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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20594
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 1997 Commission File Number 1-11011
THE FINOVA GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1850 North Central Ave., P. O. Box 2209
Phoenix, AZ 85002-2209
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code - 602-207-4900
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
Junior Participating Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment of this
Form 10-K.|_|
As of March 13, 1998, approximately 56,456,000 shares of Common Stock ($0.01 par
value) were outstanding, and the aggregate market value of the Common Stock
(based on its closing price per share on such date of $57-15/16) held by
nonaffiliates was approximately $3,211,172,000.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part Where
- -------- Incorporated
------------
1. Proxy Statement relating to 1998 Annual Meeting of Shareowners
of The FINOVA Group Inc. (but excluding information contained
therein furnished pursuant to items 402(k) and (l) of SEC III
Regulation S-K).
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TABLE OF CONTENTS
Name of Item
------------
Item # Page
- --------------------------------------------------------------------------------
Part I
Item 1 Business:
Introduction 1
General 1
Business Groups 1
Portfolio Composition 3
Investment in Financing Transactions 3
Cost and Use of Borrowed Funds 11
Matched Funding Policy 12
Credit Ratings 13
Residual Realization Experience 13
Business Development and Competition 14
Credit Quality 15
Risk Management 15
Portfolio Management 15
Delinquencies and Workouts 16
Governmental Regulation 16
Employees 16
Special Note Regarding Forward-Looking Statements 16
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 18
Optional Executive Officers of Registrant 18
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Shareowner Matters 19
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8 Financial Statements & Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 21
Part III
Item 10 Directors & Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners & Management 22
Item 13 Certain Relationships & Related Transactions 22
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries ("FINOVA Capital").
GENERAL
The FINOVA Group Inc. is a financial services holding company. Through
its principal subsidiary, FINOVA Capital, the Company provides a broad range of
financing and capital market products to midsize businesses. FINOVA Capital has
been in operation for over 43 years.
FINOVA extends revolving credit facilities, term loans and equipment
and real estate financing primarily to "middle-market" businesses with financing
needs falling generally between $500,000 and $35 million. FINOVA operates in 16
specific industry or market niches under three market groups. FINOVA selected
these groups because its expertise in evaluating the creditworthiness of
prospective customers and its ability to provide value-added services enables
the Company to differentiate itself from its competitors. That expertise and
ability also enables FINOVA to command pricing that provides a satisfactory
spread over its borrowing costs.
FINOVA seeks to maintain a high quality portfolio and to minimize
non-earning assets and write-offs. FINOVA uses clearly defined underwriting
criteria and stringent portfolio management techniques. The Company diversifies
its lending activities geographically and among a range of industries, customers
and financing products.
Due to the diversity of FINOVA's portfolio, the Company believes it is
better able to manage competitive changes in its markets and to withstand the
impact of deteriorating economic conditions on a regional or national basis.
There can be no assurance, however, that competitive changes, borrowers'
performance, economic conditions or other factors will not result in an adverse
impact on FINOVA's results of operations or financial condition.
FINOVA generates interest income, leasing income, fees and other income
through charges assessed on outstanding loans, loan servicing, leasing,
brokerage and other activities. FINOVA's primary expenses are the costs of
funding the loan and lease business, including interest paid on debt, provisions
for credit losses, marketing expenses, salaries and employee benefits, servicing
and other operating expenses and income taxes.
FINOVA is headquartered in Phoenix, Arizona with business development
offices throughout the U.S. and in London, U.K. and Toronto, Canada.
Business Groups
FINOVA operates the following principal lines of business under three
market groups:
Commercial Finance
o Business Credit offers collateral-oriented revolving credit
facilities and term loans for manufacturers, distributors,
wholesalers and service companies. Typical transaction sizes
range from $500,000 to $3 million.
o Corporate Finance provides a full range of cash
flow-oriented and asset-based term and revolving loan
products for manufacturers, wholesalers, distributors,
specialty retailers and commercial and consumer service
businesses. Typical transaction sizes range from $2 million
to $35 million.
o Inventory Finance provides inbound and outbound inventory
financing, combined inventory/accounts receivable lines of
credit and purchase order financing for equipment
distributors, value-added resellers and dealers nationwide.
Transaction sizes generally range from $500,000 to $30
million.
o Factoring Services offers full service factoring and
accounts receivable management services for entrepreneurial
and larger firms, primarily in the textile and apparel
industries. The annual factored volume of these companies is
generally between $5 million and $25 million.
1
o Rediscount Finance offers revolving credit facilities to the
independent consumer finance industry including sales,
automobile, mortgage and premium finance companies. Typical
transaction sizes range from $1 million to $35 million.
Specialty Finance
o Commercial Equipment Finance offers equipment leases, loans
and "turnkey" financing to a broad range of midsize
companies. Specialty markets include the corporate aircraft
and emerging growth technology industries, primarily
biotechnology and electronics. Typical transaction sizes
range from $500,000 to $15 million.
o Specialty Real Estate Finance focuses on first mortgage
loans for hotel and resort properties and equity investments
in real estate sale-leasebacks. Typical transaction sizes
range from $5 million to $30 million.
o Communications Finance specializes in term financing to
advertising and subscriber-supported businesses, including
radio and television stations, cable operators, outdoor
advertising firms and publishers. Typical transaction sizes
range from $1 million to $40 million.
o Franchise Finance offers equipment, real estate and
acquisition financing for operators of established franchise
concepts. Transaction sizes generally range from $500,000 to
$15 million.
o Healthcare Finance offers a full range of working capital,
equipment and real estate financing products for the U.S.
healthcare industry. Transaction sizes typically range from
$500,000 to $25 million.
o Public Finance provides tax-exempt term financing to state
and local governments, non-profit corporations and entities
using Industrial Revenue and Industrial Development Bonds.
Typical transaction sizes range from $100,000 to $5 million.
o Portfolio Services provides customized receivable servicing
and collections for timeshare developers and other
generators of consumer receivables.
o Resort Finance focuses on construction, acquisition and
receivables financing of timeshare resorts worldwide as well
as term financing for established golf resort hotels and
receivables funding for developers of second home
communities. Typical transaction sizes range from $5 million
to $35 million.
o Transportation Finance structures equipment loans, leases,
acquisition financing and leveraged lease equity investments
for commercial and cargo airlines worldwide, railroads and
operators of other transportation related equipment. Typical
transaction sizes range from $5 million to $30 million.
Through FINOVA Aircraft Investors, LLC, FINOVA also seeks to
use its market expertise and industry presence to purchase,
upgrade and resell used commercial aircraft.
Capital Markets
o FINOVA Realty Capital specializes in providing capital
markets-funded commercial real estate financing products and
commercial mortgage banking services. Typical transaction
sizes range from $1 million to $5 million.
o FINOVA Investment Alliance provides equity and debt
financing for midsize businesses in partnership with
institutional investors and selected fund sponsors. Typical
transaction sizes range from $2 million to $15 million.
FINOVA is a Delaware corporation. The Company was incorporated in 1991
to serve as the successor to The Dial Corp's financial services businesses. In
March 1992, Dial transferred those businesses to FINOVA in a spin-off. Since
that time, FINOVA has increased its total assets from about $2.6 billion at
December 31, 1992 to $8.7 billion at December 31, 1997. Income from continuing
operations increased from $36.8 million in 1992 to $139.1 million in 1997.
Management believes FINOVA ranks among the largest independent commercial
finance companies in the U.S., based on total assets. FINOVA's common stock is
traded on the New York Stock Exchange.
2
Portfolio Composition
The total assets under management of the Company consist of FINOVA's
net investment in financing transactions plus certain assets that are owned by
others but managed by the Company and are not reported on the Company's balance
sheet (securitized assets and participations sold). The Company's investment in
financing transactions is primarily settled in U.S. dollars.
Investment in Financing Transactions
The following tables detail FINOVA's investment in financing transactions
(before reserve for credit losses) at December 31, 1997, 1996, 1995, 1994, and
1993.
3
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
-------------------------------------------------------------------------------------------------------
Loans, conditional sale and
other financing contracts:
Commercial $ 4,299,909 51.2 $ 3,592,193 49.2 $ 3,389,363 53.4 $ 2,732,734 51.1 $ 1,397,863 49.1
Real estate 1,656,075 19.7 1,713,485 23.5 1,534,177 24.1 1,237,488 23.2 945,892 33.2
Factored receivables 750,399 8.9 564,430 7.7 189,486 3.0 157,862 3.0
Operating leases 712,927 8.5 517,690 7.1 460,798 7.3 412,782 7.7 147,222 5.2
Leveraged leases 619,557 7.4 514,573 7.1 366,196 5.8 287,518 5.4 283,782 10.0
Direct financing leases 360,589 4.3 396,388 5.4 408,059 6.4 514,595 9.6 71,812 2.5
----------- ------ ------------ ------ ------------ ------ ----------- ------ ----------- -----
Total investment in
financing transactions 8,399,456 100.0 7,298,759 100.0 6,348,079 100.0 5,342,979 100.0 2,846,571 100.0
====== ====== ====== ====== =====
Securitized assets 336,607 300,000 200,000 -- --
Participations sold 121,360 64,546 -- -- --
----------- ------------ ------------ ---------- -----------
Total managed assets $ 8,857,423 $ 7,663,305 $ 6,548,079 $5,342,979 $ 2,846,571
=========== ============ ============ ========== ===========
4
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------- ---------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------------------------------- --------------------------------- --------------------
Transportation Finance (3) (4) $ 1,631,685 $ $ $ $ $ $ 1,631,685 19.4%
Resort Finance (4) 1,166,199 14,450 3,974 26,240 1,210,863 14.4%
Corporate Finance (4) 791,733 981 26,888 819,602 9.8%
Specialty Real Estate Finance 610,711 24,120 38,055 7,648 10,853 196 691,583 8.2%
Communications Finance (4) 628,947 8,724 24,452 662,123 7.9%
Commercial Equipment Finance 614,712 1,816 11,802 4,030 632,360 7.5%
Rediscount Finance (4) 609,641 993 610,634 7.3%
Inventory Finance(4) 544,108 4,333 548,441 6.5%
Healthcare Finance 525,846 1,515 666 528,027 6.3%
Franchise Finance(4) 430,651 808 2,171 305 433,935 5.2%
Factoring Services 196,843 30,205 227,048 2.7%
Business Credit 195,897 7,559 203,456 2.4%
Public Finance 135,826 135,826 1.6%
Other (5) 40,347 23,526 63,873 0.8%
------------ ---------- ---------- --------- -------- -------- ------------ -----
TOTAL(4) $ 8,123,146 $ 36,449 $ 52,505 $ 121,540 $ 37,093 $ 28,723 $ 8,399,456 100.0%
============ ========== ========== ========= ======== ======== ============ =====
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.1 million on repossessed assets
during 1997, including $3.1 million in Specialty Real Estate Finance and
$1.0 million in Resort Finance.
(3) Transportation Finance includes $302.9 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and $36.6 million in Franchise Finance and participations of $40.2 million
in Corporate Finance, $61.0 million in Communications Finance, $8.5 in
Transportation Finance, $4.6 million in Rediscount Finance, $5.1 million in
Resort Finance, and $1.9 million in Inventory Finance.
(5) Primarily includes London-based FINOVA Capital Limited and assets retained
subsequent to the sale of the Manufacturer and Dealer Services line of
business which occurred in November 1996.
--------------------
5
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------- ---------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Assets Impaired Other Amount %
------------------------------------- --------------------------------- --------------------
Transportation Finance (3) $ 1,330,578 $ $ $ $ $ $ 1,330,578 18.2
Resort Finance (4) 1,124,462 2,963 13,878 77 25,136 1,166,516 16.0
Corporate Finance (4) 630,399 3,211 14,695 335 648,640 8.9
Specialty Real Estate Finance 700,932 30,245 46,068 6,748 9,853 940 794,786 10.9
Communications Finance (4) 535,701 8,796 14,129 3,095 561,721 7.7
Commercial Equipment Finance 570,574 7,900 6,564 585,038 8.0
Rediscount Finance (4) 421,232 245 421,477 5.8
Inventory Finance (4) 314,446 1,273 315,719 4.3
Healthcare Finance 497,540 1,304 1,194 500,038 6.9
Franchise Finance 366,202 1,104 1,985 996 370,287 5.0
Factoring Services 220,701 3,419 224,120 3.1
Business Credit 160,006 11,963 171,969 2.3
Public Finance 150,361 13 150,374 2.1
Other 52,998 4,498 57,496 0.8
------------- ---------- ---------- --------- --------- --------- ------------ -----
Total Continuing Operations (4) $ 7,076,132 $ 46,319 $ 59,946 $ 63,751 $ 38,419 $ 14,192 $ 7,298,759 100.0
============= ========== ========== ========= ========= 39,143 ============ =====
Discontinued Operations (5) ---------
$ 53,335
TOTAL =========
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $5.1 million on repossessed assets
during 1996, including $4.4 million in Specialty Real Estate Finance and
$0.7 million in Resort Finance.
(3) Transportation Finance includes $160.8 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and participations of $24.6 million in Corporate Finance, $27.5 million in
Communications Finance, $4.8 million in Rediscount Finance, $4.4 million in
Resort Finance and $3.2 million in Inventory Finance.
(5) Reflects assets retained by FINOVA subsequent to the sale of the
Manufacturer and Dealer Services' line of business.
--------------------
6
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------- -----------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------------------------------- ---------------------------------- ----------------------
Transportation Finance (3) $ 929,043 $ $ $ $ $ $ 929,043 14.6
Resort Finance 943,661 2,849 12,064 2,583 26,559 987,716 15.6
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 10.3
Specialty Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 12.3
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.8
Commercial Equipment Finance 345,039 69 6,079 351,187 5.5
Rediscount Finance 345,264 345,264 5.4
Inventory Finance 202,879 430 203,309 3.2
Healthcare Finance 451,503 81 1,231 452,815 7.2
Franchise Finance 327,356 1,462 6,408 1,850 337,076 5.3
Factoring Services 188,892 594 189,486 3.0
Business Credit 200,365 12,685 213,050 3.4
Public Finance 121,956 47 122,003 1.9
Other 78,645 1,275 2,360 6,061 88,341 1.5
----------- --------- ---------- --------- --------- --------- ------------ ------
Total Continuing Operations (4) $ 6,131,107 $ 17,260 $ 56,585 $ 76,883 $ 49,988 $ 16,256 $ 6,348,079 100.0
=========== ========= ========== ========= ========= ========= ============ ======
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.2 million on repossessed assets
during 1995, including $3.2 million in Specialty Real Estate Finance, $0.6
million in Resort Finance and $0.4 million in Communications Finance.
(3) Transportation Finance included $144 million of aircraft financing business
booked through the London office.
(4) Excludes $200 million of securitized assets which are managed by the
Company.
--------------------
7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(Dollars in Thousands)
Revenue Accruing Nonaccruing
--------------------------------------- ---------------------------------
Repos-
sessed Delin- Repos- Leases Total
Original Rewritten Assets quent sessed & Carrying
Rate Contracts (1) Loans Assets Other Amount %
--------------------------------------- --------------------------------- --------------------
Transportation Finance (2) $ 706,242 $ 14,620 $ $ $ $ $ 720,862 13.5
Resort Finance 634,735 4,506 7,314 2,582 30,393 679,530 12.7
Corporate Finance 746,671 21,275 6,952 2,674 777,572 14.5
Specialty Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 14.0
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 11.0
Commercial Equipment Finance 293,609 769 7,589 301,967 5.6
Rediscount Finance 99,353 99,353 1.9
Inventory Finance 58,595 642 59,237 1.1
Healthcare Finance 467,131 1,719 468,850 8.8
Franchise Finance 281,890 7,632 12,242 301,764 5.6
Factoring Services 157,090 772 157,862 3.0
Business Credit 181,741 12,003 193,744 3.6
Public Finance 93,491 144 93,635 1.8
FINOVA Capital Limited (3) 93,700 1,561 4,265 2 4,800 104,328 2.0
Other 36,951 8,918 297 46,166 0.9
------------ ----------- ---------- ---------- --------- --------- ----------- ------
Total Continuing Operations $ 5,074,939 $ 63,888 $ 55,106 $ 73,519 $ 60,451 $ 15,076 $ 5,342,979 100.0
============ =========== ========== ========== ========= ========= =========== ======
- --------------------
NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets
during 1994, including $2.0 million in Specialty Real Estate Finance, $0.8
million in Communications Finance and $0.5 million in Resort Finance.
(2) Transportation Finance included $66.9 million of aircraft finance business
booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also includes $39.2 million of
Consumer Finance assets, of which $4.8 million were nonaccruing. Consumer
Finance accounts were generally considered nonaccruing after being 180 days
delinquent.
