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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 September 30, 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
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 13, 2000, 61,303,000 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 Consolidated Balance Sheets 1
Condensed Statements of Consolidated Operations 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. 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II Other Information 19
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures 21
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE FINOVA GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 708,151 $ 100,344
Investment in financing transactions:
Loans and other financing contracts 8,463,413 8,235,850
Leveraged leases 816,956 837,083
Operating leases 565,514 587,283
Direct financing leases 588,219 493,615
Financing contracts held for sale 167,983
------------ ------------
10,434,102 10,321,814
Less reserve for credit losses (257,702) (178,266)
------------ ------------
Net investment in financing transactions 10,176,400 10,143,548
Investments 440,017 442,662
Goodwill, net of accumulated amortization 242,838 264,014
Other assets 331,431 237,085
Investment in discontinued operations 1,457,897 2,702,236
------------ ------------
$ 13,356,734 $ 13,889,889
============ ============
LIABILITIES:
Accounts payable and accrued expenses $ 116,361 $ 153,276
Interest payable 126,595 114,397
Senior debt 11,271,980 11,407,767
Deferred income taxes 299,617 439,518
------------ ------------
11,814,553 12,114,958
------------ ------------
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 1,107,205 1,109,521
Retained income 435,666 689,466
Accumulated other comprehensive income 53,750 33,812
Common stock in treasury, 3,546,000 and 3,597,000 shares, respectively (166,638) (170,066)
------------ ------------
1,430,631 1,663,381
------------ ------------
$ 13,356,734 $ 13,889,889
============ ============
</TABLE>
See notes to interim consolidated condensed financial statements.
1
<PAGE>
THE FINOVA GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest earned from financing transactions $ 266,850 $ 233,037 $ 794,663 $ 641,016
Operating lease income 26,091 29,433 80,433 85,964
Interest expense (161,565) (117,738) (454,421) (330,680)
Operating lease depreciation (15,974) (19,396) (49,046) (53,267)
------------ ------------ ------------ ------------
Interest margins earned 115,402 125,336 371,629 343,033
Volume-based fees -- 3,723 1,336 8,751
------------ ------------ ------------ ------------
Operating margin 115,402 129,059 372,965 351,784
Provision for credit losses (111,237) (13,531) (141,347) (12,183)
------------ ------------ ------------ ------------
Net interest margins earned 4,165 115,528 231,618 339,601
(Losses) gains on investments and disposal of assets (90,042) 14,880 (55,549) 45,877
------------ ------------ ------------ ------------
(85,877) 130,408 176,069 385,478
Operating expenses (29,466) (40,172) (122,228) (121,223)
------------ ------------ ------------ ------------
(Loss) income from continuing operations before income
taxes and preferred dividends (115,343) 90,236 53,841 264,255
Income tax benefit (expense) 45,278 (34,398) (18,757) (101,853)
------------ ------------ ------------ ------------
(Loss) income from continuing operations before
preferred dividends (70,065) 55,838 35,084 162,402
Preferred dividends, net of tax (946) (946) (2,837) (2,837)
------------ ------------ ------------ ------------
(Loss) income from continuing operations (71,011) 54,892 32,247 159,565
Discontinued operations, net of tax 11,803 14 (38,110) (940)
Net loss on disposal of operations, net of tax (214,853) (214,853)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (274,061) $ 54,906 $ (220,716) $ 158,625
============ ============ ============ ============
Basic (loss) earnings per share:
(Loss) income from continuing operations $ (1.16) $ 0.90 $ 0.53 $ 2.68
Discontinued operations (3.33) (4.15) (0.02)
------------ ------------ ------------ ------------
Net (loss) income (4.49) 0.90 (3.62) 2.66
============ ============ ============ ============
Adjusted weighted average shares outstanding 61,018,000 60,860,000 60,976,000 59,540,000
============ ============ ============ ============
Diluted (loss) earnings per share:
(Loss) income from continuing operations $ (1.16) $ 0.86 $ 0.53 $ 2.53
Discontinued operations (3.33) (4.15) (0.01)
------------ ------------ ------------ ------------
Net (loss) income (4.49) 0.86 (3.62) 2.52
============ ============ ============ ============
Adjusted weighted average shares outstanding 61,018,000 65,024,000 60,976,000 64,103,000
============ ============ ============ ============
Dividends declared per common share $ 0.18 $ 0.18 $ 0.54 $ 0.50
============ ============ ============ ============
</TABLE>
See notes to interim consolidated condensed financial statements.
2
<PAGE>
THE FINOVA GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 32,247 $ 159,565
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Provision for credit losses 141,347 12,183
Depreciation and amortization 66,602 69,593
Deferred income taxes (152,793) 87,133
Write downs on investments and repossessed assets 109,004
Change in assets and liabilities, net of effects from
companies purchased:
Decrease (increase) in other assets 22,203 (5,443)
Decrease in accounts payable and accrued expenses (36,915) (59,858)
Increase in interest payable 12,198 6,655
Other 2,110 (1,608)
Discontinued operations exclusive of income taxes (62,989)
Net loss on disposal of operations exclusive of income taxes (355,423) (1,555)
Adjustments to reconcile discontinued operations and loss on
disposal of operations to net cash provided by discontinued operations:
Other charges related to discontinued operations 394,722
Income tax benefit 165,449 615
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 337,762 267,280
----------- -----------
INVESTING ACTIVITIES:
Net proceeds from sales of investments and assets 208,318 342,307
Proceeds from securitizations 764,607
Net proceeds from sale of Commercial Services 205,564
Principal collections on financing transactions and revolving
credit facilities 1,547,440 1,325,491
Expenditures for investments and other income producing activities (106,964) (472,502)
Expenditures for financing transactions and revolving credit facilities (2,364,403) (2,838,025)
Net change in investment in discontinued operations 181,897 (315,942)
Cash received in acquisition 20,942
Other 916 1,500
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 437,375 (1,936,229)
----------- -----------
FINANCING ACTIVITIES:
Net change in commercial paper and short-term borrowings 903,542 591,928
Long-term borrowings 225,000 1,788,592
Repayment of long-term borrowings (1,263,900) (591,791)
Proceeds from exercise of stock options 1,112 26,677
Common stock purchases for treasury (89,272)
Dividends (33,084) (29,845)
----------- -----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (167,330) 1,696,289
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 607,807 27,340
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 100,344 49,518
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 708,151 $ 76,858
=========== ===========
</TABLE>
See notes to interim consolidated condensed financial statements.
3
<PAGE>
THE FINOVA GROUP INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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. 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 September 30, 2000, the
results of operations for the quarter and nine months ended September 30, 2000
and 1999 and cash flows for the nine months ended September 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.
