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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 March 31, 2000
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)
4800 North Scottsdale Road 85251-7623
Scottsdale, AZ (Zip Code)
(Address of Principal Executive Offices)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 11, 2000, 61,299,000 shares of Common Stock ($0.01 par value) were
outstanding.
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<PAGE>
THE FINOVA GROUP INC.
TABLE OF CONTENTS
Page No.
--------
Part I Financial Information 1
Item 1. Financial Statements 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 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 14
Part II Other Information 15
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE FINOVA GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
ASSETS:
Cash and cash equivalents $ 38,695 $ 100,344
Investment in financing transactions:
Loans and other financing contracts 10,721,268 10,446,356
Leveraged leases 846,640 837,083
Fee-based receivables 707,875 583,885
Operating leases 605,177 592,495
Direct financing leases 600,001 494,175
Financing contracts held for sale 167,983
------------ ------------
13,480,961 13,121,977
Less reserve for credit losses (269,339) (264,983)
------------ ------------
Net investment in financing transactions 13,211,622 12,856,994
Investments 441,305 446,489
Goodwill, net of accumulated amortization 361,960 367,241
Other assets 333,071 279,225
------------ ------------
$ 14,386,653 $ 14,050,293
============ ============
LIABILITIES:
Accounts payable and accrued expenses $ 130,407 $ 167,073
Due to clients 219,057 146,607
Interest payable 99,296 114,397
Senior debt 11,742,426 11,407,767
Deferred income taxes 431,338 439,518
------------ ------------
12,622,524 12,275,362
------------ ------------
Commitments and contingencies
Company-obligated mandatory redeemable convertible
preferred securities of subsidiary trust solely
holding convertible debentures of FINOVA, net
of expenses ("TOPrS") 111,550 111,550
SHAREOWNERS' EQUITY:
Common stock, $0.01 par value, 400,000,000
shares authorized, and 64,849,000 shares issued 648 648
Additional capital 1,109,000 1,109,521
Retained income 688,862 689,466
Accumulated other comprehensive income 23,493 33,812
Common stock in treasury, 3,629,000 and 3,597,000
shares, respectively (169,424) (170,066)
------------ ------------
1,652,579 1,663,381
------------ ------------
$ 14,386,653 $ 14,050,293
============ ============
See notes to interim consolidated condensed financial statements.
1
<PAGE>
THE FINOVA GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Dollars in Thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
Interest and income earned from financing
transactions $ 339,193 $ 245,222
Operating lease income 27,332 27,853
Interest expense (189,082) (131,183)
Operating lease depreciation (15,876) (17,226)
------------ ------------
Interest margins earned 161,567 124,666
Volume-based fees 12,598 12,735
------------ ------------
Operating margin 174,165 137,401
Provision for credit losses (98,000) (9,500)
------------ ------------
Net interest margins earned 76,165 127,901
Gains on disposal of assets 21,030 12,370
------------ ------------
97,195 140,271
Operating expenses (79,067) (57,499)
------------ ------------
Income before income taxes and preferred
dividends 18,128 82,772
Income taxes (6,770) (31,769)
------------ ------------
Income before preferred dividends 11,358 51,003
Preferred dividends, net of tax (946) (946)
------------ ------------
NET INCOME $ 10,412 $ 50,057
============ ============
Basic earnings per share $ 0.17 $ 0.89
============ ============
Adjusted weighted average shares outstanding 60,903,000 56,294,000
============ ============
Diluted earnings per share $ 0.17 $ 0.83
============ ============
Adjusted weighted average shares outstanding 61,635,000 61,318,000
============ ============
Dividends per common share $ 0.18 $ 0.16
============ ============
See notes to interim consolidated condensed financial statements.
2
<PAGE>
THE FINOVA GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES:
Net income $ 10,412 $ 50,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 98,000 9,500
Depreciation and amortization 24,501 24,315
Deferred income taxes (1,131) 35,283
Change in assets and liabilities, net of effects
from acquisitions
Decrease in other assets 18,317 8,018
Decrease in accounts payable and accrued expenses (36,666) (64,789)
Decrease in interest payable (15,101) (11,927)
Other 563 (14,565)
--------- ---------
Net cash provided by operating activities 98,895 35,892
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of investments, net of gains 8,965
Proceeds from sales of residual positions,
net of gains 2,134 49,128
Proceeds from sales of commercial mortgage
backed securities ("CMBS") assets, net of gains 115,770
Principal collections on financing transactions 578,569 366,679
Expenditures for investments and other income
producing activities (28,114) (9,318)
Expenditures for financing transactions (898,553) (776,238)
Expenditures for CMBS transactions (159,069)
Net change in fee-based receivables (123,990) 7,720
Net change in revolving credit facilities (211,803) (324,601)
Cash received in acquisitions 20,942
Other 700 739
--------- ---------
Net cash used in investing activities (556,322) (824,018)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under commercial paper and
short-term loans 675,329 285,935
Long-term borrowings 120,000 855,000
Repayment of long-term borrowings (461,260) (309,225)
Proceeds from exercise of stock options 275 8,683
Dividends (11,016) (8,967)
Net change in due to clients 72,450 (1,786)
--------- ---------
Net cash provided by financing activities 395,778 829,640
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (61,649) 41,514
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 100,344 49,518
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,695 $ 91,032
========= =========
See notes to interim consolidated condensed financial statements.