--------------------
8
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
Revenue Accruing Nonaccruing
--------------------------------- ------------------------------------
Repos-
sessed Delin- Repos- Leases Total
Original Rewritten Assets quent sessed & Carrying
Rate Contracts (1) Loans Assets Other Amount %
--------------------------------- ------------------------------------ --------------------
Transportation Finance (2) $ 604,416 $ $ $ 841 $ $ $ 605,257 21.2
Resort Finance 530,617 4,869 12,163 11,597 7,404 440 567,090 19.9
Corporate Finance 397,779 27,921 4,243 5,462 386 435,791 15.3
Specialty Real Estate Finance 500,598 1,574 27,844 5,759 20,838 556,613 19.6
Communications Finance 487,890 7,989 8,949 21,730 11,564 538,122 18.9
Rediscount Finance 19,439 19,439 0.7
FINOVA Capital Limited (3) 107,486 4,430 2,720 23 9,600 124,259 4.4
---------- ---------- --------- --------- ---------- --------- ------------ ------
TOTAL $2,648,225 $ 46,783 $ 48,956 $ 46,890 $ 45,291 $ 10,426 $ 2,846,571 100.0
========== ========== ========= ========= ========== ========= ============ ======
- --------------------
NOTES:
(1) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Specialty Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in Resort
Finance.
(2) Transportation Finance included $31.9 million of aircraft finance business
booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also includes $45.3 million of
Consumer Finance assets, of which $9.6 million were nonaccruing. Consumer
Finance accounts were generally considered nonaccruing after being 180 days
delinquent.
--------------------
9
The Company's geographic portfolio diversification at December 31, 1997
was as follows:
GEOGRAPHIC PORTFOLIO DIVERSIFICATION
December 31, 1997
(Dollars in thousands)
State Total Percent
------------------------- ---------------- ------------
California $ 1,386,337 15.7%
Florida 928,459 10.5
Texas 713,368 8.1
New York 617,428 7.0
Arizona 304,706 4.6
New Jersey 320,502 3.6
Illinois 308,994 3.5
Virginia 286,399 3.2
Pennsylvania 253,255 2.9
Nevada 245,830 2.8
Massachusetts 214,617 2.4
Georgia 174,778 2.0
Other (1) 3,102,750 33.7
------------- ---------
$ 8,857,423 100.0%
============ =========
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
6% of the total.
--------------------
The following is an analysis of the reserve for credit losses for the
years ended December 31:
RESERVE FOR CREDIT LOSSES
(Dollars in Thousands)
1997 1996 1995 1994 1993
---------------------------------------------------------
Balance, beginning of year $ 148,693 $ 129,077 $ 110,903 $ 64,280 $ 69,291
Provision for credit losses 69,200 41,751 37,568 10,439 5,706
Write-offs (45,487) (32,017) (25,631) (28,109) (12,575)
Recoveries 2,287 3,296 2,104 1,780 717
Other (including reserves related to
acquisitions) 2,395 6,586 4,133 62,513 1,141
---------- ---------- ---------- ---------- ---------
Balance, end of year $ 177,088 $ 148,693 $ 129,077 $ 110,903 $ 64,280
========== ========== ========== ========== =========
--------------------
Included above is a specific impairment reserve of $24.5 million at
December 31, 1997, which applies to $158.0 million of impaired loans. The
remaining $152.6 million of the reserve for credit losses is designated for
general purposes and represents management's best estimate of potential losses
in the portfolio considering delinquencies, loss experience and collateral. At
December 31, 1996, the specific impairment reserve was $6.2 million, which
applied to $110.1 million of impaired loans. Additions to general and specific
reserves are reflected in current operations. Management may transfer reserves
between the general and specific reserves as appropriate.
10
Write-offs by line of business during the years ended December 31, were
as follows:
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
1997 1996 1995 1994 1993
-------------------------------------------------------------
Factoring Services (1) $ 24,382 $ 5,098 $ 3,728 $ 1,148 $
Corporate Finance 6,577 9,470 4,660 4,233 3,741
Commercial Equipment Finance (1) 3,722 3,207 2,271 1,257
Resort Finance 2,700 4,275 2,000 2,730
Specialty Real Estate Finance 2,106 1,793 2,275 1,461 2,320
Healthcare Finance (1) 1,798 1,018 314 377
Inventory Finance (1) 1,777 201 442
Communications Finance 750 2,994 4,037 8,300 1,488
Franchise Finance (1) 696 3,267 3,448 2,247
FINOVA Capital Limited (UK) 47 895 1,523 5,140 5,026
Business Credit (1) 452 774
Other 932 722
--------- --------- --------- --------- ---------
$ 45,487 $ 32,017 $ 25,631 $ 28,109 $ 12,575
========= ========= ========= ========= =========
Write-offs as a percentage
of average managed assets (2) 0.56% 0.46% 0.44% 0.66% 0.48%
========= ========= ========= ========= =========
- --------------------
NOTES:
(1) Acquired in 1994.
(2) Excludes participations sold in which FINOVA has transferred credit risk.
--------------------
A further breakdown of the portfolio by line of business can be found in
Annex A, Notes C and D.
Cost and Use of Borrowed Funds
FINOVA Capital relies on borrowed funds as well as internal cash flow
to finance its operations. It has also raised funds through the sale or
securitization of assets, but does not rely on those methods as a primary source
of capital.
11
The following table reflects the approximate average pre-tax
effective cost of borrowed funds and pre-tax equivalent rate earned on accruing
assets for FINOVA Capital for each of the periods listed:
Year Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------
Short-term and variable rate long-term debt (1) 6.4% 6.5% 7.2% 5.5% 4.7%
Fixed-rate long-term debt (1) 7.1% 7.2% 7.3% 8.1% 11.4%
Aggregate borrowed funds (1) 6.6% 6.8% 7.2% 6.3% 6.3%
Rate earned on average earning assets (2) (3) 12.3% 11.8% 12.1% 11.3% 10.9%
Spread percentage (4) 6.2% 5.8% 5.7% 5.9% 5.4%
- ---------------------
NOTES:
(1) Includes the effects of interest rate swap and hedge agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation and include gains on sale of assets.
(4) Spread percentages represent interest margins earned as a percentage of
average earning assets.
--------------------
The effective costs presented above include costs of commitment fees
and related borrowing costs. They do not necessarily predict future costs of
funds. For further information on FINOVA Capital's cost of funds, refer to Annex
A, Notes E and F.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
1.52 1.50 1.44 1.58 1.50
========= ========== ========== ========== ==========
Variations in interest rates generally do not have a substantial impact
on the ratio because fixed-rate and floating-rate assets are generally matched
with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the above ratio, consists of income from continuing operations before income
taxes and fixed charges. Combined fixed charges include interest and related
debt expense and a portion of rental expense representing interest and preferred
stock dividends grossed up to a pre-tax basis.
Matched Funding Policy
FINOVA Capital follows a "matched funding" policy. Under that policy,
it funds its floating-rate assets (loans and leases to FINOVA's borrowers) with
floating rate liabilities (FINOVA's debt) and fixed-rate assets with fixed rate
liabilities, to the extent feasible. This policy helps protect FINOVA from
changes in interest rates. For further discussion on FINOVA Capital's debt and
matched funding policy, see Annex A, Notes E and F.
12
Credit Ratings
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
Commercial Senior
Paper Debt
-------------- ----------
Duff & Phelps Credit Rating Co. D1 A
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 A-
In addition, FINOVA Finance Trust, a subsidiary trust of the Company,
issued mandatory redeemable convertible preferred securities ("TOPrS") in
December 1996 having investment-grade ratings as follows:
Duff & Phelps Credit Rating Co. BBB+
Fitch Investors Services, Inc. A-
Moody's Investors Services, Inc. Baa2
Standard & Poor's Ratings Group BBB+
For further information relating to the TOPrS, refer to Annex A, Note
G.
There can be no assurance that these ratings will be maintained. The
ratings can be modified at any time. A credit rating is not a recommendation to
buy, sell or hold securities. Each rating should be evaluated independently of
any other rating. None of FINOVA Capital's subsidiaries have applied for credit
ratings.
Residual Realization Experience
Each year since its inception, FINOVA Capital and its predecessors have
earned total proceeds from the sale of assets upon lease terminations (other
than foreclosures) in excess of carrying amounts. There can be no assurance,
however, that those results can be achieved in future years. Actual proceeds
will depend on current market values for those assets at the time of sale. While
market values are generally beyond the control of FINOVA, the Company has some
discretion in the timing of sales of the assets. Sales proceeds on lease
terminations in excess of carrying amounts are reported as gains on sale of
assets when the assets are sold.
13
Income from leasing transactions is affected by gains from asset sales
on lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1997, the
proceeds to FINOVA Capital from sales of assets on early termination of leases
and at the expiration of leases have exceeded the carrying amounts and estimated
residual values as follows:
PROCEEDS FROM SALES OF LEASED ASSETS
(Dollars in Thousands)
Early Terminations (1) Terminations at End of Lease Term
- -------------------------------------------------------- ------------------------------------------
Proceeds
Proceeds Estimated as a % of
Carrying as a % of Residual Estimated
Sales Amount Carrying Sales Value of Residual
Year Proceeds of Assets Amount Proceeds Assets Value
- -------------------------------------------------------- ------------------------------------------
1997 $ 114,680 $ 96,656 119% $ 63,733 $ 58,127 110%
1996 87,311 75,910 115% 15,634 13,872 113%
1995 1,402 905 155% 44,395 37,053 120%
1994 6,477 5,865 110% 15,287 14,164 108%
1993 --- --- --- 486 248 196%
- --------------------
NOTE:
(1) Excludes foreclosures for credit reasons, which are immaterial.
--------------------
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA Capital at December 31, 1997 was 31.2% of the
original cost of those assets (27.1% excluding the original costs of the assets
and residuals applicable to real estate leveraged leases, which typically have
higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1997 for financing contracts excluding leveraged
leases were 7.6 and 5.1 years, respectively, and for leveraged leases were
approximately 17.5 and 11.9 years, respectively. The comparable average initial
term and remaining term at December 31, 1996 for financing contracts excluding
leveraged leases were 7.2 and 4.6 years, respectively, and for leveraged leases
were approximately 18.6 and 11.9 years, respectively. FINOVA Capital uses either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from those appraised
values.
For a discussion of accounting for lease transactions, refer to Annex
A, Notes A and C.
Business Development and Competition
FINOVA Capital develops business primarily through direct solicitation
by its own sales force. Customers are also introduced by independent brokers and
referred by other financial institutions and other sources.
FINOVA Capital is engaged in an extremely competitive activity. It
competes with banks, insurance companies, leasing companies, the credit units of
equipment manufacturers and other finance companies. Some of these competitors
have substantially greater financial resources and are able to borrow at costs
below those of FINOVA Capital. FINOVA Capital's principal means of competition
is through a combination of service, structure and innovation in transactions,
the interest rate charged for money and concentration in focused market niches.
The interest rate FINOVA Capital charges for money is a function of its
borrowing costs, its operating costs and other factors. While many of FINOVA
Capital's larger competitors are able to offer lower interest rates based upon
their lower borrowing costs, FINOVA Capital seeks to maintain the
competitiveness of the interest rates it offers by emphasizing strict control of
its operating costs. FINOVA's ability to manage costs is, in part, dependent on
factors beyond the Company's control, such as the cost of funds, outside
litigation expenses and competitive salaries.
14
Credit Quality
FINOVA Capital has maintained a high-quality asset base through the use
of clearly defined underwriting standards, portfolio management techniques,
monitoring of covenant compliance and active collections and workout efforts.
Risk Management
FINOVA Capital generally investigates its prospective customers through
a review of historical financial statements, published credit reports, credit
references, discussions with management, analysis of location feasibility,
personal visits and collateral appraisals and inspections. In many cases,
depending upon the results of its credit investigations and the nature of the
financing being provided, FINOVA Capital obtains additional collateral or
guarantees from others. As part of its underwriting process, FINOVA Capital
considers the management, industry, financial position and collateral being
provided by a proposed borrower or lessee. The purpose, term, amortization and
amount of any proposed transaction generally must be clearly defined and within
established corporate guidelines. In addition, FINOVA attempts to avoid undue
concentrations in any one customer, industry or geographic region.
o Management. FINOVA Capital considers the reputation, experience and
depth of management; quality of product or service; adaptability to
changing markets and demand; and prior banking, finance and trade
relationships.
o Industry. FINOVA Capital evaluates critical aspects of each industry to
which it lends, including general trend, seasonality and cyclicality;
governmental regulation; the effects of taxes; the economic value of
goods or services provided; and potential environmental or other
liabilities.
o Financial. FINOVA Capital's review of a prospective borrower normally
includes a thorough analysis of the borrower's financial performance.
Items considered include net worth; composition of assets and
liabilities; debt service coverage; liquidity; sales growth and earning
power; and cash flow generation and reliability.
o Collateral. FINOVA Capital regards collateral as an important factor in
a credit evaluation and, for collateral dependent transactions, has
established maximum loan to value ratios, normally ranging from 60% -
90%, for each of its lines of business.
The underwriting process includes, in addition to the analysis of the
factors noted above, the design and implementation of transaction structures and
strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors portfolio concentrations in the areas of
total exposure to a single borrower and related entities, within a given
geographical area and with respect to an industry and/or product type within an
industry. FINOVA Capital has established concentration guidelines for each line
of business. Geographic concentrations are reviewed periodically and evaluated
based on historic loan experience and prevailing market and economic conditions.
FINOVA Capital's financing contracts and leases generally require the
customer to pay taxes, license fees and insurance premiums and to perform
maintenance and repairs at the customer's expense. Contract payment rates are
based on several factors, including the cost of borrowed funds, term of
contract, credit-worthiness of the prospective customer, type and nature of
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In direct finance lease transactions,
lessees generally are granted an option to purchase the equipment at the end of
the lease term at its then fair market value or, in some cases, are granted an
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
Portfolio Management
In addition to the review at the time of original underwriting, FINOVA
Capital attempts to preserve and enhance the earnings quality of its portfolio
through proactive management of its financing relationships with its clients.
This process includes the periodic appraisal or verification of the collateral
to determine loan exposure and residual values; sales of residuals and warrants
to generate supplemental income; and review and management of covenant
compliance. The Portfolio Management department or dedicated personnel within
the business units regularly review financial statements to assess
15
customer cash flow performance and trends; periodically confirm operations of
the customer; conduct periodic reappraisals of the underlying collateral; seek
to identify issues concerning the vulnerabilities of the customer; seek to
resolve outstanding issues with the borrower; and prepare periodic summaries of
the aggregate portfolio quality and concentrations for management review.
Evaluation for loan impairment is performed as a part of the portfolio
management review process. When a loan is determined to be impaired, a
write-down is taken or an impairment reserve is established based on the
difference between the recorded balance of the loan ("carrying amount") and the
fair value of the asset.
Delinquencies and Workouts
FINOVA Capital monitors the timing of payments on its accounts. For
term loans and leases, when an invoice is 10 days past due, the customer is
generally contacted, and a determination is made as to the extent of the
problem, if any. A commitment for immediate payment is pursued and the account
is observed closely. If satisfactory results are not obtained in communication
with the customer, the guarantor(s) are contacted to advise them of the
situation and the potential obligation under the guarantee agreement. If an
invoice becomes 31 days past due, it is reported as delinquent. A notice of
default is generally sent prior to an invoice becoming 45 days past due and,
between 60 and 90 days past the due date, if satisfactory negotiations are not
underway, outside counsel is generally retained to help protect FINOVA Capital's
rights and to pursue its remedies.
When accounts become more than 90 days past due income recognition is
usually suspended, and FINOVA Capital vigorously pursues its legal remedies.
Foreclosed or repossessed assets are considered to be nonperforming, and are
reported as such unless the assets generate sufficient cash to result in a
reasonable rate of return. Those accounts are continually reviewed, and
write-downs are taken as deemed necessary. While pursuing collateral and
obligors, FINOVA Capital generally continues to negotiate the restructuring or
other settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for credit losses is adequate. For additional
information regarding the reserve for credit losses, see Annex A, Note D.
Governmental Regulation
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions and mortgage
broker activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Authority, and
communications finance is regulated by the Federal Communication Commission.
FINOVA Capital's international activities are also subject to a variety of laws
and regulations of the countries in which the business is conducted.
EMPLOYEES
At December 31, 1997, the Company had 958 employees compared to 891 at
December 31, 1996. None of the employees were covered by collective bargaining
agreements. FINOVA believes its employee relations are satisfactory.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking," in that they
do not discuss historical fact but instead note future expectations,
projections, intentions or other items relating to the future. These
forward-looking statements include matters in the sections of this report
captioned "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." They are also made in documents
incorporated in this report by reference, or in which this report may be
incorporated, such as a prospectus.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause FINOVA's actual results or performance to
differ materially from those contemplated by the forward-looking statements.
Many of those factors are noted in conjunction with the forward-looking
statements in the text. Other important factors that could cause actual results
to differ include:
16
o The results of FINOVA's efforts to implement its business strategy.
