998 consisted of the following:
1999 1998
-------- --------
Deferred tax liabilities:
Deferred income from leveraged leases $511,233 $396,572
Deferred income from lease financing 135,889 108,883
Goodwill 42,335 23,726
Other comprehensive income 23,467
Deferred acquisition costs 19,963 15,045
Foreign taxes 8,458
Other 14,751 16,229
-------- --------
Gross deferred tax liability 756,096 560,455
-------- --------
Deferred tax assets:
Reserve for credit losses 119,457 92,784
Alternative minimum tax 66,259 52,442
Net operating loss carryforward/carryback 62,965 20,625
Basis difference in loans/investments 23,324
Accrued expenses 18,054 9,051
Foreign 10,792
Other 26,519 32,493
-------- --------
Gross deferred tax asset 316,578 218,187
-------- --------
Net deferred tax liability $439,518 $342,268
======== ========
The federal statutory income tax rate is reconciled to the effective income
tax rate as follows:
1999 1998 1997
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 3.6 3.8 2.6
Foreign tax effects 0.1 (0.1)
Municipal and ESOP income (1.3) (1.6) (2.0)
Other 1.1 1.1 1.2
---- ---- ----
Provision for income taxes 38.4% 38.4% 36.7%
==== ==== ====
NOTE K PENSION AND OTHER BENEFITS
Net periodic pension costs were $4.2 million, $3.0 million and $1.9 million
for the years ended December 31, 1999, 1998 and 1997, respectively. FINOVA's
pension costs were accrued at $9.6 million at December 31, 1999 and $5.5 million
at December 31, 1998.
Net periodic other postretirement benefits costs were $0.9 million, $0.7
million and $0.5 million for each of the years ended December 31, 1999, 1998 and
1997, respectively. FINOVA's accrued postretirement benefit costs were $4.4
million at December 31, 1999 and $3.5 million at December 31, 1998.
FINOVA's investment of $71 million in trust for nonqualified compensation
plans consists of securities held for trading and is recorded at market.
NOTE L EARNINGS PER SHARE
Basic earnings per share exclude the effects of dilution and are computed
by dividing income available to common shareowners by the weighted average
amount of common stock outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if options, convertible
preferred stock or other contracts to issue stock were exercised or converted
A-36
THE FINOVA GROUP INC.
into common stock. These per share calculations are presented for the years
ended December 31, 1999, 1998 and 1997 on the Statements of Consolidated Income
and are detailed below:
1999 1998 1997
------------ ------------ ------------
BASIC EARNINGS PER SHARE COMPUTATION:
Net income $ 215,244 $ 160,341 $ 137,910
============ ============ ============
Weighted average shares outstanding 60,173,000 56,232,000 54,748,000
Contingently issued shares (293,000) (286,000) (343,000)
------------ ------------ ------------
Adjusted weighted average shares 59,880,000 55,946,000 54,405,000
============ ============ ============
Earnings per share $ 3.59 $ 2.87 $ 2.53
============ ============ ============
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 215,244 $ 160,341 $ 137,910
Preferred dividends, net of tax 3,782 3,782 3,992
------------ ------------ ------------
Net income available to common shareowners $ 219,026 $ 164,123 $ 141,902
============ ============ ============
Weighted average shares outstanding 60,173,000 56,232,000 54,748,000
Contingently issued shares (293,000) (171,000) (184,000)
Incremental shares from assumed conversions:
Stock options 1,482,000 1,706,000 1,659,000
Convertible preferred securities 2,938,000 2,938,000 2,938,000
------------ ------------ ------------
Total potential dilutive common shares 4,420,000 4,644,000 4,597,000
------------ ------------ ------------
Adjusted weighted average shares 64,300,000 60,705,000 59,161,000
============ ============ ============
Earnings per share $ 3.41 $ 2.70 $ 2.40
============ ============ ============
NOTE M LITIGATION AND CLAIMS
FINOVA is party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts. That
litigation often results from FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties and it is possible that some of the legal
actions, proceedings or claims referred to above could be decided against
FINOVA. Although the ultimate amount for which FINOVA may be held liable, if
any, is not ascertainable, FINOVA believes that any resulting liability should
not materially affect FINOVA's financial position, results of operations or cash
flows.