3
<PAGE>
THE FINOVA GROUP INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NOTE A BASIS OF PREPARATION
The consolidated financial statements present the financial position,
results of operations and cash flows of The FINOVA Group Inc. (the "Company")
and its subsidiaries (collectively, "FINOVA" or the "Company"), including FINOVA
Capital Corporation and its subsidiaries (collectively, "FINOVA Capital").
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 March 31, 2000,
the results of operations for the three months ended March 31, 2000 and 1999 and
cash flows for the three months ended March 31, 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 $93 thousand and $35.6
million for the three months ended March 31, 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 and preferred dividends, 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:
Three Months Ended March 31,
----------------------------
(Dollars in Thousands) 2000 1999
------------ ------------
Total net revenue (loss):
Commercial Finance $ 60,762 $ 51,706
Specialty Finance 99,063 94,231
Capital Markets 44,909 9,416
Corporate and other (9,539) (5,582)
------------ ------------
Consolidated total $ 195,195 $ 149,771
============ ============
Income (loss) before allocations:
Commercial Finance $ (41,986) $ 24,348
Specialty Finance 77,316 77,743
Capital Markets 21,809 (17)
Corporate and other, overhead and
unallocated provision for credit losses (39,011) (19,302)
------------ ------------
Income from continuing operations
before income taxes $ 18,128 $ 82,772
============ ============
March 31,
----------------------------
2000 1999
------------ ------------
Managed assets:
Commercial Finance $ 4,137,986 $ 3,258,093
Specialty Finance 8,518,738 7,337,715
Capital Markets 925,696 925,366
Corporate and other 93,401 94,477
------------ ------------
Consolidated total 13,675,821 11,615,651
Less securitizations and participations sold (194,860) (529,635)
------------ ------------
Investment in financing transactions $ 13,480,961 $ 11,086,016
============ ============
5
<PAGE>
NOTE D EARNINGS PER SHARE
Basic earnings per share exclude the effects of dilution and are
computed by dividing income available to common shareowners by the weighted
average amount of common stock outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options, convertible
preferred stock or other contracts to issue stock were exercised or converted
into common stock. For the three months ended March 31, 2000 convertible
preferred stock and related dividends were antidilutive and, therefore, excluded
from the calculation of diluted earnings per share. Basic and diluted earnings
per share calculations are presented for the three months ended March 31, 2000
and 1999 on the Condensed Statements of Consolidated Income and are detailed
below:
THREE MONTHS ENDED
MARCH 31,
----------------------------
(Dollars in thousands, except per share data) 2000 1999
------------ ------------
BASIC EARNINGS PER SHARE COMPUTATION:
Net income $ 10,412 $ 50,057
============ ============
Weighted average shares outstanding 61,197,000 56,545,000
Contingently issued shares (1) (294,000) (251,000)
------------ ------------
Adjusted weighted average shares 60,903,000 56,294,000
============ ============
Basic earnings per share $ 0.17 $ 0.89
============ ============
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 10,412 $ 50,057
Preferred dividends, net of tax 946
------------ ------------
Income before preferred dividends $ 10,412 $ 51,003
============ ============
Weighted average shares outstanding 61,197,000 56,545,000
Contingently issued shares (1) (291,000) (167,000)
Incremental shares from assumed conversions:
Stock options 729,000 2,002,000
Convertible preferred securities 2,938,000
------------ ------------
Total potential dilutive common shares 729,000 4,940,000
------------ ------------
Adjusted weighted average shares 61,635,000 61,318,000
============ ============
Diluted earnings per share $ 0.17 $ 0.83
============ ============
Note:
- ----------
(1) Shares represent performance-based restricted stock.
NOTE E 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.