Failure to fully implement its business strategy might result in
decreased market penetration, adverse effects on results of operations
and other adverse results.
o The effect of economic conditions and the performance of FINOVA's
borrowers. Economic conditions in general or in particular market
segments could impact the ability of FINOVA's borrowers to operate or
expand their businesses, which might result in decreased performance
for repayment of their obligations or reduce demand for additional
financing needs.
o Actions of FINOVA's competitors and FINOVA's ability to respond to
those actions. As noted in "Business Development and Competition,"
FINOVA seeks to remain competitive without sacrificing prudent lending
standards. Doing business under those standards becomes more difficult,
however, when competitors offer financing with less stringent criteria.
FINOVA seeks to maintain credit quality at the risk of growth in
assets, if necessary.
o The cost of FINOVA's capital. That cost depends on many factors, some
of which are beyond FINOVA's control, such as its portfolio quality,
ratings, prospects and outlook.
o Changes in government regulations, tax rates and similar matters. For
example, government regulations could significantly increase the cost
of doing business or could eliminate certain tax advantages of some of
FINOVA's financing products.
o Other risks detailed in FINOVA's other SEC reports or filings.
ITEM 2. PROPERTIES.
FINOVA's principal executive offices are located in premises leased
from Viad Corp (formerly The Dial Corp) in Phoenix, Arizona. FINOVA Capital
operates various additional offices in the United States, one in Canada and one
in Europe. All these properties are leased. Alternative office space could be
obtained without difficulties in the event leases are not renewed. FINOVA has
entered into a lease agreement for new executive offices which are presently
under construction. Those facilities are expected to be completed in 1999.
ITEM 3. LEGAL PROCEEDINGS.
FINOVA is a party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts.
Litigation often results from the FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties, and it is possible that some of the legal
actions, proceedings or claims could be decided against FINOVA. Although the
ultimate amount for which FINOVA may be held liable, if any, is not
ascertainable, FINOVA believes that any resulting liability would not materially
affect its financial position or results of operations.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who
serve as executive officers of FINOVA.
Name Age Position and Background
- -------------------------- ------- ----------------------------------------------------------------
Samuel L. Eichenfield 61 Chairman, President and Chief Executive Officer of FINOVA and
FINOVA Capital for more than five years.
Matthew M. Breyne 40 Executive Vice President of FINOVA since 1998. Before that he
was Group Vice President - Communications Finance or similar
positions of FINOVA Capital for more than five years.
Derek C. Bruns 38 Senior Vice President - Internal Audit or similar positions of
FINOVA for more than five years.
Robert J. Fitzsimmons 57 Senior Vice President - Treasurer of FINOVA and FINOVA Capital
or similar positions and director of FINOVA Capital for more
than five years.
William J. Hallinan 55 Senior Vice President - General Counsel and Secretary or
similar positions of FINOVA and FINOVA Capital for more than
five years.
Robert M. Korte 42 Senior Vice President - Strategy and Technology of FINOVA since
1994. Before that he was Vice President-Human and Corporate
Development of FINOVA and FINOVA Capital since 1991.
Bruno A. Marszowski 56 Senior Vice President - Controller and Chief Financial Officer
of FINOVA and FINOVA Capital since 1994. Before that he was Vice
President - Controller of FINOVA since 1992, and of FINOVA
Capital for more than five years.
William C. Roche 44 Senior Vice President - Human Resources & Facilities Planning
of FINOVA and FINOVA Capital since 1994. Before that he was
Manager-Compensation and similar positions with AlliedSignal for
seven years.
John J. Bonano 55 Executive Vice President or similar positions of FINOVA Capital
for more than five years.
Jack Fields, III 43 Executive Vice President or similar positions of FINOVA Capital
for more than five years.
Robert E. Radway 37 Executive Vice President of FINOVA Capital since 1997. Before
that he was Senior Vice President - Corporate Development and
Communications of FINOVA since 1993.
Gregory C. Smalis 45 Executive Vice President - Portfolio Management or similar
positions and a director of FINOVA Capital since 1993.
18
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY & RELATED SHAREOWNER MATTERS.
The FINOVA Group Inc.'s common stock trades on the New York Stock
Exchange. The following tables summarize the high and low market prices as
reported on the New York Stock Exchange Composite Tape and the cash dividends
declared from January 1, 1996 through December 31, 1997. Amounts have been
restated to give effect to a stock split effective October 1, 1997.
Sales Price Range of Common Stock
----------------------------------------------------
1997 1996
----------------------------------------------------
Quarters: High Low High Low
---------- ---------- ---------- ----------
First $ 39-1/2 $ 31-7/8 $ 28 $ 23-1/8
Second 38-7/8 32-1/16 28-3/16 24
Third 48-1/4 37-7/8 30-1/4 24-1/8
Fourth 50 40-1/4 33-5/8 29-13/16
Dividends Declared on
Common Stock
----------------------
1997 1996
--------- ---------
February $ 0.12 $ 0.11
May 0.12 0.11
August 0.14 0.12
November 0.14 0.12
--------- ---------
$ 0.52 $ 0.46
========= =========
Quarterly dividends have been paid on the first business day of each
calendar quarter. FINOVA anticipates it will continue to pay regular quarterly
dividends on the first business day of January, April, July and October. In
February 1998, the Board of Directors declared a dividend of $0.14 per share,
payable April 1, 1998, for shareowners of record on February 27, 1998. The
declaration of dividends and their amounts are at the discretion of the Board of
Directors of FINOVA, and there can be no assurance that additional dividends
will be declared.
FINOVA Capital is restricted in its ability to pay dividends to The
FINOVA Group Inc. The agreements pertaining to long-term debt include various
restrictive covenants and require the maintenance of certain defined financial
ratios with which FINOVA and FINOVA Capital have complied. Under one of these
covenants, dividend payments from FINOVA Capital to FINOVA Group are limited to
50 percent of accumulated earnings after December 31, 1991.
As of March 13, 1998, there were approximately 22,200 holders of record
of The FINOVA Group Inc.'s common stock. The closing price of the common stock
on that date was $57 15/16.
19
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA, which
have been derived from the audited Consolidated Financial Statements of FINOVA
for the five years ended December 31, 1997. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements of FINOVA and the Notes included in Annex A, as well as the remainder
of this report. Prior years have been restated to exclude operations which were
discontinued in 1996 and to reflect a two-for-one stock split in 1997; for
further detail, see Annex A, Notes B and H.
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
(Dollars in Thousands, except per share data)
OPERATIONS:
Income earned from financing
transactions $ 944,724 $ 797,934 $ 702,116 $ 474,200 $ 255,216
Interest margins earned 455,642 369,105 309,084 227,463 124,847
Provision for credit losses 69,200 41,751 37,568 10,439 5,706
Gains on sale of assets 30,261 12,949 10,889 3,877 5,439
Income from continuing
operations 139,098 116,493 93,798 73,770 37,846
Net income 139,098 117,000 97,629 74,313 37,347
Basic earnings from continuing
operations per share 2.56 2.14 1.72 1.48 0.96
Basic earnings per share 2.56 2.15 1.79 1.49 0.95
Basic adjusted weighted average
outstanding shares 54,405,000 54,508,000 54,633,000 49,765,000 39,277,000
Diluted earnings from continuing
operations per share 2.42 2.08 1.69 1.46 0.90
Diluted earnings per share 2.42 2.09 1.76 1.47 0.89
Diluted adjusted weighted average
shares 59,161,000 56,051,000 55,469,000 50,436,000 40,552,000
Dividends declared per common share $ 0.52 $ 0.46 $ 0.42 $ 0.37 $ 0.34
Dividend payout ratio 20.5% 21.7% 24.6% 26.3% 39.6%
FINANCIAL POSITION:
Investment in financing transactions $ 8,399,456 $ 7,298,759 $ 6,348,079 $ 5,342,979 $ 2,846,571
Nonaccruing assets 187,356 155,505 143,127 149,046 102,607
Reserve for credit losses 177,088 148,693 129,077 110,903 64,280
Total assets 8,719,840 7,526,734 7,036,514 5,821,343 2,834,322
Deferred income taxes 274,761 244,208 209,512 188,887 178,972
Total debt 6,764,581 5,850,223 5,649,368 4,573,354 2,079,286
Company-obligated mandatory
redeemable convertible preferred
securities of subsidiary trust solely
holding convertible debentures of
FINOVA ("TOPrS") 111,550 111,550 --- --- ---
Shareowners' equity 1,090,454 929,591 825,184 770,252 503,300
20
December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------
RATIOS:
Reserve for credit losses/managed assets 2.0% 2.0% 2.0% 2.1% 2.3%
Nonaccruing assets/managed assets 2.1% 2.0% 2.2% 2.8% 3.6%
Total debt to equity (1) 5.6x 5.6x 6.8x 5.9x 4.1x
Return on average common equity (2) 14.3% 13.3% 11.8% 11.1% 7.6%
Return on average funds employed (2) 1.8% 1.8% 1.7% 1.8% 1.4%
Equity to assets (1) 13.8% 13.8% 11.7% 13.2% 17.8%
- --------------------
NOTES:
(1) Equity in 1997 and 1996 includes the TOPrS noted above.
(2) Return represents income from continuing operations.
--------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
See pages 2 - 7 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included
in Supplemental Selected Financial Data of Notes to
Consolidated Financial Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING &
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning FINOVA's directors is incorporated by
reference from FINOVA's Proxy Statement issued in connection with its 1998
Annual Meeting of Shareowners (the "Proxy Statement").
For information regarding FINOVA's executive officers, see the Optional
Item in Part I, following Item 4.
21
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
Annex
Page
------------
Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations 2 - 7
Report of Management and Independent Auditors' Report 8 - 9
Consolidated Balance Sheet 10 - 11
Statement of Consolidated Income 12
Statement of Consolidated Shareowners' Equity 13
Statement of Consolidated Cash Flows 14
Notes to Consolidated Financial Statements 15 - 33
Supplemental Selected Financial Data 34 - 35
2. All Schedules have been omitted because they are not applicable or
the required information is shown in the financial statements or
related notes.
3. Exhibits.
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
22
Exhibit No.
-----------
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above are incorporated by reference.
(4.C) Rights Agreement dated as of February 15, 1992
between FINOVA and the Rights Agent named therein, as
amended (incorporated by reference from FINOVA's
report on Form 8-K dated September 21, 1995, Exhibit
4.1).
(4.C.1) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4.C above (incorporated by
reference from FINOVA's report on Form 8-K, dated
November 30, 1995, Exhibit 4).
(4.D) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets
are not filed as exhibits to this report. FINOVA will
furnish a copy of those agreements to the SEC upon
its request.
(4.E) Form of Indenture dated as of September 1, 1992
between FINOVA Capital and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S-3, Registration No. 33-51216, Exhibit 4).
(4.F) Form of Indenture dated as of October 1, 1995 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from FINOVA Capital's
report on Form 8-K dated October 25, 1995, Exhibit
4.1).
(4.G) Indenture, dated as of December 11, 1996, between
FINOVA and Fleet National Bank as trustee
(incorporated by reference from FINOVA's report on
Form 8-K dated December 20, 1996, (the "December 1996
8-K"), Exhibit 4.1).
(4.G.1) Amended and Restated Declaration of Trust, dated as
of December 11, 1996, among Bruno A. Marszowski and
Robert J. Fitzsimmons, as Regular Trustees, First
Union Bank of Delaware, as Delaware Trustee, Fleet
National Bank, as Property Trustee, and FINOVA
(incorporated by reference from the December 1996
8-K, Exhibit 4.2).
(4.G.2) Preferred Security Guarantee, dated as of December
11, 1996, between FINOVA and Fleet National Bank, as
trustee (incorporated by reference from the December
1996 8-K, Exhibit 4.3).
(4.G.3) Form of 5 1/2% Convertible Subordinated Debenture
(incorporated by reference from the December 1996
8-K, Exhibit 4.4).
(4.G.4) Form of Preferred Security (TOPrS) (incorporated by
reference from the December 1996 8-K, Exhibit 4.5).
(4.H) Form of Indenture between FINOVA, FINOVA Capital and
The First National Bank of Chicago as Trustee
(incorporated by reference from FINOVA and FINOVA
Capital's registration statement on Form S-3,
Registration No. 333-38171, Exhibit 4.8).
(4.I) Announcement of 2-for-1 Stock Split (incorporated by
reference from FINOVA's August 14, 1997 8-K, Exhibit
28).
(4.I.1) Letter to shareowners regarding FINOVA's 2-for-1
Stock Split (incorporated by reference from FINOVA's
October 1, 1997 8-K, Exhibit 28.A).
23
Exhibit No.
-----------
(4.I.2) Letter to holders of Preferred Securities regarding
the 2-for-1 common stock split and resulting
adjustment in conversion price applicable, to the
Convertible Trust Originated Preferred Securities of
FINOVA Finance Trust (incorporated by reference from
FINOVA's October 1, 1997 8-K, Exhibit 28.B).
(4.J) 1992 Stock Incentive Plan, as amended through the
date of this filing.*+
(10.A) Sixth Amendment and Restatement dated as of May 16,
1994 of the Credit Agreement dated as of May 31, 1976
among FINOVA Capital and the lender parties thereto,
and Bank of America National Trust and Savings
Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminister Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly
Report on Form 10-Q for the period ending September
30, 1995 ( the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1997 to Sixth
Amendment noted in 10.A above.*
(10.B) Credit Agreement (Short-Term Facility) dated as of
May 16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above.*
(10.C) 1997 Management Incentive Plan.*+
(10.D) 1998 Management Incentive Plan.*+
24
Exhibit No.
-----------
(10.E.1) 1995 - 1997 Performance Share Incentive Plan
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.H).+
(10.E.2) 1996 - 1998 Performance Share Incentive Plan
(incorporated by reference from 1996 10-K, Exhibit
10.E.3).+
(10.E.3) 1997 - 1999 Performance Share Incentive Plan.*+
(10.E.4) 1998 - 2000 Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield dated
March 16, 1996 (incorporated by reference from the
1995 10-K, Exhibit 10.F.3).+
(10.F.1) Amendment to Employment Agreement referenced in 10.F
above (incorporated by reference from the 1996 10-K,
Exhibit 10.F.2).+
(10.F.2) Second Amendment to Employment Agreement referenced
in 10.F above (incorporated by reference from the
2Q97 10-Q, Exhibit 10).+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.1).+
(10.H) Amended and Restated Supplemental Pension Plan,
(incorporated by reference from the 1996 10-K,
Exhibit 10.1).+
(10.I) A description of FINOVA's policies regarding
compensation of directors is incorporated by
reference from the 1998 Proxy Statement.+
(10.J) Directors Deferred Compensation Plan (incorporated
by reference from the 1992 10-K, Exhibit 10.O).+
(10.K) Directors' Retirement Benefit Plan (incorporated by
reference from FINOVA's report on Form 10-K for the
year ended December 31, 1993 (the "1993 10-K"),
Exhibit 10.OO).+
(10.L) Directors' Charitable Awards Program (incorporated
by reference from the 1994 10-K, Exhibit 10.CC).+
(10.M) Deferred Compensation Plan (incorporated by reference
from the 1995 10-K, Exhibit 10.N).+
(10.N) Bonus KEYSOP Plan.*+
(10.N.1) Bonus KEYSOP Trust Agreement.*+
(10.O) FINOVA's Executive Officer Loan Program Policies and
Procedures, (incorporated by reference from the 1996
10-K, Exhibit 10.U).+
(10.P.1) FINOVA's Executive Severance Plan for Tier 1
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.1).+
(10.P.2) FINOVA's Executive Severance Plan for Tier 2
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.2).+
25
Exhibit No.
-----------
(10.Q.1) Value Sharing Plan for the Chief Executive Officer
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.L).+
(10.Q.2) Value Sharing Plan for Executive Officers and Key
Employees (incorporated by reference from the 3Q95
10-Q, Exhibit 10.K).+
(10.R) Tax Sharing Agreement dated February 19, 1992 among
FINOVA, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(10.S) 1992 Stock Incentive Plan (filed in Exhibit 4.J to
this report).+
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27.1) Financial Data Schedule for the year ended December
31, 1997.*
(27.2) Restated Financial Data Schedule for the Quarters
ended September 30, 1997, June 30, 1997 and March 31,
1997.*
(27.3) Restated Financial Data Schedule for the Quarters
ended September 30, 1996, June 30, 1996 and March 31,
1996.*
(27.4) Restated Financial Data Schedule for the years ended
December 31, 1996 and 1995.*
*Filed with this report.
+Relating to management compensation
(b) Reports on Form 8-K
A report on Form 8-K, dated January 19, 1998, was filed by FINOVA which
reported under Item 5 and 7 the revenues, net income and selected financial data
and ratios for the fourth quarter and year ended December 31, 1997 (unaudited).
