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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20594
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number 1-7543
FINOVA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-1278569
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4800 North Scottsdale Road
Scottsdale, AZ 85251-7623
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 480-636-4800
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 [ ]
The Registrant meets the conditions set forth in General Instructions H (i) (a)
and (b) of Form 10-Q and is therefore filing this form in the reduced format.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 11, 2000, 25,000 shares of Common Stock ($1.00 par value) were
outstanding.
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<PAGE>
FINOVA CAPITAL CORPORATION
TABLE OF CONTENTS
Page No.
--------
Part I Financial Information 1
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets 1
Condensed Statements of Consolidated Income 2
Condensed Statements of Consolidated Cash Flows 3
Notes to Interim Condensed Consolidated Financial Information 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Part II Other Information 14
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2000 1999
------------ ------------
ASSETS:
Cash and cash equivalents $ 431,621 $ 100,344
Investment in financing transactions:
Loans and other financing contracts 10,567,500 10,446,356
Leveraged leases 816,008 837,083
Fee-based receivables 626,741 583,885
Operating leases 612,601 592,495
Direct financing leases 593,416 494,175
Financing contracts held for sale 167,983
------------ ------------
13,216,266 13,121,977
Less reserve for credit losses (270,572) (264,983)
------------ ------------
Net investment in financing transactions 12,945,694 12,856,994
Investments 394,892 439,507
Goodwill, net of accumulated amortization 356,450 367,241
Other assets 352,584 275,427
------------ ------------
$ 14,481,241 $ 14,039,513
============ ============
LIABILITIES:
Accounts payable and accrued expenses $ 111,130 $ 161,289
Due to clients 166,419 146,607
Interest payable 120,144 114,397
Senior debt 11,873,157 11,407,767
Deferred income taxes 451,268 461,252
------------ ------------
12,722,118 12,291,312
------------ ------------
Commitments and contingencies
SHAREOWNER'S EQUITY:
Common stock, $1.00 par value, 100,000
shares authorized, 25,000 shares issued 25 25
Additional capital 1,173,995 1,173,995
Retained income 671,921 638,733
Accumulated other comprehensive income 3,428 33,812
Net advances to parent (90,246) (98,364)
------------ ------------
1,759,123 1,748,201
------------ ------------
$ 14,481,241 $ 14,039,513
============ ============
See notes to interim consolidated condensed financial statements.
1
<PAGE>
FINOVA CAPITAL CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest and income earned from financing transactions $ 338,706 $ 266,978 $ 677,899 $ 512,201
Operating lease income 27,200 28,868 54,532 56,721
Interest expense (204,479) (139,153) (393,561) (270,336)
Operating lease depreciation (17,285) (16,720) (33,161) (33,947)
--------- --------- --------- ---------
Interest margins earned 144,142 139,973 305,709 264,639
Volume-based fees 11,678 11,264 24,276 23,999
--------- --------- --------- ---------
Operating margin 155,820 151,237 329,985 288,638
Provision for credit losses (39,800) (17,000) (137,800) (26,500)
--------- --------- --------- ---------
Net interest margins earned 116,020 134,237 192,185 262,138
Gains on disposal of assets 12,651 18,760 33,681 31,130
--------- --------- --------- ---------
128,671 152,997 225,866 293,268
Operating expenses (60,720) (63,339) (139,787) (120,839)
--------- --------- --------- ---------
Income before income taxes 67,951 89,658 86,079 172,429
Income taxes (24,073) (35,050) (30,843) (66,819)
--------- --------- --------- ---------
NET INCOME $ 43,878 $ 54,608 $ 55,236 $ 105,610
========= ========= ========= =========
</TABLE>
See notes to interim consolidated condensed financial statements.
2
<PAGE>
FINOVA CAPITAL CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 55,236 $ 105,610
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 137,800 26,500
Depreciation and amortization 51,281 49,204
Deferred income taxes 11,311 53,470
Change in assets and liabilities, net of effects
from acquisitions
Decrease in other assets 17,492 963
Decrease in accounts payable and accrued expenses (50,159) (72,130)
Increase in interest payable 5,747 8,505
Other 1,423 5,906
----------- -----------
Net cash provided by operating activities 230,131 178,028
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of investments, net of gains 23,995
Proceeds from sales of residual positions, net of gains 53,314 81,705
Proceeds from sales of commercial mortgage
backed securities ("CMBS") assets, net of gains 115,770 160,667
Expenditures for investments and other income
producing activities (47,182) (24,410)
Principal collections on financing transactions and
revolving credit facilities 1,451,225 1,080,748
Expenditures for financing transactions (1,677,004) (1,630,586)
Expenditures for revolving credit facilities (249,068) (508,949)
Expenditures for CMBS transactions (280,624)
Expenditures for fee-based receivables (2,652,259) (2,736,135)
Proceeds from fee-based receivables 2,609,403 2,846,239
Cash received in acquisitions 20,942
Other 1,676 1,442
----------- -----------
Net cash used in investing activities (370,130) (988,961)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings under commercial paper and
short-term loans 1,261,295 555,839
Long-term borrowings 120,000 955,000
Repayment of long-term borrowings (915,900) (484,077)
Net contributions from (advances to) Parent 8,118 (67,852)
Dividends (22,049) (18,741)
Net change in due to clients 19,812 (107,411)
----------- -----------
Net cash provided by financing activities 471,276 832,758
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 331,277 21,825
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 100,344 49,519
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 431,621 $ 71,344
=========== ===========
</TABLE>
See notes to interim consolidated condensed financial statements.