6
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
MARCH 31, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
---------------------------------- -------------------------------
Market Repossessed Repossessed Lease & Total Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
----------- -------- -------- -------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Finance Group
Corporate Finance $ 1,099,307 $ 38,198 $ $ 49,054 $ 1,992 $ $ 1,188,551 8.8
Rediscount Finance 1,049,904 10,819 631 3,005 1,064,359 7.9
Business Credit 877,424 9,552 39,178 5,883 932,037 6.9
Distribution & Channel Finance 534,152 11,799 16,149 562,100 4.2
Commercial Services 288,855 2,000 2,912 1,714 295,481 2.2
Growth Finance 51,840 2,184 54,024 0.4
----------- -------- ------- -------- -------- ------- ----------- -----
3,901,482 61,549 10,819 110,108 12,594 4,096,552 30.4
----------- -------- ------- -------- -------- ------- ----------- -----
Specialty Finance Group
Transportation Finance 2,490,173 64,674 2,554,847 19.0
Resort Finance 1,543,037 15,378 21,636 1,580,051 11.7
Commercial Equipment Finance 802,886 5,138 13,658 19,934 2,362 843,978 6.3
Franchise Finance 831,606 3,837 4,168 2,348 172 842,131 6.2
Healthcare Finance 761,873 9,442 5,133 53,340 2,711 832,499 6.2
Specialty Real Estate Finance 721,332 35,998 4,155 6,083 152 767,720 5.7
Communications Finance 748,497 3,909 4,394 756,800 5.6
Public Finance 180,926 6,078 103 187,107 1.4
----------- -------- ------- -------- -------- ------- ----------- -----
8,080,330 84,103 65,484 79,818 50,001 5,397 8,365,133 62.1
----------- -------- ------- -------- -------- ------- ----------- -----
Capital Markets Group
Realty Capital 455,459 4,614 460,073 3.4
Mezzanine Capital 390,974 10,986 34,929 436,889 3.2
Investment Alliance 24,648 4,086 28,734 0.2
----------- -------- ------- -------- -------- ------- ----------- -----
871,081 15,072 39,543 925,696 6.8
----------- -------- ------- -------- -------- ------- ----------- -----
Other (3) 71,926 1,099 20,555 93,580 0.7
----------- -------- ------- -------- -------- ------- ----------- -----
TOTAL (4) $12,924,819 $161,823 $76,303 $229,469 $ 62,595 $25,952 $13,480,961 100.0
=========== ======== ======= ======== ======== ======= =========== =====
</TABLE>
- ----------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $1.3 million on repossessed assets year
to date during 2000, including $0.6 million in Specialty Real Estate
Finance, $0.3 million in Resort Finance, $0.1 million in Healthcare
Finance, $0.2 million in Rediscount Finance and $0.1 million in Commercial
Equipment Finance.
(3) Primarily includes other assets retained from disposed or discontinued
operations.
(4) Excludes $194.9 million of assets securitized and participations sold which
the Company manages, including securitizations of $118.7 million in
Franchise Finance and participations of $20.9 million in Corporate Finance,
$20.7 million in Public Finance, $13.1 million in Rediscount Finance, $7.9
million in Communications Finance, $5.6 million in Business Credit, $6.3
million in Resort Finance and $1.7 million in Other.
7
<PAGE>
RESERVE FOR CREDIT LOSSES:
The reserve for credit losses at March 31, 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:
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
(Dollars in Thousands)
Balance, beginning of period $ 264,983 $ 207,618
Provision for credit losses 98,000 9,500
Write-offs (94,583) (9,142)
Recoveries 713 739
Reserves related to acquisitions 245 25,151
Other (19) 4,411
--------- ---------
Balance, end of period $ 269,339 $ 238,277
========= =========
At March 31, 2000 the total carrying amount of impaired loans was
$391.3 million, of which $161.8 million were revenue accruing. A reserve for
credit losses of $95.7 million has been established for $169.7 million of
nonaccruing impaired loans and $32.2 million has been established for $123.6
million of accruing impaired loans. The remaining $141.4 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. 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 THREE MONTHS ENDED MARCH 31, 2000
TO THE THREE MONTHS ENDED MARCH 31, 1999
THE FOLLOWING DISCUSSION RELATES TO THE FINOVA GROUP INC. AND ITS
SUBSIDIARIES (COLLECTIVELY "FINOVA" OR THE "COMPANY") INCLUDING FINOVA CAPITAL
CORPORATION AND ITS SUBSIDIARIES (COLLECTIVELY, "FINOVA CAPITAL").
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2000 was $10.4 million
($0.17 per diluted share) compared to $50.1 million ($0.83 per diluted share)
for the three months ended March 31, 1999. Net income was down as a result of an
$80 million special charge to pre-tax earnings to bolster and replenish loss
reserves and provide payment of deferred compensation and executive severance.
