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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, 1994 Commission File Number 1-11011
THE FINOVA GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(State or Other Jurisdiction of (I.R.S. Employer Identification No.
Incorporation or Organization)
1850 North Central Ave., P. O. Box 2209
Phoenix, AZ 85002-2209
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code - 602-207-4900
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $0.01 par value New York Stock Exchange
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, if definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. / X /
As of March 13, 1995, approximately 27,619,000 shares of Common Stock ($0.01 par
value) were outstanding, and the aggregate market value of the Common Stock
(based on its closing price per share on such date) held by nonaffiliates was
approximately $884,965,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part Where
Document Incorporated
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1. Proxy Statement relating to 1995 Annual Meeting of Stockholders of The
FINOVA Group Inc. (but excluding information contained therein furnished
pursuant to items 402(k) and (l) of SEC Regulation S-K.) III
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TABLE OF CONTENTS
Name of Item
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Item # Page
------ ----
Part I
Item 1 Business:
Introduction 1
General 1
Lines of Business 2
Portfolio Composition 4
Investment in Financing Transactions 4
Cost and Utilization of Borrowed Funds 15
Credit Ratings 16
Residual Realization Experience 16
Business Development and Competition 17
Credit Quality 18
Risk Management 18
Portfolio Management 19
Delinquencies and Workouts 19
Governmental Regulation 20
Former Mortgage Insurance Operations 20
Employees 20
Item 2 Properties 20
Item 3 Legal Proceedings 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Optional Executive Officers of Registrant 21
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Stockholder Matters 23
Item 6 Selected Financial Data 23
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 8 Financial Statements & Supplementary Data 25
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 25
Part III
Item 10 Directors & Executive Officers of the Registrant 26
Item 11 Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial Owners & Management 26
Item 13 Certain Relationships & Related Transactions 26
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
3
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to The FINOVA Group Inc. (formerly
known as GFC Financial Corporation) and its subsidiaries (collectively "FINOVA"
or the "Company"), including FINOVA Capital Corporation (formerly known as
Greyhound Financial Corporation) and its subsidiaries (collectively "FINOVA
Capital"), including Ambassador Factors ("Ambassador") acquired on February 14,
1994 and TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador
and TriCon were merged into FINOVA Capital in 1994. Recognizing the substantial
increase in the Company's size and scope of operations and its use of several
names in its operations, GFC Financial Corporation changed its name to The
FINOVA Group Inc., and changed its principal operating subsidiary's name from
Greyhound Financial Corporation to FINOVA Capital Corporation, both effective
February 1, 1995.
The Company is the successor to the former financial services businesses
of The Dial Corp ("Dial"). On March 18, 1992, Dial consummated the spin-off (the
"Spin-Off") of the Company by distributing one share of the Company's common
stock (the "shares") for every two shares of Dial common stock held by each
stockholder. Prior to the Spin-Off, Dial contributed to the Company (i) all of
the common stock of FINOVA Capital representing the Company's core operations,
(ii) Greyhound European Financial Group ("GEFG"), Dial's European commercial and
consumer finance businesses not previously managed by the Company, (iii)
Greyhound BID Holding Corp. ("Greyhound BID") and (iv) Verex Corporation and
subsidiaries ("Verex"), Dial's discontinued mortgage insurance operations which
had been operated in a run-off mode by Dial since 1988. The Company sold Verex
in July 1993.
The historical consolidated financial statements of FINOVA have been
retroactively restated to include the accounts and results of operations of
FINOVA Capital, GEFG and Greyhound BID Holding and the investment in Verex for
all periods presented as if a pooling of interests of companies under common
control occurred. All intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
GENERAL
FINOVA is a financial services company primarily engaged in providing
collateralized financing and leasing products to commercial enterprises in
focused market niches, principally in the United States. The FINOVA Group Inc.
is a holding company which operates through its direct and indirect subsidiaries
and was incorporated in Delaware in December 1991.
FINOVA's lending activities to businesses are conducted through FINOVA
Capital and its subsidiaries. FINOVA Capital was incorporated in 1965 in
Delaware and is the successor to a California corporation that commenced
operations in 1954. FINOVA Capital has conducted business continuously since
that time. Foreign financial services are provided primarily in the United
Kingdom, where GEFG has provided such services since 1964. Domestic and foreign
financial operations prior to the Spin-Off had been conducted independently of
each other for many years. Following the Spin-Off, they have been conducted as a
consolidated enterprise; however, following the Spin-Off, FINOVA announced its
intention to phase out the London based financing operations of GEFG. This phase
out is expected to be substantially completed by the end of 1996.
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FINOVA Capital extends revolving credit facilities, term loans and
equipment and real estate financing to "middle-market" businesses with financing
needs falling generally between $500,000 to $35 million. FINOVA Capital also
offers sales financing programs to manufacturers, distributors, vendors and
franchisors which facilitate sales of their products to customers. FINOVA
Capital currently operates in 15 specific industry or market niches in which its
expertise in evaluating the creditworthiness of prospective customers and its
ability to provide value-added services enables it to differentiate itself from
its competitors and to command product pricing which provides a satisfactory
spread over the Company's borrowing costs.
The Company seeks to maintain a high quality portfolio and to minimize
nonearning assets and write-offs by using clearly defined underwriting criteria,
stringent portfolio management techniques and by diversifying its lending
activities geographically and among a range of industries, customers and loan
products. Because of the diversity of the Company's portfolio, the Company
believes it is better able to manage competitive changes in its markets and to
withstand the impact of deteriorating economic conditions on a regional or
national basis, although there can be no assurance that competitive changes or
economic conditions will not result in an adverse impact on the Company's
results of operations or financial condition.
FINOVA Capital generates interest and other income through charges
assessed on outstanding loans, loan servicing, leasing and other fees. FINOVA
Capital's primary expenses are the costs of funding its loan and lease business
(including interest paid on debt), provisions for possible credit losses,
marketing expenses, salaries and employee benefits, servicing and other
operating expenses and income taxes.
LINES OF BUSINESS
FINOVA Capital's activities currently include the following principal
lines of business:
+ Corporate Finance. FINOVA Corporate Finance (which includes
the asset based lending activity acquired in February 1993 from
U.S. Bancorp) provides financing, generally in the range of $3
million to $35 million, focusing on middle market businesses
nationally, including distribution, wholesale, specialty
retail, manufacturing and services industries. The group's
lending is primarily in the form of revolving credit facilities
and term loans secured by the assets of the borrower, with
significant emphasis on the borrower's cash flow as the source
of repayment of the secured loan.
+ Transportation Finance. FINOVA Transportation Finance
structures secured financings for specialized areas of the
transportation industry, principally involving domestic and
foreign used aircraft, as well as domestic short-line railroads
including new and used rail equipment. Typical transactions
involve financing up to 80% of the fair market value of used
equipment in the $3 million to $30 million range. Traditionally
focused on the domestic marketplace, FINOVA Transportation
Finance has been active in international aircraft lending and
leasing since 1992 through GEFG's operations in London,
England.
+ Communications Finance. FINOVA Communications Finance
specializes in radio and television financing. Other markets
include cable television, print and outdoor media services in
the United States. FINOVA Capital extends secured loans to
communications businesses requiring funds for
recapitalizations, refinancings or
2
5
acquisitions. Loan sizes generally are from $3 million to $35
million.
+ Commercial Real Estate Finance. FINOVA Commercial Real Estate
Finance provides cash-flow-based financing primarily for
acquisitions and refinancings to experienced real estate
developers and owner/occupants of income-producing properties
in the United States. FINOVA Capital concentrates on secured
financing opportunities, generally between $3 million and $30
million, involving senior mortgage term loans on owner-occupied
commercial real estate. FINOVA Capital's portfolio of real
estate leveraged leases is also managed as part of the
commercial real estate portfolio.
+ Resort Finance. FINOVA Resort Finance focuses on successful,
experienced resort developers, primarily of timeshare resorts,
second home resort communities, golf resorts and resort hotels.
Extending funds through a variety of lending options, FINOVA
Resort Finance provides loans and lines of credit ranging from
$3 million to $30 million for construction, acquisitions,
receivables financing and purchases and other uses. Through
FINOVA Portfolio Services, Inc., FINOVA Resort Finance offers
expanded convenience and service to its customers.
Professional receivables collections and cash management give
developers the ability of having loan-related administrative
functions performed for them by FINOVA Capital.
+ Rediscount Finance. FINOVA Rediscount Finance offers $1
million to $35 million revolving credit lines to regional
consumer finance companies, which in turn extend credit to
consumers. FINOVA Capital's customers provide credit to
consumers to finance home improvements, automobile purchases,
insurance premiums and a variety of other financial needs.
+ Factoring Services. On February 14, 1994, FINOVA Capital
purchased Ambassador from Fleet Financial Group, Inc. FINOVA
Factoring Services provides full service factoring and accounts
receivable management services for entrepreneurial and larger
firms in the textile and apparel industries who generate an
average annual factored volume between $5 million and $25
million.
+ Commercial Finance. FINOVA Commercial Finance offers
collateral-oriented revolving credit facilities and term loans
for manufacturers, distributors, wholesalers and service
companies. Typical transaction sizes range from $500,000 to $3
million.
TriCon was an indirect wholly-owned subsidiary of Bell
Atlantic Corporation ("Bell Atlantic"). The acquisition of
TriCon expanded the Company's activities from eight to
fifteen principal lines of business:
+ Medical Finance. FINOVA Medical Finance offers a full range
of equipment and real estate financing and asset management
services for the U.S. health care industry, targeting the top
2,400 health care providers in the United States. Transaction
sizes typically range from $500,000 to $25 million.
+ Commercial Equipment Finance. FINOVA Commercial Equipment
Finance offers equipment leases, loans and "turnkey" financing
to the supermarket, manufacturing, packaging and general
aviation industries. Typical transaction sizes are $500,000
to $15 million.
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+ Government Finance. FINOVA Government Finance provides
primarily tax-exempt financing to state and local governments
and non-profit corporations. Typical transaction sizes range
from $100,000 to $5 million.
+ Manufacturer and Dealer Services. FINOVA Manufacturer and
Dealer Services provides point-of-sale financing programs and
support services for regional and national manufacturers,
distributors and vendors of equipment classified as "small
ticket" in transaction size (generally transactions with an
equipment cost of less than $100,000). The equipment which
FINOVA Capital leases to the ultimate end-user is typically
sold to FINOVA Capital by the vendor participating in the
financing program.
+ Franchise Finance. FINOVA Franchise Finance offers equipment,
real estate and acquisition financing programs for operators of
established franchise concepts. The equipment which FINOVA
Capital leases to the ultimate end-user is typically purchased
by FINOVA Capital from the equipment manufacturer, vendor or
dealer selected by the end-user. Typical transaction sizes
range from $500,000 to $15 million.
+ Inventory Finance. FINOVA Inventory Finance provides
inventory financing, combined inventory/accounts receivable
lines of credit and purchase order financing for equipment
distributors, value-added resellers and dealers. Transaction
sizes generally range from $1 million to $35 million.
+ Capital Services. FINOVA Capital Services focuses on the
management and origination of highly structured financing of
"large ticket" commercial equipment (generally transactions
involving the sale or lease of equipment with a cost in excess
of $15 million) primarily leveraged leases for major
corporations. The equipment which FINOVA Capital leases to its
customers is typically purchased from an equipment
manufacturer, vendor or dealer selected by the customer. This
group focuses on investments generally ranging from $5 million
to $25 million.
PORTFOLIO COMPOSITION
The total assets under the management of the Company consist of
the Company's net investment in financing contracts plus certain assets
that are owned by others but managed by the Company and are not
reflected on the Company's balance sheet ("securitized assets"). At
December 31, 1994, the net investment in financing transactions was
approximately $5,667,644,000 and securitized assets totaled $253,386,000
resulting in total managed assets of $5,921,030,000.
The Company's investment in financing transactions is primarily
settled in U.S. dollars, except for approximately $87,000,000,
$100,000,000 and $128,000,000 at December 31, 1994, 1993 and 1992,
respectively, which is primarily due in British pounds. The exchange
rate of British pounds to dollars at December 31, 1994, 1993 and 1992
was 1.57:1, 1.48:1 and 1.52:1, respectively.
INVESTMENT IN FINANCING TRANSACTIONS
At December 31, 1994, 1993, 1992, 1991 and 1990, FINOVA's investment in
financing transactions (before reserve for possible credit losses) was
$5,667,644,000, $2,846,571,000, $2,428,523,000, $2,281,872,000 and
$2,198,441,000, respectively, and consisted of the following:
4
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INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
December 31,
---------------------------------------------------------------------------------------------
1994 % 1993 % 1992 % 1991 % 1990 %
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(Dollars in Thousands)
Loans, conditional sales and
other financing contracts:
Commercial $2,797,160 49.4 $1,397,863 49.1 $1,028,181 42.3 $ 967,693 42.4 $1,046,333 47.6
Real estate 1,237,488 21.8 945,892 33.2 891,190 36.7 772,285 33.9 619,414 28.2
Direct financing leases 774,834 13.6 71,812 2.5 138,871 5.7 201,327 8.8 246,756 11.2
Operating leases 412,782 7.3 147,222 5.2 100,911 4.2 75,204 3.3 10,303 0.5
Leveraged leases 287,518 5.1 283,782 10.0 269,370 11.1 265,363 11.6 275,635 12.5
Factored receivables 157,862 2.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$5,667,644 100.0 $2,846,571 100.0 $2,428,523 100.0 $2,281,872 100.0 $2,198,441 100.0
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(Dollars in Thousands)
Revenue Accruing Nonaccruing
---------------------------------- -----------------------------
Repos-
sessed 90 Days Repos- Total
Original Rewritten Assets Delin- sessed Carrying
Rate Contracts (3) quent Assets Other Amount %
---------------------------------- ----------------------------- ----------------------
Corporate Finance $ 746,671 $ 21,275 $ $ 3,581 $ 6,045 $ $ 777,572 13.8
Commercial Real Estate Finance 672,522 7,237 40,510 994 28,147 749,410 13.2
Transportation Finance (1) 706,242 14,620 720,862 12.7
Resort Finance 634,735 4,506 7,314 32,975 679,530 12.0
Communications Finance 551,218 6,288 7,282 6,593 16,647 671 588,699 10.4
Medical Finance 470,717 1,719 472,436 8.3
Manufacturer and Dealer
Services (5) 301,251 113 19,715 321,079 5.7
Commercial Equipment Finance 293,609 769 7,589 301,967 5.3
Franchise Finance 281,890 7,632 12,242 301,764 5.3
Commercial Finance 181,741 10,061 1,942 193,744 3.4
Factoring Services 157,090 772 157,862 2.8
European Financial Group (2) 93,700 1,561 9,065 2 104,328 1.8
Rediscount Finance 99,353 99,353 1.8
Government Finance 93,491 144 93,635 1.7
Inventory Finance 58,595 642 59,237 1.0
Other 36,951 8,918 297 46,166 0.8
----------- --------- -------- -------- -------- ------ ------------ -----
TOTAL (4) $ 5,379,776 $ 64,001 $ 55,106 $ 82,035 $ 85,758 $ 968 $ 5,667,644 100.0
=========== ========= ======== ======== ======== ====== ============ =====
- --------------------
NOTES:
(1) Transportation Finance includes $66.9 million of new aircraft finance
business booked through the London office.
(2) European Financial Group balance includes transactions in Europe and other
continents (including the U.S.) originated from the Company's London office,
including Transportation Finance transactions prior to July 1, 1993. Also,
European Financial Group includes $39.2 million of Consumer Finance assets,
of which $4.8 million are nonaccruing. Consumer Finance accounts are
generally considered nonaccruing after being 180 days delinquent.
(3) The Company earned income totaling $3.3 million on repossessed assets during
1994, including $2.0 million in Commercial Real Estate Finance,
$0.8 million in Communications Finance and $0.5 million in Resort Finance.
(4) Excludes $253.4 million of assets securitized which the Company manages.
(5) Manufacturer and Dealer Services accounts are generally considered
nonaccruing after being 120 days delinquent.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
Revenue Accruing Nonaccruing
-------------------------------- -------------------------
Repos-
sessed 90 Days Repos- Total
Original Rewritten Assets Delin- sessed Carrying
Rate Contracts (4) quent Assets Other Amount %
-------------------------------- ------------------------- ------------------
Corporate Finance (1) $ 397,779 $ 27,921 $ $ 2,277 $ 7,428 $ 386 $ 435,791 15.3
Commercial Real Estate
Finance (1) $ 500,598 $ 1,574 $ 27,844 $ 1,055 $ 25,542 $ $ 556,613 19.6
Transportation Finance (1) 604,416 841 605,257 21.2
(2)
Resort Finance 530,617 4,869 12,163 19,001 440 567,090 19.9
Communications Finance 487,890 7,989 8,949 8,264 25,030 538,122 18.9
European Financial Group (3) 107,486 4,430 12,320 23 124,259 4.4
Rediscount Finance 19,439 19,439 0.7
----------- -------- -------- -------- -------- ----- ----------- -----
$ 2,648,225 $ 46,783 $ 48,956 $ 24,757 $ 77,024 $ 826 $ 2,846,571 100.0
=========== ======== ======== ======== ======== ===== =========== =====
- --------------------
NOTES:
(1) Reclassifications (effective January 1, 1993): Approximately $169 million of
accruing assets were reclassified from Corporate Finance with $163 million
going to Transportation Finance because they primarily represented aircraft
financing and $6 million to Commercial Real Estate Finance. Additionally,
$6.5 million of nonaccruing assets ($5.1 million classified as repossessed
assets and $1.4 million classified as 90 days delinquent) were reclassified
from Corporate Finance to Commercial Real Estate Finance.
(2) Transportation Finance included $31.9 million of new aircraft finance
business booked through the London office.
(3) The European Financial Group balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1, 1993.
Also, European Financial Group included $45.3 million of Consumer Finance
assets, of which $9.6 million were nonaccruing. Consumer Finance accounts
are generally considered nonaccruing after being 180 days delinquent.
(4) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Commercial Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in Resort
Finance.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1992
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------------ ------------------------------
Repos- 90 Days Repos-
Original Rewritten sessed Delin- sessed Carrying
Rate Contracts Assets (3) quent Assets Other Amount %
------------------------------------ ------------------------------ --------------------
Corporate Finance (1) $ 420,006 $16,081 $ $ 7,820 $11,808 $ 530 $ 456,245 18.8
Commercial Real Estate Finance 463,571 12,482 21,509 6,302 15,052 518,916 21.4
Transportation Finance 328,962 328,962 13.5
Resort Finance 488,224 1,356 13,889 635 504,104 20.8
Communications Finance 382,914 32,548 8,744 13,182 437,388 18.0
European Financial Group (2) 154,609 5,839 22,400 60 182,908 7.5
----------- ------- ------- ------- ------- ------ ---------- -----
$2,238,286 $68,306 $21,509 $45,266 $53,991 $1,165 $2,428,523 100.0
=========== ======= ======= ======= ======= ====== ========== =====
- --------------------
NOTES:
(1) Included $5.1 million of public sector Latin American loans that were
written-down to estimated market value. During 1992, FINOVA successfully
liquidated 72% of the face value of public sector Latin American loans at
favorable market prices, which were approximately $3.1 million in excess of
the carrying amount.