3
<PAGE>
FINOVA CAPITAL CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOTE A BASIS OF PREPARATION
The consolidated financial statements present the financial position,
results of operations and cash flows of FINOVA Capital Corporation and its
subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned
subsidiary of the FINOVA Group Inc. ("FINOVA Group").
The interim condensed consolidated financial information is unaudited. In
the opinion of management all adjustments, consisting of normal recurring items,
necessary to present fairly the financial position as of June 30, 2000, the
results of operations for the quarter and six months ended June 30, 2000 and
1999 and cash flows for the six months ended June 30, 2000 and 1999, have been
included. Interim results of operations are not necessarily indicative of the
results of operations for the full year. The enclosed financial statements
should be read in connection with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
The Company reports other comprehensive income in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Total comprehensive income was $24.9 million and $73.6 million for the
three months ended June 30, 2000 and 1999, respectively and $23.8 million and
$110.2 million for the six months ended June 30, 2000 and 1999, respectively.
The primary component of comprehensive income other than net income was
unrealized holding gains (losses).
NEW ACCOUNTING STANDARDS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by recognition of those
items as assets or liabilities in the statement of financial position and
measurement at fair value. The Company is currently assessing the impact of SFAS
No. 133 on the Company's financial position and results of operations.
NOTE C SEGMENT REPORTING
MANAGEMENT'S POLICY FOR IDENTIFYING REPORTABLE SEGMENTS
FINOVA's reportable business segments are strategic business units that
offer distinctive products and services that are marketed through different
channels.
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
Management evaluates the business performance of each group based on total
net revenue, income before allocations and managed assets. Total net revenue is
operating margin plus gains on disposal of assets. Income before allocations is
income before income taxes, excluding allocation of corporate overhead expenses
and the unallocated portion of provision for credit losses. Managed assets
include each segment's investment in financing transactions plus securitizations
and participations sold.
4
<PAGE>
Information for FINOVA's reportable segments reconciles to FINOVA's consolidated
totals as follows:
Six Months Ended June 30,
-----------------------------
(Dollars in Thousands) 2000 1999
------------ ------------
Total net revenue (loss):
Commercial Finance $ 121,510 $ 104,273
Specialty Finance 187,384 187,296
Capital Markets 79,779 39,468
Corporate and other (25,007) (11,269)
------------ ------------
Consolidated total $ 363,666 $ 319,768
============ ============
Income (loss) before allocations:
Commercial Finance $ (26,810) $ 40,827
Specialty Finance 148,020 153,278
Capital Markets 22,363 12,747
Corporate and other, overhead and
unallocated provision for credit losses (57,494) (34,423)
------------ ------------
Income from continuing operations
before income taxes $ 86,079 $ 172,429
============ ============
June 30,
-----------------------------
2000 1999
------------ ------------
Managed assets:
Commercial Finance $ 4,021,887 $ 3,351,296
Specialty Finance 8,643,330 7,367,903
Capital Markets 950,625 892,234
Corporate and other 92,707 96,615
------------ ------------
Consolidated total 13,708,549 11,708,048
Less securitizations and participations sold (492,283) (512,382)
------------ ------------
INVESTMENT IN FINANCING TRANSACTIONS $ 13,216,266 $ 11,195,666
============ ============
NOTE D PORTFOLIO QUALITY
The following table presents a distribution (by line of business) of the
Company's investment in financing transactions before the reserve for credit
losses at the dates indicated.
5
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
JUNE 30, 2000
(Dollars In Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing (5)
--------------------------------- ------------------------------
Market Repossessed Repossessed Lease & Total Carrying
Rate(1) Impaired(5) Assets(2) Impaired Assets Other Amount %
------- ----------- --------- -------- ------ ----- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Finance Group
Corporate Finance/Business
Credit $ 1,863,356 $ 64,328 $ $135,516 $ 6,712 $ $ 2,069,912 15.7
Rediscount Finance 1,111,171 3,233 9,228 610 2,962 1,127,204 8.5
Distribution & Channel Finance 411,723 23,212 20,458 455,393 3.4
Commercial Services 264,647 5,618 1,266 271,531 2.1
Growth Finance 51,056 3,253 54,309 0.4
----------- -------- ------- -------- ------- ------- ----------- -----
3,701,953 90,773 9,228 165,455 10,940 3,978,349 30.1
----------- -------- ------- -------- ------- ------- ----------- -----
Specialty Finance Group
Transportation Finance 2,466,543 8,662 38,574 2,513,779 19.0
Resort Finance 1,523,452 95,437 15,257 20,783 1,654,929 12.5
Healthcare Finance 801,251 34,837 4,794 62,897 2,836 906,615 6.9
Franchise Finance 868,217 1,909 4,083 2,169 198 876,576 6.6
Communications Finance 753,112 3,911 2,412 759,435 5.8
Specialty Real Estate Finance 690,122 35,585 3,289 6,016 152 735,164 5.6
Commercial Equipment Finance 525,784 12,288 19,369 568 558,009 4.2
Public Finance 184,460 5,616 190,076 1.4
----------- -------- ------- -------- ------- ------- ----------- -----
7,812,941 142,847 57,545 129,159 48,337 3,754 8,194,583 62.0
----------- -------- ------- -------- ------- ------- ----------- -----
Capital Markets Group
Realty Capital 482,386 4,614 487,000 3.7
Mezzanine Capital 379,992 13,667 39,178 432,837 3.3
Investment Alliance 26,638 4,151 30,789 0.2
----------- -------- ------- -------- ------- ------- ----------- -----
889,016 17,818 43,792 950,626 7.2
----------- -------- ------- -------- ------- ------- ----------- -----
Other (3) 72,653 721 19,334 92,708 0.7
----------- -------- ------- -------- ------- ------- ----------- -----
TOTAL (4) $12,476,563 $251,438 $66,773 $339,127 $59,277 $23,088 $13,216,266 100.0
=========== ======== ======= ======== ======= ======= =========== =====
</TABLE>
----------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $2.3 million on repossessed assets year
to date during 2000, including $1.3 million in Specialty Real Estate
Finance, $0.5 million in Resort Finance, $0.4 in Rediscount Finance and
$0.1 million in Healthcare Finance.