Certain reclassifications have been made to reflect discontinued
operations. These reclassifications resulted from the Company's decision in the
third quarter to sell or liquidate some of its more broad based businesses and
focus on providing financing through its niche based businesses. The businesses
discontinued include Corporate Finance, Business Credit, Growth Finance (all of
which are included under the caption "Corporate Finance"), Distribution &
Channel Finance and Commercial Services. See Note F for more information on
discontinued operations.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
The Company reports other comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." Total comprehensive (loss) income was $(223.7) million
and $56.6 million for the three months ended September 30, 2000 and 1999,
respectively and $(200.8) million and $165.0 million for the nine months ended
September 30, 2000 and 1999, respectively. The primary component of
comprehensive (loss) income other than net income was a net unrealized gain on
securities.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- An Amendment of FASB Statement No. 133." SFAS 133,
as amended, establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the statement of financial position as either an
asset or liability measured at its fair value. SFAS 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
These rules become effective for the Company on January 1, 2001. The
Company is still assessing the impact of the adoption of SFAS133 on its warrants
held on private companies with "cashless exercise" features, pending final
guidance to be issued by the FASB. The ongoing effects of adoption will depend
on future market conditions.
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.
4
<PAGE>
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
Management evaluates the business performance of each group based on total
net revenue, income (loss) before allocations and managed assets. Total net
revenue is operating margin plus (losses) gains on investments and disposal of
assets. Income (loss) before allocations is (loss) income from continuing
operations 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.
Information for FINOVA's reportable segments reconciles to FINOVA's
consolidated totals as follows:
Nine Months Ended September 30,
-------------------------------
(Dollars in Thousands) 2000 1999
------------ ------------
Total net revenue (loss):
Commercial Finance $ 43,978 $ 38,167
Specialty Finance 172,985 278,298
Capital Markets 102,613 67,084
Corporate and other (2,160) 14,112
------------ ------------
Consolidated total $ 317,416 $ 397,661
============ ============
Income (loss) before allocations:
Commercial Finance $ 33,113 $ 29,370
Specialty Finance 107,278 223,602
Capital Markets 20,200 19,827
Corporate and other, overhead and
unallocated provision for credit losses (106,750) (8,544)
------------ ------------
Income from continuing operations
before income taxes and preferred dividends $ 53,841 $ 264,255
============ ============
September 30,
-------------------------------
2000 1999
------------ ------------
Managed assets:
Commercial Finance $ 1,197,851 $ 985,039
Specialty Finance 8,619,691 7,802,280
Capital Markets 945,666 1,044,259
Corporate and other 64,725 56,480
------------ ------------
Consolidated total 10,827,933 9,888,058
Less securitizations (393,831) (123,681)
------------ ------------
Investment in financing transactions $ 10,434,102 $ 9,764,377
============ ============
5
<PAGE>
NOTE D EARNINGS PER SHARE
Basic earnings or losses 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 or
losses per share reflect the potential dilution that could occur if options,
convertible preferred stock or other contracts to issue stock at assumed rates
of conversion. Basic and diluted earnings per share calculations are presented
for the three and nine months ended September 30, 2000 and 1999 on the Condensed
Statements of Consolidated Operations and are detailed below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
(Dollars in thousands, except per share data) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE COMPUTATION:
(Loss) income from continuing operations $ (71,011) $ 54,892 $ 32,247 $ 159,565
============ ============ ============ ============
Weighted average shares outstanding 61,304,000 61,173,000 61,262,000 59,810,000
Contingently issued shares (1) (286,000) (313,000) (286,000) (270,000)
------------ ------------ ------------ ------------
Adjusted weighted average shares 61,018,000 60,860,000 60,976,000 59,540,000
============ ============ ============ ============
BASIC (LOSS) INCOME FROM CONTINUING OPERATIONS
PER SHARE $ (1.16) $ 0.90 $ 0.53 $ 2.68
============ ============ ============ ============
DILUTED EARNINGS PER SHARE COMPUTATION:
(Loss) income from continuing operations $ (71,011) $ 54,892 $ 32,247 $ 159,565
Preferred dividends, net of tax 946 2,837
------------ ------------ ------------ ------------
(Loss) income from continuing operations before
preferred dividends $ (71,011) $ 55,838 $ 32,247 $ 162,402
============ ============ ============ ============
Weighted average shares outstanding 61,304,000 61,173,000 61,262,000 59,810,000
Contingently issued shares (1) (286,000) (313,000) (286,000) (270,000)
Incremental shares from assumed conversions:
Stock options 1,226,000 1,625,000
Convertible preferred securities 2,938,000 2,938,000
------------ ------------ ------------ ------------
Total potential dilutive common shares 4,164,000 4,563,000
------------ ------------ ------------ ------------
Adjusted weighted average shares 61,018,000 65,024,000 60,976,000 64,103,000
============ ============ ============ ============
DILUTED (LOSS) INCOME FROM CONTINUING OPERATIONS
PER SHARE $ (1.16) $ 0.86 $ 0.53 $ 2.53
============ ============ ============ ============
</TABLE>
Note:
(1) Shares represent target levels of 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
SEPTEMBER 30, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------- -------------------------------
Repossessed Repossessed Lease & Total Carrying
Market Rate(1) Impaired Assets(2) Impaired Assets Other Amount %
-------------- -------- --------- -------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Finance Group
Rediscount Finance $1,185,457 $ 1,668 $ 639 $ 2,846 $ 7,241 $ 1,197,851 11.5
---------- -------- -------- -------- ------- ---------- ----------- -----
1,185,457 1,668 639 2,846 7,241 1,197,851 11.5
---------- -------- -------- -------- ------- ---------- ----------- -----
Specialty Finance Group
Transportation Finance 2,432,324 45,529 2,477,853 23.7
Resort Finance 1,406,885 148,207 14,877 140,923 6,976 1,717,868 16.5
Healthcare Finance 798,509 21,895 1,463 95,055 3,181 920,103 8.8
Franchise Finance 870,940 37,812 4,030 2,088 191 915,061 8.8
Communications Finance 691,183 3,910 34,085 729,178 7.0
Specialty Real Estate Finance 670,383 10,432 31,631 3,274 8,337 724,057 6.9
Commercial Equipment Finance 526,257 5,916 11,165 4,084 547,422 5.2
Public Finance 189,370 4,948 194,318 1.9
---------- -------- -------- -------- ------- ---------- ----------- -----
7,585,851 222,256 47,971 333,760 28,566 7,456 8,225,860 78.8
---------- -------- -------- -------- ------- ---------- ----------- -----
Capital Markets Group
Realty Capital 486,392 4,806 491,198 4.7
Mezzanine Capital 361,635 18,814 36,332 416,781 4.0
Investment Alliance 33,536 4,151 37,687 0.4
---------- -------- -------- -------- ------- ---------- ----------- -----
881,563 22,965 41,138 945,666 9.1
---------- -------- -------- -------- ------- ---------- ----------- -----
Other 64,725 64,725 0.6
---------- -------- -------- -------- ------- ---------- ----------- -----
Total Continuing Operations (3) $9,717,596 $246,889 $ 48,610 $377,744 $35,807 $ 7,456 $10,434,102 100.0
========== ======== ======== ======== ======= ========== =========== =====
</TABLE>
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $2.8 million on these repossessed assets
year to date during 2000, including $1.8 million in Specialty Real Estate
Finance, $0.7 million in Resort Finance, $0.1 million in Rediscount Finance
and $0.1 million in Healthcare Finance.
(3) Excludes $393.8 million of assets securitized which the Company manages,
including $277.9 million in Commercial Equipment Finance and $115.9 million
in Franchise Finance.