NOTE N FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined by FINOVA using market information obtained by
FINOVA and the valuation methodologies described below. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein may not be indicative of
the amounts that FINOVA could realize in a current market exchange. The use of
different market assumptions or valuation methodologies may have a material
effect on the estimated fair value amounts.
A-37
THE FINOVA GROUP INC.
The carrying amounts and estimated fair values of FINOVA's financial
instruments are as follows for the years ended December 31:
1999 1998
--------------------------- -----------------------
Carrying Estimated Fair Carrying Estimated
Amount Value Amount Fair Value
------ ----- ------ ----------
Balance Sheet - Financial Instruments:
Assets:
Loans and other financing contracts $10,109,408 $ 9,972,222 $7,115,291 $ 7,151,296
Liabilities:
Senior debt 11,407,767 11,227,306 8,394,578 8,472,603
Off-Balance Sheet - Financial Instruments:
Interest rate swaps (18,306) 17,558
Interest rate hedge agreements 2,681 (459)
The carrying values of cash and cash equivalents, fee-based receivables,
financing contracts held for sale, accounts payable and accrued expenses, due to
clients and interest payable (including accrued amounts related to interest rate
swaps and interest rate hedge agreements) approximate fair values due to the
short-term maturity of these items.
The methods and assumptions used to estimate the fair values of other
financial instruments are summarized as follows:
Loans and Other Financing Contracts:
The fair value of loans and other financing contracts was estimated by
discounting expected cash flows using the current rates at which loans of
similar credit quality, size and remaining maturity would be made as of December
31, 1999 and 1998. Management believes that the risk factor embedded in the
current interest rates on performing loans results in a fair valuation of
performing loans. As of December 31, 1999 and 1998, the fair value of
nonaccruing impaired contracts with a carrying amount of $206.2 million and
$119.7 million, respectively, was not estimated because it is not practical to
reasonably assess the credit adjustment that would be applied in the marketplace
for such loans. As of December 31, 1999 and 1998, the carrying amount of loans
and other financing contracts excludes repossessed assets with a total carrying
amount of $130.7 million and $119.7 million, respectively.
Senior Debt:
The fair value of senior debt was estimated by discounting future cash
flows using rates currently available for debt of similar terms and remaining
maturities. The carrying values of commercial paper and borrowings under
revolving credit facilities, if any, were assumed to approximate fair values due
to their short maturities.
Interest Rate Swaps:
The fair values of interest rate swaps are based on quoted market prices
obtained from participating banks and dealers.
Interest Rate Hedge Agreements:
The fair value of interest rate hedge agreements in place at December 31,
1999 and 1998 were based on quoted market prices obtained from participating
loans and dealers for transactions of similar remaining durations.
The fair value estimates presented herein were based on information
obtained by FINOVA as of December 31, 1999 and 1998. Although management is not
aware of any factors that would significantly affect the estimated fair values,
such values have not been updated since December 31, 1999 and 1998. Therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
A-38
THE FINOVA GROUP INC.
NOTE O OPERATING EXPENSES
The following represents a summary of the major components of operating
expenses for the three years ended December 31:
1999 % 1998 % 1997 %
-------- ------ -------- ----- -------- ------
Salaries and employee benefits $162,183 63.9% $140,939 65.1% $109,514 65.0%
Depreciation and amortization 31,860 12.6% 23,069 10.6% 17,021 10.1%
Travel and entertainment 18,667 7.4% 16,045 7.4% 11,917 7.1%
Problem account costs 18,636 7.3% 10,332 4.8% 11,577 6.9%
Occupancy expenses 13,356 5.3% 11,562 5.3% 8,368 5.0%
Professional services 10,504 4.1% 9,982 4.6% 7,654 4.5%
Deferred acquisition costs (32,197) (12.7%) (22,409) (10.3%) (16,847) (10.0%)
Other operating expenses 30,745 12.1% 27,133 12.5% 19,240 11.4%
-------- ------ -------- ----- -------- ------
Total operating expenses $253,754 100.0% $216,653 100.0% $168,444 100.0%
======== ====== ======== ===== ======== ======
NOTE P OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income activity for the three years ended
December 31, 1999 was as follows:
Net Accumulated
Unrealized Other
Foreign Currency Holding Gains Comprehensive
Translation on Securities Income
----------- ------------- -------------
Balance, January 1, 1997 $ 1,008 $ $ 1,008
Change during 1997 (1,018) (1,018)
------- -------- -------
Balance, December 31, 1997 (10) (10)
Change during 1998 (208) 904 696
------- -------- -------
Balance, December 31, 1998 (218) 904 686
Change during 1999 (3,928) 37,054 33,126
------- -------- -------
Balance, December 31, 1999 $(4,146) $ 37,958 $33,812
======= ======== =======
For 1999 and 1998, the changes in foreign currency translation were net of
income tax benefits of $2.1 million and $140,000, respectively. Net unrealized
holding gains were net of income tax expenses of $25.6 million in 1999 and
$608,000 in 1998.