(3) Primarily includes other assets retained from disposed or discontinued
operations.
(4) Excludes $492.3 million of assets securitized and participations sold which
the Company manages, including securitizations of $303.4 million in
Commercial Equipment Finance and $117.3 million in Franchise Finance and
participations of $28.5 million in Corporate Finance/Business Credit, $20.7
million in Public Finance, $15.0 million in Rediscount Finance, $4.4
million in Communications Finance and, $3.0 million in Resort Finance.
(5) Impaired accruing assets plus nonaccruing assets as a percent of managed
assets (less participations) was 4.9% at June 30, 2000.
6
<PAGE>
RESERVE FOR CREDIT LOSSES:
The reserve for credit losses at June 30, 2000 represents 2.0% of the
Company's investment in financing transactions and securitized assets. Changes
in the reserve for credit losses were as follows:
Six Months Ended June 30,
---------------------------
2000 1999
--------- ---------
(Dollars in Thousands)
Balance, beginning of period $ 264,983 $ 207,618
Provision for credit losses 137,800 26,500
Write-offs (134,026) (26,097)
Recoveries 1,674 1,442
Reserves related to acquisitions 245 23,763
Other (104) 4,376
--------- ---------
Balance, end of period $ 270,572 $ 237,602
========= =========
At June 30, 2000 the total carrying amount of impaired loans was $590.6
million, of which $251.4 million were revenue accruing. A reserve for credit
losses of $114.7 million has been established for $263.4 million of nonaccruing
impaired loans and $37.3 million has been established for $103.6 million of
accruing impaired loans. Additionally, specific reserves of $34.1 million have
been established for other accounts. Thus, 69% of FINOVA's reserve for credit
losses was allocated to specific accounts. The remaining $84.5 million of the
reserve for credit losses is designated for general purposes and represents
management's best estimate of inherent losses in the portfolio considering
delinquencies, loss experience and collateral. Actual results could differ from
those estimates, and there can be no assurance that the reserves will be
sufficient to cover portfolio losses. Additions to the general and specific
reserves are reflected in current operations. Management may transfer reserves
between the general and specific reserves as considered necessary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000
TO THE SIX MONTHS ENDED JUNE 30, 1999
THE FOLLOWING DISCUSSION RELATES TO FINOVA CAPITAL CORPORATION AND ITS
SUBSIDIARIES (COLLECTIVELY "FINOVA" OR THE "COMPANY"). FINOVA IS A WHOLLY OWNED
SUBSIDIARY OF THE FINOVA GROUP INC. ("FINOVA GROUP").
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2000 was $55.2 million
compared to $105.6 million for the six months ended June 30, 1999. Net income
was down as a result of several factors, including: $80 million in special
charges to pre-tax earnings in the first quarter of 2000, a subsequent increase
in cost of funds following a reduction in credit ratings, higher costs
associated with borrowing under the Company's domestic commercial paper back-up
bank facilities, the costs to exit the origination and sale of commercial real
estate loans to the CMBS market in the second quarter of 2000 and an increase in
nonaccruing accounts in the first six months of 2000.
INTEREST MARGINS EARNED. Interest margins earned represents the difference
between (a) interest and income earned from financing transactions and operating
lease income and (b) interest expense and depreciation on operating leases.
Interest margins earned in dollars were up 15.5% in the first six months of 2000
compared to the first six months of 1999 ($305.7 million vs. $264.6 million).
The increase was due primarily to portfolio growth (managed assets) which
increased by 17.1%, partially offset by a higher cost of funds in 2000.
Portfolio growth resulted primarily from $4.65 billion of new business added
during the 12 months ended June 30, 2000. Annualized portfolio growth for the
first six months of 2000 was 4.0%, excluding $168.0 million of commercial
mortgage-backed securities (CMBS) loans held for sale at December 31, 1999. The
lower growth rate in the first six months of 2000, when compared to 21.8% in the
same period for 1999, is primarily attributable to a higher beginning portfolio
base and slightly lower new business. Most of the new business in 2000 was
generated by the Specialty Finance Group, which can attract better returns than
FINOVA's other segments in the current market. Total new business for the six
months ended June 30, 2000 was $1.93 billion, down slightly from $2.14 billion
in the same period of 1999. Interest margins earned as a percent of average
earning assets was 4.9% in the first six months of 2000, down from 5.2% in the
same period of 1999. The decrease was primarily due to a higher level of
non-earning assets and investments, lower nonrecurring income and higher cost of
funds, as noted above. The events of the second quarter increased FINOVA's cost
of funds applicable to $4.5 billion in drawdowns under its domestic commercial
paper back-up bank facilities by 0.30% during the second quarter of 2000. Had
the borrowings from those back-up facilities been outstanding for the entire
second quarter, the cost of funds effect would have been 0.70%.