7
<PAGE>
RESERVE FOR CREDIT LOSSES
The reserve for credit losses at September 30, 2000 represents 2.4% of the
Company's investment in financing transactions and securitized assets. Changes
in the reserve for credit losses were as follows:
Nine Months Ended September 30,
-------------------------------
2000 1999
--------- ---------
(Dollars in Thousands)
Balance, beginning of period $ 178,266 $ 141,579
Provision for credit losses 141,347 12,183
Write-offs (62,930) (16,331)
Recoveries 922 1,501
Reserves related to acquisitions 23,763
Other 97 4,047
--------- ---------
Balance, end of period $ 257,702 $ 166,742
========= =========
At September 30, 2000 the total carrying amount of impaired loans was
$624.6 million, of which $246.9 million were revenue accruing. A reserve for
credit losses of $94.6 million has been established for $193.5 million of
nonaccruing impaired loans and $12.3 million has been established for $44.0
million of accruing impaired loans. Additionally, specific reserves of $4.9
million have been established for other accounts. As a result, 43.4% of FINOVA's
reserve for credit losses was allocated to specific accounts. The remaining
$145.9 million or 56.6% 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. No reserves for credit losses are carried for discontinued operations
because the assets of the discontinued operations have been written down to
estimated net realizable value.
NOTE F DISCONTINUED OPERATIONS
On August 28, 2000 FINOVA Capital completed the sale of substantially all
the assets of its Commercial Services division to GMAC Commercial Credit LLC, a
wholly owned subsidiary of General Motors Corporation, for approximately $235
million. The Commercial Services division is being accounted for as a
discontinued operation. The sale resulted in an after-tax loss from disposition
of $5.4 million, which included a $16.7 million after-tax charge for unamortized
goodwill. The Company has recorded $11.4 million after-tax losses from
discontinued operations. In connection with the sale, the Company retained a
small portfolio, which was $30.5 million of net loans as of September 30, 2000.
FINOVA has begun to implement a new strategic direction that will focus on
core specialty niche businesses. In the third quarter, FINOVA's board of
directors decided to discontinue and offer for sale its Corporate Finance and
Distribution & Channel Finance divisions. As a result of this decision,
Corporate Finance and Distribution & Channel Finance are being reported as
discontinued operations and, accordingly, their results of operations and
financial positions are segregated for all periods in the accompanying
consolidated financial statements. The Company has recorded $26.7 million in
after-tax losses from discontinued operations and $209.5 million in after-tax
losses from the disposal of discontinued operations for the nine months ended
September 30, 2000. These losses represent the Company's estimate of operational
losses to be incurred and the expected losses from disposition of the divisions.
Actual losses could differ from those estimates and will be reflected as
adjustments in future financial statements. No assurances can be given that the
recorded losses will be sufficient to cover the actual operational losses and
losses incurred upon disposition or winding down of the discontinued operations.
8
<PAGE>
The losses are comprised of the following:
<TABLE>
<CAPTION>
Distribution &
Corporate Channel Commercial
Finance Finance Services Total
------- ------- -------- -----
<S> <C> <C> <C> <C>
DISCONTINUED OPERATIONS, NET OF TAX $ (9,184) $(17,533) $ (11,393) $ (38,110)
========= ======== ========= =========
NET LOSS ON DISPOSAL OF OPERATIONS,
NET OF TAX
Net realizable value mark downs $(130,427) $(10,277) $(140,704)
Goodwill written-off (33,083) (15,076) (16,725) (64,884)
Proceeds in excess of assets sold 17,634 17,634
Accrued expenses (17,484) (3,142) (6,273) (26,899)
--------- -------- --------- ---------
$(180,994) $(28,495) $ (5,364) $(214,853)
========= ======== ========= =========
</TABLE>
NOTE G SUBSEQUENT EVENT
On November 10, 2000, FINOVA and Leucadia National Corporation executed a
letter agreement for an equity investment by Leucadia. Pursuant to the letter
agreement, Leucadia will purchase 10 million shares of a new series of
convertible preferred stock of FINOVA at an aggregate purchase price of $250
million, or $25 per share. The convertible preferred stock will initially have
an annual dividend of 14%, payable in additional shares of preferred stock.
After five years, the dividends may be paid in cash or shares at the same rate.
The preferred stock will be convertible into common stock at a price of $2.50
per share, subject to anti-dilution adjustments. The preferred stock will have
the right to vote as a class with the common stock, and will have 20 votes per
share, subject to New York Stock Exchange requirements. As a result, it is
expected that Leucadia will have approximately a 45.2% equity ownership and a
52.5% voting interest in FINOVA, before dividends, distributions, if any, and
warrants and assuming the rights offering described below is fully subscribed by
other shareowners.
Leucadia will receive a ten-year warrant to purchase, for an aggregate
exercise price of $125 million, FINOVA common stock amounting to 20% of the
outstanding equity of the Company at that time, with certain exceptions.
The agreement includes a provision that provides for a distribution to
common shareholders or holders of PIK Convertible Preferred and the Leucadia
warrant in 2006, based upon the performance of FINOVA's loan and lease portfolio
through 2005. The board of directors will determine the form of that
distribution.
As soon as practicable after completion of Leucadia's investment, FINOVA
will conduct a rights offering in which existing shareholders will be permitted
to purchase up to 6 million shares of the new series of convertible preferred
stock at the same per share purchase price of $25. Leucadia will act as standby
purchaser for the offering with respect to $100 million of that offering, for
which it will be entitled to a fee of $5 million.
Upon completion of the Leucadia investment, FINOVA's board of directors
will consist of 10 persons, of whom 6 will be designated by Leucadia.
Completion of the proposed transaction with Leucadia is contingent upon the
negotiation and execution of definitive agreements with respect to the
investment as well as other customary conditions. The transaction is also
subject to completion of a restructuring with holders of FINOVA's existing $4.7
billion in outstanding bank debt on terms acceptable to Leucadia and FINOVA. A
copy of the letter agreement is included as Exhibit 10.A to this report.
NOTE H COMMITMENT & CONTINGENCIES
CREDIT AGREEMENTS
FINOVA's credit agreements, pursuant to which an aggregate of $4.7 billion
of indebtedness is outstanding, contain normal and customary financial
covenants. Failure of FINOVA to comply with these covenants would result in a
default under the credit agreements, unless waived by the lenders. If a default
were to occur under the credit agreements and the lenders required repayment,
such default would in turn result in a default under substantially all of
FINOVA's other outstanding indebtedness. Under one of these covenants, the
interest coverage test, FINOVA was in compliance at September 30, 2000. However,
declines in average net income or higher interest costs in future quarter ends
could help lead to a violation of that covenant.
Inability of FINOVA to complete the transaction with Leucadia and FINOVA's
banks or other transactions referred to above, adverse developments requiring an
increase of bad debt reserves or the write-off of assets, the assertion by
creditors of a default under FINOVA's credit agreements, or other adverse
developments in FINOVA's business or results of operations could impair FINOVA's
ability to fund operations and debt payment requirements for principal and
interest.