26
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the capacities
indicated, in Phoenix, Arizona on the 17th day of March, 1998.
THE FINOVA GROUP INC.
By: /s/ Samuel L. Eichenfield
---------------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
(Chief Executive Officer)
By: /s/ Bruno A. Marszowski
---------------------------------------------
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
(Chief Accounting and Financial Officer)
27
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
* *
------------------------------- ---------------------------
Robert H. Clark, Jr. (Director) G. Robert Durham (Director)
March 17, 1998 March 17, 1998
/s/ Samuel L. Eichenfield *
- -------------------------------- ---------------------------
Samuel L. Eichenfield (Chairman) James L. Johnson (Director)
March 17, 1998 March 17, 1998
* *
------------------------------- -----------------------------
Kenneth R. Smith (Director) Shoshana B. Tancer (Director)
March 17, 1998 March 17, 1998
*
-------------------------------
John W. Teets (Director)
March 17, 1998
* Signed pursuant to Powers of Attorney dated February 12, 1998.
/s/ Bruno A. Marszowski
-----------------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 17, 1998
28
ANNEX A
THE FINOVA GROUP INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Highlights...................................................................................1
Management's Discussion and Analysis of Financial Condition and Results of Operations..................2
Management's Report on Responsibility for Financial Reporting..........................................8
Independent Auditors' Report...........................................................................9
Consolidated Balance Sheet............................................................................10
Statement of Consolidated Income......................................................................12
Statement of Consolidated Shareowners' Equity.........................................................13
Statement of Consolidated Cash Flows..................................................................14
Notes to Consolidated Financial Statements............................................................15
Supplemental Selected Financial Data..................................................................34
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Interest margins earned $ 455,642 $ 369,105 $ 309,084
Selling, administrative and other operating expenses 190,525 154,481 131,571
Income from continuing operations 139,098 116,493 93,798
Net income 139,098 117,000 97,629
FINANCIAL POSITION:
Average managed assets (1) 8,153,076 7,041,708 5,833,576
Ending funds employed 8,399,456 7,298,759 6,348,079
Ending managed assets (2) 8,857,423 7,663,305 6,548,079
Average earning assets (3) 7,356,845 6,324,545 5,442,119
Reserve for credit losses 177,088 148,693 129,077
Nonaccruing assets (4) 187,356 155,505 143,127
Funded new business 3,311,105 2,740,353 2,302,653
Fee based volume 4,532,494 2,937,311 1,951,310
Write-offs 45,487 32,017 25,631
CAPITALIZATION:
Total debt 6,764,581 5,850,223 5,649,368
Company-obligated mandatory redeemable convertible preferred securities
of subsidiary trust solely holding convertible debentures of FINOVA (TOPrS) 111,550 111,550
Shareowners' equity 1,090,454 929,591 825,184
PORTFOLIO QUALITY:
Write-offs as a % of average managed assets (5) 0.56% 0.46% 0.44%
Nonaccruing assets as a % of ending managed assets (5) 2.1% 2.0% 2.2%
Reserve for credit losses as a % of:
Ending managed assets (5) 2.0% 2.0% 2.0%
Nonaccruing assets 94.5% 95.6% 90.2%
As a multiple of write-offs 3.9x 4.6x 5.0x
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of average funds employed (6) 1.8% 1.8% 1.7%
Interest margins earned as a % of average earning assets (3) 6.2% 5.8% 5.7%
Selling, administrative and other operating expenses as a % of
interest margins earned 41.8% 41.9% 42.6%
Aggregate cost of funds 6.6% 6.8% 7.2%
Ratio of income to combined fixed charges 1.54x 1.50x 1.44x
Return from continuing operations on average equity 14.3% 13.3% 11.8%
Basic earnings per common share:
Continuing operations $ 2.56 $ 2.14 $ 1.72
Net income $ 2.56 $ 2.15 $ 1.79
Adjusted weighted average shares 54,405,000 54,508,000 54,633,000
Diluted earnings per share (7):
Continuing operations $ 2.42 $ 2.08 $ 1.69
Net income $ 2.42 $ 2.09 $ 1.76
Adjusted weighted average shares 59,161,000 56,051,000 55,469,000
Book value per share outstanding $ 19.37 $ 16.88 $ 15.12
Shares outstanding 56,282,000 55,058,000 54,558,000
===============================================================================================================================
(1) Includes average securitizations and participations of $388.9 million,
$327.4 million and $15.4 million for 1997, 1996 and 1995, respectively.
(2) Includes assets sold under securitization and participation agreements and
managed by the Company.
(3) Represents average funds employed excluding average deferred taxes on
leveraged leases and average nonaccruing assets.
(4) Includes nonaccruing assets classified as discontinued operations at
December 31, 1996.
(5) Excludes participations sold of $121.4 million, $64.5 million and $0
million for 1997, 1996 and 1995, respectively, in which the Company has
transferred credit risk.
(6) Average funds employed excludes average deferred taxes on leveraged leases
of $234 million, $238 million and $227 million for 1997, 1996 and 1995,
respectively.
(7) Diluted earnings per share give effect to the dilutive potential of
options, restricted stock and convertible preferred stock.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively, "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries (collectively, "FINOVA Capital").
Results of Operations
The following table summarizes FINOVA's operating results for the years
ended December 31, 1997, 1996 and 1995:
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, For the Year Ended December 31,
Percent Percent
(Dollars in millions) 1997 1996 Change 1996 1995 Change
- ----------------------------------------------------------------------------------------------------------------
Interest margins earned $ 455.6 $ 369.1 23% $ 369.1 $ 309.1 19%
Provision for credit losses (69.2) (41.8) 66% (41.8) (37.6) 11%
Gains on sale of assets 30.3 12.9 134% 12.9 10.9 19%
Selling, administrative and
other operating expenses (190.5) (154.5) 23% (154.5) (131.6) 17%
Income taxes (83.1) (69.3) 20% (69.3) (57.0) 22%
Preferred dividends, net (4.0) -- n/a -- -- n/a
-------- -------- -------- --------
Income from continuing
operations 139.1 116.5 19% 116.5 93.8 24%
Income and gain from
discontinued operations -- 0.5 n/a 0.5 3.8 n/a
-------- -------- -------- --------
Net Income $ 139.1 $ 117.0 19% $ 117.0 $ 97.6 20%
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
1997 Compared to 1996
Net income for 1997 increased 19% to $139.1 million from $117.0 million
in 1996. The increase reflected growth in managed assets, increased fee-related
business, higher gains on sale of assets and a lower effective income tax rate,
partially offset by higher provisions for credit losses and increased operating
expenses. Income from continuing operations for 1997 increased to $139.1 million
from $116.5 million in 1996. Continuing operations in 1996 excluded the
operating results of FINOVA's discontinued Manufacturer & Dealer Services line
of business ("MDS") and FINOVA Medical Systems and a $6 million gain resulting
from the sale of MDS. See Note B of Notes to Consolidated Financial Statements
for further discussion.
Interest Margins Earned. Interest margins earned, which represent the
difference between (a) interest, fee and other income earned from financing
transactions and operating lease income and (b) interest expense and operating
lease depreciation, increased 23% to $455.6 million in 1997 from $369.1 million
in 1996 due primarily to a higher level of average earnings assets and the
expansion of the fee-based businesses.
Average earning assets, which represent FINOVA's investment in
financing transactions less nonaccruing assets and deferred taxes related to
leveraged leases, increased 16% to $7.36 billion in 1997 from $6.32 billion a
year earlier. This increase primarily resulted from a 21% increase in funded new
business of $3.31 billion compared to $2.74 billion in 1996, and, to a lesser
extent, from portfolios purchased during 1997 (totaling $122 million). These
increases were partially offset by the normal amortization of the portfolio and
prepayments during the year.
The Company's interest margins earned as a percentage of average
earning assets ("spread") also increased during 1997, to 6.2% from 5.8%. A
portion of the increase in spread was due to a 54% growth in fee-based business
(to $4.53 billion from $2.94 billion in 1996), which provides interest, fee and
other income while requiring less investment in earning assets than term loans
and leases. Contributing to the increase in fee-based business was FINOVA Realty
2
THE FINOVA GROUP INC.
Capital ("FRC," formerly Belgravia Capital Corporation), a commercial mortgage
banking organization which was acquired in October 1997 (and which has
historically had its highest volume in the fourth quarter). Excluding the impact
of the FRC acquisition, FINOVA's spread improved to 6.1% in 1997. The increase
in interest margins earned was also partially attributable to lower aggregate
borrowing costs and lower debt leverage during 1997 compared to 1996.
Provision for Credit Losses. The provision for credit losses increased
66% to $69.2 million in 1997 compared to $41.8 million in 1996. In addition to
growth in FINOVA's managed assets, the increase in the provision for credit
losses primarily resulted from an increase in write-offs to $45.5 million in
1997 from $32.0 million in 1996. The higher write-offs in 1997 were primarily
attributable to FINOVA's Factoring Services line of business, due to credit
problems experienced among the line of business' wholesale textile customers.
Currently, Factoring Services is refocusing its portfolio toward retail
businesses and new industries. Total write-offs for FINOVA's other lines of
business were lower in 1997 than in 1996.
FINOVA's total write-offs during 1997 represented 0.56% of average
managed assets (excluding participations) compared to 0.46% in 1996. Details of
write-offs and other changes in the reserve for credit losses can be found in
Note D of Notes to Consolidated Financial Statements.
Gains on Sale of Assets. Gains on sale of assets totaled $30.3 million
in 1997, higher than the $12.9 million in 1996. In addition to the sale of
assets coming off lease, FINOVA recognized a significant gain from the early
termination of a real estate leveraged lease transaction in 1997. While FINOVA
has consistently recognized gains on the sale of assets it holds, the gains are
sporadic in their timing and amount. There can be no assurance FINOVA will
recognize such gains in the future, depending, in part, on market conditions at
the time of sale.
Selling, Administrative and Other Operating Expenses. Selling,
administrative and other operating expenses ("operating expenses") were higher
in 1997 than in 1996, primarily as a result of increased costs necessary to
manage FINOVA's larger portfolio. Also contributing to the increase in operating
expenses were incentives paid to employees based on performance criteria such as
new business, profitability and the increased value of FINOVA's stock (which
increased by 54.7% to $49.69 per share at year-end). The Company also incurred
additional costs in administering problem loan accounts in 1997, including an
increase with respect to the Factoring Services line of business.
As a percentage of interest margins earned, operating expenses declined
slightly to 41.8% in 1997 from 41.9% in 1996. FINOVA's acquisition of FRC in the
fourth quarter of 1997 is expected to increase operating expenses as a
percentage of interest margins earned in future periods. See Note O of Notes to
Consolidated Financial Statements for further detail of operating expenses.
Income Taxes. Income taxes were higher in 1997 than in 1996 due to the
increase in pre-tax income. Partially offsetting the increase was a lower
effective tax rate in 1997 of 36.7% compared to 37.3% in 1996, principally
caused by FINOVA's ability to use certain capital loss carryforwards in 1997.
See Note J of Notes to Consolidated Financial Statements for further discussion
of income taxes.
Preferred Dividends. During 1997, a subsidiary trust sponsored and
wholly owned by FINOVA had $111.6 million (net of transaction costs) outstanding
of Company-obligated mandatory redeemable convertible preferred securities
(TOPrS). FINOVA paid dividends of $4.0 million, after tax, on these securities
during 1997.
1996 Compared to 1995
Income from continuing operations for 1996 increased 24% to $116.5 million
from $93.8 million in 1995. Continuing operations exclude the operating results
and a $6 million gain, after taxes and allocation of related costs and expenses,
resulting from the sale of FINOVA's Manufacturer & Dealer Services line of
business, and the operating results of FINOVA Medical Systems, which was
liquidated in 1996. Net income for 1996 increased to $117.0 million from $97.6
million in 1995.
3
THE FINOVA GROUP INC.
Interest Margins Earned. Interest margins earned were $369.1 million for
1996, compared with $309.1 million in 1995, an increase of 19%. The increase was
primarily due to a 17% increase in managed assets (investment in financing
transactions plus securitizations and participations sold), resulting primarily
from $2.7 billion in funded new business in 1996, up from $2.3 billion in 1995,
and $2.9 billion in fee-based volume in 1996, compared to $2.0 billion in 1995.
In addition, FINOVA added funds employed of approximately $318 million through
acquisitions in 1996. These increases were partially offset by the normal
amortization of the portfolio as well as significantly higher prepayments in
1996, partially due to consolidation in the communications industry resulting
from changes in regulation at the federal level.
Interest margins earned as a percentage of average earning assets
increased to 5.8% for 1996 compared to 5.7% for 1995. This increase was the
result of FINOVA's ability to maintain rates and fees charged on its financing
transactions while benefiting from reduced interest expense due to generally
declining interest rates, improved credit ratings and the maturity of certain
interest rate hedges.
Provision for Credit Losses. The provision for credit losses increased to
$41.8 million in 1996 from $37.6 million in 1995, primarily due to the increase
in managed assets. FINOVA's reserves remained at 2.0% of ending managed assets
(excluding participations), while the credit quality of the portfolio continued
to improve. Reserves as a percentage of nonaccruing assets increased to 95.6% at
December 31, 1996 from 90.2% a year earlier. Nonaccruing assets as a percentage
of ending managed assets (excluding participations) declined to 2.0% at December
31, 1996 from 2.2% at the end of 1995. Details of write-offs and other changes
in the reserve for credit losses can be found in Note D of Notes to Consolidated
Financial Statements.
Gains on Sale of Assets. Gains on sale of assets were higher in 1996 than
1995, primarily due to the amount and type of assets coming off lease during the
respective years. While the Company has consistently recognized gains on the
sale of assets it holds, the amount and timing of such gains is sporadic in
nature.
Selling, Administrative and Other Operating Expenses. Selling,
administrative and other operating expenses were 17% higher in 1996 than in
1995, due primarily to the growth in managed assets and incentives related to
FINOVA's improved results and stock performance. However, as a percentage of
interest margins earned, these expenses decreased to 41.9% in 1996 from 42.6%
during 1995. See Note O of Notes to Consolidated Financial Statements for
additional detail.
Income Taxes. Income taxes increased during the year ended December 31,
1996, primarily due to the increase in pre-tax income, partially offset by a
lower effective tax rate. The lower tax rate, which decreased to 37.3% in 1996
from 37.8% in 1995, was primarily related to lower foreign tax effects and
increased tax exempt municipal and ESOP income. See Note J of Notes to
Consolidated Financial Statements for further discussion of income taxes.
Financial Condition, Liquidity and Capital Resources
Managed assets at December 31, 1997 increased 16% to $8.86 billion from
$7.66 billion at December 31, 1996. The increase was the result of a 21%
increase in funded new business of $3.31 billion in 1997 compared to $2.74
billion in 1996, partially offset by normal loan and lease amortization and
approximately $0.7 billion in prepayments during 1997. In addition, an early
termination of a leveraged lease occurred in the Specialty Real Estate line of
business, which experienced a reduction in managed assets of approximately $103
million. The major causes of this reduction were the sale of this leveraged
lease combined with the business decision not to aggressively pursue new deals
at the cost of compromising rate and/or underwriting standards.
FINOVA recorded $4.53 billion in fee-based volume during 1997 compared
to $2.94 billion in 1996. The 54% increase in fee-based volume was due to growth
in FINOVA's on-going fee-based lines of business and the addition of FRC in the
fourth quarter of 1997.
FINOVA's reserve for credit losses increased to $177.1 million at
December 31, 1997 compared to $148.7 million at year-end 1996 primarily due to a
provision for credit losses of $69.2 million during the year, partially offset
by write-offs
4
THE FINOVA GROUP INC.
totaling $45.5 million. At December 31, 1997 the reserve represents 2.0% of
managed assets (excluding participations sold), the same level as one year ago.
Nonaccruing assets have increased to $187.4 million at December 31, 1997 which
represents 2.1% of ending managed assets compared to $155.5 million in
nonaccruing assets as of December 31, 1996 which constituted 2.0% of ending
managed assets. At December 31, 1997, the reserve represents 94.5% of
nonaccruing assets compared to 95.6% at December 31, 1996. The increase in
nonaccruing assets is primarily in the Factoring Services line of business. See
Note D of Notes to Consolidated Financial Statements for more information on the
reserves, write-offs and nonaccruing assets.
The Company had total debt outstanding of $6.76 billion at December 31,
1997 or 5.63 times its equity base (shareowners' equity plus convertible
preferred securities) of $1.20 billion (FINOVA Capital's leverage as of December
31, 1997 was 5.37 to 1). At December 31, 1996, the Company had comparable debt
leverage of $5.85 billion debt outstanding and $1.04 billion of equity. The
Company also had $274.8 million in deferred taxes at year-end 1997 compared to
$244.2 million at year-end 1996.