7
<PAGE>
VOLUME-BASED FEES. Volume-based fees have been generated by FINOVA's
Distribution & Channel Finance, Commercial Services and Realty Capital lines of
business. These fees are predominately based on volume-originated business
rather than the balance of outstanding financing transactions during the period.
Fee-based volume for the six months ended June 30, 2000 was $2.65 billion, down
$364.5 million, or 12.1%, from the $3.02 billion generated in the first six
months of 1999. The decline in volume in 2000 was primarily due to Realty
Capital exiting from the origination and sale of commercial real estate loans to
the CMBS market in April 2000. Volume-based fees generated were $24.3 million in
the first six months of 2000 which exceeded the $24.0 million earned in the 1999
period, as higher rates earned on that business in 2000 (0.92% vs. 0.80% in
1999) mitigated the effects of the lower volume.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was higher in
the first six months of 2000 ($137.8 million vs. $26.5 million) due to the
special charge to bolster the reserve for credit losses after a $70 million loss
on a major customer of FINOVA's Distribution & Channel Finance division in the
first quarter of 2000 and due to other write-offs totaling $62.4 million in
2000. The bulk of the $38.5 million in write-offs in the second quarter of 2000
were from multiple customers in two businesses, Mezzanine Finance ($15.3
million) and Corporate Finance ($14.2 million). Write-offs as a percent of
average managed assets were 1.95% annualized for the first six months of 2000,
up from 0.44% annualized for the same period of 1999.
FINOVA monitors developments affecting loans and leases in its portfolio,
taking into account each borrower's financial developments and prospects, the
value of collateral, legal developments and other available information. Based
upon those developments, FINOVA adjusts its loan loss reserve and when
considered appropriate writes down the value of the loans. Depending on
developments, there is the possibility that the loan loss reserves and/or
writedowns will increase in the future.
GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $33.7 million
pre-tax in the first six months of 2000, up 8.2% from the $31.1 million reported
in the first six months of 1999. Gains in 2000 consisted of $5.2 million from
the sale of residuals coming off lease and $28.5 million from the sale of
investments and loans, including $4.6 million from the sale of Harris Williams &
Co. to its management and $15.9 million from sales of Healtheon/Web MD stock
during the period. At June 30, 2000, FINOVA held approximately 624,000 shares of
Healtheon/Web MD common stock. While in the aggregate FINOVA has historically
recognized gains on such disposals, the timing and amount of these gains are
sporadic in nature. There can be no assurance FINOVA will recognize gains in the
future, depending, in part, on market conditions at the time of sale.
OPERATING EXPENSES. Operating expenses were $139.8 million in the first six
months of 2000 compared to $120.8 million in the comparable 1999 period. The
increase was due to $11.8 million incurred to exit the origination and sale of
commercial real estate loans to the CMBS market, $10 million incurred for
deferred compensation and executive severance in the first quarter of 2000, and
to an increase in personnel costs, principally related to employees added via
acquisitions in 1999. These increases were partially offset by lower
performance-based compensation accruals in 2000 related to lower earnings and
the decrease in the company's stock price. Operating efficiency, which is the
ratio of operating expenses to operating margins and gains was 38.4% in the
first six months of 2000, compared to 37.8% in the same period of 1999.
INCOME TAXES. Income taxes were lower for the first six months of 2000
compared to the corresponding period in 1999 primarily due to the decrease in
pre-tax income and a beneficial IRS tax audit adjustment of $5.7 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets were $13.71 billion at June 30, 2000 compared to $13.61
billion at December 31, 1999. Included in managed assets at June 30, 2000 were
$13.22 billion in funds employed, $420.7 million of securitized assets and $71.6
million of participations sold to third parties. The increase in managed assets
was due to funded new business of $1.93 billion for the six months ended June
30, 2000, partially offset by prepayments and asset sales accompanied by normal
portfolio amortization.
The reserve for credit losses increased to $270.6 million at June 30, 2000
from $265.0 million at December 31, 1999. At June 30, 2000 and December 31,
1999, the reserve for credit losses represented 2.0% and 2.1% of ending managed
assets, respectively (excluding participations, financing contracts held for
sale and, for 2000, limited recourse securitizations). Nonaccruing assets
increased to $421.5 million or 3.1% of ending managed assets (excluding
participations) at June 30, 2000 from $295.1 million or 2.2% at the end of 1999.
The largest additions to nonaccruing assets occurred in Corporate Finance ($48.1
million), Transportation Finance ($38.6 million loan to Tower Air, Inc.) and
Healthcare Finance ($10 million related to one loan).
The Corporate Finance exposure consists of loans to two separate, but
related, companies. The first, which has approximately $17 million outstanding,
is experiencing material operating losses and is currently for sale. The other
company, with approximately $31 million outstanding, is not performing in line
with its business plan and is experiencing modest losses. A $13.4 million
8
<PAGE>
reserve has been specifically allocated to these accounts to reflect
management's current best estimate of the potential loss exposure.
FINOVA's $56.5 million balance with Tower Air, Inc. has been split into two
pieces. A newer 747-200 aircraft, with a $17.9 million valuation, has been
repossessed by FINOVA and is being converted to a cargo aircraft. FINOVA is in
possession of a letter of intent from a major corporation to lease the aircraft
upon completion of the conversion. The remaining $38.6 million has been
classified as nonaccruing and represents FINOVA's balance on the remaining
aircraft. A $6 million reserve has been specifically allocated to this account
to reflect management's current best estimate of the potential loss exposure.