(2) The European Financial Group balance included transactions in Europe and
other countries (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1, 1993.
European Financial Group included $57.8 million of Consumer Finance assets,
of which $16.4 million were nonaccruing. Consumer Finance accounts are
generally considered nonaccruing after being 180 days delinquent.
(3) The Company earned income of $1.9 million on repossessed accruing assets in
Commercial Real Estate Finance during 1992.
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1991
(Dollars in Thousands)
Revenue Accruing Nonaccruing
-------------------------- ---------------------------------------- Total
Original Rewritten 90 Days Repossessed Carrying
Terms Contracts Delinquent Assets Other Amount %
-------------------------- ----------------------------------------- ---------------
Corporate Finance $ 429,053 $14,594 $ 7,386 $ $3,694 $ 454,727 19.9
Commercial Real Estate Finance 431,097 15,734 10,504 20,002 477,337 20.9
Transportation Finance 223,803 223,803 9.8
Resort Finance 430,113 1,511 7,317 1,056 439,997 19.3
Communications Finance 321,918 12,340 16,636 350,894 15.4
European Financial Group (1) 263,995 5,095 43,875 826 313,791 13.8
Latin America (2) 21,323 21,323 0.9
---------- ------- ------- ------- ------- ---------- -----
$2,121,302 $49,274 $78,401 $28,145 $4,750 $2,281,872 100.0
========== ======= ======= ======= ====== ========== =====
- --------------------
NOTES:
(1) The European Financial Group balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1, 1993.
Also, European Financial Group included $94.3 million of Consumer Finance
assets of which $31.9 million were nonaccruing. Consumer Finance accounts
are generally considered nonaccruing after being 180 days delinquent.
(2) Included $15.5 million of Latin American loans written-down to market value.
--------------------
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1990
(Dollars in Thousands)
Revenue Accruing Nonaccruing
----------------------- ---------------------------------------- Total
Original Rewritten 90 Days Repossessed Carrying
Terms Contracts Delinquent Assets Other Amount %
---------- ----------- ------------- ------------- --------- ------------- -----
Corporate Finance $ 478,456 $ 2,833 $ 4,345 $ 968 $ 4,511 $ 491,113 22.4
Commercial Real Estate Finance 408,201 13,713 14,312 11,942 6,605 454,773 20.7
Transportation Finance 167,988 167,988 7.6
Resort Finance 374,698 215 94 378 1,247 376,632 17.2
Communications Finance 253,519 11,464 6,222 3,866 275,071 12.5
European Financial Group (1) 308,566 7,720 39,776 2,611 358,673 16.2
Latin America 7,549 66,642 74,191 3.4
---------- ------- ------- ------ ------- ---------- ------
$1,998,977 $35,945 $64,749 $15,899 $82,871 $2,198,441 100.0
========== ======= ======= ======= ======= ========== =====
- --------------------
NOTE:
(1) The European Financial Group balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1, 1993.
Also, European Financial Group included $120.0 million of Consumer Finance
assets of which $32.0 million were nonaccruing. Consumer Finance accounts
are generally considered nonaccruing after being 180 days delinquent.
--------------------
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The Company's geographic portfolio diversification at December 31, 1994
is as follows:
State Total Percent
----- ----- -------
California $ 840,556 14.8%
Texas 521,655 9.2%
Florida 317,715 5.6%
New York 314,959 5.6%
Michigan 226,367 4.0%
Pennsylvania 224,347 4.0%
New Jersey 204,824 3.6%
Arizona 170,041 3.0%
Illinois 162,798 2.9%
Nevada 157,639 2.8%
Virginia 119,320 2.1%
Georgia 116,783 2.0%
Washington 111,668 2.0%
Other (1) 2,178,972 38.4%
---------- ------
$5,667,644 100.0%
========== ======
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
5% of the total.
--------------------
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An analysis of nonaccruing contracts and repossessed assets at December
31 of each year shown is as follows:
1994 1993 1992 1991 1990
------------------------------------------------------------------
(Dollars in Thousands)
Nonaccruing contracts:
Domestic $ 73,938 $ 13,263 $ 24,031 $ 39,276 $ 41,201
Foreign 9,065 12,320 22,400 43,875 39,777
----------- ----------- ----------- ----------- -----------
83,003 25,583 46,431 83,151 80,978
----------- ----------- ----------- ----------- -----------
Latin America:
Brazil 22,775
Ecuador 40,487
Other 3,380
----------- ----------- ----------- ----------- -----------
66,642
----------- ----------- ----------- ----------- -----------
Total nonaccruing contracts 83,003 25,583 46,431 83,151 147,620
----------- ----------- ----------- ----------- -----------
Repossessed assets:
Domestic 85,756 77,001 53,931 27,319 13,288
Foreign 2 23 60 826 2,611
----------- ----------- ----------- ----------- -----------
Latin America
Total repossessed assets 85,758 77,024 53,991 28,145 15,899
----------- ----------- ----------- ----------- -----------
Total nonaccruing contracts
and repossessed assets $168,761 $102,607 $100,422 $111,296 $163,519
======== ======== ======== ======== ========
Nonaccruing contracts and
repossessed assets as a
percentage of investment
in financing transactions
and securitizations 2.9% 3.6% 4.1% 4.9% 7.4%
========= ======== ======== ======== ========
In addition to the repossessed assets in the above table, FINOVA had
repossessed assets, with a total carrying amount of $55.1 million, $49.0 million
and $21.5 million at December 31, 1994, 1993 and 1992, respectively, which
earned income of $3.3 million, $2.7 million and $1.9 million during 1994, 1993
and 1992, respectively.
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The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
1994 1993 1992 1991 1990
-----------------------------------------------------------------
(Dollars in Thousands)
Balance, beginning of year $ 64,280 $69,291 $87,600 $77,098 $72,636
Provision for possible credit losses (1) 16,670 5,706 6,740 77,687 10,529
Write-offs (1) (35,127) (12,575) (23,661) (68,346) (7,862)
Recoveries 1,898 717 749 663 1,247
Other (2) 61,524 1,141 (2,137) 498 548
-------- ------- ------- ------- -------
Balance, end of year $109,245 $64,280 $69,291 $87,600 $77,098
======== ======= ======= ======= =======
- --------------------
NOTES:
(1) In 1991, the Company recorded a special provision for possible credit losses
of $65 million and recorded a $47.8 million write-down of Latin American
assets and recorded write-offs of $15 million in the foreign operations
(GEFG) portfolio.
(2) Includes reserves for possible credit losses acquired with TriCon and
Ambassador in 1994.
--------------------
Additionally, the Company has accrued liabilities of $12,998,000 at December
31, 1994 representing reserves for estimated losses under certain recourse
provisions on $253,386,000 of assets securitized.
FINOVA does not allocate a dollar amount of its reserve for possible credit
losses to specific categories of loans and financing contracts. Upon adoption of
Statement of Financial Accounting Standards ("SFAS") Nos. 114 and 118,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures"
("SFAS 118"), in the first quarter of 1995, a specific reserve for possible
credit losses will be allocated to impaired loans in the amount equal to the
total impairment on such loans. Adoption of SFAS 114 and SFAS 118 is not
expected to have a material impact on the Company's financial position or
results of operations.
13
16
Write-offs by line of business, experienced by the Company during the
years ended December 31, are as follows:
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
TOTAL
---------------------------------------------------
1994 1993 1992 1991 1990
---------------------------------------------------
Communications Finance $ 8,300 $ 1,488 $ 1,500 $ 1,200 $
Manufacturer and Dealer Services (1) 7,018
European Financial Group 5,140 5,026 15,838 15,593 1,748
Corporate Finance 4,233 3,741 1,000 668 2,890
Resort Finance 2,730 330
Franchise Finance (1) 2,247
Commercial Real Estate Finance 1,461 2,320 4,417 2,204 1,976
Commercial Equipment Finance (1) 1,257
Factoring Services (1) 1,148
Commercial Finance (1) 774
Inventory Finance (1) 442
Medical Finance (1) 377
Latin America 47,759 419
Other 906 592 829
------- -------- -------- -------- -------
$35,127 $12,575 $23,661 $68,346 $7,862
======= ======= ======= ======= =======
Write-offs as a percentage
of ending investments in
financing transactions and
securitizations 0.59% 0.44% 0.97% 3.00% 0.36%
======== ======= ======= ======= =======
- --------------------
NOTES:
(1) These Lines of Business were not part of the Company's portfolio prior to
1994.
(2) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65.0 million and recorded write-offs of $15.0
million related to nonearning assets in the GEFG (foreign) portfolio and a
$47.8 million write-down to reduce Latin American assets to current market
value.
--------------------
A further breakdown of the portfolio by line of business can be found in
Note C of Notes to Consolidated Financial Statements in Annex A.
14
17
COST AND UTILIZATION OF BORROWED FUNDS
FINOVA Capital relies on borrowed funds as well as internal cash flow to
finance its operations. FINOVA Capital follows a policy of relating provisions
under its loans and leases to the terms on which it obtains funds so that, to
the extent feasible, floating-rate assets are funded with floating-rate
borrowings and fixed-rate assets are funded with fixed-rate borrowings. For
further discussion on FINOVA Capital's debt and matched funding policy, see
Notes E and F of Notes to Consolidated Financial Statements included in Annex A.
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,
------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------
Short-term and variable rate long-term debt 5.5% 4.7% 5.3% 8.1% 10.2%
(1)
Fixed-rate long-term debt (1) 8.1% 11.4% 10.6% 10.9% 11.4%
Aggregate borrowed funds (1) 6.3% 6.3% 7.2% 9.3% 10.8%
Rate earned on average earning assets (2) 11.6% 10.9% 11.9% 13.6% 15.7%
(3)
Spread percentage (4) 6.0% 5.4% 5.1% 4.9% 5.0%
- ---------------------
NOTES:
(1) Includes the effect of interest rate swap agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earnings are net of depreciation and include gains on sale of assets
excluding gains on securitizations.
(4) Spread percentages represent interest margins earned as a percentage of
average earning assets.
--------------------
The effective costs presented above include costs of commitment fees and
related borrowing costs and do not purport to predict the costs of funds in the
future.
For further information on FINOVA Capital's cost of funds, refer to Note
E of the Notes to Consolidated Financial Statements included in Annex A.
Following are the ratios of income to combined fixed charges and preferred
stock dividends ("ratio") for each of the past five years:
Year Ended December 31,
- -----------------------------------------------------------------------------
1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------
1.55 1.50 1.34 --- 1.23
==== ==== ==== === ====
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.
15
18
Income available for fixed charges, for purposes of the computation of
the ratio of income to combined fixed charges and preferred stock dividends,
consists of the sum of income before income taxes and fixed charges. Combined
fixed charges include interest and related debt expense and a portion of rental
expense determined to be representative of interest and preferred stock
dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to cover
combined fixed charges by $37.0 million. The decline in the ratio in 1991 was
due to restructuring and other charges and transaction costs recorded in the
fourth quarter of 1991. Those charges and costs were recorded in connection with
the Spin-Off.
CREDIT RATINGS
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
Commer Senior
cial Debt
Paper
------ ------
Duff & Phelps D1- A-
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa2
Standard & Poor's Ratings Group A2 BBB+
There can be no assurance that FINOVA Capital's ratings will be
maintained. Such ratings can be modified at any time. A credit rating is not a
recommendation to buy, sell or hold securities. Each rating should be evaluated
independently of any other rating. Neither The FINOVA Group Inc. nor any of
FINOVA Capital's subsidiaries have applied for credit ratings.
RESIDUAL REALIZATION EXPERIENCE
In approximately the last 40 years, FINOVA Capital has realized, in the
aggregate, proceeds from the sale of assets upon lease terminations (other than
foreclosures) in excess of carrying amounts; however, there can be no assurance
that such results will be realized in future years. Sales proceeds upon lease
terminations in excess of carrying amounts are reported as income when the
assets are sold.
16
19
Income from leasing activities is affected by gains from asset sales
upon lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1994, the
proceeds to FINOVA Capital from sales of assets upon early termination of leases
and at the expiration of leases have exceeded the respective carrying amounts
and estimated residual values as follows:
Early Terminations Terminations at End of Lease
(Notes 1, 2 ,4 and 5) Term (Note 3)
------------------------------------------------- ---------------------------------------
Proceeds
Proceeds Estimated as a % of
Carrying as a % of Residual Estimated
Sales Amount Carrying Sales Value of Residual
Year Proceeds of Assets Amount Proceeds Assets Value
------------------------------------------------- ---------------------------------------
(Dollars in Thousands) (Dollars in Thousands)
1994 $ 6,477 $ 5,865 110% $30,161 $25,682 117%
1993 --- --- --- 486 248 196%
1992 20,493 17,527 117% 2,164 1,768 122%
1991 25,027 21,904 114% 10,114 6,553 154%
1990 10,854 7,127 152% 20,210 11,719 172%
- ---------------
Notes:
(1) Excludes foreclosures for credit reasons which are immaterial to the above
amounts.
(2) Excludes proceeds of $3,201,000 in 1993 on assets held for sale.
(3) Excludes proceeds of $2,000,000 in 1993 received on guarantees.
(4) Excludes proceeds of $460,000 in 1990 from the disposal of warrants.
(5) Excludes gain on securitizations of $3,954,000 in 1994.
--------------------
The estimated residual value of leased assets in the accounts of FINOVA
Capital at December 31, 1994 aggregated 28.3% of the original cost of such
assets (15.3% excluding the original costs of the assets and residuals
applicable to real estate leveraged leases, which typically have higher
residuals than other leases). The financing contracts and leases outstanding at
that date had initial terms ranging generally from one to 25 years. The average
initial term weighted by carrying amount at inception and the weighted average
remaining term of financing contracts at December 31, 1994 for financing
contracts excluding leveraged leases were 6.5 and 3.7 years, respectively, and
for leveraged leases were approximately 20 and 11 years, respectively. The
comparable average initial term and remaining term at December 31, 1993 for
financing contracts excluding leveraged leases were 7.3 and 3.7 years,
respectively, and for leveraged leases were approximately 20 and 12 years,
respectively. FINOVA Capital utilizes either employed or outside appraisers to
determine the collateral value of assets to be leased or financed and the
estimated residual or collateral value thereof at the expiration of each lease.
For a discussion of accounting for lease transactions, refer to Notes A
and C of Notes to Consolidated Financial Statements included in Annex A.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA Capital develops business primarily through direct solicitation
by its own sales force. Customers are also introduced by independent brokers
and referred by other financial institutions.
17
20
At December 31, 1994, FINOVA Capital had 88,034 financing contracts with
70,892 customers (including 2,313 contracts with consumer finance customers and
small ticket transactions on 79,027 contracts and 64,886 customers in FINOVA
Manufacturer and Dealer Services), compared to 3,798 financing contracts with
3,490 customers (including 2,886 contracts with consumer finance customers) at
December 31, 1993.
FINOVA Capital is engaged in an extremely competitive activity. It
competes with banks, insurance companies, leasing companies, the credit units of
equipment manufacturers and other finance companies. Some of these competitors
have substantially greater financial resources and are able to borrow at costs
below those of FINOVA Capital. FINOVA Capital's principal means of competition
is through a combination of service, the interest rate charged for money and
concentration in focused market niches. The interest rate it charges for money
is a function of its borrowing costs, its operating costs and other factors.
While many of FINOVA Capital's larger competitors are able to offer lower
interest rates based upon their lower borrowing costs, FINOVA Capital seeks to
maintain the competitiveness of the interest rates it offers by emphasizing
strict control of its operating costs. The Company's ability to manage costs is,
in part, dependent on factors beyond the Company's control, such as the cost of
funds, outside litigation expenses and competitive salaries.
CREDIT QUALITY
As a result of the use of clearly defined underwriting standards,
portfolio management techniques, monitoring of covenant compliance and active
collections and workout departments, FINOVA Capital seeks to maintain a
high-quality customer base.
RISK MANAGEMENT
FINOVA Capital generally conducts investigations of its prospective
customers through a review of historical financial statements, published credit
reports, credit references, discussions with management, analysis of location
feasibility, personal visits and property inspections. In many cases, depending
upon the results of its credit investigations and the nature and type of
property involved, FINOVA Capital obtains additional collateral or guarantees
from others.
As part of its underwriting process, FINOVA Capital generally pays close
attention to the management, industry, financial position and level of
collateral of a proposed borrower. The purpose, term, amortization and amount of
any proposed transaction generally must be clearly defined and within
established corporate policy. In addition, underwriters attempt to avoid undue
concentrations in any one credit, industry or regional location.
- Management. FINOVA Capital generally considers the reputation,
experience and depth of management; quality of product or
service; adaptability to changing markets and demand; and prior
banking, finance and trade relationships.
- Industry. FINOVA Capital usually evaluates critical aspects of
each industry to which it lends, including the seasonality and
cyclicality of the industry; governmental regulation; the
effects of taxes; the economic value of goods or services
provided; and potential environmental liability.
- Financial. FINOVA Capital's review of a prospective borrower
includes a thorough analysis of the borrower's financial
trends. Items considered often include net worth; composition
of assets and liabilities; debt coverage and servicing
requirements; liquidity; sales growth and earning power; and
cash flow needs and generation.
- Collateral. FINOVA Capital regards collateral as an important
factor in a credit evaluation and has established maximum loan
to value ratios, normally ranging from 60% - 95%, for each of
its lines of business. However, collateral is only one of the
many factors considered.
18
21
The underwriting process includes, in addition to the analysis of the
factors set forth above, the design and implementation of transaction structures
and strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process, with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors loan portfolio concentrations in the areas
of aggregate exposure to a single borrower and related entities, within a given
geographical area and with respect to an industry and/or product type within an
industry. FINOVA Capital has established concentration guidelines for each line
of business it conducts for the various product types it may entertain within
that line of business. Geographical concentrations are reviewed periodically and
evaluated based on historical loan experience and prevailing market and economic
conditions.
FINOVA Capital's financing contracts and leases generally require the
customer to pay taxes, license fees and insurance premiums and to perform
maintenance and repairs at the customer's expense. Contract payment rates are
based on several factors, including the cost of borrowed funds, term of
contract, creditworthiness of the prospective customer, type and nature of
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In leasing 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 status 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 and
its underlying collateral. This process generally includes the periodic
appraisal or verification of the collateral to determine loan exposure and
residual values; sales of residual and warrant positions to generate
supplemental income; and review and management of covenant compliance. The
Portfolio Management department and dedicated personnel within the business
units regularly review financial statements to assess customer cash flow
performance and trends; periodically confirm operations of the customer; conduct
periodic reappraisals of the underlying collateral; seek to identify issues
concerning the vulnerability of debt service capabilities of the customer; seeks
to resolve outstanding issues with the borrower; and prepare quarterly summaries
of the aggregate portfolio quality for management review. To facilitate the
monitoring of a client's account, each client is assigned to a customer service
representative who is responsible for all follow-up with that client.