Growth in managed assets is generally financed by internally generated
cash flow and borrowings. During 1997, FINOVA Capital issued $1.1 billion in new
senior debt and increased its commercial paper and other short-term borrowings
by $650 million. These funds were used to finance new business, redeem or retire
$818 million of debt and acquire a $122 million inventory finance portfolio.
During 1997, the Company also issued approximately 1.7 million shares of its
common stock as the primary consideration for the acquisition of FRC (see Note B
of Notes to Consolidated Financial Statements for further detail). In December
1996, the Company issued $111.6 million (net of transaction costs) in
company-obligated mandatory redeemable convertible preferred securities
("TOPrS") through FINOVA Finance Trust; see Note G of Notes to Consolidated
Financial Statements for additional discussion.
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 1997, FINOVA Capital issued $15.1 billion of commercial
paper (with an average of $2.9 billion outstanding during the year) and raised
$1.1 billion, as noted above, through new long-term financing of one to 10 year
durations. At December 31, 1997 and 1996, commercial paper and short-term bank
borrowings totaled $3.1 billion and $2.5 billion, respectively, and were
supported by available unused revolving credit lines which, if not renewed, are
convertible to long-term debt at FINOVA's option.
FINOVA Capital currently maintains a five-year revolving credit facility
with numerous lenders in the aggregate principal amount of $1.0 billion.
Separately, FINOVA Capital also has a 364-day revolving credit facility with the
same lenders in the aggregate principal amount of $1.0 billion, two five-year
facilities with numerous lenders for $700 million each and one 364-day facility
with one lender for $200 million. These $3.6 billion of credit facilities
support FINOVA's outstanding commercial paper and short-term borrowings. FINOVA
intends to borrow under the domestic revolving credit agreements to refinance
commercial paper and short-term bank loans if it encounters significant
difficulties in rolling over its outstanding commercial paper and short-term
bank loans. FINOVA rarely borrows under these facilities. The 364 day $1.0
billion and $200 million revolving credit agreements will be subject to renewal
in 1998, while the two $700 million and the other $1.0 billion credit facilities
are subject to renewal in 2002. In addition to the above, The FINOVA Group Inc.
has a 364-day revolving credit facility with one lender for $25 million, which
is subject to renewal in 1998.
FINOVA, through one of its subsidiaries, maintains a five-year
multi-currency facility with a group of lenders for $100 million. Through
another subsidiary, FINOVA maintains two five-year revolving credit facilities
with two separate lenders in Canada for $25 million Canadian each. FINOVA
Capital is the guarantor of these credit facilities, which are subject to
renewal in 2002. The Company also maintains one $10 million Canadian 364-day
revolving credit facility with a lender. That agreement will be subject to
renewal in 1998.
In 1997, FINOVA and FINOVA Capital jointly filed a universal shelf
registration statement with the SEC allowing for the issuance of $2 billion of
senior debt securities, common stock, preferred stock, depositary shares and
warrants to purchase common stock or debt securities, all of which remained
available as of December 31, 1997.
5
THE FINOVA GROUP INC.
The agreements pertaining to long-term debt include various restrictive
covenants and require the maintenance of certain defined financial ratios with
which FINOVA and FINOVA Capital have complied. Under one such covenant, dividend
payments by FINOVA Capital to FINOVA are limited to 50 percent of accumulated
earnings after December 31, 1991.
FINOVA Capital's aggregate cost of funds decreased to 6.6% for 1997 from
6.8% for 1996 as a result of declining interest rates, higher credit ratings and
the elimination of costs associated with $250 million of maturing interest rate
hedges. FINOVA's cost of and access to capital is dependent, in large part, on
its credit ratings. FINOVA Capital has maintained investment-grade ratings since
1976. FINOVA Capital currently has investment-grade ratings from the following
agencies:
Commercial Senior
Paper Debt
------------ ---------
Duff & Phelps Credit Rating Co. D1 A
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 A-
In addition, FINOVA Finance Trust, a subsidiary trust of FINOVA, has
issued mandatory redeemable convertible preferred securities ("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+
None of FINOVA Capital's subsidiaries have applied for credit ratings.
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 1997 and 1995, FINOVA repurchased 1,035,800 and
1,223,200 shares, respectively. No shares were acquired in 1996. This program
may be discontinued at any time.
Derivative Financial Instruments
FINOVA enters into interest rate and basis swap agreements as part of its
interest rate risk management policy of match funding its assets and
liabilities. The derivative instruments used are straightforward. FINOVA
continually monitors its derivative position and uses derivative instruments for
non-trading and non-speculative purposes only.
At December 31, 1997, FINOVA Capital had outstanding interest rate
conversion agreements with notional principal amounts totaling $2.6 billion.
Agreements with notional principal amounts of $550 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 6.21% to 9.10% (remaining terms of
one to four years) in return for receipts calculated on the same notional
amounts at floating interest rates. In addition, agreements with notional
principal amounts of $1.4 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
nine years) in return for receipts calculated on the same notional amounts at
fixed interest rates of 5.51% to 7.71%. FINOVA Capital has also entered into
basis swap agreements with notional principal amounts of $628 million and
remaining terms of one year. See Note F of Notes to Consolidated Financial
Statements for further discussion of FINOVA's derivatives.
6
THE FINOVA GROUP INC.
Year 2000 Date Conversion
FINOVA continues to implement changes necessary to assure accurate date
recognition and data processing with respect to the year 2000. Primary internal
activities related to this issue are modifications to existing computer programs
and conversions to new programs. The Company is also communicating with software
vendors, financial institutions, clients and others with whom it conducts
business to determine the nature of any impact on FINOVA. If needed
modifications and conversions are not accomplished in a timely manner, this
issue could have a material effect on the operations of FINOVA. As of this time,
however, management believes that necessary corrections will be achieved on
time. Costs related to this issue, which have been immaterial to date, are being
expensed as incurred and are not expected to have a material impact on FINOVA's
financial position.
Recent Developments and Business Outlook
FINOVA continues to seek new business by emphasizing customer service,
providing competitive interest rates and focusing on selected market niches.
Additionally, FINOVA continues to evaluate potential acquisition opportunities
that it believes are consistent with its business strategies.
In October 1997, FINOVA acquired Belgravia Capital Corporation, a
commercial mortgage banking organization headquartered in Irvine, California.
Consideration for the acquisition included approximately 1.7 million shares of
the Company's common stock, $10 million in cash and the agreement to pay
additional amounts up to approximately $30 million per year for the next three
years, based on future results of the operations. Historically, Belgravia
originated mid-size commercial mortgage loans which were funded by third parties
who typically sold or securitized the loans.
In October 1997, FINOVA also announced the reorganization of its
businesses into three operating groups. The Commercial Finance Group comprises
FINOVA's asset-based lending businesses such as Business Credit, Corporate
Finance, Factoring Services, Inventory Finance and Rediscount Finance. The
Specialty Finance Group contains FINOVA's Commercial Equipment Finance,
Specialty Real Estate Finance, Communications Finance, Franchise Finance,
Healthcare Finance, Portfolio Services, Public Finance, Resort Finance and
Transportation Finance businesses. The new Capital Markets Group consists of
FINOVA Realty Capital and the bridge financing, mezzanine debt and equity funds
formed under the FINOVA Investment Alliance program.
In February 1998, FINOVA announced the formation of a $125 million
investment alliance with Credit Suisse First Boston PTG known as FINOVA Aircraft
Investors, LLC. The alliance will use FINOVA's market expertise and industry
presence to purchase, upgrade and resell used commercial aircraft.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. The statement changes the reporting of certain items
currently reported in the shareowners' equity section of the balance sheet and
establishes standards for reporting of comprehensive income and its components
in a full set of general purpose financial statements. Adoption of this standard
will require additional disclosure only. FINOVA will adopt this standard
effective January 1, 1998, as required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This standard requires certain
information regarding segments of a business enterprise to be reported based on
the way management organizes and evaluates segments within the company. The
standard also requires disclosures regarding products and services, geographical
areas and major customers. Adoption of this standard will require FINOVA to
include additional detail in its disclosures, including certain disaggregated
operating information. FINOVA will adopt this standard in 1998, as required, but
is not currently planning to elect early adoption for interim financial periods
during the year. At this time, management anticipates that FINOVA's reported
segments will be composed of its three operating groups: Specialty Finance,
Commercial Finance and Capital Markets.
7
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 Deloitte & Touche LLP,
independent auditors. Management has made available to Deloitte & Touche LLP all
of FINOVA's financial records and related data and has made valid and complete
written and oral representations and disclosures in connection with the audit.
Management believes it is essential to conduct its business in accordance
with the highest ethical standards, which are characterized and set forth in
FINOVA's written Code of Conduct. These standards are communicated to and
acknowledged by all of FINOVA's employees.
/s/ Samuel L. Eichenfield
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
/s/ Bruno A. Marszowski
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/ Derek C. Bruns
Derek C. Bruns
Senior Vice President - Internal Audit
8
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, 1997 and 1996, and the related
consolidated statements of income, shareowners' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of FINOVA'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 at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Phoenix, Arizona
February 11, 1998
9
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
ASSETS
- ------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 33,190 $ 31,260
Investment in financing transactions:
Loans and other financing contracts 5,955,984 5,305,678
Factored receivables 750,399 564,430
Operating leases 712,927 517,690
Leveraged leases 619,557 514,573
Direct financing leases 360,589 396,388
- ------------------------------------------------------------------------------------------------------
8,399,456 7,298,759
Less reserve for credit losses (177,088) (148,693)
- ------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 8,222,368 7,150,066
Goodwill and other assets 464,282 345,408
- ------------------------------------------------------------------------------------------------------
$ 8,719,840 $ 7,526,734
======================================================================================================
See notes to consolidated financial statements.
10
THE FINOVA GROUP INC.
LIABILITIES AND SHAREOWNERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 147,280 $ 119,991
Due to clients 278,571 218,494
Interest payable 52,643 52,677
Senior debt 6,764,581 5,850,223
Deferred income taxes 274,761 244,208
- ------------------------------------------------------------------------------------------------------------------
7,517,836 6,485,593
- ------------------------------------------------------------------------------------------------------------------
Company-obligated mandatory redeemable convertible preferred securities of
subsidiary trust solely holding convertible debentures of FINOVA, net of
expenses (TOPrS) 111,550 111,550
Shareowners' equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 58,555,000 and 56,844,000 shares issued, respectively 585 568
Additional capital 764,525 684,261
Retained income 386,665 276,151
Cumulative translation adjustments (10) 1,008
Common stock in treasury, 2,273,000 and 1,786,000 shares,
respectively (61,311) (32,397)
- ------------------------------------------------------------------------------------------------------------------
1,090,454 929,591
- ------------------------------------------------------------------------------------------------------------------
$ 8,719,840 $ 7,526,734
==================================================================================================================
See notes to consolidated financial statements.
11
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED INCOME
(Dollars in Thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Interest, fees and other income $ 750,755 $ 640,132 $ 568,115
Financing lease income 77,049 61,985 49,310
Operating lease income 116,920 95,817 84,691
- -----------------------------------------------------------------------------------------------------------------
Income earned from financing transaction 944,724 797,934 702,116
Interest expense 416,093 366,543 337,814
Operating lease depreciation 72,989 62,286 55,218
- -----------------------------------------------------------------------------------------------------------------
Interest margins earned 455,642 369,105 309,084
Provision for credit losses 69,200 41,751 37,568
- -----------------------------------------------------------------------------------------------------------------
Net interest margins earned 386,442 327,354 271,516
Gains on sale of assets 30,261 12,949 10,889
- -----------------------------------------------------------------------------------------------------------------
416,703 340,303 282,405
Selling, administrative and other operating
expenses 190,525 154,481 131,571
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 226,178 185,822 150,834
Income taxes 83,088 69,329 57,036
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations before preferred dividends 143,090 116,493 93,798
Preferred dividends, net of tax 3,992
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations 139,098 116,493 93,798
Income and gain from sale of discontinued operations, net of tax 507 3,831
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 139,098 $ 117,000 $ 97,629
=================================================================================================================
Basic earnings per share:
Income from continuing operations $ 2.56 $ 2.14 $ 1.72
Income and gain from discontinued operations .01 .07
- -----------------------------------------------------------------------------------------------------------------
Net income $ 2.56 $ 2.15 $ 1.79
=================================================================================================================
Adjusted weighted average shares outstanding 54,405,000 54,508,000 54,633,000
=================================================================================================================
Diluted earnings per share:
Income from continuing operations $ 2.42 $ 2.08 $ 1.69
Income and gain from discontinued operations .01 .07
- -----------------------------------------------------------------------------------------------------------------
Net income $ 2.42 $ 2.09 $ 1.76
=================================================================================================================
Adjusted weighted average shares outstanding 59,161,000 56,051,000 55,469,000
=================================================================================================================
Dividends per common share $ .52 $ .46 $ .42
=================================================================================================================
See notes to consolidated financial statements.
12
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance, beginning of year $ 568 $ 568 $ 568
Issuance of common stock 17
- ---------------------------------------------------------------------------------------------------------------
Balance, end of year 585 568 568
- ---------------------------------------------------------------------------------------------------------------
ADDITIONAL CAPITAL:
Balance, beginning of year 684,261 686,098 687,758
Issuance of common stock 77,521
Net change in unamortized amount of restricted
stock (1,558) (1,816) (613)
Common stock in treasury issued in connection
with employee benefit plans 4,301 (21) (1,047)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of year 764,525 684,261 686,098
- ---------------------------------------------------------------------------------------------------------------
RETAINED INCOME:
Balance, beginning of year 276,151 184,381 109,830
Net income 139,098 117,000 97,629
Dividends (28,584) (25,230) (23,078)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of year 386,665 276,151 184,381
- ---------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of year 1,008 (5,686) (4,726)
Unrealized translation (loss) gain (1,018) 6,694 (960)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of year (10) 1,008 (5,686)
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY:
Balance, beginning of year (32,397) (40,177) (23,178)
Purchase of shares (37,296) (23,588)
Shares used in connection with employee
benefit plans 8,382 7,780 6,589
- ---------------------------------------------------------------------------------------------------------------
Balance, end of year (61,311) (32,397) (40,177)
- ---------------------------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY $ 1,090,454 $ 929,591 $ 825,184
===============================================================================================================
See notes to consolidated financial statements.
13
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 139,098 $ 117,000 $ 97,629
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 69,200 41,751 37,568
Depreciation and amortization 90,396 76,471 70,017
Gains on sale of assets (30,261) (12,949) (10,889)
Gains on dispositions of discontinued operations, net (3,521)
Deferred income taxes 30,553 29,356 19,285
Change in assets and liabilities, net of effects from subsidiaries purchased:
Increase in other assets (48,610) (61,694) (53,071)
Increase (decrease) in accounts payable and accrued expenses 20,800 (16,009) (9,152)
(Decrease) increase in interest payable (34) 5,853 7,843
Other (603) 6,153 (1,573)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 270,539 182,411 157,657
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of assets 178,413 102,945 50,028
Proceeds from sales of securitized assets 36,565 100,000 200,000
Principal collections on financing transactions 2,087,619 1,781,985 1,088,420
Expenditures for financing transactions (2,507,822) (2,221,363) (1,853,330)
Net change in short-term financing transactions (844,584) (624,952) (442,405)
Acquisitions, net of cash acquired (120,883) (7,455) (261,868)
Sale of discontinued operation 616,434
Other 2,399 3,296 2,104
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,168,293) (249,110) (1,217,051)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings under commercial paper and short-term loans 649,653 62,156 373,566
Long-term borrowings 1,080,625 564,988 1,272,450
Repayment of long-term borrowings (817,892) (681,401) (570,002)
Proceeds from exercise of stock options 12,683 7,759 5,542
Net proceeds from sale of company-obligated mandatory redeemable convertible
preferred securities of subsidiary trust solely holding convertible 111,550
debentures of FINOVA (TOPrS)
Common stock purchased for treasury (37,296) (23,588)
Dividends (28,584) (25,230) (23,078)
Net change in due to clients 40,495 (32,143) 64,909
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 899,684 7,679 1,099,799
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,930 (59,020) 40,405
Cash and cash equivalents, beginning of year 31,260 90,280 49,875
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 33,190 $ 31,260 $ 90,280
========================================================================================================================
See notes to consolidated financial statements.
14
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Dollars in Thousands in Tables, except per share data)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation -- The
consolidated financial statements present the financial position, results of
operations and cash flows of The FINOVA Group Inc. and its subsidiaries
(collectively, "FINOVA" or the "Company"), including FINOVA Capital Corporation
and its subsidiaries (collectively, "FINOVA Capital").
The FINOVA Group Inc. is a financial services company engaged in
providing capital and collateralized financing products to commercial
enterprises focusing on mid-size businesses in various market niches,
principally in the United States.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles. Described below are those accounting
policies particularly significant to FINOVA, including those selected from
acceptable alternatives:
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition -- For loans and other financing contracts, earned
income is recognized over the life of the contract, using the interest method.
