-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WwPsQk0CVvkbCUyhD5hSX0apke14u6MD3yXGkrkldgkEqQYEann6zULSGTiEiI4N brklDJkqSXZgXfSEw+6FdQ== 0000898430-01-500611.txt : 20010516 0000898430-01-500611.hdr.sgml : 20010516 ACCESSION NUMBER: 0000898430-01-500611 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINOVA CAPITAL CORP CENTRAL INDEX KEY: 0000043960 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 941278569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07543 FILM NUMBER: 1638105 BUSINESS ADDRESS: STREET 1: 4800 N. SCOTTSDALE RD. STREET 2: PO BOX 2209 CITY: SCOTTSDALE STATE: AZ ZIP: 85251-7623 BUSINESS PHONE: 4806364800 MAIL ADDRESS: STREET 1: 4800 N. SCOTTSDALE RD. STREET 2: P.O. BOX 2209 CITY: SCOTTSDALE STATE: AZ ZIP: 85251-7623 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND FINANCIAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND LEASING & FINANCIAL CORP DATE OF NAME CHANGE: 19870330 10-Q 1 d10q.txt FOR THE PERIOD ENDED MARCH 31, 2001 ________________________________________________________________________________ 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, 2001 Commission File Number 1-7543 FINOVA CAPITAL CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 94-1278569 (State or Other Jurisdiction of (I.R.S. Employer 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__ The Registrant meets the conditions set forth in General Instructions H (i) (a) and (b) of Form 10-Q and is therefore filing this form in the reduced format APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 11, 2001, approximately 25,000 shares of Common Stock ($1.00 par value) were outstanding. ________________________________________________________________________________ FINOVA CAPITAL CORPORATION TABLE OF CONTENTS
Page No. -------- Part I Financial Information 1 Item 1. Financial Statements 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 12 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
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. - ------- --------------------- FINOVA CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 1,622,584 $ 699,557 Investment in financing transactions: Loans and other financing contracts 7,357,965 7,835,698 Leveraged leases 774,728 803,581 Operating leases 535,404 561,698 Direct financing leases 519,748 557,471 Financing contracts held for sale 375,293 421,956 ------------------------------------------------------------------------------------------------------ 9,563,138 10,180,404 Less reserve for credit losses (618,005) (578,750) - ------------------------------------------------------------------------------------------------------- Net investment in financing transactions 8,945,133 9,601,654 Investments 214,541 222,719 Goodwill, net of accumulated amortization 44,637 45,417 Other assets 459,268 292,314 Net assets of discontinued operations 741,875 1,162,223 - ------------------------------------------------------------------------------------------------------- $12,028,038 $12,023,884 ======================================================================================================= LIABILITIES AND SHAREOWNER'S EQUITY Liabilities not subject to Chapter 11 proceedings: Accounts payable and accrued expenses $ 11,605 $ Liabilities subject to Chapter 11 proceedings at March 31, 2001; Secured: Fixed rate nonrecourse notes 5,813 5,813 Unsecured: Accounts payable and accrued expenses 125,248 92,032 Interest payable 198,067 129,402 Senior debt 10,987,327 10,991,874 Deferred income taxes, net 50,792 61,000 - ------------------------------------------------------------------------------------------------------- 11,378,852 11,280,121 - ------------------------------------------------------------------------------------------------------- Commitments and contingencies Shareowner's equity: Common stock, $1.00 par value, 100,000 shares authorized, 25,000 shares issued 25 25 Additional capital 1,173,995 1,173,995 Retained (deficit) income (398,204) (330,386) Accumulated other comprehensive (loss) income (1,115) 15,154 Net advances to Parent (125,515) (115,025) - ------------------------------------------------------------------------------------------------------- 649,186 743,763 - ------------------------------------------------------------------------------------------------------- $12,028,038 $12,023,884 =======================================================================================================