DELINQUENCIES AND WORKOUTS
FINOVA Capital monitors timely payment of all accounts. Generally, when
an invoice is 10 days past due, the customer is contacted, and a determination
is made as to the extent of the problem, if any. A commitment for immediate
payment is pursued and the account is observed closely. If payment is not
received after this contact, all guarantors of the account are contacted within
the next 20 days. If an invoice becomes 31 days past due, it is reported as
delinquent. A notice of default is generally sent prior to an invoice becoming
45 days past due and, between 60 and 90 days past the due date, if satisfactory
negotiations are not underway, outside counsel is generally retained to help
protect FINOVA Capital's rights and to pursue its remedies.
19
22
When accounts become more than 90 days past due (or in the cases of
Manufacturer and Dealer Services, 120 days past due, or United Kingdom consumer
finance accounts, 180 days past due), income recognition is suspended, and
FINOVA Capital vigorously pursues its legal remedies. Foreclosed or repossessed
assets are considered to be nonperforming, and are reported as such unless such
assets generate sufficient cash to result in a reasonable rate of return. Such
accounts are continually reviewed, and write-downs are taken as deemed
necessary. While pursuing collateral and obligors, FINOVA Capital generally
continues to negotiate the restructuring or other settlement of the debt, as
appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for possible credit losses is adequate. For
additional information regarding the reserve for possible credit losses, see
Note D of Notes to Consolidated Financial Statements included in Annex A.
GOVERNMENTAL REGULATION
FINOVA Capital's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA Capital's financing transactions are subject to
additional government regulation, such as aircraft leasing, which is regulated
by the Federal Aviation Authority, and communications, which is regulated by the
Federal Communication Commission. FINOVA Capital's international activities are
also subject to a variety of laws and regulations promulgated by the governments
and various agencies of the countries in which the business is conducted.
FORMER MORTGAGE INSURANCE OPERATIONS
Verex, which conducted FINOVA's mortgage insurance operations, ceased
writing new business as of January 1, 1988 but continued to write renewals and
settle valid claims in accordance with insurance contracts in force.
Accordingly, Verex was treated as a discontinued operation. On July 16, 1993,
FINOVA consummated the sale of Verex. Proceeds from the sale of Verex were
approximately $215 million. The sale price was generally determined by the book
value of the Verex assets plus a premium of $6 million and an adjustment for the
difference between the market value and book value of Verex's investment
portfolio, calculated as prescribed more fully by the Agreement.
EMPLOYEES
At December 31, 1994, the Company had 943 employees. None of such
employees were covered by collective bargaining agreements. The Company believes
its employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in premises leased
from Dial in Phoenix, Arizona. FINOVA Capital operates 30 additional offices in
the United States and one office in Europe. All such properties are leased.
Alternative office space could be obtained without
20
23
difficulty in the event leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation, in part, often results from the Company's attempts to
enforce its lending agreements against borrowers and other parties to such
transactions. Litigation is subject to many uncertainties and it is possible
that some of the legal actions, proceedings or claims referred to above could be
decided against the Company. Although the ultimate amount for which the Company
may be held liable is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1994.
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 58 Chairman, President and Chief Executive Officer since 1993 and Chairman and Chief
Executive Officer and a Director of The FINOVA Group Inc. since 1992; also Chairman,
President and Chief Executive Officer and a Director of FINOVA Capital for more than
five years.
Robert J. Fitzsimmons 54 Senior Vice President - Treasurer of The FINOVA Group Inc. or similar positions since
1992; also Senior Vice President - Treasurer or similar positions of FINOVA Capital
for more than five years and a Director of FINOVA Capital since 1992.
William J. Hallinan 52 Senior Vice President - General Counsel and Secretary or similar positions of The
FINOVA Group Inc. and FINOVA Capital since 1992; prior thereto for more than five
years served as Vice President - Taxes and Associate General Counsel or a similar
position of Dial.
Robert M. Korte 39 Senior Vice President - Strategy and Technology since 1994 and prior thereto was Vice
President Human and Corporate Development of The FINOVA Group Inc. since 1992; also
Vice President - Human and Corporate Development or in a similar positions of FINOVA
Capital since 1991, and prior thereto was Assistant Vice President - Administration.
Bruno A. Marszowski 53 Senior Vice President - Controller and Chief Financial Officer of The FINOVA Group
Inc. and FINOVA Capital since 1994 and prior thereto was Vice President - Controller
of The FINOVA Group Inc. since 1992; also, Vice President - Controller of FINOVA
Capital for more than five years and a Director thereof during 1992.
(continued)
21
24
Name Age Position and Background
- ---------------- ----- -------------------------------------------------------------------------------------
Robert E. Radway 34 Senior Vice President - Corporate Development and Communications or similar positions
of The FINOVA Group Inc. since 1993; prior thereto was Manager, Corporate Finance
Division of CMS Companies, an investment management/merchant banking firm since 1990
and prior thereto was Vice President, Investment Banking Division of First Fidelity
Bancorporation (a bank holding company) since 1988.
Derek C. Bruns 35 Vice President - Internal Audit or similar positions of The FINOVA Group Inc. since
1992; prior thereto was Senior Manager - Audit Services or in a similar position at
Deloitte & Touche LLP for more than five years.
John J. Bonano 52 Group Vice President or similar positions of FINOVA Capital since 1993; prior thereto
was Senior Vice President, Asset Based Finance Division of U.S. Bancorp Financial,
Inc. since 1988.
J. Paul Buchanan 53 Group Vice President of FINOVA Capital since 1994; prior thereto was Executive Vice
President, or similar positions, of Bell Atlantic TriCon Leasing Corporation for more
than five years.
Matthew M. Breyne 37 Group Vice President or similar positions of FINOVA Capital for more than five years.
Jack Fields, III 40 Group Vice President or similar positions of FINOVA Capital for more than five years.
Thomas C. Parrinello 53 Group Vice President of FINOVA Capital since 1994; prior thereto was Executive Vice
President of Heller Financial for more than five years.
Martin G. Roth 57 Group Vice President or similar positions of FINOVA Capital for more than five years.
Gregory C. Smalis 42 Group Vice President - Portfolio Management or similar positions and a Director of
FINOVA Capital since 1993; prior thereto served as Managing Director of GEFG from
1992 and as Vice President - Credit of FINOVA Capital from 1987.
Paul A. Thulin 45 Senior Vice President of FINOVA Capital since 1994; prior thereto was Vice President
of Bell Atlantic TriCon Leasing Corporation for more than five years.
22
25
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY & RELATED STOCKHOLDER MATTERS.
The principal market on which the common stock of The FINOVA Group Inc.
is traded is the New York Stock Exchange. The following tables summarize the
high and low market prices as reported on the New York Stock Exchange Composite
Tape and the cash dividends declared from January 1, 1993 through December 31,
1994:
Sales Price Range of Common Stock
-------------------------------------------------------------
1994 1993
--------------------------- --------------------------
Quarters: High Low High Low
--------- --------- --------- ---------
First $ 33-3/4 $ 28-1/4 $ 29-5/8 $ 23-5/8
Second 34-3/8 29-1/8 30-1/8 25-1/2
Third 39 33-1/8 31-7/8 28-1/4
Fourth 35-7/8 29-1/8 32 26-1/2
Dividends Declared on
Common Stock
-----------------------
1994 1993
------ ------
February $ 0.18 $ 0.16
April 0.16
May 0.18
August 0.18 0.18
November 0.20 0.18
------ ------
$ 0.74 $ 0.68
====== ======
Following the Spin-Off, quarterly dividends have been paid on the first
business day of each calendar quarter. It is anticipated that FINOVA will
continue to pay regular quarterly dividends on the first business day of
January, April, July and October. In February 1995, the Board of Directors
declared a dividend of $0.20 per share, payable April 3, 1995, for shareholders
of record on March 1, 1995. The declaration of dividends and their amounts will
be at the discretion of the Board of Directors of FINOVA and there can be no
assurance that additional dividends will be declared.
FINOVA Capital is restricted in its ability to pay dividends to its
shareholder. The agreements pertaining to long-term debt of FINOVA Capital
include various restrictive covenants and require the maintenance of certain
defined financial ratios with which FINOVA Capital has complied. Under one of
these covenants, dividend payments are limited to 50 percent of accumulated
earnings after December 31, 1991.
As of March 13, 1995, there were approximately 28,627 holders of record
of The FINOVA Group Inc.'s common stock. The closing price of the common stock
on that date was $32-3/8.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA which
have been derived from the audited Consolidated Financial Statements of FINOVA
for the five years ended December
23
26
31, 1994. The information set forth below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of FINOVA and the Notes
thereto included in Annex A, as well as the remainder of this Report. Per share
data for income and dividends have not been presented for 1991 and prior years
as The FINOVA Group Inc. was not a publicly held company prior to the Spin-Off.
Year Ended December 31,
-------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ---------- ----------
OPERATIONS: (dollars in thousands, except per share data)
Interest earned from
financing $ 503,351 $ 255,216 $ 243,337 $ 251,472 $ 256,962
transactions
Interest margins earned 244,414 124,847 104,699 93,912 85,310
Provision for possible
credit losses (1) 16,670 5,706 6,740 77,687 10,529
Gains on sale of assets 9,045 5,439 3,362 6,684 12,678
Core income (2) 80,834 40,463 34,289 31,629 21,697
Income (loss) from
continuing 74,313 37,846 36,750 (38,742) 29,558
operations
Net income (loss) 74,313 37,347 48,957 (52,471) 29,558
Earnings per common
and equivalent share $ 2.94 $ 1.77 $ 2.31
Dividends declared per
common share $ 0.74 $ 0.68 $ 0.42
Dividend payout ratio 25.2% 38.4% 18.2%
Average outstanding common
and equivalent share 25,307,000 20,332,000 20,464,000
FINANCIAL POSITION:
Investment in financing
transactions $ 5,667,644 $ 2,846,571 $ 2,428,523 $2,281,872 $2,198,441
Nonaccruing contracts
and repossessed assets 168,761 102,607 100,422 111,296 163,519
Reserve and accrued
liabilities for possible
credit losses (1) (3) 122,233 64,280 69,291 87,600 77,098
Total assets 5,834,331 2,834,322 2,641,668 2,414,484 2,393,309
Deferred income taxes 188,887 178,972 172,727 198,366 214,825
Senior and subordinated
debt 4,573,354 2,079,286 1,882,349 1,706,470 1,510,675
Customer deposits and
short-term debt 16,424 63,075 175,161
--------- --------- --------- --------- ---------
Total debt 4,573,354 2,079,286 1,898,773 1,769,545 1,685,836
Redeemable preferred stock 25,000
Stockholders' equity 770,252 503,300 488,396 371,576 442,747
24
27
December 31,
-------------------------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------
RATIOS:
Reserve and accrued liabilities for possible
credit losses/investment in financing
transactions and securitizations 2.1% 2.3% 2.9% 3.8% 3.5%
Nonaccruing contracts and repossessed assets/
investment in financing transactions and
securitizations 2.9% 3.6% 4.1% 4.9% 7.4%
Total debt to stockholder's equity 5.9x 4.1x 3.9x 4.8x 3.8x
Return on average equity 11.1% 7.5% 11.4% (12.9%) 6.8%
Return on average total assets 1.6% 1.4% 1.9% (2.2%) 1.3%
Equity to assets 13.2% 17.8% 18.5% 15.4% 18.5%
- --------------------
NOTES:
(1) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65,000,000 and recorded write-offs of $15,000,000
related to nonearning assets in the GEFG portfolio and a $47,759,000
write-down to reduce Latin American assets to current market value.
(2) Core income is defined as domestic income from continuing operations plus
the charges made to deferred taxes applicable to leveraged leases in 1993
and the restructuring and other charges recorded in 1991 in connection with
the Spin-Off.
(3) Accrued liabilities of $13 million at December 31, 1994 represent an
allowance for estimated losses under certain recourse provisions of
securitizations.
--------------------
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.
25
28
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this Item
is incorporated by reference from the Company's Proxy Statement issued in
connection with its 1995 Annual Meeting of Stockholders (the "Proxy Statement").
The information regarding the Company's executive officers required by
this item is found as an Optional Item in Part I, following Item 4 hereof.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
Annex
Page
-----
Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations 2-8
Report of Management and Independent Auditors' Report 9-10
Consolidated Balance Sheet 11-12
Statement of Consolidated Operations 13
Statement of Consolidated Stockholders' Equity 14
Statement of Consolidated Cash Flows 15
Notes to Consolidated Financial Statements 16-42
Supplemental Selected Financial Data 43-44
2. All Schedules have been omitted because they are not applicable
or the required information is shown in the financial
statements or notes thereto.
26
29
3. Exhibits.
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the date of
this filing.*
(3.B) By-Laws, as amended through the date of this filing.*
(4.A) Instruments with respect to issues of long-term debt have not
been filed as exhibits to this Annual Report on Form 10-K if the
authorized principal amount of any one of such issues does not
exceed 10% of total assets of the Company and its subsidiaries
on a consolidated basis. The Company agrees to furnish a copy of
each such instrument to the Securities and Exchange Commission
upon request.
(4.B) Form of Common Stock Certificate of the Company*.
(4.C) Relevant portions of the Company's Certificate of Incorporation
and Bylaws included in Exhibits 3.A and 3.B above, respectively,
are hereby incorporated by reference.
(4.D) Rights Agreement dated as of February 15, 1992 between the
Company and the Rights Agent named therein (incorporated by
reference from the Company's Registration Statement on Form S-1,
SEC File No. 33-45452 (the "Registration Statement"), Annex V to
Prospectus and Exhibit 4.1).
(4.E) Indenture dated as of November 1, 1990 between FINOVA Capital
and the Trustee named therein (incorporated by reference from
Greyhound Financial Corporation's Registration Statement on Form
S-3, Registration No. 33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17, 1992 between
FINOVA Capital and the Trustee named therein, supplementing the
Indenture referenced in Exhibit 4.E above, is hereby
incorporated by reference from GFC Financial Corporation's
Annual Report on Form 10-K for the year 1992 (the "1992 10-K"),
Exhibit 4.F.
(4.G) Form of Indenture dated as of September 1, 1992 between FINOVA
Capital and the Trustee names therein (incorporated by reference
from the Greyhound Financial Corporation Registration Statement
on Form S-3, Registration No. 33-51216, Exhibit 4).
(4.H) 1992 Stock Incentive Plan of the Company as amended through the
date hereof, with a proposed amendment thereto incorporated from
the Proxy Statement.*+
(10.A) Sixth Amendment and Restatement dated as of May 16, 1994 of the
Credit Agreement dated as of May 31, 1976 among FINOVA Capital
and the lender parties thereto, and Bank of America National
Trust and Savings Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminster Bank USA, as agents (the
"Agents") and Citibank, N.A., as Administrative Agent
(incorporated by reference from the Corporation's Current Report
on Form 8-K dated May 23, 1994, Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to the Sixth
Amendment and Restatement, noted in 10.A above.*
27
30
Exhibit No.
-----------
(10.B) Credit Agreement (Short-Term Facility) dated as of May 16, 1994
among FINOVA Capital, the Lender parties thereto, the Agents and
Citibank, N.A., as Administrative Agent (incorporated by
reference from the Company's Report on Form 8-K dated May 23,
1994, Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the Credit
Agreement noted in 10.B above.*
(10.C.1) The Company's Executive Severance Plan for Tier 1 Employees.*+
(10.C.2) The Company's Executive Severance Plan for Tier 2 Employees.*+
(10.D) The Company's Management Incentive Plan.*+
(10.E) The Company's Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield, dated March 16,
1992, is hereby incorporated by reference from the 1992 10-K,
Exhibit 10.F.
(10.G) Employment Agreement with William J. Hallinan, dated February
25, 1992, is hereby incorporated by reference from the 1992
10-K, Exhibit 10.I.+
(10.H) Employment Agreement with Thomas C. Parrinello, dated February
14, 1992.*+
(10.I.1) Form on Resolutions of the Company's Board of Directors
(adopted on December 5, 1994) amending the Company's Retirement
Income, Capital Accumulation, Employees' Stock Ownership and
Supplemental Pension Plans.*+
(10.I.2) Form of Resolutions of the Company's Board of Directors
(adopted on February 9, 1995) amending the names of the
Company's various benefit plans.*+
(10.J) The Company's Retirement Income Plan.*+
(10.K) The Company's Supplemental Pension Plan.*+
(10.L) The Company's Employee Stock Ownership Plan and Trust.*+
(10.M) The Company's Capital Accumulation Plan.*+
(10.N) The Company's Directors Deferred Compensation Plan, is hereby
incorporated by reference from the 1992 10-K, Exhibit 10.O.+
(10.O) Form of the Company's 1992 Stock Incentive Plan Nonqualified
Stock Option Agreement (for exempt employees) (for August 25,
1992 and subsequent grants through August 10, 1994) (various
prices) is hereby incorporated by reference from the 1992 10-K,
Exhibit 10.FF.+
28
31
Exhibit No.
-----------
(10.P) Form of the Company's 1992 Stock Incentive Plan Nonqualified
Stock Option Agreement (for nonexempt employees) (for August 25,
1992 and subsequent grants through August 10, 1994) (various
grants) is hereby incorporated by reference from the 1992 10-K,
Exhibit 10.GG.
(10.Q) A description of the Company's policies regarding compensation
of directors is incorporated from the Proxy Statement.+
(10.R) The Company's 1992 Deferred Compensation Plan is hereby
incorporated by reference from the 1992 10-K, Exhibit 10.II.+
(10.S) Interim Services Agreement dated January 28, 1992 among the
Company, The Dial Corp and others, is hereby incorporated by
reference from the 1992 10-K, Exhibit 10.JJ.
(10.T) Tax Sharing Agreement dated February 19, 1992 among the Company,
The Dial Corp and others, is hereby incorporated by reference
from the 1992 10-K, Exhibit 10.KK.
(10.U) Certificate of Designations of Series A Redeemable Preferred
Stock of FINOVA Capital, dated March 17, 1992, is hereby
incorporated by reference from the 1992 10-K, Exhibit 10.MM.
(10.V) Sublease dated as of April 1, 1991, among the Company, The Dial
Corp and others, relating to the Company's principal office
space, is hereby incorporated by reference from the 1992 10-K,
Exhibit 10.NN.
(10.W) Directors' Retirement Benefit Plan is hereby incorporated by
reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 (the "1993 10-K"), Exhibit 10.OO.+
(10.X) Stock Purchase Agreement between Bell Atlantic TriCon Leasing
Corporation and Greyhound Financial Corporation dated as of
March 4, 1994 is hereby incorporated by reference from the 1993
10-K, Exhibit 10.QQ.
(10.Y) Form of Assets Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and TriCon Capital Corporation is hereby
incorporated by reference from the 1993 10-K, Exhibit 10.RR.
(10.Z) Form of Distribution Agreement among the Company, Greyhound
Financial Corporation, The Dial Corp and certain other parties
named therein, dated as of January 28, 1992 (incorporated by
reference from the Registration Statement, Annex II to the
Prospectus and Exhibit 2.1).