FINOVA's Healthcare Finance division has a total of $24 million outstanding
to Genesis Health Ventures, Inc. and Subsidiaries ("Genesis") and its affiliate,
The Multicare Companies, Inc. and Subsidiaries ("Multicare"). The $14 million
related to Genesis is current and payments are expected to continue. The $10
million Multicare loan is delinquent and is not expected to resume paying in the
near future; therefore, it has been classified as a nonaccruing account. A $1.9
million reserve has been specifically allocated to this account to reflect
management's current best estimate of the potential loss exposure.
Earning impaired assets increased slightly during the six months ended June
30, 2000 to $251.4 million from $240.1 million at December 31, 1999, but
remained a consistent percentage of ending managed assets (excluding
participations) at 1.8%. While there was a significant amount of movement in and
out of the impaired category, two of the larger additions were $95.4 million
relating to Sunterra Corporation ("Sunterra"), a customer of Resort Finance
which filed Chapter 11 bankruptcy during the second quarter, and $13.5 million
related to MicroAge, Inc. The Sunterra loans are secured by marketable assets,
primarily completed but unsold timeshare units, at 13 of Sunterra's
approximately 90 resorts. FINOVA believes the value of the collateral is
sufficient to enable recovery of the principal loan balances outstanding plus
any accrued interest. An additional $20 million outstanding to Sunterra is
secured by consumer timeshare receivables. On these receivables, FINOVA is
collecting cash on a current basis in accordance with the terms of the
agreements; therefore, this portion is classified as a performing asset.
MicroAge, Inc. and its subsidiary, Pinacor, Inc., filed bankruptcy during the
second quarter. Other additions to the impaired category were primarily from
Corporate Finance and Healthcare Finance while most of the reductions occurred
via migration to nonaccruing status (most notably Tower Air, Inc.). FINOVA's
policy is to suspend income recognition for leases, loans and other financing
contracts at the earlier of the date at which payments become 90 days past due
or when, in the opinion of management, a full recovery of income and principal
becomes doubtful.
FINOVA's 31 to 90 day delinquencies rose from 66 basis points at December
31, 1999 to 112 basis points at June 30, 2000. The increase was due primarily to
three Healthcare Finance customers that moved into this category in the second
quarter of 2000.
At June 30, 2000, FINOVA had $11.87 billion of debt outstanding,
representing 6.7 times the Company's equity base of $1.76 billion. At year-end
1999, FINOVA's debt was 6.5 times the equity base of $1.75 billion.
FINOVA's internally generated funds, available credit lines and asset sales
have financed growth in funds employed and liquidity during the six months ended
June 30, 2000. During May and June 2000, FINOVA drew down $4.5 billion against
domestic commercial paper back-up bank facilities and used the proceeds
primarily for repayment of commercial paper and to fund normal operations. Of
this amount, $1.6 billion is due May 15, 2001. The other $2.9 billion is to be
repaid over a three-year period from 2001 to 2003. FINOVA also has $150 million
(Canadian) due under a bank facility that matures in July 2001. During the first
six months of 2000, FINOVA issued $120 million of new long-term borrowings and
repaid $915.9 million of long-term borrowings. Subsequent to June 30, 2000,
FINOVA's credit ratings were reduced by Standard & Poor's Ratings Group. See
Recent Developments and Business Outlook for further discussion of the rating
agency downgrade.
In May 2000, FINOVA completed a loan and lease securitization with assets
originated by the Commercial Equipment Finance division, which resulted in
initial proceeds to FINOVA of $302 million. Deutsche Bank Alex Brown acted as
structuring agent for this transaction, which includes a 364-day commitment to
purchase up to $375 million of equipment loans and leases on a revolving basis.
A non-cash gain of $200 thousand was recorded on the transaction. During July
2000, FINOVA structured two additional securitizations totaling $800 million.
See Recent Developments and Business Outlook for further discussion of the
securitization transactions.
SEGMENT REPORTING
FINOVA's business is organized into three market groups, which are also its
reportable segments: Commercial Finance, Specialty Finance and Capital Markets.
Management principally relies on total revenue, income before allocations and
managed assets in evaluating the business performance of each reportable
segment.
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Total revenue is the sum of operating margin and gains on disposal of
assets. Income before allocations is income before income taxes, corporate
overhead expenses and the unallocated portion of the provision for credit
losses. Managed assets include each segment's investment in financing
transactions plus securitizations and participations sold.
COMMERCIAL FINANCE. Commercial Finance includes traditional asset-based
businesses that provide financing through revolving credit facilities and term
loans secured by assets such as receivables and inventories, as well as
providing factoring and management services.
Total net revenue was $121.5 million in 2000 compared to $104.3 million for
the first six months of 1999, an increase of 16.5%. The increase was primarily
due to a 20.0% increase in managed assets over the last twelve months, partially
offset by the effects of competitive pressures on pricing in the asset-based
lending businesses. Corporate Finance/Business Credit managed assets grew 28.1%
over the last twelve months; however, their non-accruing assets grew to 6.8% of
managed assets compared to 3.6% in June 1999. Commercial Services increased its
revenue primarily due to growth in asset-based loans and fee-based volume.
Fee-based volume for the business unit increased to $782.1 million vs. $579.8
million in 1999, partially offset by lower rates earned on that volume, 0.74% in
2000 vs. 0.89% in 1999. Distribution and Channel Finance (DCF) had fee-based
volume of $1.66 billion during the first six months of 2000 compared to $1.49
billion in 1999. The rate earned on that volume also increased from 0.97% to
1.01% in 2000. The Rediscount Finance business grew its managed assets by 18.7%
over 1999 and its net revenue by 18.1% over the same period.