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.
Leases that are financed by nonrecourse borrowings and meet certain
other criteria are classified as leveraged leases. For leveraged leases,
aggregate rentals receivable are reduced by the related nonrecourse debt service
obligation including interest ("net rentals receivable"). The difference between
(a) the net rentals receivable 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 leases classified as direct financing leases, the difference
between (a) aggregate lease rentals and (b) the cost of the related assets less
estimated residual value at the end of the lease term is recorded as unearned
income. Earned income is recognized over the life of the contracts using the
interest method.
Fees received in connection with loan commitments are deferred in
accounts payable and accrued expenses until the loan is advanced and are then
recognized over the term of the loan as an adjustment of the yield. Fees on
commitments that expire unused are recognized at expiration.
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 becomes
contractually current and performance is demonstrated to be resumed or when
foreclosed or repossessed assets generate a reasonable rate of return.
Cash Equivalents -- FINOVA classifies highly liquid investments with
original maturities of three months or less from date of purchase as cash
equivalents.
Marketable Securities -- As discussed in Note K, FINOVA owns certain
marketable securities which are considered trading securities. Trading
securities are stated at fair value with gains or losses recorded in income in
the period they occur.
15
THE FINOVA GROUP INC.
Reserve for Credit Losses -- The reserve for credit losses is available
to absorb credit losses. The provision for credit losses is the charge to income
to increase the reserve for credit losses to the level that management estimates
to be adequate considering delinquencies, loss experience and collateral. Other
factors considered include changes in geographic and product diversification,
size of the portfolio and current economic conditions. Accounts are either
written-off or written-down when the loss is considered probable and
determinable, after giving consideration to the customer's financial condition
and the value of the underlying collateral, including any guarantees. Any
deficiency between the carrying amount of an asset and the net sales price of
repossessed collateral is charged to the reserve for credit losses. Recoveries
of amounts previously written-off as uncollectible are credited to the reserve
for credit losses.
Repossessed Assets -- Repossessed assets are carried at the lower of
cost or fair value less estimated selling expenses.
Residual Values -- FINOVA has a significant investment in residual
values in its leasing portfolios. These residual values represent estimates of
the value of leased assets at the end of the contract terms and are initially
recorded based upon appraisals and estimates. Actual residual values realized
could differ from these estimates. Residual values are periodically reviewed to
determine that recorded amounts are appropriate.
Goodwill -- FINOVA amortizes the excess of cost over the fair value of
net assets acquired ("goodwill") on a straight-line basis primarily over 20 to
25 years. Goodwill at December 31, 1997 and 1996 was $288.2 million and $179.5
million (net of amortization), respectively. Amortization totaled $10.1 million
($6.3 million after-tax), $9.6 million ($5.7 million after-tax) and $8.2 million
($4.9 million after-tax) for the years ended December 31, 1997, 1996 and 1995,
respectively. FINOVA periodically evaluates the carrying value of its intangible
assets for impairment. This evaluation is based principally on projected,
undiscounted cash flows generated by the underlying assets. At December 31,
1997, approximately $272.0 million of goodwill was deductible for federal income
tax purposes over 15 years under Section 197 of the Internal Revenue Code.
Pension and Other Benefits -- Trusteed, noncontributory pension plans
cover substantially all employees. Benefits are based primarily on final average
salary and years of service. Funding policies provide that payments to pension
trusts shall be at least equal to the minimum funding required by applicable
regulations.
Other postretirement benefit costs are recorded during the period the
employees provide service to FINOVA. FINOVA funds its postretirement benefit
obligation as benefits are paid.
FINOVA records postemployment benefit costs at the time employees leave
active service. Postemployment benefits are any benefits other than retirement
benefits.
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. Voluntary wage reductions may be elected by the
employee 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.
16
THE FINOVA GROUP INC.
Expenses under the Savings Plan and Employee Stock Ownership Plan were
$2.5 million, $2.1 million and $1.7 million in 1997, 1996 and 1995,
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 -- For the year ended December 31, 1997, FINOVA
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." This statement specifies the presentation and
disclosure of earnings per share for entities with publicly held common stock or
potential common stock. The statement also requires the calculation of two
earnings per share measures, basic and diluted. 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, 1997, 1996 and 1995 on the Statement of
Consolidated Income and are more fully discussed in Note L.
Derivative Financial Instruments -- As more fully described in Note F,
FINOVA uses derivative financial instruments as part of its interest rate risk
management policy of match funding its assets and liabilities. The derivative
instruments used include interest rate swaps which are accounted for using
settlement or matched swap accounting.
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.
Securitizations -- Effective January 1, 1997, FINOVA adopted the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" which requires receivable transfers
occurring after December 31, 1996 to be accounted for as sales when legal and
effective control over the transferred receivables is surrendered.
Reclassifications -- Certain reclassifications have been made to the
1996 and 1995 financial statements to conform to the 1997 presentation,
including a two-for-one stock split effected in October 1997.
NOTE B ACQUISITIONS AND DISPOSITIONS
During 1997 and 1996, FINOVA Capital, in transactions accounted for as
purchases, acquired various businesses and portfolios having initial funds
employed totaling $122 million and $318 million, respectively. In October 1997,
FINOVA also purchased Belgravia Capital Corporation, a commercial mortgage
banking organization, for $77.5 million of the Company's common stock (1.7
million shares), $10.0 million in cash and an agreement to pay additional
amounts up to approximately $30 million per year for the next three years,
contingent upon future results of the operations. The acquisition was comprised
of $91.5 million in assets, including $88.0 million in goodwill and $4.0 million
in liabilities and acquisition costs. The results of these operations have been
included in FINOVA's results since the date of acquisition. Goodwill related to
this transaction is being amortized over 25 years.
In 1996, the company sold its Manufacturer & Dealer Services operations
for $616.4 million, recognizing a gain on sale, net of taxes, of $6.0 million
after allocation of related costs and expenses. In connection with the sale, the
Company retained a portfolio of leases relating to one vendor program. Also in
1996, the Company closed FINOVA Medical Systems, a remanufacturer of medical
equipment, recognizing a loss on disposal of approximately $2.5 million, net of
tax. Income (losses) from these operations, net of tax, for the two years ended
December 31, 1996 and 1995 were ($3.0 million) and $3.8 million, respectively.
Assumptions used to calculate these results were similar to those used by FINOVA
to evaluate its other lines of business and included the allocation of interest
expense based on certain leverage ratios and the allocation of indirect
operating expenses. Results for 1995 have been restated to classify these
operations as discontinued.
NOTE C INVESTMENT IN FINANCING TRANSACTIONS
17
THE FINOVA GROUP INC.
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
and factored receivables). At December 31, 1997 and 1996, the carrying amount of
the investment in financing transactions, including the estimated residual value
of leased assets upon lease termination, was $8.4 billion and $7.3 billion
(before reserve for credit losses), respectively, and consisted of the following
percentage of carrying amount by line of business:
- --------------------------------------------------------------------------------
Percent of Total
Carrying Amount
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Transportation Finance 19.4% 18.2%
Resort Finance 14.4 16.0
Corporate Finance 9.8 8.9
Specialty Real Estate Finance 8.2 10.9
Communications Finance 7.9 7.7
Commercial Equipment Finance 7.5 8.0
Rediscount Finance 7.3 5.8
Inventory Finance 6.5 4.3
Healthcare Finance 6.3 6.9
Franchise Finance 5.2 5.0
Factoring Services 2.7 3.1
Business Credit 2.4 2.3
Public Finance 1.6 2.1
Other 0.8 0.8
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
18
THE FINOVA GROUP INC.
Aggregate installments on loans and other financing contracts, direct
financing leases, operating leases, leveraged leases and factored receivables at
December 31, 1997 (excluding repossessed assets of $37.1 million and estimated
residual values) are contractually due during each of the years ending December
31, 1998 to 2002 and thereafter as follows:
- --------------------------------------------------------------------------------------------------------
There-
1998 1999 2000 2001 2002 after
- --------------------------------------------------------------------------------------------------------
Loans and other financing
contracts:
Commercial:
Fixed interest rate $ 332,773 $ 376,445 $ 270,568 $ 306,517 $ 150,631 $ 405,615
Floating interest rate 640,324 538,160 545,215 417,486 220,807 95,437
Real estate:
Fixed interest rate 90,091 93,535 40,530 50,152 31,311 130,954
Floating interest rate 447,377 349,907 132,069 144,931 37,301 70,755
Factored receivables 750,399
Leases, primarily at
fixed interest rates:
Operating leases 127,053 143,946 103,196 71,510 39,513 112,453
Leveraged leases 31,582 25,456 15,859 13,010 8,073 402,266
Direct financing leases 100,174 74,040 48,073 33,378 23,401 88,714
- --------------------------------------------------------------------------------------------------------
$ 2,519,773 $ 1,601,489 $ 1,155,510 $1,036,984 $ 511,037 $ 1,306,194
========================================================================================================
The investment in operating leases at December 31 consisted of the
following:
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
Cost of assets $ 855,670 $ 646,918
Accumulated depreciation (142,743) (129,228)
- --------------------------------------------------------------------------------------------------------
Investment in operating leases $ 712,927 $ 517,690
========================================================================================================
The net investment in leveraged leases at December 31 consisted of the
following:
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
Rentals receivable $ 2,287,233 $ 1,898,996
Less principal and interest payable on nonrecourse debt (1,790,987) (1,486,249)
- --------------------------------------------------------------------------------------------------------
Net rentals receivable 496,246 412,747
Estimated residual values 575,234 479,850
Less unearned income (451,923) (378,024)
- --------------------------------------------------------------------------------------------------------
Investment in leveraged leases 619,557 514,573
Less deferred taxes arising from leveraged leases (249,710) (246,075)
- --------------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 369,847 $ 268,498
========================================================================================================
19
THE FINOVA GROUP INC.
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:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Lease and other income, net $ 41,605 $ 30,230 $ 12,080
Income tax expense 19,476 11,321 4,201
- --------------------------------------------------------------------------------------------------------
The investment in direct financing leases at December 31 consisted of
the following:
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
Rentals receivable $ 367,780 $ 398,928
Estimated residual values 120,020 100,039
Unearned income (127,211) (102,579)
- --------------------------------------------------------------------------------------------------------
Investment in direct financing leases $ 360,589 $ 396,388
========================================================================================================
FINOVA has a substantial number of loans and leases with payments that
fluctuate with changes in index rates, primarily prime interest rates and the
London interbank offered rates ("LIBOR"). The investment in loans and leases
with floating interest rates (excluding nonaccruing contracts and repossessed
assets) was $4.34 billion and $3.70 billion at December 31, 1997 and 1996,
respectively.
Interest earned from financing transactions with floating interest
rates was approximately $491 million in 1997, $436 million in 1996 and $402
million in 1995. The adjustments which arise from changes in index rates can
have a significant effect on interest 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, 1997, FINOVA had a committed backlog of new business of
approximately $1.6 billion compared to $1.5 billion at December 31, 1996. The
committed backlog includes lines of credit totaling $666 million and $702
million at December 31, 1997 and 1996, 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 - On a limited basis, FINOVA sells receivables in
transactions subject to limited recourse provisions and remains a servicer for
which it is paid a fee. Normal servicing fees are earned on a level yield basis
over the remaining terms of the related receivables sold.
In 1996 and 1995, FINOVA, under a securitization agreement, sold a
total of $300 million in undivided proportionate interests in a revolving loan
portfolio totaling approximately $736.2 million as of December 31, 1997. Under
this agreement, there is recourse to FINOVA based on the outstanding balance of
the proportionate interest sold. In 1997, under a separate securitization
agreement, FINOVA sold $36.6 million of loan receivables with limited recourse.
FINOVA will service these loan contracts for the transferee and has deferred a
portion of the proceeds to be recognized as service fee income over the term of
the agreements.
20
THE FINOVA GROUP INC.
NOTE D RESERVE FOR CREDIT LOSSES
The following is an analysis of the reserve for credit losses for the
years ended December 31:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 148,693 $ 129,077 $ 110,903
Provision for credit losses 69,200 41,751 37,568
Write-offs (45,487) (32,017) (25,631)
Recoveries 2,287 3,296 2,104
Other (including reserves related to acquisitions) 2,395 6,586 4,133
- --------------------------------------------------------------------------------------------------------
Balance, end of year $ 177,088 $ 148,693 $ 129,077
========================================================================================================
Write-offs by lines of business during the years ended December 31 are
as follows:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Factoring Services $ 24,382 $ 5,098 $ 3,728
Corporate Finance 6,577 9,470 4,660
Commercial Equipment Finance 3,722 3,207 2,271
Resort Finance 2,700 4,275 2,000
Specialty Real Estate Finance 2,106 1,793 2,275
Healthcare Finance 1,798 1,018 314
Inventory Finance 1,777 201
Communications Finance 750 2,994 4,037
Franchise Finance 696 3,267 3,448
FINOVA Capital Limited (UK) 47 895 1,523
Business Credit 452
Other 932 722
- --------------------------------------------------------------------------------------------------------
$ 45,487 $ 32,017 $ 25,631
========================================================================================================
Write-offs as a percentage of average managed assets (excluding
participations) 0.56% 0.46% 0.44%
========================================================================================================
An analysis of nonaccruing assets included in the investment in
financing transactions at December 31 is as follows:
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
Contracts $ 150,263 $ 117,086
Repossessed assets 37,093 38,419
- --------------------------------------------------------------------------------------------------------
Total nonaccruing assets $ 187,356 $ 155,505
========================================================================================================
Nonaccruing assets as a percentage of managed assets (excluding participations) 2.1% 2.0%
========================================================================================================
In addition to the repossessed assets included in the above table,
FINOVA had repossessed assets with a total carrying amount of $52.5 million and
$60.0 million at December 31, 1997 and 1996, respectively, which earned income
of $4.1 million and $5.1 million during 1997 and 1996, respectively.
21
THE FINOVA GROUP INC.
At December 31, 1997, the total carrying amount of impaired loans was
$158.0 million, of which $36.4 million were revenue accruing. A reserve for
credit losses of $24.5 million has been established for $39.0 million of
nonaccruing impaired loans. At December 31, 1996, the total carrying amount of
impaired loans was $110.1 million, of which $46.3 million were revenue accruing.
At December 31, 1996, a reserve for credit losses of $6.2 million was
established for $14.1 million of nonaccruing impaired loans. For the three years
ended December 31, 1997, 1996 and 1995, the average carrying amount of impaired
loans was $130.3 million, $85.1 million and $93.2 million, respectively. Income
earned on accruing impaired loans was approximately $4.0 million in all three
years. Income earned on impaired loans is recognized in the same manner as it is
on other accruing loans. Cash collected on all nonaccruing loans is applied to
the carrying amount.
Had all nonaccruing assets outstanding at December 31, 1997, 1996 and
1995 remained accruing, income earned would have increased by approximately $22
million, $19 million and $17 million, respectively.
NOTE E DEBT
FINOVA satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank loans
and public notes. FINOVA's commercial paper borrowings are supported by unused
long-term revolving bank credit agreements totaling $3.6 billion. FINOVA Capital
currently maintains a five-year revolving credit facility with numerous lenders,
in the aggregate principal amount of $1.0 billion. Separately, FINOVA Capital
also has a 364-day revolving credit facility with the same lenders in the
aggregate principal amount of $1.0 billion, two five-year facilities with
numerous lenders for $700 million each and one 364-day facility with one lender
for $200 million. FINOVA intends to borrow under the domestic revolving credit
agreements to refinance commercial paper and short-term bank loans if it
encounters significant difficulties in rolling over its outstanding commercial
paper and short-term bank loans. FINOVA rarely borrows under these facilities.
Under the terms of these agreements, FINOVA has the option to periodically
select either domestic dollars or Eurodollars as the basis of borrowings.
Interest is based on the lenders' prime rate for domestic dollar advances or
London interbank offered rates ("LIBOR") for Eurodollar advances. The agreements
also provide for a commitment fee on the unused credit. The 364-day $1.0 billion
and $200 million revolving credit agreements will be subject to renewal in 1998,
while the two $700 million and the other $1.0 billion credit facilities are
subject to renewal in 2002. In addition to the above, The FINOVA Group Inc. has
a 364-day revolving credit facility with one lender for $25 million, which is
subject to renewal in 1998.
FINOVA, through one of its subsidiaries, maintains a five-year
multi-currency facility with a small group of lenders for $100 million. Under
the terms of this agreement, the subsidiary has the option to periodically
select multiple currencies as the basis of borrowings. Interest is based on the
Eurocurrency rate per annum for deposits in the relevant designated currency.
Through another subsidiary, FINOVA maintains two five-year revolving credit
facilities with two separate lenders in Canada for $25 million Canadian each.