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LEGAL PROCEEDINGS
Between March 29 and May 23, 2000, five shareowner lawsuits were filed
against FINOVA and Samuel Eichenfield, FINOVA's former chairman, president, and
chief executive officer; two of the lawsuits also named FINOVA Capital as a
defendant, and one named three other executive officers. 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 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.
In an order by the U.S. District Court dated August 30, 2000, all five
lawsuits were consolidated and captioned IN RE: FINOVA GROUP INC. SECURITIES
LITIGATION. The court also selected the Louisiana School Employees Retirement
System ("LSERS") as the lead plaintiff in the consolidated cases. LSERS filed
its Amended Consolidated Complaint on September 29, 2000, naming FINOVA, FINOVA
Capital, Samuel Eichenfield, Matthew Breyne, and Bruno Marszowski as defendants.
The Consolidated Amended complaint generally alleges 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's stock
price, among other reasons. The complaint seeks unspecified damages for losses
incurred by shareholders, plus interest, and other relief, and rescission with
regard to the notes purchased.
FINOVA believes the claims are without merit. FINOVA and the other
defendants intend to vigorously defend against the claims. On October 30, 2000,
FINOVA and the other defendants filed a motion to dismiss the complaint, which
is now pending.
Since consolidation of the original five shareowner lawsuits, other
apparently related lawsuits have been initiated against the Company and current
and former officers and directors. Two shareowner lawsuits were filed in the
United States District Court for the Middle District of Tennessee, in which the
plaintiffs (John Cartwright, Sirrom Partners and Sirrom G-1) assert claims
relating to the Company's acquisition in 1999 of Sirrom Capital Corporation, and
the exchange of shares of Sirrom stock for shares of FINOVA stock. The
Cartwright complaint purports to be a class action lawsuit on behalf of all
Sirrom shareowners that exchanged their Sirrom stock for FINOVA stock as a
result of the acquisition. The defendants named are Sirrom Capital Corporation,
Samuel Eichenfield, John W. Teets, Constance Curran, G. Robert Durham, James L.
Johnson, Kenneth Smith, Shoshana Tancer, Bruno Marszowski, and FINOVA Group. The
complaints appear related to the consolidated securities litigation because they
also allege that the defendants made materially misleading statements regarding
FINOVA's loss reserves, and otherwise violated the federal securities laws in an
effort to reduce the total consideration provided to Sirrom shareowners at the
time of the acquisition. The complaint seeks unspecified damages for losses
incurred by shareholders, plus interest, and other relief. On October 23, the
Company and the other defendants filed a motion to dismiss both complaints, or
in the alternative to transfer venue of the actions to the U.S. District Court
for the District of Arizona, where the consolidated securities litigation is
pending.
There have also been two shareholders' derivative lawsuits filed against
current and former officers and directors, one in the United States District
Court for the District of Arizona, and one in the Court of Chancery for
Newcastle County, Delaware. Both complaints were filed on September 11, 2000,
and both purport to be brought by the named plaintiffs (William Kass and Cindy
Burkholter) derivatively on behalf of the Company against the officers and
directors, alleging generally breaches of fiduciary and other duties as
directors. As with the consolidated securities litigation, the allegations
center generally on claims that there were materially misleading statements
regarding FINOVA's loss reserves.
Finally, another shareholder's derivative lawsuit was filed on September
13, 2000, in the Circuit Court for Davidson County, Tennessee, by Ronald
Benkler, purportedly on behalf of Sirrom Capital Corporation, against several
former officers of Sirrom Capital Corporation. The complaint alleges that the
Sirrom officers breached various duties to Sirrom in connection with the
acquisition of Sirrom by the Company in 1999, and the exchange of Sirrom stock
for FINOVA stock as a result of the acquisition.
Inasmuch as the allegations are similar or related to those asserted in the
consolidated securities litigation, the Company believes that the claims are
without merit, and the Company and the other defendants intend to vigorously
defend against the claims.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000
TO THE NINE MONTHS ENDED SEPTEMBER 30, 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
For the nine months ended September 30, 2000, FINOVA reported a loss of
$220.7 million ($3.62 per diluted share) compared to net income of $158.6
million ($2.52 per diluted share) for the nine months of 1999. The results for
the nine months of 2000 included income from continuing operations of $32.2
million ($0.53 per diluted share) and net losses from discontinuing operations
totaling $253.0 million ($4.15 per diluted share) compared to income from
continuing operations for the first nine months of 1999 of $159.6 million ($2.53
per diluted share) and a net loss from discontinued operations for the same
period of $0.9 million ($0.01 per diluted share).
DISCONTINUED OPERATIONS. The discontinued operations resulted from the
Board of Director's decision in the third quarter to sell or liquidate some of
its more broad based businesses and focus more on providing financing through
its niche based businesses. The businesses included in discontinued operations
consist of Commercial Services (sold during the third quarter of 2000),
Corporate Finance, Business Credit, Growth Finance (all of which are included
under the caption "Corporate Finance") and Distribution & Channel Finance.
Corporate Finance and Distribution & Channel Finance are actively being marketed
for sale. The sale could be for all or portions of the businesses, and if only
portions of the businesses are sold, the Company intends to liquidate the unsold
portions in an orderly manner.
The losses from discontinued operations in the first nine months of 2000
primarily consisted of charges to value the assets included in the businesses to
be sold or liquidated at estimated net realizable amounts, including the
write-off of unamortized goodwill and accrued retention and severance payments
applicable to those businesses and the operating losses experienced by those
businesses. Those losses were partially offset by the gain on sale of Commercial
Services (net of goodwill write-off) and a gain of approximately $4.0 million
from the sale of a portion of the collateral supporting the $70 million
transaction written off in the Distribution & Channel Finance line of business
in March 2000. See Note F of Notes to Interim Condensed Consolidated Financial
Information for more information on discontinued operations.
LOSS FROM CONTINUING OPERATIONS. The decrease in income from continuing
operations was primarily due to the following:
* Higher loss provisions to bolster the reserve for credit losses
* Losses on investments and assets held for sale
* Increases in the Company's cost of funds due to
- Several reductions in credit ratings
- Higher costs associated with borrowing under the Company's
domestic commercial paper back-up bank facilities
* Higher write-offs of financing contracts
* An increase in the level of nonaccruing assets
* The costs to exit the origination and sale of commercial real estate
loans to the CMBS market in the second quarter 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 8.3% in the first nine months of 2000
compared to the first nine months of 1999 ($371.6 million vs. $343.0 million).
The increase was due primarily to portfolio growth (managed assets) which
increased by 3.7%, partially offset by a higher cost of funds in 2000. Portfolio
growth resulted primarily from $4.2 billion of new business added during the 12
months ended September 30, 2000. Annualized portfolio growth for the first nine
months of 2000 was 7.1%, 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 nine months of 2000, when compared to 25.6% in the same period
for 1999, is primarily attributable to a higher beginning portfolio base and
lower new business. New business for the nine months of 2000 is running 16.7%
below new business for the first nine months of 1999 ($2.364 billion vs. $2.838
billion). Lower new business volumes are expected to continue as the Company
focuses on managing its liquidity position by being selective in originating any
new business over and above outstanding commitments. New business for the third
quarter of 2000 was $619.0 million down 43.9% from $1.104 billion originated in
the third quarter of 1999. The backlog of new business at September 30, 2000
declined to $1.683 billion from $1.987 billion at June 30, 2000. Most of the new
business in 2000 was generated by the more niche focused Specialty Finance
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Group, which generally attracts higher returns than FINOVA's other segments.