The additional loss reserves were added following a first-quarter 2000 write-off
related to a $70 million loss on a major customer of FINOVA's Distribution &
Channel Finance (DCF) division. The remainder of the charge will be used to
provide payment of deferred compensation and executive severance for Samuel L.
Eichenfield, FINOVA's former chairman, president and chief executive officer,
who retired on March 24, 2000.
Excluding the special charge, net income for the first quarter of 2000
would have been $58.8 million ($0.92 per diluted share), a 17% increase in net
income and an 11% increase in earnings per share over the comparable 1999
quarter.
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 were up 30% in the first quarter of
2000 compared to the first quarter of 1999 ($161.6 million vs. $124.7 million).
The increase was due primarily to portfolio growth (managed assets) which
increased by 18%, 21% when excluding $345 million of assets held for sale at
Realty Capital at March 31, 1999. Portfolio growth resulted primarily from $4.8
billion of new business added during the 12 months ended March 31, 2000.
First-quarter annualized portfolio growth was 7.1%, excluding $168 million of
commercial mortgage-backed securities (CMBS) loans held for sale at December 31,
1999. The lower growth rate in the first quarter of 2000, when compared to 22.3%
in the same period for 1999, is primarily attributable to lower new-business
volume generated by the company's Commercial Finance segment ($108 million in
the first quarter of 2000 vs. $346 million in the comparable 1999 quarter),
partially offset by an increase in new business volume by the Specialty Finance
segment ($834 million in the first quarter of 2000 vs. $648 million during the
same period in 1999). The fact that the 2000 new business volume was compared to
a much larger beginning portfolio base ($13.6 billion in 2000 vs. $10.6 billion
in 1999) also contributed to the lower annualized percentage growth of the
portfolio in the first quarter of 2000. Total new business for the first quarter
8
<PAGE>
of 2000 was $984 million, down slightly from $1.061 billion in the first quarter
of 1999. Interest margins earned as a percent of average earning assets were
5.15% in the first quarter of 2000, up slightly from 5.09% in the first quarter
of 1999, primarily due to more favorable borrowing costs resulting from lower
spreads (approximately 0.17%) on commercial-paper borrowings in the first
quarter of 2000 when compared to the first quarter of 1999.
To alleviate administrative burdens, FINOVA terminated a $300 million
securitization agreement that the company's Corporate Finance division entered
into in 1995 and 1996, which has very little economic impact, but does reduce
the interest margin percentage by approximately 0.10% going forward.
VOLUME-BASED FEES. Volume-based fees are 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 first quarter of 2000 was $1.390 billion, down $83
million, or 5.6%, from the $1.473 billion generated in the first quarter of
1999. The decline in volume in 2000 was primarily due to lower CMBS volume,
partially offset by higher volume in FINOVA's remaining fee-based businesses.
Volume-based fees generated were $12.6 million in the first quarter of 2000
which approximated the $12.7 million earned in the 1999 period, as higher rates
earned on that business in 2000 (0.92% vs. 0.86% in 1999) helped mitigate the
effects of the lower volume. In April 2000, Realty Capital exited from the
origination and sale of commercial real estate loans to the CMBS market. See
Recent Developments and Business Outlook for further discussion.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was higher
in the 2000 quarter ($98.0 million vs. $9.5 million) due to the special $70
million charge to bolster the reserve for credit losses after the DCF loss and
due to other write-offs totaling $23.9 million in 2000, which were spread
relatively evenly among FINOVA's three operating segments, compared to $8.4
million in 1999. Write-offs, excluding the one-time $70 million charge, as a
percent of average managed assets were 0.71% annualized in 2000, up from 0.31%
annualized in 1999. Excluding the special charge, the company expects write-offs
to range from 0.50% to 0.60% of average managed assets for the full-year 2000.
There can be no assurance that these levels will be achieved, depending in part,
on conditions that could adversely affect FINOVA's borrowers and their ability
to meet their obligations to FINOVA.
GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $21.0
million pre-tax in the first quarter of 2000, up 70% from the $12.4 million
reported in the first quarter of 1999. Gains in 2000 consisted of $1.1 million
from the sale of residuals coming off lease and $19.9 million from the sale of
investments and loans, $12.5 million of which came from sales of Healtheon/Web
MD stock during the quarter. At March 31, 2000, FINOVA held approximately
924,000 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 increased to $79.1 million in
the first quarter of 2000 from $57.5 million in the comparable 1999 quarter, due
to the previously mentioned $10 million accrual for deferred compensation and
executive severance, as well as to an increase in personnel costs, principally
related to employees added via acquisitions in 1999. Operating efficiency, which
is the ratio of operating expenses to operating margins and gains, excluding the
special charge for deferred compensation and severance, was 35.4% in 2000,
compared to 38.4% in 1999. The improvement is principally due to lower incentive
compensation accruals in 2000 related to lower earnings and the decrease in the
company's stock price.