Under the terms of these agreements, the subsidiary has the option to borrow
Canadian dollars through either bankers' acceptances or prime rate advances.
Interest is based on the lenders' bankers' acceptance rates or prime rate for
prime advances. FINOVA Capital is the guarantor of these credit facilities,
which are subject to renewal in 2002. FINOVA also maintains one $10 million
Canadian 364-day revolving credit facility with one lender. That credit
agreement will be subject to renewal in 1998.
22
THE FINOVA GROUP INC.
The following information pertains to all short-term financing,
primarily commercial paper, issued by FINOVA Capital for the years ended
December 31:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Maximum amount of short-term debt outstanding
during year $ 3,284,118 $ 3,087,876 $ 2,518,733
Average short-term debt outstanding during year 2,886,668 2,551,316 2,210,329
Weighted average short-term interest rates
at end of year:
Short-term borrowings 5.6% 5.4% 5.9%
Commercial paper* 5.7% 5.6% 6.0%
Weighted average interest rate on short-term debt
outstanding during year* 5.7% 5.6% 6.1%
- --------------------------------------------------------------------------------------------------------
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
Senior debt at December 31 was as follows:
- ----------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
Commercial paper and short-term bank loans supported by unused long-term
bank revolving credit agreements, less unamortized discount $ 3,132,109 $ 2,482,496
Medium-term notes due to 2005, 6.1% to 10.3% 1,343,148 1,414,500
Term loans payable to banks due to 1999, 6.0% 190,000 180,000
Senior notes due to 2007, 6.1% to 16.0%, less unamortized discount 2,083,761 1,758,176
Nonrecourse installment notes due to 2002, 10.6% (assets of
$58,064 and $24,656, respectively, pledged as collateral) 15,563 15,051
- ----------------------------------------------------------------------------------------------------------------
Total senior debt $ 6,764,581 $ 5,850,223
================================================================================================================
Annual maturities of senior debt outstanding at December 31, 1997 due
through June 2007 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $687.3 million (1998), $707.8
million (1999), $721.8 million (2000), $476.2 million (2001), $539.7 million
(2002) and $499.7 million (thereafter).
The agreements pertaining to senior debt and revolving credit
agreements include various restrictive covenants and require the maintenance of
certain defined financial ratios with which FINOVA and FINOVA Capital have
complied. Under one such covenant, dividend payments by FINOVA Capital are
limited to 50% of accumulated earnings after December 31, 1991. As of December
31, 1997, FINOVA Capital had $126.4 million of excess accumulated earnings
available for distribution.
Total interest paid is not significantly different from interest
expense.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
FINOVA enters into interest rate and basis swap agreements as part of
its interest rate risk management policy of match funding its assets and
liabilities. The derivative instruments used are straightforward. The Company
continually monitors its derivative position and uses derivative instruments for
non-trading and non-speculative purposes only.
FINOVA uses derivative instruments to minimize its exposure to
fluctuations in interest rates. FINOVA strives to minimize its overall debt
costs while limiting the short-term variability of interest expense and funds
required for debt service. To achieve this objective, FINOVA diversifies its
borrowing sources (short- and long-term debt with a fixed or a variable rate)
and seeks to maintain
23
THE FINOVA GROUP INC.
a portfolio that is matched funded. FINOVA's matched funding policy generally
requires that floating-rate assets be financed with floating-rate liabilities
and fixed-rate assets be financed with fixed-rate liabilities. FINOVA's matched
funding policy also requires that the difference between floating-rate
liabilities and floating-rate assets, measured as a percent of total assets,
should not vary by more than 3% for any extended period. The amount of
derivatives used is a function of this 3% gap policy with the maturities of the
derivatives being correlated to the maturities of the assets being financed.
The notional amounts of derivatives do not represent amounts exchanged
by the parties and, thus, are not a measure of FINOVA's exposure through its use
of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivatives.
Under interest rate swaps, FINOVA agrees to exchange with the other
party, at specified intervals, the payment streams calculated on a specified
notional amount, with at least one stream based on a floating interest rate.
Generic swap notional amounts do not change for the life of the contract. Basis
swaps involve the exchange of floating-rate indices, such as the prime rate, the
commercial paper composite rate and LIBOR and are used primarily to protect
FINOVA's margins on floating-rate transactions by locking in the spread between
FINOVA's lending and borrowing rates.
FINOVA's off-balance sheet derivative instruments involve credit and
interest rate risks. The credit risk would be the nonperformance by the other
parties to the financial instruments. All financial instruments have been
entered into with major financial institutions, which are expected to fully
perform under the terms of the agreements, thereby mitigating the credit risk
from the transactions, although there can be no assurance that any such
institution will perform under its agreement. FINOVA's derivative policy
stipulates that the maximum exposure to any one counter party, relative to the
derivative products, is limited on a net basis to 10% of FINOVA's outstanding
debt at the time of that transaction. Interest rate risks relate to changes in
interest rates and the impact on earnings. FINOVA mitigates interest rate risks
through its matched funding policy.
The use of derivatives decreased interest expense by $1.0 million in
1997, a decrease in the aggregate cost of funds of 0.03%, whereas the use of
derivatives increased interest expense by $3.0 million in 1996, an increase in
the aggregate cost of funds of 0.05% and $9.8 million in 1995, an increase in
the aggregate cost of funds of 0.2%. These changes in interest expense from
off-balance sheet derivatives effectively alter on-balance sheet costs and must
be viewed as total interest rate management. There were no deferred gains or
losses associated with derivatives.
24
THE FINOVA GROUP INC.
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type in place at December
31, 1997. The rates presented are as of December 31, 1997. To the extent that
rates change, variable interest information will change:
-------------------------------------------------------------------------------------------------------
Maturities of Derivative Products
December 31, --------------------------------------------------------
(Dollars in Millions) 1997 1998 1999 2000 2001 2002 Thereafter
-------------------------------------------------------------------------------------------------------
Receive fixed-rate swaps:
Notional value $ 1,402 $ 325 $ 377 $ 150 $ 150 $ 200 $ 200
Weighted average receive rate 6.77% 6.82% 6.45% 7.24% 6.66% 6.51% 7.26%
Weighted average pay rate 5.82% 5.78% 5.79% 5.78% 5.83% 5.80% 5.98%
Pay fixed-rate swaps:
Notional value $ 550 $ 200 $ 150 $ 100 $ 100
Weighted average receive rate 5.81% 5.86% 5.80% 5.74% 5.77%
Weighted average pay rate 7.14% 7.30% 7.06% 7.38% 6.70%
Basis swaps:
Notional value $ 628 $ 628
Weighted average receive rate 5.75% 5.75%
Weighted average pay rate 6.04% 6.04%
-------------------------------------------------------------------------------------------------------
TOTAL NOTIONAL VALUE $ 2,580 $ 1,153 $ 527 $ 250 $ 250 $ 200 $ 200
=======================================================================================================
Total weighted average rates
on swaps:
Receive rate 6.32% 6.07% 6.26% 6.64% 6.30% 6.51% 7.26%
=======================================================================================================
Pay rate 6.15% 6.19% 6.15% 6.42% 6.18% 5.80% 5.98%
=======================================================================================================
For the benefit of its customers, FINOVA enters into interest rate cap
agreements. The total notional amount of these agreements at December 31, 1997
was $41.9 million, none of which was in a pay or receive position. These
agreements will mature as follows: $16.9 million in 1998, $15.9 million in 1999,
$1.5 million in 2000 and $7.6 million in 2001.
At December 31, 1996, FINOVA was a party to a short-term foreign
currency forward exchange agreement with a notional amount of approximately $73
million to mitigate its foreign currency risk. The exchange agreement expired in
1997.
25
THE FINOVA GROUP INC.
Derivative product activity for the three years ended December 31, 1997
is as follows:
- --------------------------------------------------------------------------------------------------------
Pay Interest
Receive Pay Fixed-Rate Rate
Fixed-Rate Fixed-Rate Amortizing Basis Hedge
(Dollars in Millions) Swaps Swaps Swaps Swaps Agreements TOTAL
- --------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $ 1,190 $ 780 $ 242 $ 254 $ 750 $ 3,216
Expired (40) (30) (152) (126) (348)
Additions 150 50 5 750 955
- --------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,300 800 95 878 750 3,823
Expired (100) (325) (95) (750) (1,270)
Additions 150 350 500
- --------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,350 825 -- 878 -- 3,053
Expired (275) (275) (250) (800)
Additions 327 327
- --------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 1,402 $ 550 $ -- $ 628 $ -- $ 2,580
========================================================================================================
NOTE G COMPANY-OBLIGATED MANDATORY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST SOLELY HOLDING CONVERTIBLE
DEBENTURES OF FINOVA
In December 1996, FINOVA Finance Trust, a subsidiary trust sponsored
and wholly-owned by FINOVA, issued (a) 2,300,000 shares of convertible trust
originated preferred securities (the "Preferred Securities" or "TOPrS") to the
public for gross proceeds of $115 million (before transaction costs of $3.5
million) and (b) 71,135 shares of common securities to FINOVA. The gross
proceeds from these transactions were invested by the trust in $118.6 million
aggregate principal amount of 5 1/2% convertible subordinated debentures due
2016 (the "Debentures") newly issued by FINOVA. The Debentures represent all of
the assets of the trust. The proceeds from the issuance of the Debentures were
contributed by FINOVA to FINOVA Capital, which used the proceeds to repay
commercial paper and other indebtedness.
The Preferred Securities accrue and pay cash distributions quarterly
when declared by FINOVA at a rate of 5 1/2% per annum of the stated liquidation
amount of $50 per preferred security. FINOVA has guaranteed, on a subordinated
basis, distributions and other payments due on the Preferred Securities (the
"Guarantee"). The Guarantee, when taken together with FINOVA's obligations under
the Debentures, the indenture under which the Debentures were issued and
FINOVA's obligations under the Amended and Restated Declaration of Trust
governing the trust, provides a full and unconditional guarantee on a
subordinated basis of amounts due on the Preferred Securities. FINOVA can defer
making distributions on the Debentures for up to 20 consecutive quarters, but
does not anticipate doing so. The Preferred Securities are 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 Debentures are convertible into FINOVA's
common stock at the election of the holders of the Preferred Securities
individually. Each debenture is convertible into 1.2774 shares of FINOVA's
common stock (equivalent to a conversion price of $39.14 per share), subject to
adjustment in specified circumstances. FINOVA can terminate the conversion
rights noted above on 30 days notice on or after December 31, 1999 if it is
current on its payments for the Debentures and the closing prices of its common
stock trade at or above 120% of the conversion price of the preferred securities
($46.97, assuming no adjustments).
NOTE H SHAREOWNERS' EQUITY
On August 14, 1997, the Board of Directors declared a two-for-one stock
split of FINOVA's common stock effected as a stock distribution on October 1,
1997 to shareowners of record as of September 1, 1997. All share and per share
data has been restated to reflect the split.
26
THE FINOVA GROUP INC.
At December 31, 1997, 1996 and 1995, The FINOVA Group Inc. had
58,555,000, 56,844,000 and 56,844,000 shares of common stock issued, with
56,282,000, 55,058,000 and 54,558,000 shares of common stock outstanding,
respectively. Approximately 7,972,000, 8,632,000 and 9,492,000 common shares
were reserved for issuance under the 1992 Stock Incentive Plan at December 31,
1997, 1996 and 1995, respectively.
In addition to the convertible preferred securities issued by FINOVA
Finance Trust in 1996, FINOVA has 5,000,000 shares of preferred stock
authorized, none of which was issued at December 31, 1997. The Board of
Directors is authorized to provide for the issuance of shares of preferred stock
in series, to establish the number of shares to be included in each series and
to fix the designation, powers, preferences and rights of the shares of each
series. In connection with FINOVA's stock incentive plan, 250,000 shares of
preferred stock are reserved for issuance of awards under that plan.
Each outstanding share of FINOVA's common stock has a tandem junior
participating preferred stock purchase right ("Right") attached to it. The
Rights contain provisions to protect shareowners in the event of an unsolicited
acquisition or attempted acquisition of 20% or more of FINOVA's common stock
which is not believed by the Board of Directors to be in the best interest of
shareowners. The Rights are represented by the common share certificates and are
not exercisable or transferable apart from the common stock until such a
situation arises. The Rights may be redeemable by FINOVA at $0.01 per Right
prior to the time any person or group has acquired 20% or more of FINOVA's
shares. FINOVA has reserved 600,000 shares of Junior Participating Preferred
Stock for issuance in connection with the Rights.
FINOVA periodically repurchases its securities on the open market to
fund its obligations pursuant to employee stock options, benefit plans and
similar obligations. During the years ended December 31, 1997 and 1995, FINOVA
repurchased 1,035,800 and 1,223,200 shares, respectively. No shares were
acquired during the year ended December 31, 1996. The program may be
discontinued at any time.
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 certain key
employees. The Plan provides for the following types of awards: (a) stock
options (both incentive stock options 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, 1997 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 was established, which has been
the case for multi-year grants.
27
THE FINOVA GROUP INC.
Information with respect to options granted and exercised for the three
years ended December 31, 1997 is as follows:
- --------------------------------------------------------------------------------------------------------
Average Option
Shares Price Per Share
- --------------------------------------------------------------------------------------------------------
Options outstanding at January 1, 1995 2,923,210 $ 14.06
Granted 626,600 19.40
Exercised (336,776) 11.20
Canceled (166,016) 17.09
- --------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 3,047,018 15.31
Granted 1,011,740 29.05
Exercised (359,408) 13.37
Canceled (262,172) 20.45
- --------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 3,437,178 19.17
Granted 781,108 43.57
Exercised (442,049) 15.57
Canceled (191,094) 28.05
- --------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 3,585,143 $ 24.45
========================================================================================================
At December 31, 1997, stock options with respect to 3,585,143 common
shares were outstanding at exercise prices ranging from $6.35 to $55.49 per
share.
The following table summarizes information about stock options
outstanding at December 31, 1997:
------------------------------------------------------------------------------------------------
Weighted
Average
Range of Number Remaining Weighted Number Weighted
Exercise Outstanding Contractual Average Exercisable Average
Prices at 12/31/97 Life Exercise Price at 12/31/97 Exercise Price
------------------------------------------------------------------------------------------------
$6.35 - $15.25 909,454 4.34 $ 11.07 909,454 $ 11.07
15.34 - 20.74 980,892 6.61 18.35 818,014 18.32
20.83 - 26.38 544,289 7.80 24.84 142,937 25.59
27.25 - 42.75 857,752 9.20 36.63 181,156 31.81
43.50 - 55.49 292,756 9.66 49.96 -- --
================================================================================================
$6.35 - $55.49 3,585,143 7.09 $ 24.45 2,051,561 $ 16.80
================================================================================================
Since 1992, the Board of Directors has only granted performance based
restricted stock to employees. Performance based restricted stock awards (90,100
shares in 1997, 138,160 shares in 1996 and 109,100 shares in 1995), 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
vestings over the target are reported as new grants as of the vesting dates.
Vestings below target would be reported as a forfeiture of amounts below the
target number of shares.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. The compensation cost that has been charged
against income for its performance-based plan was $7.9 million, $2.9 million and
$1.6 million for 1997, 1996 and 1995, 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 method
of FASB Statement 123, FINOVA's net income would have been $135.6
28
THE FINOVA GROUP INC.
million, $115.0 million and $97.0 million for 1997, 1996 and 1995, respectively.
Basic earnings per share would have been $2.49, $2.11 and $1.78 and diluted
earnings per share would have been $2.36 , $2.05 and $1.75 for 1997, 1996 and
1995, 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 1997, 1996 and 1995: dividend yield of 1.92%,
expected volatility of 43%, risk-free interest rates of 6.2% and expected lives
of five to seven years.
NOTE J INCOME TAXES
The consolidated provision for income taxes consists of the following
for the years ended December 31:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Current:
United States:
Federal $ 34,936 $ 30,574 $ 30,557
State 13,973 7,654 7,194
Foreign 3,626 1,745
- --------------------------------------------------------------------------------------------------------
52,535 39,973 37,751
- --------------------------------------------------------------------------------------------------------
Deferred:
United States:
Federal 31,051 24,294 13,946
State (498) 5,062 4,535
Foreign 804
- --------------------------------------------------------------------------------------------------------
30,553 29,356 19,285
- --------------------------------------------------------------------------------------------------------
Provision for income taxes $ 83,088 $ 69,329 $ 57,036
========================================================================================================
29
THE FINOVA GROUP INC.