Income before allocations declined from $40.8 million in 1999 to a loss of
$26.8 million in the first six months of 2000, primarily due to a $70 million
special charge to bolster the reserve for credit losses following a first
quarter 2000 write-off related to a major customer of DCF. Excluding the special
charge, the segment had income before allocations of $43.2 million, an increase
of approximately 6%. Net write-offs for the group totaled $97.7 million in the
first six months of 2000 compared to $19.2 million in 1999. Excluding the $70
million special charge, net write-offs as an annualized percent of average
managed assets for the Commercial Finance Group were 1.41% compared to 1.27% in
the first six months of 1999. Operating expenses as a percent of operating
margin and gains improved from 54.1% in 1999 to 52.0% in 2000 for the Commercial
Finance segment. This is primarily due to operating efficiencies realized in the
Commercial Services and Rediscount Finance lines of business compared to 1999.
Managed assets grew to $4.02 billion over the last twelve months from $3.35
billion, an increase of 20.0%. The growth in managed assets was primarily due to
the addition of $661.9 million of managed assets acquired in connection with the
acquisition of Fremont Financial Corporation. Excluding the assets acquired in
the Fremont acquisition, managed assets for the segment remained relatively flat
from June 1999; however, Rediscount Finance grew 18.7%, partially offset by
12.3% asset compression in Corporate Finance/Business Credit. The lower asset
levels in this unit are primarily due to a slowdown in new business growth
resulting from increasingly competitive pricing pressures and the higher cost of
funds.
The Commercial Finance Group had new loan business of $300.5 million in the
first six months of 2000 compared to $642.6 million in 1999. The group, which is
considered more generalist than FINOVA's more profitable niche-oriented
businesses, is expected to continue its slower growth rate during 2000. The
Company as a whole expects to significantly slow managed asset growth on an
annual basis. There can be no assurance that FINOVA's asset base will grow. See
Recent Developments and Business Outlook for further discussion.
SPECIALTY FINANCE. Specialty Finance provides a wide variety of lending
products such as leases, loans, accounts receivable and cash flow based
financing, as well as servicing and collection services to a number of highly
focused industry specific niches.
Total net revenue was $187.4 million in the first six months of 2000
compared to $187.3 million in 1999. Revenue did not grow in spite of 17.3%
growth in managed assets over the last twelve months and 9.1% annualized growth
during the first half of 2000, due to a lower level of gains on disposal of
assets ($7.7 million in 2000 vs. $14.4 million in 1999) and to the effects of
higher cost of funds. The lower gains were primarily attributable to the timing
of assets coming off lease and the company's ability to re-lease assets at end
of term. While in the aggregate FINOVA has historically recognized gains on
disposals, the timing and amount of these gains are sporadic in nature.
Additionally, certain business units within this segment will sometimes receive
equity interests to complement their financing arrangements. Depending on
various factors, including management's discretion, FINOVA may opt to exercise
and sell its position in these equities when permitted to do so.
Income before allocations was $148.0 million for the six months ended June
30, 2000 compared to $153.3 million for the same period in 1999. The decrease
was primarily due to lower gains and an increase in net write-offs from $4.0
million to $7.9 million in 2000. Annualized net write-offs as a percentage of
average managed assets for the group rose to 0.18% from 0.11% in 1999.
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Managed assets grew to $8.64 billion in 2000 from $7.37 billion in the same
period of 1999, an increase of 17.3%. The growth in managed assets was driven by
new business of $993.2 million in 2000 compared to $848.5 million in 1999. The
growth in managed assets was spread across most business units with
Communications Finance, Franchise Finance, Healthcare Finance, Resort Finance
and Transportation Finance all growing in excess of 15% over the last twelve
months, while Public Finance and Specialty Real Estate Finance experienced a
decline. The group as a whole was able to increase backlog to $1.60 billion at
June 30, 2000 compared to $1.30 billion at December 31, 1999. In the second
quarter of 2000, the Commercial Equipment Finance unit completed a
securitization resulting in initial proceeds of $302 million. The structure of
the transaction includes a 364-day commitment to securitize up to $375 million
on a revolving basis. See Financial Condition, Liquidity and Capital Resources
for additional discussion of the securitization.
CAPITAL MARKETS. Capital Markets, in conjunction with institutional
investors, provide debt and equity capital funding and provided commercial
mortgage banking services until those operations were discontinued in the second
quarter of 2000. Mezzanine Capital (formerly Sirrom Capital Corporation) was
added to this segment late in the first quarter of 1999.
Total net revenue was $79.8 million in 2000 compared to $39.5 million in
1999. The increase in 2000 was primarily due to the addition of Mezzanine
Capital and Harris Williams & Co., both acquired late in the first quarter of
1999. Also contributing to the increase in net revenue was the continued growth
of Realty Capital's bridge and mezzanine financing activities, which offset a
decline in net revenue generated by Realty Capital's exit from the origination
and sale of commercial real estate loans to the CMBS market in April 2000.
Realty Capital's bridge and mezzanine financing portfolio grew to $487.0 million
by June 30, 2000 compared to $171.3 million at June 30, 1999. Realty Capital's
CMBS volume declined to $193.6 million in 2000 from $947.1 million for the same
period in 1999, while the rate earned on that volume increased to 0.69% from
0.53%.