(10.AA) Asset Purchase Agreement dated as of February 3, 1995 between
Transamerica Business Credit Corporation and FINOVA Capital.*
(10.BB) Stock Purchase Agreement among The FINOVA Group Inc., FINOVA
Capital and GE Capital Mortgage Corporation dated May 26, 1993,
incorporated by
29
32
Exhibit No.
-----------
reference from the Company's Report on Form 8-K dated
July 15, 1993, Exhibit 2.
(10.CC) Directors' Charitable Awards Program.*+
(10.DD) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for exempt
employees) (various prices). *+
(10.EE) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for
non-exempt employees) (various prices).*
(10.FF) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for
non-employee directors) (various prices).*+
(10.GG) Form of the Company's 1992 Stock Incentive Plan Restricted
Stock Agreements.*+
(11) Computation of Per Share Earnings.*
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries of the Registrant.*
(25) Powers of Attorney.*
(27) Financial Data Schedule.*
* Filed herewith + Relating to Management Compensation
(b) Reports on Form 8-K:
A Report on Form 8-K dated October 18, 1994 was filed by
Registrant, which reported under Items 5 and 7 the revenues, net income
and selected financial data and ratios for the nine months ended
September 30, 1994 (unaudited).
A Report on Form 8-K dated January 24, 1995 was filed by
Registrant, which reported under Items 5 and 7 the revenues, net income
and selected financial data and ratios for the twelve months ended
December 31, 1994 (unaudited).
A Report on Form 8-K dated January 25, 1995 was filed by
Registrant, which reported under Items 5 and 7 the name change from GFC
Financial Corporation to The FINOVA Group Inc. and from Greyhound
Financial Corporation to FINOVA Capital Corporation.
30
33
A Report on Form 8-K dated February 3, 1995 was filed by
Registrant, which reported under Item 7 the Underwriting Agreement and
certain other information relating to the sale of FINOVA Capital's
$100,000,000 8% Notes due February 1, 2000.
A Report on Form 8-K dated February 9, 1995 was filed by
Registrant, which reported under Items 5 and 7 the definitive agreement
to acquire a substantial portion of the rediscount portfolio of the
Lender Finance Division of Transamerica Business Credit Corporation.
A Report on Form 8-K dated February 27, 1995 was filed by
Registrant, which reported under Item 7 the Underwriting Agreement and
certain other information relating to the sale of FINOVA Capital's
$150,000,000 Floating-Rate Notes due March 6, 1998.
31
34
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 20th day of March, 1995.
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)
______________________
32
35
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
* /s/ Samuel L. Eichenfield
_________________________________ ___________________________________
G. Robert Durham (Director) Samuel L. Eichenfield (Chairman)
March 20, 1995 March 20, 1995
* *
_________________________________ ___________________________________
James L. Johnson (Director) L. Gene Lemon (Director)
March 20, 1995 March 20, 1995
* *
_________________________________ ___________________________________
Kenneth R. Smith (Director) Robert P. Straetz (Director)
March 20, 1995 March 20, 1995
* *
_________________________________ ___________________________________
Shoshana B. Tancer (Director) John W. Teets (Director)
March 20, 1995 March 20, 1995
* Signed pursuant to Powers of Attorney dated February 9, 10 and 14, 1995.
/s/ Bruno A. Marszowski
____________________________
Bruno A. Marszowski
Attorney-in-Fact
March 20, 1995
33
36
ANNEX A
37
THE FINOVA GROUP INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations 2-8
Report of Management 9
Independent Auditors' Report 10
Consolidated Balance Sheet at December 31, 1994 and 1993 11-12
Statement of Consolidated Operations for the Years Ended
December 31, 1994, 1993 and 1992 13
Statement of Consolidated Stockholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992 14
Statement of Consolidated Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992 15
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1994, 1993 and 1992 16-42
Supplemental Selected Financial Data 43-44
38
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1994 (1) 1993 1992
- -------------------------------------------------------------------------------------------------------
OPERATIONS:
Interest margins earned $ 244,414 $ 124,847 $ 104,699
Selling, administrative and other operating expenses 113,018 58,158 50,728
Net income 74,313 37,347 48,957
FINANCIAL POSITION:
Average funds employed (AFE) 4,446,745 2,637,547 2,355,198
Ending funds employed (EFE) 5,667,644 2,846,571 2,428,523
Securitizations (2) 253,386
Average earning assets (3) 4,064,971 2,321,359 2,045,091
Reserve and accrued liabilities for possible credit losses (4) 122,233 64,280 69,291
Nonaccruing assets 168,761 102,607 100,422
New business 1,799,331 1,007,794 684,900
Factoring/floor planning volume 1,129,936
Write-offs 35,127 12,575 23,661
CAPITALIZATION:
Total debt 4,573,354 2,079,286 1,898,773
Stockholders' equity 770,252 503,300 488,396
PORTFOLIO QUALITY:
Write-offs as a % of AFE and average securitizations (5) 0.8% 0.5% 1.0%
Nonaccruing assets as a % of EFE and securitizations (2) 2.9% 3.6% 4.1%
Reserve and accrued liabilities (4) for possible credit
losses as a % of:
Ending funds employed and securitizations (2) 2.1% 2.3% 2.9%
Nonaccruing assets 72.4% 62.6% 69.0%
As a multiple of write-offs 3.5x 5.1x 2.9x
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of AFE (6) 1.8% 1.6% 1.7%
Interest margins earned as a % of average earning assets (3) 6.0% 5.4% 5.1%
Selling, administrative and other operating expenses as
a % of interest margins earned 46.2% 46.6% 48.5%
Aggregate cost of funds 6.3% 6.3% 7.2%
Ratio of income to combined fixed charges and preferred
stock dividends 1.6 1.5 1.3
Return on average equity 11.1% 7.5% 11.4%
Income per share (continuing operations) $ 2.94 $ 1.80 $ 1.71
Book value per share outstanding $ 27.83 $ 25.06 $ 24.14
Average outstanding common shares 25,307,000 20,332,000 20,464,000
Shares outstanding 27,677,000 20,080,000 20,236,000
======================================================================================================
(1) Includes financial results from the acquisitions of Ambassador
(February 14, 1994) and TriCon (April 30, 1994).
(2) Securitizations are assets sold under securitization agreements and
managed by the Company.
(3) Average earning assets represents AFE excluding average deferred taxes
on leveraged leases and average nonaccruing assets.
(4) Accrued liabilities of $13 million at December 31, 1994 represent an
allowance for estimated losses under certain recourse provisions of
securitizations.
(5) Average contracts securitized were $183 million in 1994.
(6) AFE in this item, excludes average deferred taxes on leveraged leases
of $225 million, $215 million and $204 million for 1994, 1993 and 1992,
respectively.
1
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to The FINOVA Group Inc. (formerly
known as GFC Financial Corporation) and its subsidiaries (collectively,
"FINOVA" or the "Company"), including FINOVA Capital Corporation (formerly
known as Greyhound Financial Corporation) and its subsidiaries (collectively,
"FINOVA Capital"), including Ambassador Factors ("Ambassador") acquired on
February 14, 1994 and TriCon Capital ("TriCon") acquired on April 30, 1994.
Both Ambassador and TriCon were merged into FINOVA Capital in 1994.
Recognizing the substantial increase in the Company's size and scope of
operations and its use of several names in its operations, GFC Financial
Corporation changed its name to The FINOVA Group Inc., and changed its
principal operating subsidiary's name from Greyhound Financial Corporation to
FINOVA Capital Corporation, both effective February 1, 1995.
The Company is the successor to the former financial services
businesses of The Dial Corp ("Dial"). On March 18, 1992, Dial consummated the
spin-off (the "Spin-Off") of the Company by distributing one share of the
Company's common stock (the "shares") for every two shares of Dial common stock
held by each stockholder. Prior to the Spin-Off, Dial contributed to the
Company (i) all of the common stock of FINOVA Capital representing the
Company's core operations, (ii) Greyhound European Financial Group ("GEFG"),
Dial's European commercial and consumer finance businesses not previously
managed by the Company, (iii) Greyhound BID Holding Corp. ("Greyhound BID")
and (iv) Verex Corporation and subsidiaries ("Verex"), Dial's discontinued
mortgage insurance operations, which had been operated in a run-off mode by
Dial since 1988. The Company sold Verex in July 1993.
The historical consolidated financial statements of FINOVA have been
retroactively restated to include the accounts and results of operations of
FINOVA Capital, GEFG and Greyhound BID and the investment in Verex for all
periods presented as if a pooling of interests of companies under common
control occurred. All intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
Income from continuing operations increased 96% during 1994 to $74.3
million from $37.8 million in 1993. The 1994 results include income for
Ambassador and TriCon from the acquisition dates. Net income for the 1994
period rose to $74.3 million from $37.3 million in 1993, an increase of 99%.
Net income in 1993 included a $0.5 million loss from the Company's discontinued
mortgage insurance subsidiary sold in July 1993. Income from continuing
operations and net income in 1993 included a $4.9 million adjustment for tax
rate increases applicable to deferred income taxes generated by the Company's
leveraged lease portfolio.
2
40
THE FINOVA GROUP INC.
INTEREST MARGINS EARNED. Interest margins earned, which represent the
difference between interest earned from financing transactions and interest
expense, increased to $244.4 million for 1994 from $124.8 million for 1993, an
increase of 96%. This increase was driven by portfolio growth, together with
the addition of TriCon and Ambassador in 1994. The primary source of the
portfolio growth was new business, which totaled $1.8 billion for 1994 compared
to $1.0 billion for 1993 (an increase of 80%).
Interest margins earned, measured as a percent of average earning
assets, were strong at 6.0%. This measurement compares to 5.4% for the 1993
period and reflects the contributions of the acquisitions made in 1994, the
continuing healthy returns of the charter financial operations and the
Company's access to lower cost capital. Growth in interest margins more than
offset the higher provisions for possible credit losses and the higher selling,
administrative and other operating expenses.
In early 1995, FINOVA Capital helped protect its margins on
floating-rate transactions by hedging an additional $750 million of
floating-rate debt to lock in the spread between the Company's lending and
borrowing rates. With this hedge, the Company helped to protect its margins on
$1.5 billion of floating-rate transactions (or approximately 50% of its
floating-rate liabilities), during the terms of those hedging transactions.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserve"), were greater by $11.0 million during 1994
compared to 1993. The greater loss provisions were consistent with the
requirements of a larger portfolio and the loss experience of the businesses
acquired. Higher interest margins generated by Ambassador and certain TriCon
businesses are used to cover the risk profiles associated with those
businesses. Management believes that reserve coverage (reserve and accrued
liabilities/nonaccruing assets) remains adequate at 72.4% of nonaccruing assets
and at 2.1% of funds employed and securitizations. Details of the write-offs
by line of business, as well as changes in the reserve for possible credit
losses, can be found in Note D of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by
approximately $54.9 million in 1994 consistent with the growth in assets. The
running rate of these expenses (measured as a percent of interest margins
earned) was 46.2% (for the combined entities) in 1994, an improvement over
46.6% in 1993 (which excluded TriCon and Ambassador). See Note N of Notes to
Consolidated Financial Statements.
GAINS ON SECURITIZATIONS AND SALE OF ASSETS. Gains on securitizations
and sale of assets were $3.6 million higher in 1994 compared to 1993. The
increase principally is the result of a $4.0 million ($2.4 million after-tax)
gain from the securitization of assets recorded in 1994.
During 1994, FINOVA Capital entered into one transaction resulting in
a gain on the securitization of selected assets. The securitization of assets
was consistent with TriCon's historical experience; however, the Company does
not currently intend to use asset securitizations as a form of financing.
Reduced utilization of securitizations will have the result of reducing net
income in the near term since no gain on the sale of assets will be recorded.
However, earnings from assets retained and not securitized would continue to be
recognized over the life of the assets.
INCOME TAXES. Income taxes for 1994 increased to $49.5 million from
$28.6 million in 1993.
3
41
THE FINOVA GROUP INC.
This increase is attributable to: (a) higher income before income taxes; (b)
higher state income tax rates in 1994 because of the apportionment of the
Company's assets to states with higher income tax rates and (c) increased
foreign income taxes due to the increase in foreign income. The overall
effective income tax rate for the Company, including both federal and state
income taxes, approximates 40.0% for 1994 and 35.7% for 1993, excluding the
$4.9 million tax adjustment for the Company's leveraged lease portfolio. See
Note I of Notes to Consolidated Financial Statements.
1993 COMPARED TO 1992
Income from continuing operations for 1993, excluding a $4.9 million
adjustment for deferred taxes applicable to leveraged leases, rose to $42.7
million from $36.8 million in 1992, a 16% increase in earnings from continuing
operations. The $4.9 million adjustment in 1993 represented the effects of
increases in federal and state income tax rates in 1993 as they applied to
deferred income taxes generated by the Company's leveraged lease portfolio.
Income from continuing operations for 1993, including the adjustment for
deferred taxes, was $37.8 million.
Net income for 1993 was $37.3 million. Excluding the $4.9 million
deferred tax adjustment, net income for 1993 was $42.2 million compared to
$49.0 million in 1992. The primary reason for the lower earnings in 1993 was
the loss of $0.5 million reported from discontinued operations in 1993 compared
to income of $12.2 million in 1992. The $0.5 million loss for the year
consisted of $0.8 million of income from the discontinued mortgage insurance
operations and a loss of $1.3 million on the sale of that operation.
INTEREST MARGINS EARNED. Interest margins earned increased by 19% in
1993 compared to 1992. These margins were improved significantly by more
favorable debt costs in 1993 when compared to 1992 (approximately a 1%
reduction in the aggregate cost of debt). Also contributing to the improved
margins was the growth of the domestic portfolio and higher prepayment fees,
partially offset by the effects of larger foreign exchange gains reported by
GEFG in 1992 and the continued winding down of the GEFG portfolio.
The $12.3 million reduction in interest expense was attributable to
more favorable debt costs and the interest savings from the repayment of
commercial paper with the proceeds from the sale of the mortgage insurance
operations. The more favorable debt costs, in comparison to 1992, primarily
relate to the Company's ability to consistently maintain a matched position
throughout 1993 relative to financing its floating-rate assets with
floating-rate debt. During the second and third quarters of 1992, FINOVA,
because of the significant refinancing done in connection with the Spin-Off,
had to finance a major portion of its floating-rate assets with fixed-rate
debt. That fixed-rate debt was subsequently converted to floating-rate debt
through interest rate conversion agreements. However, the timing between the
issuance of fixed-rate debt and the execution of the interest rate conversion
agreements caused interest margins to shrink by approximately $2.8 million in
1992.
NON-INTEREST EXPENSE. Although the provision for possible credit
losses was lower in 1993 versus 1992, in the opinion of management, such
provision was adequate to cover the growth and risk in the portfolio. The
reserve for possible credit losses, which is increased by the loss provisions
and reduced by write-offs, was 2.3% of funds employed at December 31, 1993.
Details of the write-offs by line of business, as well as changes in the
reserve for possible credit losses, can be found in Note D of Notes to
Consolidated Financial Statements.
4
42
THE FINOVA GROUP INC.
Selling, administrative and other operating expenses increased during
1993 due to the addition of the asset based lending operations acquired from
U.S. Bancorp expenses that were no longer allocated to discontinued operations
and legal expenses incurred in connection with certain problem accounts. See
Note N of Notes to Consolidated Financial Statements.
GAINS ON SALE OF ASSETS. Gains on sale of assets were higher in 1993
than in 1992 due to the amount and type of assets sold. Gains in 1993
primarily were derived from the sale of aircraft and other assets held for
sale.
INCOME TAXES. Income taxes, excluding the $4.9 million adjustment
applicable to deferred taxes, were higher in 1993 and more in the range of an
ongoing effective tax rate (approximately 36% of income before income taxes)
for the Company. The higher income taxes were attributable to the effects of a
1% increase in both federal and state income tax rates, which increased the
provision for taxes by approximately $1 million, and to higher income before
income taxes. Additionally, in 1992, income taxes were reduced by $3.1 million
representing tax adjustments related to the refinancing of the Company's debt.
See Note I of Notes to Consolidated Financial Statements.
FORMER MORTGAGE INSURANCE OPERATIONS. FINOVA sold all of the issued
and outstanding common stock of Verex in July 1993. The initial cash sale
price was approximately $215 million, before transaction costs. The sale price
was generally determined by the book value of Verex's assets plus a premium of
$6 million and an adjustment for the difference between market value and book
value of Verex's investment portfolio. Adjustments to the sale were made in the
fourth quarter of 1993 to reflect estimated transaction costs and additional
liabilities resulting in a $1.3 million loss on the sale of Verex.
The loss from discontinued operations for 1993 was $0.5 million
compared to income of $12.2 million in 1992. The $0.5 million loss for the
year consisted of $0.8 million of income from operations and the loss of $1.3
millon on the sale of the mortgage insurance operations. The $0.8 million in
income from the mortgage insurance operations represented income through the
sale date and the accrual of expenses necessary to complete the disposition of
the remaining assets and liabilities of the mortgage insurance operations which
were retained by FINOVA.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Funds employed increased by $2.9 billion to $5.7 billion at December
31, 1994 from $2.8 billion at December 31, 1993. This increase is attributable
to the acquisitions of TriCon ($1.8 billion) and Ambassador ($329 million) and
new business generated ($1.8 billion), less securitization of assets and
portfolio amortization.
The reserve and accrued liabilities for possible credit losses
increased by $58.0 million in 1994 to $122.2 million. The increase in the
reserve and accrued liabilities consisted of increases due to loss provisions
of $16.7 million which were applicable to portfolio growth, $62.6 million of
reserves and accrued liabilities acquired with TriCon and $10.4 million of
reserves acquired with Ambassador, partially offset by decreases due to
write-offs of $35.1 million.
Nonaccruing contracts and repossessed assets increased to $168.8
million at December 31, 1994 from $102.6 million at December 31, 1993,
primarily due to the inclusion of nonaccruing assets of TriCon ($60 million)
and Ambassador ($14.7 million). When measured as a percent of funds
5
43
THE FINOVA GROUP INC.
employed and securitizations, nonearning assets declined to 2.9% at December
31, 1994 from 3.6% of funds employed at December 31, 1993. For more
information on write-offs and nonaccruing assets see Note D of Notes to
Consolidated Financial Statements.
The Company had total debt of approximately $4.6 billion or 5.9 times
its equity base of $770.3 million at December 31, 1994. The Company also had
deferred income taxes of $189 million, generally used to reduce debt and,
therefore, help finance lending activities.
Growth in funds employed is generally financed by internally generated
cash flow and additional borrowings. During 1994, FINOVA Capital issued $827.6
million in new senior debt, which, together with general corporate funds, net
commercial paper borrowings and $226.0 million of net proceeds from a secondary
equity offering, was used to finance new business, redeem or retire $1.2
billion of debt and acquire TriCon and Ambassador. The equity offering was
completed in May 1994 and was for 8,050,000 shares of The FINOVA Group Inc.'s
common stock (the "Offering").
FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent upon any
one lender. Additionally, FINOVA relies on the issuance of commercial paper as
a major funding source. During 1994, FINOVA Capital issued $9.5 billion of
commercial paper (with an average of $1.0 billion outstanding during the year)
and raised $827.6 million, as noted above, through new long-term financings of
one to seven year durations. At December 31, 1994 and 1993, commercial paper
and short-term bank borrowings totaling $2.0 billion and $516 million,
respectively, were supported by available unused revolving credit lines which
if not renewed are convertible to long-term debt at FINOVA's option. In 1994,
FINOVA Capital filed a shelf-registration statement with the Securities and
Exchange Commission that would allow for the issuance of up to $1.0 billion of
senior debt securities, $822 million of which remained available as of December
31, 1994.
FINOVA Capital currently maintains a three-year revolving credit
facility with numerous lenders, in the aggregate principal amount of $1.0
billion. Under the terms of this agreement, the Company has the option to
periodically select either domestic dollars or Eurodollars as the basis of
borrowings. Interest is based on the lenders' Prime rate for domestic dollar
advances or London interbank offered rates ("LIBOR") for Eurodollar advances.
The agreements also provide for a commitment fee on the unused credit.
Separately, FINOVA Capital also has a 364 day revolving credit facility with
the same lenders in the aggregate principal amount of $1.0 billion. In
addition, FINOVA Capital has another 364 day facility with the administrative
agent for $100 million. All of these facilities support FINOVA's outstanding
commercial paper and short-term borrowings. The Company intends to borrow
under the domestic revolving credit agreements to refinance commercial paper
and short-term bank loans to the extent that it experiences significant
difficulties in rolling over its outstanding commercial paper and short-term
bank loans. The Company has never borrowed under these facilities. The 364
day $1.1 billion revolving credit agreements will be subject to renewal in 1995
while the three year $1 billion credit facility is subject to renewal in 1997.
The agreements pertaining to long-term debt of FINOVA Capital include
various restrictive covenants and require the maintenance of certain defined
financial ratios with which FINOVA Capital has complied. Under one such
covenant, dividend payments are limited to 50 percent of accumulated earnings
after December 31, 1991.
6
44
THE FINOVA GROUP INC.
FINOVA Capital's aggregate cost of funds remained constant at 6.3% for
1994 and 1993, notwithstanding rising interest rates generally in 1994. The
Company's cost of and access to capital is dependent, in a large part, on its
credit ratings. FINOVA Capital has maintained investment grade ratings since
1976, and recently received an upgrade in those ratings from Standard & Poor's
Ratings Group. Neither The FINOVA Group Inc. nor any of FINOVA Capital's
subsidiaries have applied for credit ratings. FINOVA Capital currently has
investment-grade ratings from the following agencies:
Commercial Senior
Paper Debt
---------- ------
Duff & Phelps D1- A-
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa2
Standard & Poor's Ratings Group A2 BBB+
At December 31, 1994, FINOVA Capital had outstanding 57 interest rate
conversion agreements with notional principal amounts totaling $2.5 billion.
Twenty-six agreements with notional principal amounts of $1.0 billion were
arranged to effectively convert certain floating interest rate obligations into
fixed interest rate obligations and require interest payments on the stated
principal amount at rates ranging from 4.1% to 9.3% (remaining terms of one to
six years) in return for receipts calculated on the same notional amounts at
floating interest rates. In addition, 26 agreements with notional principal
amounts of $1.19 billion were arranged to effectively convert certain fixed
interest rate obligations into floating interest rate obligations and require
interest payments on the stated principal amount at the three month or six
month LIBOR (remaining terms of one to eight years) in return for receipts
calculated on the same notional amounts at fixed interest rates of 4.9% to
7.6%. FINOVA Capital has also entered into five basis swaps with notional
principal amounts of $254 million and remaining terms of one month to three
years.
In 1993, FINOVA Capital entered into four three-year interest rate
hedge agreements on $750 million of floating-rate borrowings. In early 1995,
FINOVA Capital hedged an additional $750 million of floating-rate debt to lock
in a spread between its lending and borrowing rates. FINOVA's assets are
primarily Prime based while a significant portion of its liabilities are either
LIBOR based or tied to the 30-day commercial paper composite rate. The
agreements enable FINOVA to hedge against a narrowing of the spread between the
Prime rate (lending rate) and its borrowing rates (LIBOR and commercial paper).
With this additional hedge, the Company helped to protect its margins on $1.5
billion of floating-rate transactions (or approximately 50% of its
floating-rate liabilities). For more information on derivative financial
instruments, see Note F of Notes to Consolidated Financial Statements.
The FINOVA Group Inc. announced in 1992 that it intended to repurchase
its securities on the open market, from time to time, to fund its obligations
pursuant to employee stock options, benefit plans and similar obligations. The
repurchase program commenced in the fourth quarter of 1992, with 602,800,
349,909 and 137,500 shares being acquired during the years ending December 31,
1994, 1993 and 1992, respectively. The program may be discontinued at any
time.
7
45
THE FINOVA GROUP INC.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
Following the Spin-Off in 1992, the Company decided to focused its
resources and capital on its domestic commercial finance activities. The
Company embarked on a program of selling or winding down those businesses
included in the Spin-Off that were not associated with the Company's charter
domestic commercial finance activities. The Company concentrated on
redeploying the capital previously invested in such businesses and raised
additional capital to support internal portfolio growth and to make selected
acquisitions to complement the Company's charter operations. This strategy has
resulted in (i) the managed liquidation and sale of the GEFG and Latin American
loan portfolios, (ii) an increase (excluding acquisitions) in FINOVA's domestic
loan portfolio each year, (iii) the acquisition of the asset based lending
activity of U.S. Bancorp, (iv) the sale of the discontinued mortgage insurance
subsidiary, (v) the acquisition of Ambassador and (vi) the acquisition of
TriCon. More recently, on February 27, 1995, FINOVA Capital acquired
substantially all of the rediscount portfolio of the Lender Finance Division of
Transamerica Business Credit Corporation, a wholly owned subsidiary of
Transamerica Corporation. The rediscount portfolio is comprised of secured
revolving credit facilities to independent consumer finance companies. The
principal amount of the loans purchased amounted to approximately $118 million.
In 1994, the Company raised an additional $226 million of equity
through the sale of 8,050,000 shares in a secondary offering, expanded its debt
sources through a $1 billion shelf registration with the Securities and
Exchange Commission ("SEC") and increased its revolving credit lines to $2.1
billion. As a result of the execution of its business strategy, management
believes that the Company now ranks among the largest independent commercial
finance companies, based on assets, in the United States, and can direct its
energies primarily to its principal business operations, including those
businesses acquired since 1993.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued two
accounting standards which the Company will adopt effective January 1, 1995:
Statements of Financial Accounting Standards ("SFAS") Nos. 114 and 118,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures"
("SFAS 118"). These standards require that impaired loans which are within the
scope of these statements generally be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate or the
fair value of the collateral, if the loan is collateral dependent. Under SFAS
114, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due. Presently, the reserve for possible credit losses represents management's
estimate of the amount necessary to cover potential losses in the portfolio
considering delinquencies, loss experience and collateral. The impact of these
new standards, effective for fiscal years beginning after December 15, 1994,
which for the Company would be 1995, is not expected to have a material impact
on the Company's financial position or results of operations.
During 1994, FINOVA adopted SFAS No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial Instruments." The
disclosures required by SFAS No. 119 are included in Notes F and M of Notes to
Consolidated Financial Statements.
New accounting standards adopted by FINOVA in 1993 included SFAS No.
112, "Employers' Accounting for Postemployment Benefits," which did not have
a material impact on the Company's financial position or results of operations.
8
46
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.
Management of the Company has established and maintains a system of
internal controls to reasonably assure the fair presentation of the financial
statements, the safeguarding of the Company'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 the Company 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.
The Company's financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte &
Touche LLP all of the Company'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 the Company's written Code of Conduct. These standards are
communicated to and acknowledged by all of the Company's employees.
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
Derek C. Bruns
Vice President - Internal Audit
9
47
THE FINOVA GROUP INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of The FINOVA Group Inc.
We have audited the accompanying consolidated balance sheet of The
FINOVA Group Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company'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, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Phoenix, Arizona
March 8, 1995
10
48
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
------------------------------------------------------------------------------------
December 31, 1994 1993
------------------------------------------------------------------------------------
Cash and cash equivalents $ 49,875 $ 929
Investment in financing transactions:
Loans and other financing contracts, less unearned
income of $249,550 and $72,747, respectively 4,034,648 2,343,755
Direct financing leases 774,834 71,812
Operating leases 412,782 147,222
Leveraged leases 287,518 283,782
Factored receivables 157,862
- -------------------------------------------------------------------------------------
5,667,644 2,846,571
Less reserve for possible credit losses (109,245) (64,280)
- -------------------------------------------------------------------------------------
Investment in financing transactions - net 5,558,399 2,782,291
Other assets and deferred charges 226,057 51,102
- -------------------------------------------------------------------------------------
$5,834,331 $2,834,322
=====================================================================================
See notes to consolidated financial statements.
11
49
THE FINOVA GROUP INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------
December 31, 1994 1993
- ----------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 173,079 $ 49,131
Due to factored clients 91,049
Interest payable 37,710 23,633
Senior debt 4,573,354 1,992,496
Subordinated debt 86,790
Deferred income taxes 188,887 178,972
- ----------------------------------------------------------------------------------------
5,064,079 2,331,022
- ----------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 28,422,000 and 20,372,000 shares issued,
respectively 284 204
Additional capital 688,042 464,487
Retained income 109,830 54,901
Cumulative translation adjustments (4,726) (7,773)
Common stock in treasury, 745,000 and 292,000 shares,
respectively (23,178) (8,519)
- ----------------------------------------------------------------------------------------
770,252 503,300
- ----------------------------------------------------------------------------------------
$ 5,834,331 $ 2,834,322
========================================================================================
See notes to consolidated financial statements.
12
50
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- ----------------------------------------------------------------------------------------
Interest and other income $ 386,566 $ 218,171 $ 210,873
Financing lease income 62,990 20,838 24,896
Operating lease income 53,795 16,207 7,568
- ----------------------------------------------------------------------------------------
Interest earned from financing transactions 503,351 255,216 243,337
Interest expense 222,200 123,853 136,107
Depreciation 36,737 6,516 2,531
- ----------------------------------------------------------------------------------------
Interest margins earned 244,414 124,847 104,699
Provision for possible credit losses 16,670 5,706 6,740
- ----------------------------------------------------------------------------------------
Net interest margins earned 227,744 119,141 97,959
Gains on securitizations and sale of assets 9,045 5,439 3,362
- ----------------------------------------------------------------------------------------
236,789 124,580 101,321
- ----------------------------------------------------------------------------------------
Selling, administrative and other operating
expenses 113,018 58,158 50,728
- ----------------------------------------------------------------------------------------
Income before income taxes 123,771 66,422 50,593
Income taxes 49,458 28,576 13,843
- ----------------------------------------------------------------------------------------
Income from continuing operations 74,313 37,846 36,750
(Loss) income from discontinued operations (499) 12,207
- ----------------------------------------------------------------------------------------
NET INCOME $ 74,313 $ 37,347 $ 48,957
========================================================================================
Earnings per common and equivalent share:
Income from continuing operations $ 2.94 $ 1.86 $ 1.80
Preferred dividends 0.06 0.09
- ----------------------------------------------------------------------------------------
Income from continuing operations after
preferred dividends 2.94 1.80 1.71
(Loss) income from discontinued operations (0.03) 0.60
- ----------------------------------------------------------------------------------------
EARNINGS PER COMMON AND EQUIVALENT SHARE $ 2.94 $ 1.77 $ 2.31
========================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.74 $ 0.68 $ 0.42
========================================================================================
Average outstanding common and equivalent
shares 25,307,000 20,332,000 20,464,000
========================================================================================
See notes to consolidated financial statements.
13
51
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------------------------
COMMON STOCK:
Balance, beginning of year $ 204 $ 204 $ 203
Issuance of common stock 80 1
- --------------------------------------------------------------------------------------------
Balance, end of year 284 204 204
- --------------------------------------------------------------------------------------------
ADDITIONAL CAPITAL:
Balance, beginning of year 464,487 465,955 376,136
Issuance of common stock 225,911 2,148
Net change in unamortized amount of restricted
stock (2,113) (223) (1,506)
Common stock in treasury issued in connection
with employee benefit plans (243) (1,245) (18)
Contributions from The Dial Corp 89,195
- --------------------------------------------------------------------------------------------
Balance, end of year 688,042 464,487 465,955
- --------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT LOSSES:
Balance, beginning of year (387) ---
Change in net unrealized investment losses 387 (387)
- --------------------------------------------------------------------------------------------
Balance, end of year --- (387)
- --------------------------------------------------------------------------------------------
RETAINED INCOME:
Balance, beginning of year 54,901 32,524 (3,124)
Net income 74,313 37,347 48,957
Dividends (19,384) (14,970) (13,309)
- --------------------------------------------------------------------------------------------
Balance, end of year 109,830 54,901 32,524
- --------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of year (7,773) (6,685) (1,639)
Unrealized translation gain (loss) 3,047 (1,088) (5,046)
- --------------------------------------------------------------------------------------------
Balance, end of year (4,726) (7,773) (6,685)
- --------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY:
Balance, beginning of year (8,519) (3,215) ---
Purchase of shares (18,954) (10,162) (3,249)
Shares used in connection with employee
benefit plans 4,295 4,858 34
- --------------------------------------------------------------------------------------------
Balance, end of year (23,178) (8,519) (3,215)
- --------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY $770,252 $503,300 $488,396
============================================================================================
See notes to consolidated financial statements.
14
52
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 74,313 $ 37,347 $ 48,957
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses 16,670 5,706 6,740
Depreciation and amortization 46,470 9,318 4,501
Gains on securitizations and sale of assets (9,045) (5,439) (3,362)
Loss (income) from discontinued operations 499 (12,207)
Deferred income taxes 9,915 17,947 (4,837)
Change in assets and liabilities, net of effects from
subsidiaries purchased:
Increase in other assets (20,087) (6,290) (7,682)
(Decrease) increase in accounts payable (82,694) (14,246) 3,938
Increase (decrease) in interest payable 14,077 (5,429) 3,576
Other (4,548) (1,311) (3,841)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 45,071 38,102 35,783
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of assets 35,106 5,681 22,657
Proceeds from sale of securitized assets 115,507
Principal collections on financing transactions 908,862 638,423 454,390
Expenditures for financing transactions (1,505,208) (1,007,794) (684,900)
Net change in short-term financing transactions (294,123)
Purchase of Asset Based Lending (69,808)
Purchase of Ambassador (246,285)
Purchase of TriCon (344,212)
Sale of Verex 171,500
Net advances to discontinued insurance subsidiary 57,321 (57,321)
Other 1,898 221 392
- -------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,328,455) (204,456) (264,782)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term borrowings 827,550 200,000 644,091
Net borrowings under commercial paper 1,508,564 185,735 330,141
Repayment of long-term borrowings (1,186,191) (190,136) (829,212)
Issuance of common stock 225,991
(Redemption) issuance of preferred stock (25,000) 25,000
Proceeds from exercise of stock options 4,052 3,613 562
Common stock purchased for treasury (18,954) (10,162) (3,249)
Advances and contributions from The Dial Corp 55,275
Dividends (19,384) (14,970) (13,309)
Net change in due to factored clients (9,298)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,332,330 149,080 209,299
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 48,946 (17,274) (19,700)
Cash and cash equivalents, beginning of year 929 18,203 37,903
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 49,875 $ 929 $ 18,203
=============================================================================================================
See notes to consolidated financial statements.
15
53
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS IN TABLES)
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. (formerly known as GFC
Financial Corporation) and its subsidiaries (collectively, "FINOVA" or the
"Company"), including FINOVA Capital Corporation, (formerly known as Greyhound
Financial Corporation), and its subsidiaries (collectively, "FINOVA Capital"),
including Ambassador Factors ("Ambassador") acquired on February 14, 1994 and
TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador and
TriCon were merged into FINOVA Capital in 1994. Recognizing the substantial
increase in the Company's size and scope of operations and its use of several
names in its operations, GFC Financial Corporation changed its name to The
FINOVA Group Inc., and changed its principal operating subsidiary's name from
Greyhound Financial Corporation to FINOVA Capital Corporation, both effective
February 1, 1995.
The Company is the successor to the former financial services
businesses of The Dial Corp ("Dial"). On March 18, 1992, Dial consummated the
spin-off (the "Spin-Off") of the Company by distributing one share of the
Company's common stock (the "shares") for every two shares of Dial common stock
held by each stockholder. Prior to the Spin-Off, Dial contributed to the
Company (i) all of the common stock of FINOVA Capital representing the
Company's core operations, (ii) Greyhound European Financial Group ("GEFG"),
Dial's European commercial and consumer finance businesses not previously
managed by the Company, (iii) Greyhound BID Holding Corp. ("Greyhound BID")
and (iv) Verex Corporation and subsidiaries ("Verex"), Dial's discontinued
mortgage insurance operations, which had been operated in a run-off mode by
Dial since 1988. The Company sold Verex in July 1993.
The historical consolidated financial statements of FINOVA have been
retroactively restated to include the accounts and results of operations of
FINOVA Capital, GEFG and Greyhound BID and the investment in Verex for all
periods presented as if a pooling of interests of companies under common
control occurred. All intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
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.
FINANCING TRANSACTIONS -- For loans and other financing contracts
earned income is recognized over the life of the contract, using the interest
method.
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.
16
54
THE FINOVA GROUP INC.
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 life.
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.
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 (other than consumer finance accounts of GEFG, which are considered
nonaccruing when 180 days past due and the accounts of Manufacturer and Dealer
Services, which are considered nonaccruing when 120 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.
The reserve for possible credit losses is available to absorb credit
losses. The provision for possible credit losses is the charge to income to
increase the reserve for possible credit losses to the level that management
estimates to be adequate considering delinquencies, loss experience and
collateral. Other factors 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 probability of loss
has been established in amounts determined to cover such losses 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 ultimate sales price of repossessed
collateral is charged to the reserve for possible credit losses. Recoveries of
amounts previously written-off as uncollectible are credited to the reserve for
possible credit losses.
Under certain limited recourse provisions of receivable transfer
agreements (securitizations), the Company repurchases defaulted leases and
subsequently classifies these leases as nonaccruing. At the time the defaulted
leases are repurchased, the Company transfers from accrued liabilities for
securitized assets to the reserve for possible credit losses, the amount of the
estimated loss relating to the repurchased assets. If the accounts have to be
written-down, they are charged to the reserve for possible credit losses.
Repossessed assets are carried at the lower of cost or fair value.
Loans classified as in-substance foreclosures are included in repossessed
assets. Loans are classified as in-substance foreclosed assets, even though
legal foreclosure has not occurred, when (i) the borrower has little or no
equity in the collateral at its current fair value, (ii) proceeds for repayment
are expected to come only from the operation or sale of the collateral and
(iii) it is doubtful that the borrower will
17
55
THE FINOVA GROUP INC.
rebuild equity in the collateral or otherwise repay the loan in the foreseeable
future.