Interest margins earned as a percent of average earning assets were 5.1% in the
first nine months of 2000, down from 5.4% 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.
Various downgrades of its senior debt ratings caused FINOVA's annual cost of
funds (in the form of the all in spread over LIBOR) applicable to $4.5 billion
in drawdowns under its domestic commercial paper back-up bank facilities to
increase by 1.35%. The impact of the weighted average wider spreads over LIBOR
on FINOVA's cost of funds for the first nine months of 2000 was approximately
0.50%
VOLUME-BASED FEES. Volume-based fees historically were generated by
FINOVA's Distribution & Channel Finance, Commercial Services and Realty Capital
lines of business. Since Distribution & Channel Finance and Commercial Services
are discontinued operations, the fees included in continuing operations apply
only to Realty Capital. These fees are predominately based on volume-originated
business rather than the balance of outstanding financing transactions during
the period. Volume-based fees for the nine months ended September 30, 2000 were
$1.3 million, down from $8.8 million reported in the first nine months of 1999.
The decline in 2000 was due to Realty Capital exiting from the origination and
sale of commercial real estate loans to the CMBS market in April 2000.
PROVISION FOR CREDIT LOSSES. The provision for credit losses on continuing
operations was higher in the first nine months of 2000 compared to the first
nine months of 1999 ($141.3 million vs. $12.2 million) due to the need to
bolster the reserve in light of increasing problem accounts and higher net
write-offs in the first nine months of 2000 ($62.0 million compared to $14.8
million in the nine months of 1999). The largest portion of net write-offs in
2000 was from multiple customers in Mezzanine Finance totaling $40.7 million.
Net write-offs as a percent of average managed assets were 0.78% annualized for
the first nine months of 2000, up from 0.22% annualized for the same period of
1999. A discussion of the increase in problem accounts is included under
Financial Condition, Liquidity and Capital Resources.
FINOVA monitors developments affecting loans and leases in its portfolio,
taking into account each borrower's financial developments and prospects, the
estimated value of collateral, legal developments and other available
information. Based upon that information, 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 write
downs will increase in the future.
(LOSSES)/GAINS ON INVESTMENTS AND DISPOSAL OF ASSETS. The losses for the
nine months of 2000 were primarily due to the write-off of equity positions in
the Resort, Communication and Mezzanine Finance businesses as well as charges to
write down repossessed assets in Resort Finance and residual positions in
Transportation Finance. The most significant charge was in Resort Finance which
wrote-off its $54.8 million equity investment in a major developer that has
experienced a decline in earnings and a significant reduction in its net worth.
The write down of residual positions in Transportation Finance totaled $17.9
million and principally related to assets held for sale or lease. The total
charges of $109.0 million from the write-off of investments, repossessed assets
and assets held for sale or lease were partially offset by gains of $53.5
million. Gains in the third quarter of 2000 included $4.8 million from the sale
of the Company's remaining Healtheon stock; total gains from Healtheon in the
nine months of 2000 were $20.7 million.
While in the aggregate FINOVA has historically recognized gains on asset
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 $122.2 million in the first
nine months of 2000 compared to $121.2 million in the first nine months of 1999.
The increase was principally due to nonrecurring expenses consisting of $11.8
million incurred to exit the origination and sale of commercial real estate
loans to the CMBS market in the second quarter of 2000 and $7.6 million incurred
for deferred compensation and executive severance. Excluding those nonrecurring
charges, operating expenses declined by 17.2% in the nine months of 2000 from
the comparable 1999 period ($100.4 million vs. $121.2 million). Operating
efficiency, which is the ratio of operating expenses to operating margins, was
32.8% in the first nine months of 2000, compared to 34.5% in the same period of
1999.
INCOME TAXES. Income taxes were lower for the first nine months of 2000
compared to the corresponding period in 1999 primarily due to the decrease in
pre-tax income and beneficial IRS tax audit adjustments.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following primarily relates to continuing operations, except as noted.
Managed assets were $10.83 billion at September 30, 2000 compared to $10.44
billion at December 31, 1999. Included in managed assets at September 30, 2000
were $10.43 billion in funds employed and $393.8 million of securitized assets.
The increase in managed assets was due to funded new business of $2.36 billion
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for the nine months ended September 30, 2000, partially offset by prepayments
and asset sales accompanied by normal portfolio amortization.
The reserve for credit losses as it pertains to continuing operations
increased to $257.7 million at September 30, 2000 from $178.3 million at
December 31, 1999. As previously discussed, the reserve was bolstered in 2000 as
a result of problem accounts. At September 30, 2000 and December 31, 1999, the
reserve for credit losses was 2.4% and 1.7% of ending managed assets,
respectively. The reserve for credit losses as a percent of nonaccruing assets
declined to 61.2% at September 30, 2000, from 101.9% at December 31, 1999, due
to the increase in nonaccruing assets. Nonaccruing assets increased to $421.0
million or 3.9% of ending managed assets at September 30, 2000 from $175.0
million or 1.7% at the end of 1999. The largest increases to nonaccruing during
the nine months of 2000 occurred in Resort Finance ($125.9 million), Healthcare
Finance ($56.1 million) and Communications Finance ($23.8 million).
The increase in nonaccruing assets in Resort Finance principally relates to
the addition of $23.5 million of working capital loans to eight related
special-purpose project development entities and $117.4 million for Sunterra
Corporation ("Sunterra") in the third quarter of 2000. The working capital loans
to the eight related project development entities were classified as nonaccruing
due to concerns over each of the borrower's financial condition and FINOVA's
collateral coverage if a forced liquidation became necessary. The eight
development entities are all special-purpose subsidiaries of the major resort
developer in which FINOVA had the $54.8 million investment previously described.
Sunterra filed bankruptcy in the second quarter of 2000 and has not made a
payment in over 90 days; therefore, all Sunterra loans were classified as
nonaccruing. The Sunterra loans are secured by marketable assets, primarily
completed but unsold timeshare units, at 13 of Sunterra's approximately 90
resorts. Although payments on the $20 million of consumer timeshare receivables
continue to be collected, these amounts are being held in segregated bank
accounts pending a cash collateral agreement with Sunterra.
Increases in nonaccruing assets in Healthcare Finance during the third
quarter of 2000 were primarily related to the addition of three accounts, a
special-purpose developer of an assisted living facility ($12.4 million), a
dental practice management firm ($10.4 million), and a skilled nursing and
assisted living developer ($9.6 million). The first is a senior secured real
estate loan collateralized by a first lien on a 92-unit assisted living facility
located in Connecticut. FINOVA has entered into a letter agreement to sell the
facility for its carrying value, with FINOVA financing the purchase. The second
loan is secured by all the assets of a dental practice management company.