See notes to interim consolidated condensed financial statements. 1 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (Dollars in Thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, - ------------------------------------------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Interest, fees and other income $215,633 $241,011 Financing lease income 20,336 25,130 Operating lease income 23,407 27,237 - ------------------------------------------------------------------------------------------------------------------ Income earned from financing transactions 259,376 293,378 Interest expense 172,550 141,815 Operating lease depreciation 20,831 15,838 - ------------------------------------------------------------------------------------------------------------------ Interest margins earned 65,995 135,725 Volume-based fees 1,054 - ------------------------------------------------------------------------------------------------------------------ Operating margin 65,995 136,779 Provision for credit losses 61,750 20,898 - ------------------------------------------------------------------------------------------------------------------ Net interest margins earned 4,245 115,881 Gains on investments and disposal of assets 13,633 21,030 - ------------------------------------------------------------------------------------------------------------------ 17,878 136,911 Operating expenses 54,988 56,825 Reorganization items 9,619 - ------------------------------------------------------------------------------------------------------------------ (Loss) income from continuing operations before income taxes (46,729) 80,086 Income tax expense (2,343) (31,560) - ------------------------------------------------------------------------------------------------------------------ (Loss) income from continuing operations (49,072) 48,526 Discontinued operations (net of tax expense of $685 and a net tax benefit of $24,790 for 2001 and 2000, respectively) (5,946) (37,168) Net loss on disposal of operations (12,800) - ------------------------------------------------------------------------------------------------------------------ Net (loss) income $(67,818) $ 11,358 ==================================================================================================================
2 See notes to interim consolidated condensed financial statements. FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in Thousands) (Unaudited)
- ----------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES $ 25,718 $ 586 - ------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Proceeds from disposal of leases and other owned assets 5,720 2,834 Proceeds from sales of investments 26,019 31,400 Proceeds from sales of commercial mortgage backed securities ("CMBS") 113,737 Principal collections on financing transactions 781,127 594,987 Expenditures for investments and other income producing activities (20,588) (21,531) Expenditures for financing transactions (277,446) (913,991) Recoveries of loans previously written-off 232 73 - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 515,064 (192,491) - ------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Net change in commercial paper and short term borrowings (8,867) 675,329 Proceeds from issuance of term notes 120,000 Repayment of term notes (461,260) Net (advances to) contributions from Parent (10,490) 21,395 Dividends (11,016) - ------------------------------------------------------------------------------------------------------------ NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (19,357) 344,448 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS 401,602 (214,088) - ------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 923,027 (61,545) CASH AND CASH EQUIVALENTS, beginning of period 699,557 100,344 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, end of period $1,622,584 $ 38,799 ============================================================================================================
See notes to interim consolidated condensed financial statements. 3 FINOVA CAPITAL CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Dollars in thousands in tables) NOTE A ORGANIZATION AND BASIS OF PREPARATION The consolidated financial statements present the financial position, results of operations and cash flows of FINOVA Capital Corporation and its subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned subsidiary of The FINOVA Group Inc. ("FINOVA Group"). All significant intercompany balances have been eliminated in consolidation. 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, 2001, and the results of operations and cash flows for the quarter ended March 31, 2001 and 2000, 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, 2000, which describes significant business developments chronology culminating in the March 2001 filing for protection pursuant to Chapter 11, Title 11, of the United States Code, in the United States Bankruptcy Court for the District of Delaware. Certain reclassifications have been made to reflect discontinued operations. These reclassifications resulted from the Company's decision in the third quarter of 2000 to sell or liquidate some of its more broad based businesses and focus on 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. Going Concern The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. During the year ended December 31, 2000, the Company experienced a significant deterioration in the credit quality of its portfolio, the loss of its investment grade credit ratings and the resulting loss of access to capital and increase in cost of funds. The Company was not in compliance with its debt covenants as of December 31, 2000 and filed for protection from its creditors under Chapter 11 of the United States Bankruptcy Code on March 7, 2001. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors including the confirmation of a plan of reorganization (the "Plan") and successful execution of management's plans for the collection of its portfolio pursuant to contractual terms and negotiation of appropriate rates and fee structures with its customers. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Bankruptcy Accounting Entering a reorganization, although a significant event, does not ordinarily affect or change the application of generally accepted accounting principles ("GAAP") followed by a company. The accompanying financial statements have been prepared assuming that FINOVA will continue as a going concern in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). As such, asset and liability carrying amounts do not purport to represent realizable or settlement values as contemplated by the Bankruptcy Code. Liabilities Subject to Chapter 11 Proceedings Liabilities subject to Chapter 11 proceedings, including claims that become known after the petition date, are reported at their expected allowed claim amount in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." To the extent that the amounts of claims change as a result of actions in the bankruptcy case or other factors, the recorded amount of liabilities subject to Chapter 11 proceedings will be adjusted. The results of these adjustments are recorded as reorganization items. 4 Reorganization Items Reorganization items are income and expenses that are realized or incurred by FINOVA because it is in reorganization. For the three months ended March 31, 2001, reorganization items were a charge of $9.6 million. The components of reorganization items are as follows:
Three Months Ended March 31, 2001 ---------------------------------------------------------------------------------------- Unamortized gains on terminated and cash settled interest rate $ 22,197 swaps Interest income earned on unpaid interest and debt payments 804 Unamortized debt origination costs (15,095) Professional service fees (9,599) Unamortized debt discounts (7,926) ----------------------------------------------------------------------------------------- Total reorganization items $ (9,619) =========================================================================================
The financial statements of the Company are substantially the same as the financial statements of the entities in bankruptcy. 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 $(84.1) million and $0.1 million for the three months ended March 31, 2001 and 2000, respectively. The primary component of comprehensive (loss) income other than net income was a change in net unrealized gains 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 derivative instruments, 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. FINOVA adopted the provisions of SFAS 133, as amended, on January 1, 2001, which resulted in an immaterial impact on FINOVA's consolidated results of operations and financial position. NOTE C SEGMENT REPORTING FINOVA's business is organized into three market groups, which are also its reportable segments: Specialty Finance, Commercial Finance and Capital Markets. Management has not yet determined whether its reportable segments will be reorganized as a result of the decision to discontinue several lines of business and pending reorganization proceedings. Management relies principally on total revenue, income before allocations and managed assets in evaluating the business performance of each reportable segment. Total net revenue is the sum of operating margin and (losses) gains on investments and disposal of assets. Income before allocations is income before income taxes, corporate overhead expenses and the unallocated portion of the provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations. The Company expects that managed assets in all segments will decline significantly over the next several years as available cash flow will be used principally for debt service rather than the funding of new business. 5 Information for FINOVA's reportable segments that are part of continuing operations reconciles to FINOVA's consolidated totals as follows:
- --------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2001 2000 - --------------------------------------------------------------------------------------------------------- Total net revenue: Specialty Finance $ 67,956 $ 99,063 Commercial Finance 11,653 14,040 Capital Markets 9,667 44,909 Corporate and other (9,648) (203) - -------------------------------------------------------------------------------------------------------- Consolidated total $ 79,628 $ 157,809 ======================================================================================================== (Loss) income before income taxes and allocations: Specialty Finance $ 53,042 $ 77,180 Commercial Finance 2,348 10,922 Capital Markets (6,983) 21,727 Corporate and other, overhead and unallocated provision for credit (97,479) (61,303) losses - -------------------------------------------------------------------------------------------------------- (Loss) income