The Financial Accounting Standards Board ("FASB") has issued two new
accounting standards: Statements of Financial Accounting Standards ("SFAS")
Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan" ("SFAS
114") and "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" ("SFAS 118"). These standards require that
impaired loans that are within the scope of these statements generally be
measured based on the present value of expected cash flows discounted at the
loan's effective interest rate or the fair value of the collateral, if the loan
is collateral dependent. Under SFAS 114, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due. Presently, the reserve for possible credit
losses represents management's estimate of the amount necessary to cover
potential losses in the portfolio considering delinquencies, loss experience
and collateral. These new standards, effective for fiscal years beginning
after December 15, 1994, are not expected to have a material impact on the
Company's financial position or results of operations. Adoption of SFAS 114
and 118 will be applied by the Company, effective January 1, 1995. Under SFAS
114, assets classified as in-substance foreclosures will generally be
reclassified as impaired loans.
PENSION AND OTHER BENEFITS -- Trusteed, noncontributory pension plans
cover substantially all employees. Benefits are based primarily on final
average salary and years of service. Net periodic pension cost for FINOVA is
based on the provisions of SFAS No. 87, "Employers' Accounting for Pensions."
Funding policies provide that payments to pension trusts shall be at least
equal to the minimum funding required by applicable regulations.
Effective January 1, 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual of such benefits during the years the employees provide
services. Prior to 1993, the costs of such benefits were expensed as incurred.
The adoption of SFAS No. 106 had no material effect on the Company's financial
condition or results of operations.
Effective January 1, 1994, the Company adopted SFAS Statement No. 112,
"Employers' Accounting for Postemployment Benefits." Analogous to SFAS No. 106
for postretirement benefits, this standard requires companies to accrue for
estimated future postemployment benefits during the periods when employees are
working. Postemployment benefits are any benefits other than retirement
benefits that are provided after employment ceases. Prior to 1994, the costs
of such benefits were expensed as incurred. The adoption of SFAS No. 112 had
no material effect on the Company's financial condition or results of
operations.
SAVINGS PLAN -- The Company 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 1% to 22% of taxable compensation. The
Company matching contributions are based on employee pre-tax salary reductions,
up to a maximum of 100% of the first 3% of salary reductions (increased to 6%
effective January 1, 1995).
EMPLOYEE STOCK OWNERSHIP PLAN -- Employees of the Company are eligible
to participate in the Employee Stock Ownership Plan in the month following the
last twelve consecutive month
18
56
THE FINOVA GROUP INC.
period during which they have at least 1,000 hours of service with the Company.
Company contributions are made in the form of matching stock contributions of
100% of the first 3% of salary reduction contributions made by participants of
the Savings Plan.
Expenses under the Savings Plan and Employee Stock Ownership Plan were
$900,000 in 1994, $400,000 in 1993 and $300,000 in 1992.
INCOME TAXES -- Income taxes are provided based upon the provisions of
SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
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.
CASH EQUIVALENTS -- The Company classifies highly liquid investments
with original maturities of three months or less from date of purchase as cash
equivalents.
EARNINGS PER COMMON AND EQUIVALENT SHARE -- Earnings per common and
equivalent share is based on net income after preferred stock dividend
requirements and the weighted average number of common shares outstanding
during the year giving effect to stock options considered to be dilutive common
stock equivalents. Fully diluted earnings per share is not materially
different from primary earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into derivative
financial instruments as part of its interest rate risk management. The
Company uses interest rate swaps and interest rate hedge agreements. These
interest rate derivatives are accounted for using settlement or matched swap
accounting. Periodic net cash settlements are recognized when they occur.
ACQUISITIONS -- During 1994, FINOVA Capital, in transactions accounted
for as purchases, acquired Ambassador Factors (February 14, 1994) and TriCon
(April 30, 1994). The consolidated financial statements include the results of
operations of the acquired companies since the date of acquisition and reflect
final adjustments for purchase accounting. The prior years 1993 and 1992
consolidated financial statements have not been restated for acquisitions made
subsequent to such dates. The unaudited pro forma results of operations of
these acquisitions are included in Note O to Notes to Consolidated Financial
Statements. Cost in excess of net assets ("goodwill") of acquired businesses
is being amortized using the straight-line method over 20 years. The
amortization of goodwill resulting from the acquisitions is tax deductible
under Section 197 of the Internal Revenue Code.
RECLASSIFICATIONS -- Certain reclassifications have been made to the
1993 and 1992 financial statements to conform to the 1994 presentation.
NOTE B DISCONTINUED OPERATIONS
Verex, which conducted FINOVA's mortgage insurance operations, ceased
writing new business as of January 1, 1988 but continued to write renewals
and settle valid claims in accordance with insurance contracts in force.
Accordingly, Verex was treated as a discontinued operation. On July 16, 1993,
FINOVA consummated the sale of Verex. Proceeds from the sale of Verex were
approximately $215,000,000. The sale price was generally determined by the
book value of Verex's assets plus a premium of $6,000,000 and an adjustment for
the difference between the market value and book value of Verex's investment
portfolio. The loss from discontinued operations for the year ended December
31, 1993 included all transaction costs and anticipated costs to complete
disposition of the remaining assets and liabilities of Verex retained by FINOVA.
19
57
THE FINOVA GROUP INC.
NOTE C INVESTMENT IN FINANCING TRANSACTIONS
The Company 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, 1994 and 1993, the carrying
amount of the investment in financing transactions, including the estimated
residual value of leased assets upon lease termination, was $5,667,644,000 and
$2,846,571,000 (before reserve for possible credit losses), respectively, and
consisted of the following percentage of carrying amount by line of business:
- -------------------------------------------------------------
Percent of Total
Carrying Amount
- -------------------------------------------------------------
1994 1993
- -------------------------------------------------------------
Corporate Finance 13.8% 15.3%
Commercial Real Estate Finance 13.2% 19.6%
Transportation Finance 12.7% 21.2%
Resort Finance 12.0% 19.9%
Communications Finance 10.4% 18.9%
Medical Finance 8.3%
Manufacturer and Dealer Services (1) 5.7%
Commercial Equipment Finance (1) 5.3%
Franchise Finance (1) 5.3%
Commercial Finance 3.4%
Factoring Services 2.8%
Rediscount Finance 1.8% 0.7%
European Financial Services 1.8% 4.4%
Government Finance 1.7%
Inventory Finance 1.0%
Other 0.8%
- -------------------------------------------------------------
100.0% 100.0%
=============================================================
(1) Excludes assets sold under securitization agreements that are managed
by the Company.
20
58
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, 1994 (excluding repossessed assets of $85,758,000 and estimated
residual values) are due during each of the years ending December 31, 1995 to
1999 and thereafter as follows:
- -------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 Thereafter
- -------------------------------------------------------------------------------------------------------------
Loans and other financing
contracts:
Commercial:
Fixed interest rate $ 209,944 $ 197,825 $ 173,295 $141,158 $129,900 $272,710
Floating interest rate 600,935 371,039 349,562 368,201 151,183 185,457
Real Estate:
Fixed interest rate 55,397 51,055 34,890 30,746 72,306 75,394
Floating interest rate 178,483 213,536 215,154 121,738 91,267 65,127
Operating and direct
financing leases,
primarily at fixed
interest rates 329,110 282,894 219,582 151,842 104,705 161,726
Leveraged leases 4,543 6,828 14,367 10,431 5,783 164,673
- -------------------------------------------------------------------------------------------------------------
$1,378,412 $1,123,177 $1,006,850 $824,116 $555,144 $925,087
=============================================================================================================
The net investment in leveraged leases at December 31 consisted of the
following:
- ------------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------
Rentals receivable $1,268,843 $1,377,107
Less principal and interest payable on nonrecourse debt (1,062,218) (1,165,466)
- ------------------------------------------------------------------------------------------------
Net rentals receivable 206,625 211,641
Estimated residual values 306,204 306,894
Less unearned income (225,311) (234,753)
- ------------------------------------------------------------------------------------------------
Investment in leveraged leases 287,518 283,782
Less deferred taxes arising from leveraged leases (226,115) (223,006)
- ------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 61,403 $ 60,776
================================================================================================
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:
- -----------------------------------------------------------------
1994 1993 1992
- -----------------------------------------------------------------
Lease and other income $9,240 $11,376 $9,172
Income tax expense 3,143 8,363 2,757
- -----------------------------------------------------------------
21
59
THE FINOVA GROUP INC.
The investment in direct financing leases at December 31 consisted of
the following:
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
Rentals receivable $885,148 $91,153
Estimated residual values 86,191 23,121
Unearned income (196,505) (42,462)
- -------------------------------------------------------------------------------
Investment in direct financing leases $774,834 $71,812
===============================================================================
The investment in operating leases at December 31 consisted of the
following:
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
Cost of assets $526,191 $157,823
Accumulated depreciation (113,409) (10,601)
- -------------------------------------------------------------------------------
Investment in operating leases $412,782 $147,222
===============================================================================
The Company 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) at December 31 was as follows:
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
Receivables due on financing transactions $2,928,287 $1,661,602
Less unearned income (65,327) (25,928)
- -------------------------------------------------------------------------------
Investment in loans and leases $2,862,960 $1,635,674
===============================================================================
Interest earned from financing transactions with floating interest
rates was approximately $269,000,000 in 1994, $154,000,000 in 1993 and
$127,000,000 in 1992. 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. The Company's matched funded policy
is more fully described in Note F.
At December 31, 1994, the Company had a committed backlog of new
business of approximately $764,000,000 compared to $420,000,000 at December 31,
1993. The committed backlog includes lines of credit totaling $540,000,000 and
$272,000,000 for December 31, 1994 and 1993, respectively. Historically, the
Company has booked a substantial portion of its backlog, although there can be
no assurance that such trend will continue. Loan commitments and lines of
credit have generally the same credit risk in extending loans to borrowers.
These commitments are subject to the same credit quality and collateral
requirements involved in normal lending transactions. Commitments generally
have a fixed expiration and usually require payment of a fee.
RECEIVABLE TRANSFER AGREEMENTS (SECURITIZATIONS) -- During 1994, the
Company transferred its interest in approximately $125,400,000 of its direct
finance lease portfolio for $135,000,000. These transfers provide limited
recourse for credit losses to the Company
22
60
THE FINOVA GROUP INC.
and certain of its assets. As of December 31, 1994, $58,540,000 of finance
lease receivables were the sole collateral for certain limited recourse
provisions. In addition to such finance lease receivables, the Company has
recourse exposure at December 31, 1994 limited to $78,846,000. At December 31,
1994, an outstanding allowance for estimated losses under these recourse
provisions of $12,988,000 is included in accounts payable and accrued expenses.
The outstanding gross receivable balance of transferred receivables completed
and assumed in the acquisitions in 1994 was $253,386,000 at December 31, 1994.
The Company services these lease 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.
NOTE D RESERVE FOR POSSIBLE CREDIT LOSSES
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
- ------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------
Balance, beginning of year $ 64,280 $69,291 $87,600
Provision for possible credit losses 16,670 5,706 6,740
Write-offs (35,127) (12,575) (23,661)
Recoveries 1,898 717 749
Other (including addition of TriCon and Ambassador
reserves in 1994) 61,524 1,141 (2,137)
- ------------------------------------------------------------------------------------------------
Balance, end of year $109,245 $64,280 $69,291
================================================================================================
Additionally, the Company has recorded accrued liabilities of
$12,988,000 that represent an allowance for estimated losses under certain
recourse provisions on $253,386,000 of assets securitized.
23
61
THE FINOVA GROUP INC.
Write-offs by lines of business experienced by the Company during the
years ended December 31 are as follows:
- ------------------------------------------------------------------------------------
1994 1993 (1) 1992 (1)
- ------------------------------------------------------------------------------------
Communications Finance $ 8,300 $ 1,488 $ 1,500
Manufacturer and Dealer Services 7,018
European Financial Services 5,140 5,026 15,838
Corporate Finance 4,233 3,741 1,000
Resort Finance 2,730
Franchise Finance 2,247
Commercial Real Estate Finance 1,461 2,320 4,417
Commercial Equipment Finance 1,257
Factoring Services 1,148
Commercial Finance 774
Inventory Finance 442
Medical Finance 377
Other 906
- ------------------------------------------------------------------------------------
$35,127 $12,575 $23,661
====================================================================================
Write-offs as a percentage of investment in
financing transactions and securitizations 0.59% 0.44% 0.97%
====================================================================================
(1) The 1993 and 1992 periods exclude line of business write-offs for
acquisitions made subsequent to such dates.
An analysis of nonaccruing contracts and repossessed assets at
December 31 is as follows:
- -----------------------------------------------------------------------------------------------
1994 1993 (1)
- -----------------------------------------------------------------------------------------------
Nonaccruing contracts:
Domestic $ 73,938 $ 13,263
Foreign 9,065 12,320
- -----------------------------------------------------------------------------------------------
Total nonaccruing contracts 83,003 25,583
Repossessed assets 85,758 77,024
- -----------------------------------------------------------------------------------------------
Total nonaccruing contracts and repossessed assets $168,761 $102,607
===============================================================================================
Nonaccruing contracts and repossessed assets as a percentage of
investment in financing transactions and securitizations 2.9% 3.6%
===============================================================================================
(1) The 1993 period excludes nonaccruing and repossessed assets for
acquisitions made subsequent to such dates.
In addition to the repossessed assets included in the above table, the
Company had repossessed assets, with a total carrying amount of $55,106,000 and
$48,956,000 at December 31,
24
62
THE FINOVA GROUP INC.
1994 and 1993 which earned income of $3,316,000 and $2,700,000 during 1994 and
1993, respectively.
In the normal course of business, the Company has renegotiated and
modified certain contracts with respect to rates and other terms. The Company
had approximately $64,000,000, or 1.1% of ending funds employed and
securitizations in 1994, and $47,000,000, or 1.6% of ending funds employed in
1993, of these rewritten contracts requiring disclosure under the provisions of
SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". These contracts are yielding, on a weighted average basis, a
return of approximately 10.2%.
Had all contracts placed in a nonaccrual status outstanding at
December 31, 1994, 1993 and 1992, remained accruing, interest earned would have
been increased by approximately $14,000,000, $11,000,000 and $12,600,000,
respectively. Income recognized on these accounts was approximately $1,742,000,
$1,732,000 and $589,000 in 1994, 1993 and 1992, respectively.
Included in repossessed assets are in-substance foreclosures of
$35,400,000 and $31,700,000 at December 31, 1994 and 1993, respectively, which
were accounted for in the same manner as collateral that had been formally
repossessed, even though the Company did not hold legal title.
NOTE E DEBT
The Company satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank
loans and public notes. The Company's commercial paper borrowings are
supported by unused long-term revolving bank credit agreements totaling
$2,100,000,000. FINOVA Capital currently maintains a three-year revolving
credit facility with numerous lenders, in the aggregate principal amount of
$1,000,000,000. Under the terms of these agreements, the Company has the
option to periodically select either domestic dollars or Eurodollars as the
basis of borrowings. Interest is based on the lenders' Prime rate for domestic
dollar advances or London interbank offered rates ("LIBOR") for Eurodollar
advances. The agreements also provide for a commitment fee on the unused
credit. Separately, FINOVA Capital also has a 364 day revolving credit
facility with the same lenders in the aggregate principal amount of
$1,000,000,000. In addition, FINOVA Capital has another 364 day facility with
the administrative agent for $100,000,000. The 364 day $1,100,000,000
revolving credit agreements will be subject to renewal in 1995 while the three
year $1,000,000,000 credit facility is subject to renewal in 1997.
25
63
THE FINOVA GROUP INC.
The following information pertains to all short-term financing,
including bank loans and commercial paper issued by FINOVA Capital for the
years ended December 31:
- ------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------
Maximum amount of short-term debt outstanding
during year $2,024,441 $516,386 $504,829
Average short-term debt outstanding during year 1,050,358 336,672 322,176
Weighted average short-term interest rates
at end of year:
Short-term borrowings 6.2% 3.5% 4.1%
Commercial paper* 6.0% 3.6% 4.2%
Weighted average interest rate on short-term debt
outstanding during year* 4.8% 3.5% 4.3%
- ------------------------------------------------------------------------------------------------
* 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:
- -----------------------------------------------------------------------------------------------
1994 1993
- -----------------------------------------------------------------------------------------------
Commercial paper and short-term bank loans supported
by unused long-term bank revolving credit agreements,
less unamortized discount $2,024,441 $ 516,386
Medium-term notes due to 2003, 4.5% to 10.2% 1,167,811 751,500
Term loans payable to banks due to 1996, 6.0% to 6.9% 130,000 150,000
Senior notes due to 2002, 6.75% to 16.0%, less
unamortized discount 1,233,013 555,666
Nonrecourse installment notes due to 2002, 10.6% (assets of
$25,648 and $25,613, respectively, pledged as collateral) 18,089 18,944
- -----------------------------------------------------------------------------------------------
Total senior debt $4,573,354 $1,992,496
===============================================================================================
Subordinated debt outstanding at December 31, 1993, in the amount of
$86,790,000 (14.1%), was repaid in 1994.
Annual maturities of senior debt outstanding at December 31, 1994 due
through June 2003 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $568,767,000 (1995),
$399,116,000 (1996), $358,137,000 (1997), $347,960,000 (1998), $334,324,000
(1999) and $540,609,000 (thereafter).
The agreements pertaining to senior debt and revolving credit
agreements of FINOVA Capital include various restrictive covenants and require
the maintenance of certain defined financial ratios with which FINOVA Capital
has complied. Under one such covenant, dividend payments are limited to 50
percent of accumulated earnings after December 31, 1991. As of December 31,
1994, FINOVA Capital had $24,383,000 of excess accumulated earnings available
for distribution.
Total interest paid is not significantly different from interest
expense.
26
64
THE FINOVA GROUP INC.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into interest rate swaps and interest rate hedge
agreements as part of its interest rate risk management policy of match funding
its assets and liabilities. The derivative instruments utilized are
straightforward and involve little complexity. The Company continually
monitors its position relative to derivatives and utilizes derivative
instruments for non- trading purposes only.
The Company utilizes derivative instruments to minimize its exposure
to fluctuations in interest rates. The Company 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, the Company
diversifies its borrowing sources (short- and long-term debt with a fixed or a
variable rate) and maintains a portfolio that is matched funded. The Company'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. The Company's matched funding policy requires that the
difference between floating-rate liabilities and floating-rate assets, as
measured as a percent of investment in financing transactions ("funds
employed"), 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, the Company agrees to exchange with the
counterparty, 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. Amortizing swap notional amounts amortize over the life of the
transaction. Basis swaps involve the exchange of floating-rate indices, such
as the Prime rate, the Commercial Paper Composite rate and LIBOR.
The Company purchased interest rate hedge agreements to reduce the
impact of increases in interest rates on its floating- rate debt. These
agreements effectively lock in a spread of approximately 2.3% between the
Company's borrowing rate, LIBOR, and its lending rate (Prime based). In early
1995, the Company further protected its margins on floating-rate transactions
by entering into basis swaps with a notional amount of $750,000,000 to lock in
the spread between the Company's lending and borrowing rates. With these
agreements, the Company protected its margins on $1,500,000,000 of
floating-rate transactions (or approximately 50% of its floating-rate
liabilities).