NOTE Q SEGMENT REPORTING
Management's Policy for Identifying Reportable Segments
FINOVA's reportable business segments are strategic business units that
offer distinctive products and services that are marketed through different
channels.
Types of Products and Services
FINOVA has three market groups that are also its reportable segments:
Commercial Finance, Specialty Finance and Capital Markets. Commercial Finance
includes traditional asset-based businesses that provide financing through
revolving credit facilities and term loans secured by assets such as receivables
and inventory, as well as providing factoring and management services. This
segment includes the following lines of business: Business Credit, Commercial
Services, Corporate Finance, Distribution & Channel Finance, Growth Finance and
Rediscount Finance. Specialty Finance includes businesses which lend to a
variety of highly focused, industry-specific niches. This segment includes the
following lines of business: Commercial Equipment Finance, Communications
Finance, Franchise Finance, Healthcare Finance, Portfolio Services, Public
Finance, Resort Finance, Specialty Real Estate Finance and Transportation
Finance. Capital Markets, in conjunction with institutional investors, provides
commercial mortgage banking services and debt and equity capital funding. This
segment includes: Realty Capital, Investment Alliance, Loan Administration,
Mezzanine Capital and Harris Williams & Co.
A-39
THE FINOVA GROUP INC.
Reconciliation of Segment Information to Consolidated Amounts
Management evaluates the business performance of each group based on total
net revenue, income before allocations and managed assets. Total net revenue is
operating margin plus gains on disposal of assets. Income before allocations is
income before income taxes and preferred dividends, excluding allocation of
corporate overhead expenses and the unallocated portion of provision for credit
losses. Managed assets includes each segment's investment in financing
transactions plus securitizations and participations sold.
Information for FINOVA's reportable segments reconciles to FINOVA's
consolidated totals as follows:
1999 1998
---- ----
TOTAL NET REVENUE:
Commercial Finance $ 216,083 $ 187,461
Specialty Finance 384,789 344,541
Capital Markets 101,414 24,170
Corporate and other (16,388) 8,978
----------- -----------
Consolidated total $ 685,898 $ 565,150
=========== ===========
INCOME (LOSS) BEFORE ALLOCATIONS:
Commercial Finance $ 87,406 $ 67,013
Specialty Finance 307,377 273,674
Capital Markets 31,235 (2,775)
Corporate and other, overhead and unallocated
provision for credit losses (70,674) (71,615)
----------- -----------
Income before income taxes and preferred dividends $ 355,344 $ 266,297
=========== ===========
MANAGED ASSETS:
Commercial Finance $ 4,195,237 $ 3,005,130
Specialty Finance 8,265,497 7,211,164
Capital Markets 1,051,367 255,575
Corporate and other 93,273 85,948
----------- -----------
Consolidated total $13,605,374 $10,557,817
Less securitizations and participations sold (483,397) (537,596)
----------- -----------
Investment in financing transactions $13,121,977 $10,020,221
=========== ===========
GEOGRAPHIC INFORMATION
FINOVA attributes managed assets to geographic areas based on the location
of the asset. Managed assets at December 31, 1999 and 1998 by geographic area
were as follows:
1999 % 1998 %
----------- ----- ----------- -----
United States $12,248,105 90.0% $ 9,932,318 94.1%
Canada 258,990 1.9% 94,035 0.9%
United Kingdom 214,781 1.6% 156,021 1.5%
Other foreign 883,498 6.5% 375,443 3.5%
----------- ----- ----------- -----
$13,605,374 100.0% $10,557,817 100.0%
=========== ===== =========== =====
Other foreign includes customer relationships in geographic areas which, on
an individual basis represent less than 1.0% of the total.
Currently, it is impracticable to report revenues attributed to foreign
countries.
MAJOR CUSTOMER INFORMATION
FINOVA has no single customer that accounts for 10% or more of revenue.