INCOME TAXES. Income taxes were lower for the first three months of
2000 compared to the corresponding period in 1999 primarily due to the decrease
in pre-tax income.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets were $13.68 billion at March 31, 2000 compared to $13.61
billion at December 31, 1999. Included in managed assets at March 31, 2000 were
$13.48 billion in funds employed, $118.7 million of securitized assets managed
by FINOVA and $76.2 million of participations sold to third parties. The
increase in managed assets was due to funded new business of $984.4 million for
the three months ended March 31, 2000, partially offset by prepayments and asset
sales accompanied by normal portfolio amortization.
The reserve for credit losses increased to $269.3 million at March 31,
2000 from $265.0 million at December 31, 1999. At March 31, 2000 and December
31, 1999, the reserve for credit losses represented 2.0% of ending managed
assets (excluding participations and financing contracts held for sale).
Nonaccruing assets increased to $318.0 million or 2.3% of ending managed assets
(excluding participations) at March 31, 2000 from $295.1 million or 2.2% at the
end of 1999. The largest account that was moved into this category during the
quarter had a balance of approximately $8.8 million. FINOVA's share
(approximately $32 million) of a large syndicated credit facility held in
Healthcare Finance is the overall largest account in nonaccruing assets. It has
been a nonaccruing asset since the third quarter of 1999 and is currently in
bankruptcy. FINOVA does not expect any activity that might change the status of
this account until late 2000 or early 2001.
9
<PAGE>
Revenue accruing impaired assets were $161.8 million or 1.2% of ending
funds employed at March 31, 2000, compared to $240.1 million or 1.8% of ending
funds employed at December 31, 1999. The largest account in this category was an
airline customer from the Transportation Finance line of business with an
account balance of approximately $56 million. This customer filed for bankruptcy
in the first quarter of 2000. FINOVA's position in the account is secured by
Boeing 747 aircraft. FINOVA is negotiating with the trustee for repossession
and/or continued use of its collateral.
At March 31, 2000, a Healthcare Finance customer was granted a 60-day
moratorium on a large credit facility in which FINOVA participated with a group
of banks. The account was current at March 31, 2000. FINOVA's exposure is
approximately $24 million. Also, in early April, a computer reseller
headquartered in Arizona that is a Distribution & Channel Finance customer filed
bankruptcy. FINOVA has an exposure of approximately $12 million on this account
primarily from an inventory financing line. These two collateralized accounts
are being evaluated for any potential impairment.
FINOVA's thirty-one to ninety day delinquencies rose from 66 basis
points at December 31, 1999 to 108 basis points at March 31, 2000. The increase
resulted from the airline customer mentioned above moving into this category.
Excluding that customer, delinquencies would have been approximately 65 basis
points, consistent with the prior quarter.
At March 31, 2000, FINOVA had $11.74 billion of debt outstanding,
representing 6.7 times the Company's equity base of $1.76 billion. Included in
debt at March 31, 2000 was approximately $4.55 billion of commercial paper and
short-term borrowings supported by unused long-term revolving-credit agreements.
At year-end 1999, FINOVA's debt was 6.4 times the equity base of $1.77 billion.
FINOVA renewed a $500 million, 364-day revolving credit agreement on
May 3, 2000. 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 renewed on May 3rd, 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
notified the lending institutions on May 8, 2000 that it would exercise its
term-out option under the $1.6 billion of facilities and draw on these and its
other credit agreements, as needed. The proceeds, along with cash flow from
operations, will be used to retire debt, satisfy other obligations and to fund
new business. The $1.6 billion in borrowings are payable on May 15, 2001. Draws
under the credit facilities are due during 2001, 2002, or 2003.
Growth in funds employed has been financed by FINOVA's internally
generated funds and new borrowings. During the three months ended March 31,
2000, FINOVA issued $120 million of new long-term borrowings and recognized a
net increase in commercial paper outstanding of $675.3 million. During the same
period, FINOVA repaid $461.2 million of long-term borrowings. Subsequent to
quarter end, FINOVA Capital Corporation's credit ratings were reduced by Moody's
Investor Services, Inc., Standard & Poor's Ratings Group, Fitch Investors
Services, Inc., Duff & Phelps Credit Rating Co and Dominion Bond Rating Service,
which rates FINOVA's debt in Canada. See Recent Developments and Business
Outlook for further discussion of the rating agency downgrades.