FINOVA and the borrower are evaluating an offer to purchase the practice for
less than FINOVA's carrying value. The third is a participation facility in a
healthcare entity that filed bankruptcy in June 2000. A plan of reorganization
has not yet been presented to the lender group.
A $31.7 million loan to a Southeast U.S.-based wireless messaging company
represents the increase in nonaccruing assets in Communications Finance during
the third quarter of 2000. The borrower is over 90 days delinquent on interest
payments. The borrower has implemented a comprehensive expense reduction
strategy with the intent of bringing interest current and is pursuing a sale or
merger of the Company.
Earning impaired assets increased during the nine months ended September
30, 2000 to $246.9 million from $108.8 million at December 31, 1999. The
percentage of earning impaired assets to ending managed assets was 2.3% at
September 30, 2000 compared to 1.0% at December 31, 1999. The largest additions
to earning impaired assets were in Resort Finance ($148.2 million), Franchise
Finance ($37.8 million) and Specialty Real Estate Finance ($10.4 million).
Additions of $148.2 million in Resort Finance represent the balances of the
obligations, other than the working capital loans, owed by seven of the eight
related project developers mentioned above. These impaired, but still accruing,
loans are secured by receivables and real property, which FINOVA believes are
sufficient to repay the loans, including interest. The loans are considered
impaired because the parent company of the special-purpose obligors has
experienced a decline in earnings and a significant reduction in its net worth,
which could possibly cause FINOVA to have to manage the underlying resort
projects without support from the parent company. The Franchise Finance increase
relates to loans to a Florida-based restaurant franchisee ($19.8 million) and an
operator of a chain of casual-dining restaurants ($18 million). The franchisee
is involved in ownership and operation of Denny's restaurants. FINOVA is
pursuing the restructuring of the borrower's loan terms and extending certain
loan schedules which contractually matured at the end of the third quarter.
FINOVA has a participation in the second transaction, which is in forbearance
with the lending group until March 2001. The increase in Specialty Real Estate
Finance was attributable to a loan to a hotel operator ($10.4 million) secured
principally by a 160-room hotel in Kissimmee, Florida. The borrower filed for
bankruptcy during the third quarter. FINOVA is currently negotiating an
agreement with the borrower involving the pledge of additional collateral. If
the negotiations are successful, the combination of the hotel and excess pledged
collateral should be adequate to cover FINOVA's exposure. The most significant
decreases in earning impaired resulted from the migration to nonaccruing of the
loans to Sunterra and Tower Air, discussed in the Company's prior quarterly
report.
There can be no assurance that any of the potential transactions noted
above will be consummated on anticipated terms.
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The 31-90 day delinquencies at September 30, 2000 increased to 1.35% of
managed assets from 0.62% of managed assets at the end of 1999. The increases in
31-90 day delinquencies were in Healthcare Finance $41.8 million, Transportation
Finance $26.1 million and Communications Finance $17.8 million. $12.5 million of
the total $146.5 million of 31-90 day delinquent outstandings are included in
earning impaired assets.
At September 30, 2000, FINOVA had $11.27 billion of debt outstanding,
representing 7.3 times the Company's equity base of $1.54 billion. At year-end
1999, FINOVA's debt was 6.4 times the equity base of $1.77 billion. FINOVA
Capital is restricted under its bank credit agreements from maintaining debt to
equity above a 7.0 to 1.0 ratio. FINOVA Capital is compliant with that covenant
and had leverage of 6.93 to 1.0 calculated in accordance with those agreements,
which nets cash and cash equivalents against outstanding debt, as of September
30, 2000.
FINOVA's internally generated funds, available credit lines and asset sales
have financed growth in funds employed and liquidity during the nine months
ended September 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 maturing debt and to fund
general operations. Of this amount, $2.1 billion is due May 15, 2001, although
$500.0 million can be extended over a two year term-out if no default exists at
that time. The other $2.4 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. Term debt maturities over the next twelve months by
quarter include $182.9 million in the fourth quarter of 2000, $242.0 million in
the first quarter of 2001, $2.4 billion in the second quarter of 2001 (includes
$2.1 billion of bank facilities, of which $500.0 million can be extended over a
two year term-out if no defaults exist at that time) and $449.2 million in the
third quarter of 2001. During the first nine months of 2000, FINOVA issued $225
million of new long-term borrowings and repaid $1.3 billion of long-term
borrowings. Subsequent to September 30, 2000, FINOVA's credit ratings were
further reduced. 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 has not yet determined whether its reportable segments would be
reorganized as a result of the recent announcement to discontinue several
operations. 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 (losses) gains on
investments and 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.
COMMERCIAL FINANCE. Commercial Finance currently only includes the
Rediscount Finance business unit which provides financing through revolving
credit facilities to finance companies. This segment previously included
traditional asset-based businesses that provided financing through revolving
credit facilities and term loans secured by assets such as receivables and
inventories, as well as providing factoring and management services. In the
third quarter of 2000, FINOVA announced that the Corporate Finance/Business
Credit/Growth Finance and Distribution & Channel Finance business units would be
discontinued. The Company also completed the sale of its Commercial Services
business line to GMAC Commercial Credit LLC in the third quarter. For further
discussion on activity previously reported within the Commercial Finance
segment, see Discontinued Operations.
Total net revenue was $44.0 million in 2000 compared to $38.2 million for
the first nine months of 1999, an increase of 15.2%. The increase was primarily
due to a 21.6% increase in managed assets over the last twelve months, partially
offset by the effects of a higher cost of funds.
Income before allocations increased to $33.1 million in the first nine
months of 2000 from $29.4 million in 1999, primarily due to a higher level of
managed assets, partially offset by a higher cost of funds and an increase in
net write-offs. Net write-offs for the unit totaled $3.4 million in the first
nine months of 2000 compared to $1.5 million in 1999. Net write-offs as an
annualized percent of average managed assets for the business unit was 0.40%
compared to 0.21% in the first nine months of 1999. Operating expenses as a
percent of operating margin improved to 23.4% in 2000 from 25.7% in 1999 for the
unit.
Managed assets grew to $1.2 billion over the last twelve months from $985.0
million, an increase of 21.6%. The growth in managed assets was primarily due to
increased net utilization under existing revolving commitments. 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.
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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 $173.0 million in the first nine months of 2000
compared to $278.3 million in 1999. The decrease in net revenue was primarily
due to the write-off of equity positions in Resort Finance and Communications as
well as charges to write down repossessed assets in Resort Finance and residual
positions in Transportation Finance. The most significant charge was in Resort
Finance which wrote-off a $54.8 million equity investment in a major developer
that has experienced a decline in earnings and a significant reduction in net
worth. The write down of residual positions in Transportation Finance totaled
$17.9 million and principally related to assets held for sale or lease. Also
contributing to the decline in net revenue was the effects of higher cost of
funds, and a lower level of gains from the disposal of assets partially offset
by a higher level of managed assets. The segment experienced a 10.5% growth in
managed assets over the last twelve months and 5.9% annualized growth during the
first nine months of 2000. 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. In the third
quarter of 2000, FINOVA recorded a pre-tax unrealized gain of $63.7 million
through other comprehensive income on the balance sheet related to a
telecommunications stock.