Income taxes paid in 1997, 1996 and 1995 amounted to approximately
$30.3 million, $31.3 million and $47.9 million, respectively.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1997 and 1996 consisted of the following:
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred income from leveraged leases $ 308,465 $ 274,224
Deferred income from lease financing 89,196 68,542
Goodwill 24,343 10,776
Other 3,498 9,450
- --------------------------------------------------------------------------------------------------------
Gross deferred tax liability 425,502 362,992
- --------------------------------------------------------------------------------------------------------
Deferred tax assets:
Reserve for credit losses 75,670 61,083
Foreign 16,802 24,159
Alternative minimum tax 26,153
Accrued expenses 9,739 19,299
Net operating loss carryforward 4,875
Other 17,502 14,243
- --------------------------------------------------------------------------------------------------------
Gross deferred tax asset 150,741 118,784
- --------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 274,761 $ 244,208
========================================================================================================
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 2.6 4.4 5.1
Foreign tax effects (0.1) (0.9) (0.5)
Municipal and ESOP income (2.0) (2.2) (1.7)
Other 1.2 1.0 (0.1)
- --------------------------------------------------------------------------------------------------------
Provision for income taxes 36.7% 37.3% 37.8%
========================================================================================================
NOTE K PENSION AND OTHER BENEFITS
Net periodic pension costs were $1.9 million, $1.7 million and $1.3
million for the years ended December 31, 1997, 1996 and 1995, respectively.
FINOVA's pension costs were accrued at $2.8 million at December 31, 1997 and
prepaid by $0.6 million at December 31, 1996.
Net periodic postretirement benefit costs were $0.5 million, $0.7
million and $0.6 million for each of the years ended December 31, 1997, 1996 and
1995, respectively. FINOVA's accrued postretirement benefit costs were $2.8
million at December 31, 1997 and $2.2 million at December 31, 1996.
FINOVA's investment of $47 million in trust for nonqualified
compensation plans consists of securities held for trading and is recorded at
market.
30
THE FINOVA GROUP INC.
NOTE L EARNINGS PER SHARE
For the year ended December 31, 1997, FINOVA adopted the provisions of
SFAS No. 128, "Earnings Per Share." This statement specifies the presentation
and disclosure of earnings per share for entities with publicly held common
stock or potential common stock. The statement also requires the calculation of
two earnings per share measures, basic and diluted. 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, 1997, 1996 and 1995 on the Statement
of Consolidated Income and are detailed below:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Basic Earnings Per Share Computation:
Income from continuing operations $ 139,098 $ 116,493 $ 93,798
========================================================================================================
Net income $ 139,098 $ 117,000 $ 97,629
========================================================================================================
Weighted average shares outstanding 54,748,000 54,816,000 54,905,000
Contingently issued shares (343,000) (308,000) (272,000)
- --------------------------------------------------------------------------------------------------------
Adjusted weighted average shares 54,405,000 54,508,000 54,633,000
========================================================================================================
Earnings from continuing operations per share $ 2.56 $ 2.14 $ 1.72
========================================================================================================
Net income per share $ 2.56 $ 2.15 $ 1.79
========================================================================================================
Diluted Earnings Per Share Computation:
Income from continuing operations $ 139,098 $ 116,493 $ 93,798
Preferred dividends, net of tax 3,992 - -
- --------------------------------------------------------------------------------------------------------
Income from continuing operations available to
common shareowners $ 143,090 $ 116,493 $ 93,798
========================================================================================================
Net income $ 139,098 $ 117,000 $ 97,629
Preferred dividends, net of tax 3,992 - -
- --------------------------------------------------------------------------------------------------------
Net income available to common shareowners $ 143,090 $ 117,000 $ 97,629
========================================================================================================
Weighted average shares outstanding 54,748,000 54,816,000 54,905,000
Contingently issued shares (184,000) (183,000) (195,000)
Incremental shares from assumed conversions:
Stock options 1,659,000 1,257,000 759,000
Convertible preferred securities 2,938,000 161,000 -
- --------------------------------------------------------------------------------------------------------
Total potential dilutive common shares 4,597,000 1,418,000 759,000
- --------------------------------------------------------------------------------------------------------
Adjusted weighted average shares 59,161,000 56,051,000 55,469,000
========================================================================================================
Earnings from continuing operations per share $ 2.42 $ 2.08 $ 1.69
========================================================================================================
Earnings per share $ 2.42 $ 2.09 $ 1.76
========================================================================================================
31
THE FINOVA GROUP INC.
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. Such
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 or results of operations.
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.
The carrying amounts and estimated fair values of FINOVA's financial
instruments are as follows for the years ended December 31:
- -------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------
Balance Sheet -
Financial Instruments:
Assets:
Loans and other financing contracts $ 5,744,846 $ 5,872,082 $ 5,143,562 $ 5,417,865
Liabilities:
Senior debt 6,764,581 6,832,327 5,850,223 5,952,108
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps --- 15,893 --- 1,462
- -------------------------------------------------------------------------------------------------------
The carrying values of cash and cash equivalents, factored receivables,
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, 1997 and 1996. Management believes
that the risk factor embedded in the entry value interest rates
applicable to performing loans for which there are no known credit
concerns results in a fair valuation of such loans on an entry value
basis. As of December 31, 1997 and 1996, the fair value of nonaccruing
impaired contracts with a carrying amount of $121.5 million and $63.8
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, 1997 and 1996, the
carrying amount of loans and other financing contracts excludes
repossessed assets with a total carrying amount of $89.6 million and
$98.4 million, respectively.
32
THE FINOVA GROUP INC.
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.
The fair value estimates presented herein were based on information
obtained by FINOVA as of December 31, 1997 and 1996. 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, 1997 and 1996. Therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE O SELLING, ADMINISTRATIVE AND OTHER OPERATING EXPENSES
The following represents a summary of the major components of selling,
administrative and other operating expenses for the three years ended December
31:
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 112,980 $ 94,272 $ 74,884
Depreciation and amortization 17,407 14,185 14,799
Travel and entertainment 11,917 8,953 8,030
Problem account costs 11,586 7,753 7,941
Occupancy expenses 8,368 7,104 6,253
Professional services 7,654 5,738 6,121
- --------------------------------------------------------------------------------------------------------
NOTE P NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported in the shareowners' equity section of the
balance sheet and establishes standards for reporting of comprehensive income
and its components in a full set of general purpose financial statements.
Adoption of this standard will require additional disclosure only. FINOVA will
adopt this standard effective January 1, 1998, as required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This standard requires certain
information regarding segments of a business enterprise to be reported based on
the way management organizes and evaluates segments within FINOVA. The standard
also requires disclosures regarding products and services, geographical areas
and major customers. Adoption of this standard will require FINOVA to include
additional detail in its disclosures, including certain disaggregated operating
information. FINOVA will adopt this standard in 1998, as required, but is not
currently planning to elect early adoption for interim financial periods during
the year. At this time, management anticipates that FINOVA's reported segments
will be composed of its three operating groups: Specialty Finance, Commercial
Finance and Capital Markets.
33
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, 1997, 1996 and 1995:
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
Interest earned from financing transactions:
1997 $ 217,077 $ 228,487 $ 237,356 $ 261,804
1996 190,652 192,635 204,972 209,675
1995 161,369 170,475 176,802 193,470
- --------------------------------------------------------------------------------------------------------
Interest expense:
1997 97,172 101,883 105,592 111,446
1996 88,224 89,718 91,629 96,972
1995 78,275 83,248 85,544 90,747
- --------------------------------------------------------------------------------------------------------
Gains on sale of assets:
1997 3,233 10,468 8,706 7,854
1996 6,730 1,315 397 4,507
1995 1,710 728 2,557 5,894
- --------------------------------------------------------------------------------------------------------
Non-interest expenses:
1997 70,327 82,522 84,500 95,365
1996 66,489 56,989 65,480 69,560
1995 47,581 52,832 54,605 69,339
- --------------------------------------------------------------------------------------------------------
Income from continuing operations:
1997 31,658 33,751 34,921 38,768
1996 26,756 28,852 30,489 30,396
1995 22,205 22,279 24,417 24,897
- --------------------------------------------------------------------------------------------------------
Net income:
1997 31,658 33,751 34,921 38,768
1996 27,121 28,121 29,763 31,995
1995 22,368 23,629 25,150 26,482
-------------------------------------------------------------------------------------------------------
Basic earnings per share:
1997 $0.59 $0.62 $0.65 $0.70
1996 $0.50 $0.52 $0.54 $0.59
1995 $0.41 $0.43 $0.46 $0.49
-------------------------------------------------------------------------------------------------------
Diluted earnings per share:
1997 $0.56 $0.59 $0.61 $0.66
1996 $0.49 $0.51 $0.53 $0.56
1995 $0.40 $0.43 $0.45 $0.48
34
THE FINOVA GROUP INC.
AVERAGE BALANCES/INTEREST MARGINS/AVERAGE ANNUAL RATES (UNAUDITED) (1)
(Dollars in Thousands)
The following represents the breakdown of FINOVA's average balance sheet,
interest margins and average annual rates for the years ended December 31, 1997
and 1996:
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 36,873 $ $ 38,685 $
Investment in financing transactions 7,764,224 871,735 (4) 11.85% (2) 6,716,996 735,648 (4) 11.63% (2)
Less reserve for credit losses (160,241) (138,896)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 7,603,983 6,578,100
Goodwill and other assets 365,885 312,539
Investment in discontinued operations 2,703 487,915
- -----------------------------------------------------------------------------------------------------------------------------------
$8,009,444 $7,417,239
====================================================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Other liabilities $ 408,640 $ $ 356,704 $
Senior debt 6,253,588 416,093 6.65% 5,944,599 366,543 (5) 6.17% (5)
Deferred income taxes 260,027 233,606
- ------------------------------------------------------------------------------------------------------------------------------------
$6,922,255 $6,534,909
Company-obligated mandatory redeemable convertible
preferred securities of subsidiary trust solely holding
convertible debentures of FINOVA 111,550 8,581
Shareowners' equity 975,639 873,749
- ------------------------------------------------------------------------------------------------------------------------------------
$8,009,444 $7,417,239
====================================================================================================================================
Interest income/average earning assets (2) $871,735 11.85% $735,648 11.63%
Interest expense/average earning assets (2) (3) 416,093 5.66% 366,543 5.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest margins earned (3) $455,642 6.19% $369,105 5.83%
====================================================================================================================================
(1) Averages are calculated based on monthly balances.
(2) The average rate is calculated based on average earning assets ($7,356,845
and $ 6,324,545 for 1997 and 1996, respectively) which are net of average
deferred taxes on leveraged leases and average nonaccruing assets.
(3) For the year ended December 31, 1997, excluding the impact of derivatives,
interest expense would have been $417,140 or 5.67% of average earning
assets and interest margins earned would have been $454,595 or 6.18% of
average earning assets. For the year ended December 31, 1996, excluding the
impact of derivatives, interest expense would have been $363,526 or 5.75%
of average earning assets and interest margins earned would have been
$372,122 or 5.88% of average earning assets.
(4) Interest income is shown net of operating lease depreciation.
(5) Interest expense for 1996 excludes expense related to MDS which was
classified as discontinued operations. The average rate would have been
6.77% if the expense had not been reclassified.
35
THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
DECEMBER 31, 1997 FORM 10-K
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K,") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
(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 current report on Form 8-K,
dated November 30, 1995, Exhibit 4).
(4.D) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets
are not filed as exhibits to this report. FINOVA will
furnish a copy of those agreements to the SEC upon
its request.
(4.E) Form of Indenture dated as of September 1, 1992
between FINOVA Capital and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S-3, Registration No. 33-51216, Exhibit 4).
(4.F) Form of Indenture dated as of October 1, 1995 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from FINOVA Capital's
report on Form 8-K dated October 25, 1995, Exhibit
4.1).
(4.G) Indenture, dated as of December 11, 1996, between
FINOVA and Fleet National Bank as trustee
(incorporated by reference from FINOVA's report on
Form 8-K dated December 20, 1996, (the "December 1996
8-K"), Exhibit 4.1).
(4.G.1) Amended and Restated Declaration of Trust, dated as
of December 11, 1996, among Bruno A. Marszowski and
Robert J. Fitzsimmons, as Regular Trustees, First
Union Bank of Delaware, as Delaware Trustee, Fleet
National Bank, as Property Trustee, and FINOVA
(incorporated by reference from the December 1996
8-K, Exhibit 4.2).
(4.G.2) Preferred Security Guarantee, dated as of December
11, 1996, between FINOVA and Fleet National Bank, as
trustee (incorporated by reference from the December
1996 8-K, Exhibit 4.3).
36
Exhibit No.
-----------
(4.G.3) Form of 5 1/2% Convertible Subordinated Debenture
(incorporated by reference from the December 1996
8-K, Exhibit 4.4).
(4.G.4) Form of Preferred Security (TOPrS) (incorporated by
reference from the December 1996 8-K, Exhibit 4.5).
(4.H) Form of Indenture between FINOVA, FINOVA Capital and
The First National Bank of Chicago as Trustee
(incorporated by reference from FINOVA and FINOVA
Capital's registration statement on Form S-3,
Registration No. 333-38171, Exhibit 4.8).
(4.I) Announcement of 2-for-1 Stock Split (incorporated by
reference from the August 14, 1997 8-K, Exhibit 28).
(4.I.1) Letter to shareowners regarding FINOVA's 2-for-1
Stock Split (incorporated by reference from October
1, 1997 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
October 1, 1997 8-K, Exhibit 28.B).
(4.J) 1992 Stock Incentive Plan, as amended through the
date of this filing.*+
(10.A) Sixth Amendment and Restatement dated as of May 16,
1994 of the Credit Agreement dated as of May 31, 1976
among FINOVA Capital and the lender parties thereto,
and Bank of America National Trust and Savings
Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminister Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly
Report on Form 10-Q for the period ending September
30, 1995 ( the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1997 to Sixth
Amendment noted in 10.A above.*
(10.B) Credit Agreement (Short-Term Facility) dated as of
May 16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
37
Exhibit No.
-----------
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above.*
(10.C) 1997 Management Incentive Plan.*+
(10.D) 1998 Management Incentive Plan.*+
(10.E.1) 1995 - 1997 Performance Share Incentive Plan
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.H).+
(10.E.2) 1996 - 1998 Performance Share Incentive Plan
(incorporated by reference from 1996 10-K, Exhibit
10.E.3).+
(10.E.3) 1997 - 1999 Performance Share Incentive Plan.*+
(10.E.4) 1998 - 2000 Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield dated
March 16, 1996 (incorporated by reference from the
1995 10-K, Exhibit 10.F.3).+
(10.F.1) Amendment to Employment Agreement referenced in 10.F
above (incorporated by reference from the 1996 10-K,
Exhibit 10.F.2).+
(10.F.2) Second Amendment to Employment Agreement referenced
in 10.F above (incorporated by reference from the
2Q97 10-Q, Exhibit 10).+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.1).+
(10.H) Amended and Restated Supplemental Pension Plan,
(incorporated by reference from the 1996 10-K,
Exhibit 10.1).+
(10.I) A description of FINOVA's policies regarding
compensation of directors is incorporated by
reference from the 1998 Proxy Statement.+
(10.J) Directors Deferred Compensation Plan (incorporated
by reference from the 1992 10-K, Exhibit 10.O).+
(10.K) Directors' Retirement Benefit Plan (incorporated by
reference from FINOVA's report on
38
Exhibit No.
-----------
Form 10-K for the year ended December 31, 1993 (the
"1993 10-K"), Exhibit 10.OO).+
(10.L) Directors' Charitable Awards Program (incorporated
by reference from the 1994 10-K, Exhibit 10.CC).+
(10.M) Deferred Compensation Plan (incorporated by reference
from the 1995 10-K, Exhibit 10.N).+
(10.N) Bonus KEYSOP Plan.*+
(10.N.1) Bonus KEYSOP Trust Agreement.*+
(10.O) FINOVA's Executive Officer Loan Program Policies and
Procedures, (incorporated by reference from the 1996
10-K, Exhibit 10.U).+
(10.P.1) FINOVA's Executive Severance Plan for Tier 1
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.1).+
(10.P.2) FINOVA's Executive Severance Plan for Tier 2
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.2).+
(10.Q.1) Value Sharing Plan for the Chief Executive Officer
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.L).+
(10.Q.2) Value Sharing Plan for Executive Officers and Key
Employees (incorporated by reference from the 3Q95
10-Q, Exhibit 10.K).+
(10.R) Tax Sharing Agreement dated February 19, 1992 among
FINOVA, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(10.S) 1992 Stock Incentive Plan (filed in Exhibit 4.J to
this report).+
(12) Computation of Ratio of Income to Combine Fixed
Charges and Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Independent Auditor's Consent.*
(24) Powers of Attorney.*
(27.1) Financial Data Schedule for the year ended December
31, 1997.*
(27.2) Restated Financial Data Schedule for the Quarters
ended September 30, 1997, June 30, 1997 and March 31,
1997.*
(27.3) Restated Financial Data Schedule for the Quarters
ended September 30, 1996, June 30, 1996 and March 31,
1996.*
(27.4) Restated Financial Data Schedule for the years ended
December 31, 1996 and 1995.*
*Filed with this report.
+Relating to management compensation
39