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.
Total revenue is the sum of operating margin and gains on disposal of
assets. Income before allocations is income before income taxes, preferred
dividends, corporate overhead expenses and the unallocated portion of the
provision for credit losses. Managed assets include each segment's investment in
financing transactions plus securitizations and participations sold.
COMMERCIAL FINANCE. Commercial Finance includes traditional asset-based
businesses that provide financing through revolving credit facilities and term
loans secured by assets such as receivables and inventories, as well as
providing factoring and management services.
Total net revenue was $60.8 million in 2000 compared to $51.7 million
for the first three months of 1999, an increase of 17.5%. The increase was
primarily due to a 27.0% 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, slower growth rate in volume-based fees and a
lower level of prepayment related income and fees. Distribution and Channel
Finance had fee-based volume of $831.5 million during the first three months of
2000 compared to $803.5 million in 1999. The rate earned on that volume also
increased from 0.93% to 1.00%. Commercial Services' fee-based volume rose to
$390.5 million from $285.7 million in 1999, an increase of 36.7%; however, the
rate earned on that volume declined to 0.73% from 0.89% for the first three
months of 1999. The group also generated a small level of fee-based volume
($11.7 million) by its Growth Finance unit in 2000.
10
<PAGE>
Income before allocations declined from $24.3 million in 1999 to a loss
of $42.0 million in the first three 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 $28.0 million, an
increase of approximately 15%. Net write-offs for the group totaled $78.6
million in the first three months of 2000 compared to $6.1 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 was 0.86%
compared to 0.84% in the first three months of 1999.
Managed assets grew to $4.14 billion over the last twelve months from
$3.26 billion, an increase of 27.0%. 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 and strong growth in the
Rediscount Finance operation, which grew 20.3% over the last twelve months.
However, the first quarter annualized growth represented a 5.5% decline
from year-end 1999. The decline was primarily due to compression in the
Corporate Finance/Business Credit portfolio, which dropped nearly 21.0%
annualized during the first quarter from $2.27 billion to $2.15 billion. The
Commercial Finance Group had new loan business of $108.1 million in the first
three months compared to $346.4 million in 1999. The group, which is considered
more generalist than FINOVA's more profitable niche-oriented businesses is
expected to slow its 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, even excluding sales of assets
through possible securitizations, which would reduce owned assets. 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 increased 5.1% to $99.1 million in the first three
months of 2000 compared to $94.2 million in 1999. The increase was primarily due
to 16.1% growth in managed assets over the last twelve months and 12.3%
annualized growth during the first quarter, partially offset by the effects of
competitive pricing pressures in certain business units and a lower level of
gains on disposal of assets during the first quarter of 2000 ($3.0 million in
2000 vs. $9.6 million in 1999). 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.
Income before allocations was consistent with the prior year at $77.3
million compared to $77.7 million in 1999, primarily due to the lower level of
gains and the increase in net write-offs from $2.3 million to $5.8 million in
the first quarter of 2000. Net write-offs in 2000 were spread among the business
units. Annualized net write-offs as a percentage of average managed assets for
the group rose to 0.28% from 0.12%.
Managed assets grew to $8.52 billion in the first quarter of 2000 from
$7.34 billion in the same period of 1999, an increase of 16.1%. The growth in
managed assets was driven by new business of $833.5 million in the first three
months of 2000 compared to $648.2 million in 1999. The growth in managed assets
was spread across most business units with Franchise Finance, Healthcare
Finance, Resort Finance and Transportation Finance all growing in excess of 15%
over the last twelve months, while only Public Finance experienced a decline.
The group as a whole was able to increase backlog from $1.30 billion to $1.60
billion by the end of the first quarter of 2000.
CAPITAL MARKETS. Capital Markets, in conjunction with institutional
investors, provides commercial mortgage banking services and debt and equity
capital funding. Mezzanine Capital (formerly Sirrom Capital Corporation) was
added to this segment late in the first quarter of 1999.
Total net revenue was $44.9 million for the first three months of 2000
compared to $9.4 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
CMBS activities. Realty Capital's bridge and mezzanine financing portfolio grew
to $460.1 million by the end of the first quarter of 2000 compared to $84.9
million in 1999. Realty Capital's CMBS volume declined to $140.9 million in the
first quarter of 2000 from $383.5 million for the same period in 1999, while the
rate earned on that volume increased to 0.75% from 0.41%.