A-40
THE FINOVA GROUP INC.
NOTE R ACQUISITIONS
During 1999 and 1998, FINOVA acquired various businesses and portfolios
under the purchase method with initial managed assets totaling $1.15 billion and
$44 million, respectively.
In December 1999, FINOVA acquired Fremont Financial Corporation, the
commercial lending subsidiary of Fremont General Corporation, headquartered in
Santa Monica, California. The company, which provides secured working capital
and term loans averaging $2 million to $4 million to midsize businesses
throughout the U.S., was added to FINOVA's Commercial Finance Group. The
purchase price was approximately $131 million, paid in cash. Total assets
acquired were $723 million, including $23 million in goodwill and assumed
liabilities of $592 million. Managed assets purchased were $662 million.
Goodwill, amortizing over 20 years, is subject to change due to a preliminary
estimate of loan balances at the date of acquisition.
In March 1999, FINOVA acquired Sirrom Capital Corporation, a specialty
finance company headquartered in Nashville, Tennessee. The purchase price was
approximately $343 million in FINOVA common stock, excluding converted stock
options. Total assets acquired were $621 million, including $67 million in
goodwill with $278 million in assumed liabilities and transaction costs. Managed
assets acquired were $469 million. Goodwill is being amortized over 25 years and
covenants not to compete, which are included in goodwill, are being amortized
over 3 years.
The following unaudited pro forma information gives effect to the merger as
if it had occurred on January 1, 1999 and 1998 and combines the historical
consolidated information of FINOVA and Sirrom for the year ended December 31,
1999 and 1998.
The comparative pro forma information is not necessarily indicative of the
results that actually would have occurred had the merger been consummated on the
dates indicated or that may be obtained in the future. The pro forma financial
information does not give effect to the potential cost savings and other
synergies that may result from the merger or the possible cash-out of existing
stock options held by employees of Sirrom that became fully vested by reason of
the adoption of the merger agreement by Sirrom shareowners. There can be no
assurance that FINOVA will realize cost savings or synergies from this or any
other acquisition. Included in the historical operations of Sirrom for the year
ended 1999 are approximately $27 million of nonrecurring charges, a significant
portion of which related to the acquisition.
Years Ended December 31,
------------------------
1999 1998
---- ----
Total revenue $1,243,970 $1,080,507
Net Income $ 163,060 $ 87,853
Earnings per share-basic $ 2.72 $ 1.57
Earnings per share-diluted $ 2.59 $ 1.51
The acquisition resulted in an excess purchase price over the historical
net assets acquired. The excess is allocated to the net assets acquired and
liabilities assumed, as follows:
Allocation of purchase price:
Purchase price $ 342,730
Elimination of historical shareowners' equity of Sirrom (262,046)
---------
Excess purchase price $ 80,684
=========
Allocation of excess purchase price:
Elimination of unamortized debt costs $ (3,227)
Deferred income taxes 44,152
Assumed liabilities (26,802)
Goodwill 66,561
---------
Excess purchase price $ 80,684
=========
In February 1999, FINOVA acquired Preferred Business Credit, a Los
Angeles-based provider of accounts receivable loans to small and midsize
businesses for $12 million in FINOVA common stock. It is functioning as the West
Coast operation for the Growth Finance division, acquired in October 1998. Total
assets purchased were $30 million, including $12 million in goodwill that is
being amortized over 25 years. Managed assets purchased were $18 million.
A-41
THE FINOVA GROUP INC.
In October 1998, FINOVA acquired United Credit Corporation for $26 million
cash. The New York-based provider of commercial financing serves small and
mid-size growth-oriented businesses. Total assets purchased were $62 million,
including $16 million in goodwill, which is being amortized over 25 years.
Managed assets acquired were $45 million. The addition formed a new division
named FINOVA Growth Finance, providing collateral-based working capital
financing, primarily secured by accounts receivable. The division provides
financing ranging from $100,000 to $1 million to businesses with annual sales
under $10 million.
In October 1998, FINOVA acquired Electronic Payment Systems, Inc., a
commercial receivables servicing business headquartered in Salt Lake City, Utah,
to support the activities of FINOVA Realty Capital.
NOTE S NEW ACCOUNTING STANDARDS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
("SFAS No. 137"). This statement defers the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133")
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by recognition of
those items as assets or liabilities in the statement of financial position and
measurement at fair value. The impact of SFAS No. 133 on the Company's financial
position and results of operations has not yet been determined.