The Mezzanine Capital and Harris Williams & Co. units provided $64.6
million of net revenue during 2000 compared to $17.1 million in 1999. The net
revenue in 2000 from these two business units included $28.8 million of gains
from sale of equity and warrant positions, and a $4.6 million gain on the sale
of Harris Williams & Co. to its management, as well as the elimination of $1.9
million of management incentives. Gains generated from the sale of
Healtheon/WebMD stock in 2000 amounted to $15.9 million. FINOVA recorded a
pre-tax unrealized gain of $4.3 million through other comprehensive income on
the balance sheet related to 623,832 shares of Healtheon/WebMD stock in its
portfolio at June 30, 2000. FINOVA periodically assesses its position in this
unit's investment portfolio and may opt to exercise and sell its position based
on various factors, including management's discretion, when permitted to do so.
Income before allocations grew to $22.4 million in 2000 from $12.7 million
in 1999. This increase was primarily attributable to the increased net revenue,
partially offset by $22.9 million of net write-offs in the Mezzanine Capital
portfolio, $11.8 million incurred by Realty Capital's exit from the origination
and sale of loans to the CMBS market, and higher operating expenses due to the
inclusion of Mezzanine Capital and Harris Williams & Co. for virtually the full
six months ended June 30, 2000.
Managed assets grew to $950.6 million despite the elimination of Realty
Capital's on-balance sheet CMBS product, which totaled $243.5 million at June
30, 1999. This reduction was offset by $315.7 million of growth in Realty
Capital's bridge and mezzanine financing portfolio.
Mezzanine Capital's managed assets declined to $432.8 million in 2000 from
$456.6 million in 1999. The compression is primarily due to transitioning its
new business originations using FINOVA's underwriting standards. Loan backlog
for the segment as a whole, excluding fee-based volume, decreased to $190.8
million from $257.2 million in 1999.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
On March 27, 2000, FINOVA Group announced the retirement of its Chairman,
President and Chief Executive Officer, Samuel L. Eichenfield, for personal and
health reasons. Following Mr. Eichenfield's retirement as a director and
officer, the FINOVA Group's board of directors elected Matthew M. Breyne as a
director, President and Chief Executive Officer of FINOVA Group. FINOVA's board
of directors has elected Mr. Breyne as Chairman, President and Chief Executive
Officer of FINOVA. He previously served as President and Chief Operating Officer
of FINOVA and continues to serve as a director of the company.
FINOVA also announced that it would take a special $80 million pre-tax
charge to earnings in the first quarter of 2000 to bolster loss reserves and
provide for payment of deferred compensation and executive severance. The
additional loss reserves related to a $70 million loss on a major customer in
the Distribution and Channel Finance line of business. The remainder of the
charge will be used to provide for payment of deferred compensation and
executive severance for Mr. Eichenfield.
11
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On May 5, 2000, FINOVA renewed a $500 million, 364-day revolving credit
agreement for another year to 2001. Two additional 364-day commercial paper
back-up facilities aggregating $1.6 billion were scheduled to renew on May 16,
2000. FINOVA received commitments to renew approximately $1.1 billion of these
facilities. The $1.1 billion, along with the $500 million renewal on May 5th and
$2.4 billion previously in place, was not adequate to provide dollar-for-dollar
coverage on $4.3 billion of commercial paper outstanding. As a result, FINOVA
exercised its term-out option under the $1.6 billion of facilities, which are
payable on May 15, 2001 and also drew down its other commercial paper back-up
bank facilities as discussed in Financial Condition, Liquidity and Capital
Resources.
On May 8, 2000, FINOVA announced that it had engaged Credit Suisse First
Boston to assist in the exploration of strategic alternatives with financial,
strategic and other potential partners. This process is continuing with various
forms of transactions under review, including a sale of the company.
In light of these recent events, several credit ratings agencies reduced
the senior debt and commercial paper credit ratings for FINOVA. Including the
July 31st downgrades, the credit ratings for FINOVA are as follows:
Senior Debt Commercial Paper
----------- ----------------
Moody's Investors Service Inc. Baa2 P-3
Standard & Poor's Ratings Group BBB- A-3
Fitch Investors Services, Inc. BBB F-2
Duff & Phelps Credit Rating Co. BBB D-2
Dominion Bond Rating Services (Canada) BBB (high) R-2 (high)
FINOVA expects to use cash flow from operations, proceeds from
securitizations and proceeds from other asset sales to satisfy its debt
obligations and operational needs, and to fund reduced amounts of new business.
In May 2001, FINOVA is obligated to repay approximately $1.6 billion of
borrowings under the back-up bank facilities, which is in addition to other debt
maturities. These repayments will require additional asset sales, new financing
arrangements, infusion of debt or equity or similar arrangements.
During July 2000, FINOVA structured two securitizations with total
commitments of $800 million. One securitization, with Chase Securities acting as
structuring agent, includes a commitment to purchase up to $500 million of loans
on a revolving basis until February 2001, which may be extended by mutual
agreement, and is funded through a commercial paper conduit. As with FINOVA's
other securitizations, other events, such as the performance of the portfolio or
of FINOVA, could result in termination of the securitizations. If the
securitizations are not extended or renewed, loan collections will thereafter be
applied to reduce the securitization balance rather than to fund the obligations
to the underlying borrowers. Proceeds to FINOVA through the first two fundings
of the Chase securitization aggregated approximately $475 million. The
securitization assets were originated through FINOVA's Corporate Finance
division. An additional $300 million securitization, structured by Morgan
Stanley Dean Witter, is available for future funding. Assets for this
securitization will originate through FINOVA's Franchise Finance division.