In early April, FINOVA repositioned its Realty Capital business by
ending the preferred partner program entered into with an investment banker in
December 1999 and exiting from the origination and sale of commercial real
estate loans to the CMBS market. The Realty Capital division will now focus on
its on-balance sheet bridge and mezzanine financing activities. The Company
estimates this change will decrease 2000 diluted EPS by an estimated $0.15 to
$0.20.
11
<PAGE>
The Mezzanine Capital and Harris Williams & Co. units provided $35.9
million of net revenue during the first three months of 2000 compared to $2.3
million in 1999. The net revenue in 2000 included $20.4 million related to gains
from sale of equity and warrant positions. Included in this amount were $12.5
million of gains generated from the sale of Healtheon/WebMD stock. FINOVA
recorded a pre-tax unrealized gain of $14.6 million through other comprehensive
income on the balance sheet related to 923,832 shares of Healtheon/WebMD stock
in its portfolio at March 31, 2000. FINOVA periodically assesses its position in
this unit's investment portfolio and will exercise its position based on various
factors, including management's discretion.
Income before allocations grew to $21.8 million in the first three
months of 2000 from a breakeven in 1999. This increase was primarily
attributable to the increased net revenue, partially offset by $7.6 million of
net write-offs in the Mezzanine Capital portfolio and higher operating expenses
due to the addition of Mezzanine Capital and Harris Williams & Co. for an entire
quarter.
Managed assets remained flat at approximately $925 million despite the
elimination of Realty Capital's on-balance sheet CMBS product, which totaled
$345.5 million at March 31, 1999. This reduction was offset by $375.2 million of
growth in Realty Capital's bridge and mezzanine financing portfolio.
The acquired assets of Mezzanine Capital declined to $436.9 million in
2000 from $477.5 million at March 31, 1999. FINOVA expects this portfolio to
further compress during the first half of 2000 as it transitions to originating
new business using FINOVA's underwriting standards. Loan backlog for the segment
as a whole increased to $271.3 million from $160.7 million in 1999.
YEAR 2000 COMPLIANCE
FINOVA successfully completed all work necessary to make its
mission-critical systems Year 2000 compliant in 1999 and experienced no
significant problems during the transition to the new year. The Company incurred
expenses of $207,000 and capital costs of $1.7 million related to its Year 2000
compliance efforts. No material expenditures related to the Year 2000 issue are
expected to be incurred in the future.
FINOVA's estimate of future costs does not include time and costs that
may be incurred as a result of the failure of any third parties to become Year
2000 compliant. FINOVA monitored activity with customers and others during the
first quarter of 2000 to determine if their applications are Year 2000 compliant
and to assess the potential impact on FINOVA related to this issue. At the date
of this filing, no significant impact has been noted.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
On March 27, 2000, FINOVA 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 board of directors elected Matthew M. Breyne as a director,
President and Chief Executive Officer of FINOVA. FINOVA Capital's board of
directors has elected Mr. Breyne as Chairman, President and Chief Executive
Officer of FINOVA Capital. He previously served as President and Chief Operating
Officer of FINOVA Capital and continues to serve as a director of that 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.
In early April, FINOVA repositioned its Realty Capital business by
ending the preferred partner program entered into with an investment banking
firm in December 1999 and exiting from the origination and sale of commercial
real estate loans to the CMBS market. The Realty Capital division will now focus
on its on-balance sheet real estate loan products. This change is expected to
decrease 2000 EPS by an estimated $0.15 to $0.20.
In early April, FINOVA Capital entered into a $500 million credit
facility with various lenders to provide additional liquidity following the
announcements noted above. Those facilities required that they be repaid in the
event the company borrowed under the commercial paper back-up facilities. FINOVA
repaid the amounts borrowed under that facility in May 2000 after it drew upon
its other credit agreements, as discussed more fully below.
On May 1, 2000, FINOVA Capital issued $105 million of medium term
notes. On May 5, 2000, FINOVA Capital renewed a $500 million, 364-day revolving
credit agreement. 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 3rd 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
12
<PAGE>
notified the lending institutions on May 8, 2000 that it would exercise its
term-out option under the $1.6 billion of facilities, which are payable in 364
days, and draw on these and its other credit agreements as needed. The proceeds,
along with cash flow from operations, will be used to retire debt, satisfy other
obligations and to fund new business.
FINOVA has subsequently been receiving funding under those credit
facilities. FINOVA expects that its available credit facilities, cash flow from
operations, proceeds from assets available for sale and other resources will be
sufficient to satisfy its debt obligations, operational needs and to fund
reduced amounts of new business at least through the second quarter of 2001.