A-42
THE FINOVA GROUP INC.
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(Dollars in Thousands, except per share data)
The following represents the condensed quarterly results for the three
years ended December 31, 1999, 1998 and 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Income earned from financing
transactions:
1999 $ 273,075 $ 295,846 $ 318,688 341,034
1998 232,833 246,069 253,309 275,562
1997 206,226 216,836 219,012 237,689
Interest expense:
1999 131,183 139,153 150,142 172,380
1998 110,280 114,692 121,937 131,268
1997 96,793 101,501 105,208 111,148
Volume-based fees:
1999 12,735 11,264 14,317 11,764
1998 22,156 19,103 16,687 19,777
1997 7,784 8,583 9,546 13,465
Gains on disposal of assets:
1999 12,370 18,760 14,880 22,010
1998 1,525 7,433 6,471 12,483
1997 3,233 9,768 10,305 7,027
Non-interest expenses:
1999 84,225 97,059 107,485 109,772
1998 79,548 89,702 85,922 113,762
1997 66,769 77,599 80,334 85,931
Net income:
1999 50,057 53,663 54,905 56,619
1998 39,741 40,535 41,838 38,227
1997 32,178 34,670 33,337 37,725
Basic earnings per share:
1999 0.89 0.87 0.90 0.93
1998 0.71 0.72 0.75 0.69
1997 0.60 0.64 0.62 0.68
Diluted earnings per share:
1999 0.83 0.83 0.86 0.89
1998 0.67 0.68 0.71 0.65
1997 0.57 0.61 0.58 0.64
A-43
THE FINOVA GROUP INC.
AVERAGE BALANCES/OPERATING MARGIN/AVERAGE ANNUAL RATES (UNAUDITED) (1)
(Dollars in Thousands)
The following represents the breakdown of FINOVA's average balance
sheet, operating margin and average annual rates for the years ended December
31, 1999 and 1998:
1999 1998
------------------------------------- ------------------------------------
Interest & Interest &
Average Volume-Based Average Average Volume-Based Average
Balance Fees Rate Balance Fees Rate
------- ---- ---- ------- ---- ----
ASSETS
Cash and cash equivalents $ 70,247 $ $ 38,304 $
Investment in financing transactions 11,352,204 1,210,736(2) 11.3%(3) 9,018,351 1,015,415(2) 11.9%(3)
Less reserve for credit losses (237,146) (184,162)
----------- ---------- ---- ---------- ---------- ----
Net investment in financing transactions 11,115,058 8,834,189
Investments 236,730
Goodwill and other assets 580,781 519,742
----------- ----------
$12,002,816 $9,392,235
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Other liabilities $ 380,913 $ $ 386,714 $
Senior debt 9,646,010 592,858 6.2% 7,452,245 478,177 6.4%
Deferred income taxes 370,986 304,571
----------- ---------- ---- ---------- ---------- ----
10,397,909 8,143,530
Company-obligated mandatory redeemable
convertible preferred securities of
subsidiary trust solely holding
convertible debentures of FINOVA 111,550 111,550
Shareowners' equity 1,493,357 1,137,155
----------- ----------
$12,002,816 $9,392,235
=========== ==========
Interest income and volume based fees/
average earning assets (3) $1,210,736 11.3% 1,015,415 11.9%
Interest expense/average earning
assets (3) (4) 592,858 5.5% 478,177 5.6%
---------- ---- ---------- ----
Operating margin (4) $ 617,878 5.8% $ 537,238 6.3%
========== ==== ========== ====
- ----------
(1) Averages are calculated based on monthly balances.
(2) For the years ended December 31, 1999 and 1998 interest income is shown net
of operating lease depreciation.
(3) The average rate is calculated based on average earning assets ($10,718,941
and $8,546,715 for 1999 and 1998, respectively) which are net of average
deferred taxes on leveraged leases and average nonaccruing assets.
(4) For the year ended December 31, 1999, excluding the impact of derivatives,
interest expense would have been $597,919 or 5.58% of average earning
assets and operating margin would have been $612,817 or 5.72% of average
earning assets. For the year ended December 31, 1998, excluding the impact
of derivatives, interest expense would have been $472,893 or 5.53% of
average earning assets and operating margin would have been $542,522 or
6.35% of average earning assets.
A-44