The Company's off-balance sheet derivative instruments involve credit
and interest rate risks. The credit risk would be the nonperformance by the
counterparties 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. The Company's derivative policy
stipulates that the maximum exposure to any one
27
65
THE FINOVA GROUP INC.
counterparty, relative to the derivative products, is limited on a net basis,
to 10% of the Company's outstanding debt at the time of that transaction.
Interest rate risks relate to changes in interest rates and the impact on
earnings. The Company mitigates interest rate risks through its matched
funding policy.
The use of derivatives decreased interest expense by $13,655,000, a
decrease in the aggregate cost of funds of 0.4% in 1994, $25,875,000, a
decrease in the aggregate cost of funds of 1.3% in 1993 and $8,155,000, a
decrease in the aggregate cost of funds of 0.4% in 1992. These reductions in
interest expense from off-balance sheet derivatives effectively alters
on-balance sheet costs and must be viewed as total interest rate management.
At December 31, 1994 and 1993, unamortized premiums amounted to $1,875,000 and
$3,138,000, respectively. There were no deferred gains or losses associated
with derivatives.
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type. The rates
presented are as of December 31, 1994. To the extent that rates change,
variable interest information will change.
28
66
THE FINOVA GROUP INC.
DERIVATIVE MATURITIES AND WEIGHTED-AVERAGE INTEREST RATES
(Dollars in Millions)
- ---------------------------------------------------------------------------------------------------------------------------
December Maturities of Derivative Products
31, ----------------------------------------------------------------
1994 1995 1996 1997 1998 1999 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------
RECEIVED FIXED-RATE SWAPS:
Notional value $1,190 $ 40 $ 100 $ 275 $ 325 $ 250 $ 200
Weighted average received rate 6.66% 5.52% 5.34% 6.70% 6.83% 6.82% 7.00%
Weighted average pay rate 6.56% 7.00% 6.50% 6.50% 6.50% 6.50% 6.74%
PAY FIXED-RATE GENERIC SWAPS:
Notional value $ 780 $ 30 $ 325 $ 225 $ 100 $ 50 $ 50
Weighted average receive rate 6.58% 7.00% 6.56% 6.50% 6.75% 6.50% 6.50%
Weighted average pay rate 7.43% 9.05% 6.89% 7.32% 8.37% 7.98% 8.09%
PAY FIXED-RATE AMORTIZING SWAPS:
Notional value $ 242 $ 154 $ 70 $ 18
Weighted average receive rate 6.03% 6.03% 6.03% 6.03%
Weighted average pay rate 5.04% 4.83% 5.20% 6.18%
INTEREST RATE HEDGE AGREEMENTS:
Notional value $ 750 $ 750
Weighted average receive rate 2.50% 2.50%
Weighted average pay rate 2.50% 2.50%
BASIS SWAPS:
Notional value $ 254 $ 126 $ 128
Weighted average receive rate 5.91% 5.74% 6.08%
Weighted average pay rate 6.73% 6.52% 6.93%
TOTAL NOTIONAL VALUE $3,216 $ 350 $ 1,245 $ 518 $ 553 $ 300 $ 250
=================================================================================================================
Total weighted average rates on swaps
Receive rate 5.56% 5.95% 3.99% 6.59% 6.64% 6.77% 6.90%
=================================================================================================================
Pay rate 5.72% 6.05% 4.12% 6.85% 6.94% 6.75% 7.01%
=================================================================================================================
29
67
THE FINOVA GROUP INC.
ACTIVITY IN DERIVATIVE PRODUCTS
(Dollars in Millions)
- -----------------------------------------------------------------------------------------------------
Pay Fixed- Pay Fixed-
Received Rate Rate Interest
Fixed-Rate Generic Amortizing Rate Hedge Basis
Swaps Swaps Swaps Agreements Swaps TOTAL
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1991 $ 50 $ 205 $ $ $ $ 255
Expired (50) (50)
Additions 890 890
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1992 890 205 1,095
Expired (50) (25) (75)
Additions 300 750 1,050
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,140 180 750 2,070
Expired (50) (50) (148) (248)
Additions 100 650 390 254 1,394
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $1,190 $ 780 $ 242 $ 750 $ 254 $3,216
=====================================================================================================
NOTE G STOCKHOLDERS' EQUITY
At December 31, 1994 and 1993, The FINOVA Group Inc. had 28,421,703
and 20,371,703 shares of common stock issued, respectively, with 27,676,526 and
20,079,486 shares of common stock outstanding, respectively. Approximately
5,011,000 common shares were reserved for issuance under the 1992 Stock
Incentive Plan at December 31, 1994.
FINOVA has 5,000,000 shares of preferred stock authorized, none of
which was issued at December 31, 1994. 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 the Company's stock incentive plan, 250,000 shares of preferred stock are
reserved for issuance of stock options.
NOTE H STOCK OPTIONS
During 1992, the Board of Directors of the Company adopted The FINOVA
Group Inc. 1992 Stock Incentive Plan (the "Plan") for the grant of options,
restricted stock and stock appreciation
30
68
THE FINOVA GROUP INC.
rights to officers, directors and certain key employees. In connection with
the Spin-Off, shares of common stock were made available to provide new
options, restricted shares of common stock and stock appreciation rights to
employees of the Company or its subsidiaries in exchange for awards outstanding
under certain stock option and incentive plans of Dial. Each option was
adjusted so that the aggregate exercise price and the aggregate spread before
the Spin-Off was preserved at the time of the Spin-Off. For each share of Dial
restricted stock held by an employee, such employee received replacement shares
of FINOVA restricted stock with a market value intended to compensate for the
Spin-Off.
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 percent 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, 1994 were granted for
terms of ten years and generally become exercisable over two to three years
from the date of grant. Stock options are exercisable based on the market
value at the date of grant, unless a higher exercise price was established,
which has been the case for multi-year grants.
Information with respect to options granted and exercised from the
date of Spin-off to December 31, 1994 is as follows:
- -----------------------------------------------------------------------
Average Option
Shares Price Per Share
- -----------------------------------------------------------------------
Granted during 1992 (1) 892,908 $17.01
Exercised (41,235) 14.00
Canceled (23,590) 18.34
- -----------------------------------------------------------------------
Options outstanding at December 31, 1992 828,083 17.12
Granted 454,450 31.17
Exercised (166,839) 16.10
Canceled (103,580) 22.61
- -----------------------------------------------------------------------
Options outstanding at December 31, 1993 1,012,114 23.04
Granted 635,766 36.18
Exercised (66,418) 17.29
Canceled (119,857) 33.54
- -----------------------------------------------------------------------
Options outstanding at December 31, 1994 1,461,605 $28.12
=======================================================================
(1) Includes 526,658 shares granted in exchange for awards outstanding
under certain stock option and incentive plans of Dial at an average
exercise price of $14.35.
31
69
THE FINOVA GROUP INC.
At December 31, 1994, stock options with respect to 1,461,605 common
shares were outstanding at exercise prices ranging from $12.70 to $41.65 per
share, of which options to purchase 576,609 common shares were exercisable at
an average price of $19.24 per share.
Since the Spin-Off, the Board of Directors has granted only
performance based restricted stock, excluding the restricted stock converted
from previous Dial awards. Performance based restricted stock awards (104,820
shares in 1994, 38,629 in 1993 and 146,136 in 1992, excluding 64,586 shares
converted in the Spin-Off) vest generally over periods not exceeding 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 the Spin-Off were based on Company share
performance and may result in greater or lesser numbers of shares finally 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.
NOTE I INCOME TAXES
Prior to the Spin-Off, Dial credited or charged the Company an amount
equal to the tax reductions realized or tax payments made by Dial as a result
of including the Company's tax results and credits in Dial's consolidated
federal and other applicable income tax returns. In all other respects, the
Company's tax provisions have been computed on a separate return basis.
The consolidated provision (benefit) for income taxes consist of the
following for the years ended December 31:
- ---------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------
Current:
United States:
Federal $ 33,107 $ 9,783 $ 16,265
State 6,436 1,002 2,069
Foreign (156) 346
- ---------------------------------------------------------------------------
39,543 10,629 18,680
- ---------------------------------------------------------------------------
Deferred:
United States 10,003 17,947 (2,377)
Foreign (88) (2,460)
- ---------------------------------------------------------------------------
9,915 17,947 (4,837)
- ---------------------------------------------------------------------------
Provision for income taxes $ 49,458 $ 28,576 $ 13,843
===========================================================================
Income taxes paid in 1994, 1993 and 1992 amounted to approximately
$41,213,000, $10,511,000 and $19,096,000, respectively.
32
70
THE FINOVA GROUP INC.
The significant components of deferred tax liabilities and deferred
tax assets at December 31, 1994 and 1993 consisted of the following:
- --------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred income from leveraged leases $226,115 $223,006
Deferred income from lease financing 32,833 35,950
Other 8,353 622
- --------------------------------------------------------------------------------------
Gross deferred tax liability 267,301 259,578
- --------------------------------------------------------------------------------------
Deferred tax assets:
Reserve for possible credit losses 29,363 27,272
Investment in foreign subsidiary carrying value difference 23,193 23,193
Accrued expenses 11,400 15,121
Alternative minimum tax credit carryforward 6,183 6,291
Other 8,275 8,729
- --------------------------------------------------------------------------------------
Gross deferred tax asset 78,414 80,606
- --------------------------------------------------------------------------------------
Net deferred tax liability $188,887 $178,972
======================================================================================
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
- -------------------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 34.0%
State income taxes 5.1% 3.4% 2.7%
Foreign tax effects 1.2% (2.0%) (2.4%)
Municipal income (1.2%)
Recognition of tax benefit on refinancing charges
accrued in 1991 (6.2%)
Other (0.1%) (0.7%) (0.7%)
- -------------------------------------------------------------------------------------
Current provision for income taxes 40.0% 35.7% 27.4%
Adjustments to deferred taxes 7.3%
- -------------------------------------------------------------------------------------
Provision for income taxes 40.0% 43.0% 27.4%
=====================================================================================
33
71
THE FINOVA GROUP INC.
NOTE J PENSION AND OTHER BENEFITS
PENSION BENEFITS
Net periodic pension cost (income) for the years ended December 31,
included the following components:
United States Foreign
- --------------------------------------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Service cost benefits earned during period $1,508 $ 813 $ 738 $ 66 $ 215 $ 341
Interest cost on projected benefit obligation 1,217 1,063 878 308 293 345
Actual return on plan assets 78 (2,306) (1,781) 242 (736) (382)
Net amortization and deferral (1,538) 967 553 (544) 459 79
- --------------------------------------------------------------------------------------------------------------
Periodic pension cost 1,265 537 388 72 231 383
Curtailment loss (gain) 135 (777) 21
- --------------------------------------------------------------------------------------------------------------
Net periodic pension cost (income) $1,400 $(240) $ 388 $ 93 $ 231 $ 383
==============================================================================================================
Assumptions regarding the determination of net periodic pension cost
(income) for the years ended December 31, were:
- -------------------------------------------------------------------------------------------------------------
United States Foreign
- -------------------------------------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
Discount rate for obligation 7.75% 8.50% 9.00% 8.00% 9.00% 9.00%
Rate of increase in compensation levels 4.25% 5.50% 6.00% 6.00% 8.00% 8.00%
Long-term rate of return on assets 9.50% 9.50% 9.50% 8.00% 9.00% 9.00%
- -------------------------------------------------------------------------------------------------------------
The following table indicates the plans' funded status and amounts
recognized in the Company's consolidated balance sheet at December 31, 1994 and
1993:
- -------------------------------------------------------------------------------------------------------------
United States Foreign
- -------------------------------------------------------------------------------------------------------------
1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligations $13,200 $12,000 $3,785 $3,440
=============================================================================================================
Accumulated benefit obligations $13,800 $12,600 $3,785 $3,440
=============================================================================================================
Projected benefit obligation $14,800 $14,400 $3,785 $3,755
Market value of plan assets, primarily equity and fixed
income securities 17,134 17,606 3,785 3,781
- -------------------------------------------------------------------------------------------------------------
Plan assets over projected benefit obligation $ 2,334 $ 3,206 $ -- $ 26
Unrecognized transition asset (390) (451) (105) (109)
Unrecognized prior service cost reduction (1,088) 404 72
Unrecognized net loss 2,707 1,804 105 101
- -------------------------------------------------------------------------------------------------------------
Prepaid pension costs $ 3,563 $ 4,963 $ -- $ 90
=============================================================================================================
34
72
THE FINOVA GROUP INC.
Assumptions regarding the funded status of pension plans as of
December 31, 1994 and 1993 are:
- -------------------------------------------------------------------------------------------------------------
United States Foreign
- -------------------------------------------------------------------------------------------------------------
1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------
Discount rate for obligation 8.50% 7.75% 8.50% 8.00%
Rate of increase in compensation levels 5.00% 4.25% -- 6.00%
Long-term rate of return on assets 9.50% 9.50% -- 9.00%
- -------------------------------------------------------------------------------------------------------------
There are restrictions on the use of excess pension plan assets in the
event of a defined change in control of the Company.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted the provisions of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("OPEB"), which requires the accrual of retiree benefits during the
years the employees provide services. OPEB requires the recognition of a
transition obligation that represents the aggregate amount that would have
accrued in the years prior to adoption of OPEB had the standard been in effect
for those years. The Company elected to accrue the transition obligation over
20 years. The adoption of SFAS No. 106 has no cash impact because the plans
are not funded and the pattern of benefit payments did not change.
Net periodic postretirement benefit cost for the year ended December
31, 1994 and 1993 included the following components:
- ----------------------------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------------------------
Service cost benefits earned during period $ 159 $ 55
Interest cost on accumulated postretirement benefit obligation 244 143
Net amortization and deferral 140 85
- ----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 543 $ 283
========================================================================================
Assumptions regarding the determination of net periodic postretirement
benefit costs at December 31, 1994 and 1993 were:
- ------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------
Discount rate for obligation 7.75% 8.50%
Rate of increase in compensation levels 4.25% 5.50%
Rate of increase in health care costs (1) 12.25% 14.00%
==========================================================================================
(1) Rate of increase in health care costs was 12.25% in 1994, scaled down
to 6.25% by 2000 and thereafter.
35
73
THE FINOVA GROUP INC.
The following table indicates the amounts recognized in the Company's
consolidated balance sheet at December 31, 1994 and 1993:
- -----------------------------------------------------------------------------
1994 1993
- -----------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 1,257 $ 1,680
Actives eligible for full benefits 183 230
Other actives 2,125 370
- -----------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 3,565 2,280
Unrecognized transition obligation (1,523) (1,607)
Unrecognized prior service cost (1,547)
Unrecognized net gain (loss) 264 (437)
- -----------------------------------------------------------------------------
Accrued postretirement benefit cost $ 759 $ 236
=============================================================================
Assumptions regarding the accrued postretirement benefit cost at
December 31, 1994 and 1993 were:
- ---------------------------------------------------------------------------
1994 1993
- ---------------------------------------------------------------------------
Discount rate for obligation 8.50% 7.75%
Rate of increase in compensation levels 5.00% 4.25%
Rate of increase in health care costs (1) 12.25% 13.25%
- ---------------------------------------------------------------------------
(1) Rate of increase in health care costs was 12.25% in 1994, scaled down
to 6.25% by 2000 and thereafter.
A one percentage point increase in the assumed health care cost trend
rate for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by approximately 5% and the ongoing annual
expense by approximately 3%.
NOTE K TRANSACTIONS WITH DIAL
Pursuant to the Spin-Off, the Company and Dial entered into several
agreements, including the Distribution Agreement, Tax Sharing Agreement,
Sublease Agreement, Interim Services Agreement and Trademark Assignment and
Agreement. These agreements do not result in significant additional expenses
over comparable third party services.
The Company leases its corporate office facilities from Dial under an
agreement which expires March 31, 2001. Annual rentals under the lease are
approximately $1,616,000 to 1996 and $1,806,000 thereafter.
36
74
THE FINOVA GROUP INC.
NOTE L LITIGATION AND CLAIMS
The Company is party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation, in part, often results from the Company's attempts
to enforce its lending agreements against borrowers and other parties to such
transactions. Litigation is subject to many uncertainties and it is possible
that some of the legal actions, proceedings or claims referred to above could
be decided against the Company. Although the ultimate amount for which the
Company may be held liable is not ascertainable, the Company believes that any
resulting liability should not materially affect the Company's financial
position or results of operations.
NOTE M FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and 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 the Company 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 the Company's
financial instruments are as follows for the years ended December 31:
- ------------------------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------
Balance Sheet -
Financial Instruments:
Assets:
Loans and other financing contracts $3,810,781 $3,829,881 $2,192,192 $2,172,154
Liabilities:
Senior debt 4,573,354 4,510,043 1,992,496 2,149,387
Subordinated debt -- -- 86,790 88,390
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps -- (47,937) -- 37,202
Interest rate hedge agreements -- (4,049) -- (841)
- ------------------------------------------------------------------------------------------------------------
The carrying values of cash and cash equivalents, factored
receivables, accounts payable and accrued expenses, due to factored clients and
interest payable approximate fair values due to
37
75
THE FINOVA GROUP INC.
the short-term maturities of these instruments.
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, 1994 and 1993. 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, 1994 and 1993, the fair value of
nonaccruing contracts with a carrying amount of $83,003,000 and
$25,583,000, respectively, was not estimated because it is not
practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loans. As of December 31, 1994
and 1993, the carrying amount of loans and other financing contracts
excludes repossessed assets with a total carrying amount of
$140,864,000 and $125,980,000, respectively.
SENIOR AND SUBORDINATED DEBT:
The fair value of senior and subordinated 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 is based on quoted
market prices obtained from participating banks and dealers for
transactions of similar remaining duration.
INTEREST RATE HEDGE AGREEMENTS:
The fair values of interest rate hedge agreements is
based on quoted market prices obtained from participating banks and
dealers for transactions of similar remaining duration.
The fair value estimates presented herein were based on information
available as of December 31, 1994 and 1993. 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, 1994 and 1993; therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE N 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:
- -------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------
Salaries and employee benefits $ 63,891 $29,502 $27,247
Problem account costs 13,505 11,822 7,642
Depreciation and amortization 9,733 2,802 1,970
Professional services 7,357 2,201 2,868
Occupancy expense 6,124 4,160 4,494
Travel and entertainment 6,099 2,182 1,661
Other 6,309 5,489 4,846
- --------------------------------------------------------------------------
$113,018 $58,158 $50,728
==========================================================================
38
76
THE FINOVA GROUP INC.
NOTE O PURCHASE OF AMBASSADOR FACTORS AND TRICON CAPITAL CORPORATION.
On February 14, 1994, FINOVA Capital acquired Ambassador, which
represented Fleet Financial Group, Inc.'s ("Fleet") factoring and asset based
lending subsidiary. The cash purchase price of the acquisition was
$246,285,000, which included repayment of $170,000,000 intercompany balance due
from Ambassador to Fleet. In addition, FINOVA Capital assumed $101,471,000 due
to factored clients, $5,851,000 of accrued liabilities and $10,987,000 of
additional liabilities and transaction costs. The acquisition has been
accounted for as a purchase and created approximately $40,800,000 of goodwill,
which is being amortized on a straight line basis over 20 years. The
amortization of goodwill is tax deductible.