Income before allocations was $107.3 million for the nine months ended
September 30, 2000 compared to income of $223.6 million for the same period in
1999. The decrease was primarily due to the charge-offs mentioned above, a
higher cost of funds, lower gains and an increase in net write-offs of financing
contracts, which rose to $17.7 million in 2000 from $8.4 million in 1999.
Annualized net write-offs as a percentage of average managed assets for the
group increased to 0.27% from 0.15% in 1999.
Managed assets grew to $8.6 billion in 2000 from $7.8 billion in the same
period of 1999, an increase of 10.5%. The growth in managed assets was driven by
new business of $2.0 billion in 2000 compared to $2.4 billion in 1999. This
growth was spread across most business units over the last twelve months, with
Specialty Real Estate Finance being the only business experiencing a decline.
The group as a whole experienced a decrease in backlog to $1.39 billion at
September 30, 2000 from $1.68 billion at September 30, 1999.
CAPITAL MARKETS. Capital Markets, in conjunction with institutional
investors, provide debt and equity capital funding, third-party loan
administration services and provided commercial mortgage banking services until
those operations were terminated.
Total net revenue was $102.6 million in 2000 compared to $67.1 million in
1999. The increase in net revenue was primarily attributable to the group's
Mezzanine Capital unit, which experienced a $37.5 million increase in net
revenue from $27.0 million in 1999 to $64.5 million for the nine months of 2000.
The growth in Mezzanine Capital's net revenue was primarily due to an increased
level of gains from the sale of equity and warrant positions. Gains from the
sale of equity and warrant positions totaled $35.8 million in 2000 as compared
to $9.0 million for the first nine months of 1999. The gains in 2000 included
$20.7 million from the sale of the Company's position in Healtheon stock. 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.
Also contributing to the increase in net revenue was the continued growth
of Realty Capital's bridge and mezzanine financing activities partially offset
by a lower level of volume-based fees, advisory and consulting income and a
higher cost of funds. The lower level of volume-based fees was due to Realty
Capital's exit from the origination and sale of commercial real estate loans to
the CMBS market in April 2000. The lower level of advisory and consulting income
was primarily due to the sale of the Harris Williams & Co. business unit to its
management in the second quarter of 2000. Realty Capital's bridge and mezzanine
financing portfolio grew to $491.2 million by September 30, 2000 compared to
$237.5 million at September 30, 1999.
Income before allocations was $20.2 million in 2000 compared to income of
$19.8 million in 1999. This increase was primarily attributable to the increased
net revenue, offset by $40.7 million of net write-offs in the Mezzanine Capital
portfolio as compared to $5.0 million in 1999, and $11.8 million of costs
incurred in connection with Realty Capital's exit from the origination and sale
of loans to the CMBS market.
Managed assets declined to $945.7 million from $1.0 billion. Excluding
Realty Capital's on-balance sheet CMBS loans, which totaled $313.8 million at
September 30,1999, the group's asset grew by $215.2 million or 29.5%. This
growth was primarily due to increased assets in Realty Capital's bridge and
mezzanine financing products, partially offset by a decline in Mezzanine
Capital's portfolio of $51.6 million.
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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 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 which is now included as
part of the loss from discontinued operations. The remainder of the charge was
used to provide for payment of deferred compensation and executive severance for
Mr. Eichenfield.
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. Since that time FINOVA has had
discussions with a substantial number of persons concerning the possibility of
an acquisition of the entire ownership of FINOVA or a substantial equity
ownership position. As described in Note G of Notes to Interim Condensed
Consolidated Financial Information, on November 10, 2000, FINOVA entered into a
letter agreement with respect to an equity infusion of up to $350 million by
Leucadia National Corporation.
During July 2000, FINOVA structured a securitization with Chase Securities
acting as structuring agent, which 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 securitization is terminated or not extended, loan collections will
thereafter be applied to reduce the securitization balance rather than to fund
the obligations to the underlying borrowers, which would become the obligation
of FINOVA. Proceeds to FINOVA through the first two fundings of the Chase
securitization aggregated approximately $475 million. This securitization
requires, among other things, that a back-up servicer be appointed by November
29, 2000. Due to the potential sale of the Corporate Finance assets, the Company
has not yet engaged a back-up servicer although it is presently engaged in
negotiations with a prospective backup servicer. If a backup servicer is not
engaged by November 29, 2000, Chase would have the ability to retain collections
on the securitized loans, thereby constraining liquidity further. The
securitization assets were originated through FINOVA's Corporate Finance
division.
An additional $300 million securitization, structured by Morgan Stanley
Dean Witter earlier this year, was not funded and currently is not available for
future funding, pending satisification of certain conditions. The Company has
been in negotiations with Morgan Stanley Dean Witter to seek a revision of these
conditions, although the outcome is uncertain.
On August 28, 2000, FINOVA completed the sale of substantially all the
assets of its Commercial Services division to GMAC Commercial Credit LLC, a
wholly owned subsidiary of General Motors Corporation, for approximately $235
million.
In light of the events since March 2000, the credit rating agencies
downgraded the senior debt and commercial paper credit ratings for FINOVA
Capital Corporation. Including the October 31st downgrades, the credit ratings
for FINOVA Capital are as follows:
Senior Debt Commercial Paper
----------- ----------------
Moody's Investors Service Inc. B1 NP
Standard & Poor's Ratings Group BB B
Fitch IPCA B B
The Company decided in the third quarter to sell or liquidate some of its
more broad based businesses and focus on providing financing through its niche
based businesses. The Company has decided to discontinue and actively market for
sale its Corporate Finance and Distribution & Channel Finance businesses. A sale
could be for all or parts of the businesses, and if only parts of the business
are sold, the Company intends to orderly liquidate the unsold portions.
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FINOVA has engaged Jay Alix & Associates, a nationally recognized financial
consulting firm, to assist in connection with the development of strategic and
financial planning, including re-negotiation of its bank debt.
FINOVA's credit agreements, pursuant to which an aggregate of $4.7 billion
of indebtedness is outstanding, contain normal and customary financial
covenants. Failure of FINOVA to comply with these covenants would result in a
default under the credit agreements, unless waived by the lenders. If a default
were to occur under the credit agreements and the lenders required repayment,
such default would in turn result in a default under substantially all of
FINOVA's other outstanding indebtedness. Under one of these covenants, the
interest coverage test, FINOVA was in compliance at September 30, 2000. However,
declines in average net income or higher interest costs in future quarter ends
could help lead to a violation of that covenant.
On November 10, 2000, FINOVA announced that it entered into a letter
agreement with Leucadia National Corporation with respect to an equity
investment in the Company that, if consummated, would improve the Company's
liquidty. See Note G to Notes to Interim Condensed Consolidated Financial
Information.
Pending consummation of the transaction with Leucadia, FINOVA expects to
use cash flow from operations and if consented to by Leucadia, 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 $2.1 billion of
borrowings ($500 million of which may be extended over a two year term-out if no
default exists at that time) under FINOVA's credit 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. The transaction with Leucadia will involve negotiations with the
banks concerning the timing and amount of those repayments among other items.