On August 9, 2000, FINOVA signed an agreement to sell substantially all of
the assets related to its Commercial Services division. The transaction is
expected to close in the third quarter of 2000 and is subject to certain
conditions, including regulatory approvals.
FINOVA continues to seek new business by emphasizing customer service,
providing competitive interest rates and focusing on selected market niches. The
Company as a whole expects to significantly slow managed asset growth on an
annual basis. There can be no assurance that FINOVA's asset base will grow.
NEW ACCOUNTING STANDARDS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by recognition of those
items as assets or liabilities in the statement of financial position and
measurement at fair value. The Company is currently assessing the impact of SFAS
No.133 on the Company's financial position and results of operations.
12
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, such as predictions or
forecasts. FINOVA assumes no obligation to update those statements to reflect
actual results, changes in assumptions or other factors.
The forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those predicted. Those factors include:
* FINOVA's ability to address its financing requirements in light of its
existing debt obligations and market conditions.
* Pending and potential litigation relating to the special charge to
earnings announced on March 27, 2000.
* The results of efforts to implement FINOVA's business strategy,
including the evaluation of strategic alternatives.
* The ability to attract and retain key personnel and customers.
* Conditions that adversely impact FINOVA's borrowers and their ability
to meet their obligations to FINOVA.
* The adequacy of FINOVA's loan loss reserves.
* Other risks detailed in FINOVA's SEC reports, including on page 15 of
FINOVA's 10-K for 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Subsequent to the announcements of the special charge of $80 million to
bolster loss reserves and provide for payment of deferred compensation and
executive severance in the first quarter of 2000 and the draws against the
Company's commercial paper back-up bank facilities, FINOVA's credit ratings were
downgraded by Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Fitch Investors Services, Inc. and Duff & Phelps Credit Rating Co. On July 31,
2000, Standard & Poor's Ratings Group again reduced FINOVA's credit ratings. The
draws on the commercial paper back-up facilities and credit downgrades are
expected to decrease 2000 net income by $20 million to $26 million. See Recent
Developments and Business Outlook for further discussion.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between March 29 and May 23, 2000, five shareowner lawsuits were filed
against FINOVA Group and Samuel Eichenfield, FINOVA Group's former chairman,
president, and chief executive officer; two of the lawsuits also named FINOVA as
a defendant, and one named three other executive officers. The first lawsuit was
filed in the United States District Court for the District of New York; that
action has been transferred to the United States District Court for the District
of Arizona, where the remaining four lawsuits were filed. Motions to consolidate
all five lawsuits into one action are currently pending.
All of the lawsuits purport to be on behalf of the named plaintiffs
(William K. Steiner, Uri Borenstein, Jerry Krim, Mark Kassis, and the Louisiana
School Employees Retirement System), and others who purchased FINOVA Group
common stock during the class period of July 15, 1999, through either March 26,
2000, or May 7, 2000. The suit brought by the Louisiana School Employees
Retirement System also purports to be on behalf of all those who purchased
FINOVA Capital 7.25% Notes which are due November 8, 2004, pursuant to the
registration statement and prospectus supplement dated November 1, 1999.
The complaints generally allege that the defendants made materially
misleading statements regarding FINOVA's loss reserves, and otherwise violated
the federal securities laws in an effort to bolster FINOVA Group's stock price,
among other reasons. The complaints all seek unspecified damages, interest, and
other relief; the Louisiana School Employees Retirement System complaint also
seeks rescission with regard to the notes purchased.
FINOVA has not had an opportunity to fully assess the likelihood of success
in the matters, but believes the claims are without merit, and in any event does
not expect the actions to have a material adverse impact on the Company's
financial condition. FINOVA and the other defendants intend to vigorously defend
against the claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
Exhibit No. Document
----------- --------
10.A Employment Agreement for Matthew M. Breyne dated April 1,
2000 (incorporated by reference from FINOVA Group's
Quarterly Report on Form 10-Q for the period ended June 30,
2000 (the "FINOVA Group 2Q00 10-Q"), Exhibit 10.A).+
10.B Executive Retention Plan adopted May 26, 2000 (incorporated
by reference from the FINOVA Group 2Q00 10-Q, Exhibit
10.B).+
12 Computation of Ratio of Income to Fixed Charges (interim
period).
27 Financial Data Schedule
----------
+ Relating to management compensation
(b) Reports on Form 8-K:
A report on Form 8-K, dated July 28, 2000 was filed by Registrant which
reported under Items 5 and 7 the revenues, net income and selected financial
data and ratios for the quarter ended June 30, 2000 (unaudited).
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FINOVA CAPITAL CORPORATION
(Registrant)
Dated: August 11, 2000 By: /s/ Bruno A. Marszowski
-------------------------------------
Bruno A. Marszowski, Senior Vice
President, Chief Financial Officer
and Controller Principal Financial
and Accounting Officer
15
<PAGE>
FINOVA CAPITAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
JUNE 30, 2000 FORM 10-Q
Exhibit No. Document
----------- --------
10.A Employment Agreement for Matthew M. Breyne dated April 1,
2000 (incorporated by reference from FINOVA Group's
Quarterly Report on Form 10-Q for the period ended June 30,
2000 (the "FINOVA Group 2Q00 10-Q"), Exhibit 10.A).
10.B Executive Retention Plan adopted May 26, 2000 (incorporated
by reference from the FINOVA Group 2Q00 10-Q, Exhibit 10.B).
12 Computation of Ratio of Income to Fixed Charges (interim
period).
27 Financial Data Schedule
16