The acquisition was financed with proceeds received from the sale of
FINOVA's discontinued mortgage insurance subsidiary and cash generated from
operations. FINOVA, simultaneous with the acquisition, increased its
investment in FINOVA Capital by contributing $40,000,000 of intercompany loans
as additional paid in capital of FINOVA Capital.
On April 30, 1994, FINOVA Capital acquired all of the stock of TriCon
from Bell Atlantic Corporation ("Bell Atlantic"), in an all-cash transaction.
The cash purchase price of the acquisition was $344,212,000. In addition,
FINOVA Capital assumed outstanding indebtedness and liabilities of TriCon
totaling $1,500,650,000 and incurred additional liabilities and acquisition
costs of $41,301,000. The acquisition has been accounted for as a purchase and
created approximately $102,000,000 of goodwill, which is being amortized on a
straight line basis over 20 years. The amortization of goodwill is tax
deductible.
The cash purchase price was financed initially with the proceeds from
the issuance of $300,000,000 of debt and the remainder with internally
generated funds. A portion of the interim debt was replaced with the net
proceeds from a public offering completed in May 1994 of 8,050,000 shares of
the Company's common stock.
The following Pro Forma Statements of Consolidated Income (unaudited)
for the years ended December 31, 1994 and 1993 have been prepared to reflect
net income as adjusted to reflect the acquisitions of Ambassador and TriCon as
if such acquisitions had occurred on January 1, 1994 and 1993, respectively,
and give effect to the Offering as of such dates. The Pro Forma Statements of
Consolidated Income are unaudited and are not necessarily indicative of the
results that would have occurred if the acquisitions had been consummated as of
January 1, 1994 or January 1, 1993, nor are they necessarily indicative of the
results of future operations.
39
77
THE FINOVA GROUP INC.
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31, 1994
(Dollars in Thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Historical ProForma Adjustments(1)
- ---------------------------------------------------------------------------------------------------------------------------------
TriCon
Ambassador January
Company 1994 thru April Ambassador TriCon Pro
1994 Forma
- ---------------------------------------------------------------------------------------------------------------------------------
Interest earned from financing transactions $ 503,351 $ 3,072 $ 74,263 $ $(3,158) (7) $ 577,528
Interest expense and depreciation 258,937 563 37,711 271 (2) 1,538 (9) 299,020
- ---------------------------------------------------------------------------------------------------------------------------------
Interest margins earned 244,414 2,509 36,552 (271) (4,696) 278,508
Provision for possible credit losses 16,670 500 7,749 24,919
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margins earned 227,744 2,009 28,803 (271) (4,696) 253,589
Gains on securitizations and sale of assets 9,045 1,303 10,348
- ---------------------------------------------------------------------------------------------------------------------------------
236,789 2,009 30,106 (271) (4,696) 263,937
Selling, administrative and other operating 113,018 634 18,198 249 (3) 1,700 (10) 134,135
expenses 83 (4) 253 (8)
- ---------------------------------------------------------------------------------------------------------------------------------
123,771 1,375 11,908 (603) (6,649) 129,802
Income taxes 49,458 649 4,059 (241) (5) (2,660) (11) 51,166
(99) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 74,313 $ 726 $ 7,849 $ (263) $(3,989) $ 78,636
=================================================================================================================================
Earnings per common share (13) $ 2.94 $ 2.76
=================================================================================================================================
Average outstanding common and equivalent
shares (13) 25,307,000 28,461,000
=================================================================================================================================
40
78
THE FINOVA GROUP INC.
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31, 1993
(Dollars in Thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
Historical Pro Forma Adjustments
- -------------------------------------------------------------------------------------------------------------------------------
Company Ambassador TriCon Ambassador TriCon ProForma
- -------------------------------------------------------------------------------------------------------------------------------
Interest earned from financing transactions $ 255,216 $ 35,235 $ 245,300 $ $ (7,667) (7) $ 529,584
1,500 (8)
Interest expense and depreciation 130,369 5,780 121,793 4,226 (2) 4,613 (9) 266,781
- -------------------------------------------------------------------------------------------------------------------------------
Interest margins earned 124,847 29,455 123,507 (4,226) (10,780) 262,803
Provision for possible credit losses 5,706 7,177 21,634 34,517
- -------------------------------------------------------------------------------------------------------------------------------
Net interest margins earned 119,141 22,278 101,873 (4,226) (10,780) 228,286
Gains on sale of assets 5,439 5,439
- -------------------------------------------------------------------------------------------------------------------------------
124,580 22,278 101,873 (4,226) (10,780) 233,725
Selling, administrative and other operating
expenses 58,158 8,125 48,128 2,990 (3) 5,100 (10) 124,260
1,000 (4) 759 (8)
- -------------------------------------------------------------------------------------------------------------------------------
66,422 14,153 53,745 (8,216) (16,639) 109,465
Income taxes 28,576 6,481 22,164 (3,286) (5) (6,656) (11) 43,215
(820) (6) (3,244) (12)
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 37,846 7,672 31,581 (4,110) (6,739) 66,250
Loss from discontinued operations (499) (499)
Cumulative effect of changes in accounting
principles 480 5,530 6,010
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 37,347 $ 8,152 $ 37,111 $ (4,110) $ (6,739) $ 71,761
===============================================================================================================================
Income from continuing operations after
preferred dividends per common share(13) $ 1.80 $ 2.29
===============================================================================================================================
Earnings per common share (13) $ 1.77 $ 2.48
===============================================================================================================================
Average outstanding and equivalent share(13) 20,332,000 28,382,000
===============================================================================================================================
41
79
THE FINOVA GROUP INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Pro forma adjustments included in the Pro Forma Statement of
Consolidated Income for the year ended December 31, 1994 related to
the acquisitions of Ambassador and TriCon present the effects of the
one month and four months, respectively, not included in the Company's
historical financial statements.
ACQUISITION OF AMBASSADOR
(2) To record the estimated interest expense ($271,000 - 1994; $4,226,000
- 1993) arising from the debt incurred to fund the acquisition and the
repayment of the intercompany payable due to Fleet.
(3) To record tax deductible amortization of goodwill ($249,000 - 1994;
$2,990,000 - 1993) based on an amortization period of twenty years and
amortization of the covenant not to compete over one year.
(4) To record administrative expenses for additional employees and general
overhead ($83,000 - 1994; $1,000,000 - 1993).
(5) To record the income tax effect ($241,000 - 1994; $3,286,000 - 1993)
of Notes (2), (3) and (4) at the Company's effective incremental
income tax rate of 40%.
(6) To adjust income taxes for the lower state income tax rate applicable
to the Company ($99,000 - 1994; $820,000 - 1993).
ACQUISITION OF TRICON
(7) To reduce interest earned from financing transactions for the income
recorded on assets not purchased by the Company in 1994 and 1993
($3,158,000 - 1994; $7,667,000 - 1993).
(8) To reflect base fees ($1,500,000 - 1993) and incremental costs
($253,000 - 1994; $759,000 - 1993) related to an agreement to manage
leveraged leases for Bell Atlantic by TriCon.
(9) To record interest expense ($1,538,000 - 1994; $4,613,000 - 1993)
resulting from the additional debt issued to purchase TriCon and
certain debt to Bell Atlantic incurred to fund a deferred tax payment
and dividends, reduced by the interest savings applicable to the debt
not transferred in the TriCon acquisition.
(10) To record tax deductible amortization of goodwill ($1,700,000 - 1994;
$5,100,000 - 1993) based on an amortization period of twenty years.
(11) To record the income tax effect ($2,660,000 - 1994; $6,656,000 - 1993)
of Notes (7) through (10) at the Company's effective incremental
income tax rate of 40%.
(12) To reduce TriCon's income taxes for the effect of increases in income
tax rates for 1993 (principally the increase in the federal tax rate)
due to the deferred tax payment and the new tax basis in assets at the
beginning of the pro forma period ($3,244,000).
(13) Pro forma per share amounts are calculated assuming the 8,050,000
shares of the Company's common stock were issued at the beginning of
the respective periods.
42
80
THE FINOVA GROUP INC.
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(Dollars in Thousands)
The following represents the condensed quarterly results for the two
years ended December 31, 1994:
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------
Interest earned from financing transactions:
1994 $73,961 $121,891 $147,649 $159,850
1993 59,514 63,948 64,944 66,810
- ---------------------------------------------------------------------------------------------------
Interest expense:
1994 33,133 53,648 65,881 69,538
1993 30,568 31,423 30,788 31,074
- ---------------------------------------------------------------------------------------------------
Gains on securitizations and sale of assets:
1994 3 4,500 1,169 3,373
1993 2,061 179 --- 3,199
- ---------------------------------------------------------------------------------------------------
Non-interest expenses (includes provision for
possible credit losses):
1994 22,510 42,526 45,813 55,576
1993 17,591 16,614 15,883 20,292
- ---------------------------------------------------------------------------------------------------
Income from continuing operations:
1994 11,389 17,305 22,257 23,362
1993 8,545 10,323 6,750 (1) 12,228
- ---------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations:
1993 1,338 2,870 --- (4,707)
- ---------------------------------------------------------------------------------------------------
Net income:
1994 11,389 17,305 22,257 23,362
1993 9,883 13,193 6,750 (1) 7,521
===================================================================================================
(1) Income from continuing operations and net income for the third quarter
of 1993 included an adjustment of $4,857,000 representing the effect
of federal and state income tax rate increases applicable to deferred
income taxes generated by the Company's leveraged lease portfolio.
43
81
THE FINOVA GROUP INC.
AVERAGE BALANCES/INTEREST MARGIN/AVERAGE ANNUAL RATES (UNAUDITED)
(Dollars in Thousands)
The following represents the breakdown of the Company's average
balance sheet, interest margins and average annual rates for the years ended
December 31, 1994 and 1993:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 (1) 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 28,886 $ $ 9,566 $
Investment in financing transactions 4,446,745 466,614 11.5% (2) 2,637,547 248,700 10.7% (2)
Less reserve (97,704) (66,786)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 4,349,041 2,570,761
Investment in and advances to Verex Corporation 110,656
Other assets and deferred charges 183,069 47,012
- -----------------------------------------------------------------------------------------------------------------------------------
$4,560,996 $2,737,995
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 235,221 $ 73,235
Senior and subordinated debt 3,468,498 222,200 6.4% 1,980,562 123,853 6.3%
Deferred income taxes 190,710 175,850
- -----------------------------------------------------------------------------------------------------------------------------------
3,894,429 2,229,647
Redeemable preferred stock 12,500
Stockholders' equity 666,567 495,848
- -----------------------------------------------------------------------------------------------------------------------------------
$4,560,996 $2,737,995
===================================================================================================================================
Interest income/average earning assets (2) 466,614 11.5% 248,700 10.7%
Interest expense/average earning assets (2) (3) 222,200 5.5% 123,853 5.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Interest margins earned (3) $244,414 6.0% $124,847 5.4%
===================================================================================================================================
(1) Includes financial results from the acquisitions of Ambassador (February
14, 1994) and TriCon (April 30, 1994).
(2) Average earning assets ($4,064,971 and $2,321,359 for 1994 and 1993,
respectively) are net of average deferred taxes on leveraged leases and
average nonaccruing assets.
(3) For the year ended December 31, 1994, excluding the impact of derivatives,
interest expense would have been $235,855 or 5.8% of average earning
assets and interest margins earned would have been $230,759 or 5.7% of
average earning assets. For the year ended December 31, 1993, excluding
the impact of derivatives, interest expense would have been $149,728 or
6.5% of average earning assets and interest margins earned would have
been $98,972 or 4.3% of average earning assets.
44
82
THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
DECEMBER 31, 1994 FORM 10-K
Exhibit No. Description
---------- -----------
(3.A) Certificate of Incorporation, as amended through the date of this
filing.*
(3.B) By-Laws, as amended through the date of this filing.*
(4.A) Instruments with respect to issues of long-term debt have not been
filed as exhibits to this Annual Report on Form 10-K if the
authorized principal amount of any one of such issues does not
exceed 10% of total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish a copy of each
such instrument to the Securities and Exchange Commission upon
request.
(4.B) Form of Common Stock Certificate of the Company*.
(4.C) Relevant portions of the Company's Certificate of Incorporation and
Bylaws included in Exhibits 3.A and 3.B above, respectively, are
hereby incorporated by reference.
(4.D) Rights Agreement dated as of February 15, 1992 between the Company
and the Rights Agent named therein (incorporated by reference from
the Company's Registration Statement on Form S-1, SEC File No.
33-45452 (the "Registration Statement"), Annex V to Prospectus and
Exhibit 4.1).
(4.E) Indenture dated as of November 1, 1990 between FINOVA Capital and
the Trustee named therein (incorporated by reference from Greyhound
Financial Corporation's Registration Statement on Form S-3,
Registration No. 33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17, 1992 between
FINOVA Capital and the Trustee named therein, supplementing the
Indenture referenced in Exhibit 4.E above, is hereby incorporated by
reference from The FINOVA Group Inc.'s Annual Report on Form 10-K
for the year 1992 (the "1992 10-K"), Exhibit 4.F.
(4.G) Form of Indenture dated as of September 1, 1992 between FINOVA
Capital and the Trustee names therein (incorporated by reference
from the Greyhound Financial Corporation Registration Statement on
Form S-3, Registration No. 33-51216, Exhibit 4).
(4.H) 1992 Stock Incentive Plan of the Company as amended through the date
hereof, with a proposed amendment thereto incorporated from the
Proxy Statement.*+
83
Exhibit No. Description
---------- -----------
(10.A) Sixth Amendment and Restatement dated as of May 16, 1994 of the
Credit Agreement dated as of May 31, 1976 among FINOVA Capital and
the lender parties thereto, and Bank of America National Trust and
Savings Association, Bank of Montreal, Chemical Bank, Citibank,
N.A. and National Westminster Bank USA, as agents (the "Agents")
and Citibank, N.A., as Administrative Agent (incorporated by
reference from the Corporation's Current Report on Form 8-K dated
May 23, 1994, Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to the Sixth
Amendment and Restatement, 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 the Company's Report on Form 8-K dated May 23, 1994, Exhibit
10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the Credit
Agreement noted in 10.B above.*
(10.C.1) The Company's Executive Severance Plan for Tier 1 Employees.*+
(10.C.2) The Company's Executive Severance Plan for Tier 2 Employees.*+
(10.D) The Company's Management Incentive Plan.*+
(10.E) The Company's Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield, dated March 16,
1992, is hereby incorporated by reference from the 1992 10-K,
Exhibit 10.F.
(10.G) Employment Agreement with William J. Hallinan, dated February 25,
1992, is hereby incorporated by reference from the 1992 10-K,
Exhibit 10.I.+
(10.H) Employment Agreement with Thomas C. Parrinello, dated February 14,
1992.*+
(10.I.1) Form of Resolutions of the Company's Board of Directors (adopted on
December 5, 1994) amending the Company's Retirement Income, Capital
Accumulation, Employees' Stock Ownership and Supplemental Pension
Plans.*+
(10.I.2) Form of Resolutions of the Company's Board of Directors (adopted on
February 9, 1995) amending the names of the Company's various
benefit plans.*+
84
Exhibit No. Description
--------- -----------
(10.J) The Company's Retirement Income Plan.*+
(10.K) The Company's Supplemental Pension Plan.*+
(10.L) The Company's Employee Stock Ownership Plan and Trust.*+
(10.M) The Company's Capital Accumulation Plan.*+
(10.N) The Company's Directors Deferred Compensation Plan, is hereby
incorporated by reference from the 1992 10-K, Exhibit 10.O.+
(10.O) Form of the Company's 1992 Stock Incentive Plan Nonqualified Stock
Option Agreement (for exempt employees) (for August 25, 1992 and
subsequent grants through August 10, 1994) (various prices) is
hereby incorporated by reference from the 1992 10-K, Exhibit
10.FF.+
(10.P) Form of the Company's 1992 Stock Incentive Plan Nonqualified Stock
Option Agreement (for nonexempt employees) (for August 25, 1992 and
subsequent grants through August 10, 1994) (various grants) is
hereby incorporated by reference from the 1992 10-K, Exhibit
10.GG.
(10.Q) A description of the Company's policies regarding compensation of
directors is incorporated from the Proxy Statement.+
(10.R) The Company's 1992 Deferred Compensation Plan is hereby
incorporated by reference from the 1993 10-K, Exhibit 10.II.+
(10.S) Interim Services Agreement dated January 28, 1992 among the
Company, The Dial Corp and others, is hereby incorporated by
reference from the 1992 10-K, Exhibit 10.JJ.
(10.T) Tax Sharing Agreement dated February 19, 1992 among the Company,
The Dial Corp and others, is hereby incorporated by reference from
the 1992 10-K, Exhibit 10.KK.
(10.U) Certificate of Designations of Series A Redeemable Preferred Stock
of FINOVA Capital, dated March 17, 1992, is hereby incorporated by
reference from the 1992 10-K, Exhibit 10.MM.
(10.V) Sublease dated as of April 1, 1991, among the Company, The Dial
Corp and others, relating to the Company's principal office space,
is hereby incorporated by reference from the 1992 10-K, Exhibit
10.NN.
(10.W) Directors' Retirement Benefit Plan is hereby incorporated by
reference from the Company's Annual Report on Form 10- K for the
year ended December 31, 1993 (the "1993 10-K"), Exhibit 10.OO.+
85
Exhibit No. Description
--------- -----------
(10.X) Stock Purchase Agreement between Bell Atlantic TriCon Leasing
Corporation and Greyhound Financial Corporation dated as of March
4, 1994 is hereby incorporated by reference from the 1993 10-K,
Exhibit 10.QQ.
(10.Y) Form of Assets Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and TriCon Capital Corporation is hereby
incorporated by reference from the 1993 10-K, Exhibit 10.RR.
(10.Z) Form of Distribution Agreement among the Company, Greyhound
Financial Corporation, The Dial Corp and certain other parties
named therein, dated as of January 28, 1992 (incorporated by
reference from the Registration Statement, Annex II to the
Prospectus and Exhibit 2.1).
(10.AA) Asset Purchase Agreement dated as of February 3, 1995 between
Transamerica Business Credit Corporation and FINOVA Capital.*
(10.BB) Stock Purchase Agreement among The FINOVA Group Inc., FINOVA
Capital and GE Capital Mortgage Corporation dated May 26, 1993,
incorporated by reference from the Company's Report on Form 8-K
dated July 15, 1993, Exhibit 2.
(10.CC) Directors' Charitable Awards Program.*+
(10.DD) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for exempt
employees) (various prices).*+
(10.EE) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for non-exempt
employees) (various prices).*
(10.FF) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for
non-employee directors) (various prices).*+
(10.GG) Form of the Company's 1992 Stock Incentive Plan Restricted Stock
Agreements.*+
(11) Computation of Per Share Earnings.*
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries of the Registrant.*
(25) Powers of Attorney.*
(27) Financial Data Schedule.*
* Filed herewith + Relating to Management Compensation.