Inability of FINOVA to complete the transaction with Leucadia and FINOVA's
banks or other transactions referred to above, adverse developments requiring an
increase of bad debt reserves or the write-off of assets, the assertion by
creditors of a default under FINOVA's credit agreements, or other adverse
developments in FINOVA's business or results of operations could impair FINOVA's
ability to fund operations and debt payment requirements for principal and
interest.
FINOVA's ability to seek new business has been adversely affected by the
events noted above. It continues to do so by emphasizing customer service 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.
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NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- An Amendment of FASB Statement No. 133." SFAS 133,
as amended, establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the statement of financial position as either an
asset or liability measured at its fair value. SFAS 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
These rules become effective for the Company on January 1, 2001. The
Company is still assessing the impact of the adoption of SFAS 133 on its
warrants held on private companies with "cashless exercise" features, pending
final guidance to be issued by the FASB. The ongoing effects of adoption will
depend on future market conditions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, such as estimates of gain
or loss and other 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 charges to earnings.
* The results of efforts to implement FINOVA's business strategy,
including the ability to successfully conclude its evaluation of
strategic alternatives and to conclude proposed transactions.
* 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.
* Actual results in connection with continuing or discontinued
operations and the disposition of assets.
* Other risks detailed in FINOVA's SEC reports, including on page 15 of
FINOVA's 10-K for 1999.
In addition, FINOVA's financial condition, liquidity and future results of
operations will be materially affected by the results of negotiations seeking a
restructuring of its credit facilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
One of the major elements in determining FINOVA's success as a commercial
finance company is its ability to access capital and the cost of that capital.
The events that have transpired in 2000 have adversely affected FINOVA's ability
to access the capital markets and has significantly increased its cost of
capital. The total impact on its annual cost of capital cannot be accurately
determined at this time because the sources of capital and respective costs are
uncertain. One borrowing cost that can be quantified is the Company's $4.5
billion bank facility where the all in spread over LIBOR has increased rates by
1.35% during 2000 which effectively increases the annual interest expense on
those borrowings by $60.8 million.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between March 29 and May 23, 2000, five shareowner lawsuits were filed
against FINOVA and Samuel Eichenfield, FINOVA's former chairman, president, and
chief executive officer; two of the lawsuits also named FINOVA Capital as a
defendant, and one named three other executive officers. 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 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.
In an order by the U.S. District Court dated August 30, 2000, all five
lawsuits were consolidated and captioned IN RE: FINOVA GROUP INC. SECURITIES
LITIGATION. The court also selected the Louisiana School Employees Retirement
System ("LSERS") as the lead plaintiff in the consolidated cases. LSERS filed
its Amended Consolidated Complaint on September 29, 2000, naming FINOVA, FINOVA
Capital, Samuel Eichenfield, Matthew Breyne, and Bruno Marszowski as defendants.
The Consolidated Amended complaint generally alleges 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's stock
price, among other reasons. The complaint seeks unspecified damages for losses
incurred by shareholders, plus interest, and other relief, and rescission with
regard to the notes purchased.
FINOVA believes the claims are without merit. FINOVA and the other
defendants intend to vigorously defend against the claims. On October 30, 2000,
FINOVA and the other defendants filed a motion to dismiss the complaint, which
is now pending.
Since consolidation of the original five shareowner lawsuits, other
apparently related lawsuits have been initiated against the Company and current
and former officers and directors. Two shareowner lawsuits were filed in the
United States District Court for the Middle District of Tennessee, in which the
plaintiffs (John Cartwright, Sirrom Partners and Sirrom G-1) assert claims
relating to the Company's acquisition in 1999 of Sirrom Capital Corporation, and
the exchange of shares of Sirrom stock for shares of FINOVA stock. The
Cartwright complaint purports to be a class action lawsuit on behalf of all
Sirrom shareowners that exchanged their Sirrom stock for FINOVA stock as a
result of the acquisition. The defendants named are Sirrom Capital Corporation,
Samuel Eichenfield, John W. Teets, Constance Curran, G. Robert Durham, James L.
Johnson, Kenneth Smith, Shoshana Tancer, Bruno Marszowski, and FINOVA Group. The
complaints appear related to the consolidated securities litigation because they
also allege that the defendants made materially misleading statements regarding
FINOVA's loss reserves, and otherwise violated the federal securities laws in an
effort to reduce the total consideration provided to Sirrom shareowners at the
time of the acquisition. The complaint seeks unspecified damages for losses
incurred by shareholders, plus interest, and other relief. On October 23, the
Company and the other defendants filed a motion to dismiss both complaints, or
in the alternative to transfer venue of the actions to the U.S. District Court
for the District of Arizona, where the consolidated securities litigation is
pending.
There have also been two shareholders' derivative lawsuits filed against
current and former officers and directors, one in the United States District
Court for the District of Arizona, and one in the Court of Chancery for
Newcastle County, Delaware. Both complaints were filed on September 11, 2000,
and both purport to be brought by the named plaintiffs (William Kass and Cindy
Burkholter) derivatively on behalf of the Company against the officers and
directors, alleging generally breaches of fiduciary and other duties as
directors. As with the consolidated securities litigation, the allegations
center generally on claims that there were materially misleading statements
regarding FINOVA's loss reserves.
Finally, another shareholder's derivative lawsuit was filed on September
13, 2000, in the Circuit Court for Davidson County, Tennessee, by Ronald
Benkler, purportedly on behalf of Sirrom Capital Corporation, against several
former officers of Sirrom Capital Corporation. The complaint alleges that the
Sirrom officers breached various duties to Sirrom in connection with the
acquisition of Sirrom by the Company in 1999, and the exchange of Sirrom stock
for FINOVA stock as a result of the acquisition.
Inasmuch as the allegations are similar or related to those asserted in the
consolidated securities litigation, the Company believes that the claims are
without merit, and the Company and the other defendants intend to vigorously
defend against the claims.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
Exhibit No. Document
----------- --------
4 1992 Stock Incentive Plan, as amended.+
10.A Letter Agreement Between Leucadia National Corporation and The
FINOVA Group Inc., dated November 10, 2000.
12 Computation of Ratio of Income to Fixed Charges (interim period).
27 Financial Data Schedule
99 Earnings Release dated November 14, 2000.
----------
+ Relating to management compensation
(b) Reports on Form 8-K:
A report on Form 8-K dated August 28, 2000 was filed by Registrant which
reported under Item 5 Other Events, for the sale of substantially all the assets
of Commercial Services Division.
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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: November 14, 2000 By: /s/ Bruno A. Marszowski
-------------------------------------------
Bruno A. Marszowski, Senior Vice President,
Chief Financial Officer and Controller
Principal Financial and Accounting Officer
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THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
SEPTEMBER 30, 2000 FORM 10-Q
Exhibit No. Document
----------- --------
4 1992 Stock Incentive Plan, as amended.+
10.A Letter Agreement Between Leucadia National Corporation and The
FINOVA Group Inc., dated November 10, 2000.
12 Computation of Ratio of Income to Fixed Charges (interim period).
27 Financial Data Schedule
99 Earnings Release dated November 14, 2000.