FINOVA is managing its business to help assure its ability to satisfy those and
its other obligations in due course.
In light of recent events, on May 8, 2000, FINOVA announced that its
board of directors had retained Credit Suisse First Boston to assist the Company
with a comprehensive evaluation of its strategic alternatives.
After the May 8th announcement, the credit ratings for FINOVA Capital
have been reduced as follows:
Senior Debt Commercial Paper
--------------- -------------------
From To From To
---- ---- ---- ----
Moody's Investors Service Inc. Baa1 Baa2 P-2 P-3
Standard & Poor's Ratings Group A- BBB+ A2 Credit Watch
Fitch Investors Services, Inc. A BBB F-1 F-2
Duff &Phelps Credit Rating Co. A BBB D-1 D-2
Dominion Bond Rating Service, which rates FINOVA's debt in Canada,
reduced its Senior Debt rating from A(low) to BBB(high) and reduced its
Commercial Paper rating from R1(low) to R2(high). To supplement internally
generated cash flows, the company is evaluating alternative funding sources such
as asset-backed facilities and securitizations. The draws on the commercial
paper back-up facilities and credit downgrades are expected to decrease 2000 EPS
by $0.30 to $0.40.
The costs to exit the CMBS market place, draws on commercial paper
back-up facilities and increase in cost of funds are expected to reduce 2000 EPS
by $0.45 to $0.60.
FINOVA intends to significantly slow its overall growth rate on an
annual basis in an effort to maintain or gradually reduce its debt to equity
ratio from the March 31, 2000 level of 6.7:1. There can be no assurance that
FINOVA's asset base will grow, even excluding sales of assets through possible
securitizations, which would reduce owned assets.
FINOVA continues to seek new business by emphasizing customer service,
providing competitive interest rates and focusing on selected market niches.
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.
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.
* Other risks detailed in FINOVA's SEC reports, including on page 15 of
FINOVA's 10-K for 1999.
13
<PAGE>
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 and the draws against the Company's commercial paper back-up
facilities, FINOVA Capital'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. The draws on the commercial paper back-up
facilities and credit downgrades are expected to decrease 2000 EPS by $0.30 to
$0.40. See Recent Developments and Business Outlook for further discussion.
Excluding the effect of the credit downgrades, there were no material
changes from the information provided in the report on Form 10-K for the year
ended December 31, 1999.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 29, 2000, an action was filed in the United States District
Court for the Southern District of New York against FINOVA, FINOVA Capital and
four executive officers, including Samuel Eichenfield, FINOVA's former chairman,
president and chief executive officer. A similar action was subsequently filed
in the United States District Court for the District of Arizona against FINOVA
and Mr. Eichenfield. The actions purport to be on behalf of the plaintiffs,
William K. Steiner and Uri Borenstein, respectively, and all other shareowners
who purchased FINOVA common stock during the same class period of July 15, 1999
through March 26, 2000. The complaints allege that defendants made materially
misleading statements regarding FINOVA's loss reserves relating to one account
and otherwise violated the federal securities laws in an effort to bolster
FINOVA's stock price, among other reasons. The complaints seek unspecified
damages, interest and other relief. FINOVA has not had an opportunity to assess
the likelihood of success in the matters, but 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
- ----------- --------
12 Computation of Ratio of Income to Fixed Charges (interim period).
27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K, dated April 18, 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 March 31, 2000 (unaudited).
15
<PAGE>
THE FINOVA GROUP INC.
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.
THE FINOVA GROUP INC.
(Registrant)
Dated: May 15, 2000 By: /s/ Bruno A. Marszowski
------------------------------------
Bruno A. Marszowski, Senior Vice
President, Chief Financial Officer
and Controller Principal Financial
and Accounting Officer
16
<PAGE>
THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
MARCH 31, 2000 FORM 10-Q
Exhibit No. Document
- ----------- --------
12 Computation of Ratio of Income to Fixed Charges (interim period).
27 Financial Data Schedule
17
THE FINOVA GROUP INC.
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
(Dollars in Thousands)
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
Income before income taxes $ 18,128 $ 82,772
Add fixed charges:
Interest expense 189,082 131,183
One-third rentals 1,763 1,111
-------- --------
Total fixed charges 190,845 132,294
-------- --------
Income as adjusted $208,973 $215,066
-------- --------
Ratio of income to fixed charges 1.09 1.63
======== ========
Preferred stock dividends on a pre-tax basis $ 1,581 $ 1,581
Total fixed charges and preferred stock dividends $192,426 $133,875
-------- --------
Ratio of income to fixed charges and preferred
stock dividends $ 1.09 $ 1.61
======== ========
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