from continuing operations $ (49,072) $ 48,526 ======================================================================================================== Managed assets: Specialty Finance $7,941,139 $8,483,819 Commercial Finance 1,185,247 1,064,359 Capital Markets 720,699 925,696 Corporate and other 37,615 64,336 - -------------------------------------------------------------------------------------------------------- Consolidated total $9,884,700 $10,538,210 Less securitizations 321,562 118,686 - --------------------------------------------------------------------------------------------------------- Investment in financing transactions $9,563,138 $10,419,524 =========================================================================================================
NOTE D PORTFOLIO QUALITY The following table presents a distribution (by line of business) of the Company's investment in financing transactions before the reserve for credit losses at March 31, 2001. 6 INVESTMENT IN FINANCING TRANSACTIONS BY LINE OF BUSINESS March 31, 2001 (Dollars in Thousands)
Revenue Accruing Nonaccruing ------------------------------------------- -------------------------------- Performing at Contractual Repossessed Repossessed Lease & Total Carrying Terms Impaired Assets Impaired Assets Other Amount % ------------------------------------------- -------------------------------- ---------------------- Specialty Finance Group Transportation Finance $2,017,131 $ $ $ 223,108 $ $ $2,240,239 23.4 Resort Finance 1,381,883 157,042 12,685 136,971 5,025 1,693,606 17.7 Franchise Finance 824,567 8,503 50,396 2,224 29 885,719 9.3 Healthcare Finance 523,985 28,680 1,433 247,497 5,895 807,490 8.4 Specialty Real Estate Finance 628,958 6,019 25,460 10,194 7,724 678,355 7.1 Communications Finance 517,276 4,285 137,968 659,529 6.9 Commercial Equipment Finance 417,473 4,405 62,838 5,959 3,956 494,631 5.2 Public Finance 154,891 5,117 160,008 1.7 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- 6,466,164 208,934 39,578 874,089 20,932 9,880 7,619,577 79.7 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- Commercial Finance Group Rediscount Finance 986,093 63,493 449 131,900 3,312 1,185,247 12.4 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- 986,093 63,493 449 131,900 3,312 1,185,247 12.4 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- Capital Markets Group Realty Capital 326,321 22,502 24,488 1,982 375,293 3.9 Mezzanine Capital 199,838 13,125 94,346 307,309 3.2 Investment Alliance 32,570 5,526 38,096 0.4 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- 558,729 35,627 124,360 1,982 720,698 7.5 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- Other 37,616 37,616 0.4 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ------- Total Continuing Operations (1) 8,048,602 308,054 40,027 1,130,349 26,226 9,880 9,563,138 100.0 ------------ ------------ ----------- -------------- ----------- ----------- -------------- ======= Discontinued Operations 338,579 423,426 5,496 4,257 771,758 ------------ ------------ ----------- -------------- ----------- ----------- -------------- TOTAL $8,387,181 $ 308,054 $ 40,027 $1,553,775 $31,722 $14,137 $ 10,334,896 ============ ============ =========== ============== =========== =========== ==============
Notes: (1) Excludes $321.6 million of assets sold which the company manages, $209.6 million in Commercial Equipment Finance and $112.0 million in Franchise Finance. ________________________________________ 7 Reserve for Credit Losses The reserve for credit losses at March 31, 2001 represents 6.5% 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, 2001 2000 ---------------------------------------------------------------------- Balance, beginning of period $ 578,750 $ 178,266 Provision for credit losses 61,750 20,898 Write-offs (22,661) (13,866) Recoveries 232 71 Other (66) 227 ---------------------------------------------------------------------- Balance, end of period $ 618,005 $ 185,596 ======================================================================
At March 31, 2001, the total carrying amount of impaired loans was $1.4 billion, of which $308.1 million were revenue accruing. A specific impairment reserve for credit losses of $320 million has been established for $808.2 million of nonaccruing impaired loans. Additionally, $5.8 million was established for other accounts. As a result, 53% of FINOVA's reserve for credit losses was allocated to specific reserves. The remaining $292.2 million or 47% of the reserve for credit losses is designated for general purposes and represents management's best estimate of inherent losses in the remaining portfolio considering delinquencies, loss experience and collateral. Actual results could differ from estimates and values, 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. At March 31, 2001, discontinued operations included $433.2 million of nonaccruing assets, of which $365.8 million were in Corporate Finance. Since the assets of the discontinued operations have been written down to estimated net realizable value, no reserves for credit losses are carried against those assets. The balance of net realizable value write-downs was $332.6 million at March 31, 2001. NOTE E DISCONTINUED OPERATIONS During the third quarter of 2000, FINOVA's Board of Directors approved a plan to discontinue and offer for sale its Corporate Finance, Distribution & Channel Finance and Commercial Services lines of business. As a result, the Company has reported these divisions as discontinued operations in accordance with Accounting Principles Board Opinion ("APB") No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. At March 31, 2001, FINOVA had total net assets of discontinued operations of $742 million, which includes the following:
- ------------------------------------------------------------------------------------------------------ Corporate Distribution & Commercial Finance Channel Finance Services Total - ------------------------------------------------------------------------------------------------------ Investment in financing transactions $ 740,465 $ 24,940 $ 6,353 $ 771,758 Investments 8,266 9,000 17,266 Accounts payable and accrued expenses (41,691) (3,479) (1,805) (46,975) Due to clients 156 (331) (174) - ------------------------------------------------------------------------------------------------------ Net assets of discontinued operations $ 707,196 $ 30,130 $ 4,548 $ 741,875 ======================================================================================================
Loss from discontinued operations in the Consolidated Statement of Operations for the quarter ended March 31, 2001 includes the following:
--------------------------------------------------------------------------------------------------------- Corporate Distribution & Commercial Finance Channel Finance Services Total --------------------------------------------------------------------------------------------------------- Discontinued operations, net of tax $ (3,766) $ (2,163) $ (17) $ (5,946) =========================================================================================================
8 The cumulative net loss on disposal of assets is comprised of the following adjustments from September 30, 2000:
- ------------------------------------------------------------------------------------------------------------------------------ Corporate Distribution & Commercial Finance Channel Finance Services Total - ----------------------------------------------------------------------------------------------------------------------------- As of September 30, 2000 on a pre-tax basis: Net realizable value mark-downs $ (215,760) $ (17,000) $ $ (232,760) Goodwill written off (54,729) (24,940) (27,669) (107,338) Proceeds in excess of assets sold 29,172 29,172 Accrued expenses (28,922) (5,198) (10,377) (44,497) Income tax benefit 118,417 18,643 3,510 140,570 - ----------------------------------------------------------------------------------------------------------------------------- Net loss on disposal of operations as of September 30, 2000 (180,994) (28,495) (5,364) (214,853) Additional net realizable value mark-downs (112,543) (893) (1,315) (114,751) Additional accrued expenses (13,385) (4,815) (18,200) Income tax benefit (expense) 12,800 (2,337) (370) 10,093 - ----------------------------------------------------------------------------------------------------------------------------- Net loss on disposal of operations as of December 31, 2000 (294,122) (36,540) (7,049) (337,711) Additional net realizable value mark-downs (12,800) (12,800) - ----------------------------------------------------------------------------------------------------------------------------- Net loss on disposal of operations as of March 31, 2001 $ (294,122) $ (49,340) $ (7,049) $ (350,511) =============================================================================================================================
The additional losses in the first quarter of 2001 were primarily attributable to a further deterioration in the Distribution & Channel Finance portfolio. NOTE F SUBSEQUENT EVENT On May 2, 2001, FINOVA Group, FINOVA and seven of their subsidiaries filed a proposed Joint Plan of Reorganization and a Disclosure Statement with the United States Bankruptcy Court for the District of Delaware. The Plan contemplates implementation of a comprehensive restructuring transaction with Berkadia LLC, a joint venture of Berkshire Hathaway Inc. and Leucadia National Corporation, that was first announced on February 27, 2001. As more fully described in the Plan, Berkadia has committed to make a $6 billion loan to FINOVA, subject to conditions. The loan proceeds, together with cash on hand, will fund a cash disbursement to general unsecured creditors of FINOVA equal to 60% of their claims, an increase from the approximately 54% cash payment originally proposed. In addition, FINOVA Group will issue ten-year New Senior Notes equal to 40% of the general unsecured claims against FINOVA. The New Senior Notes will be secured by a second lien on the stock of FINOVA. Interest on the New Senior Notes will be payable semi-annually out of available cash (calculated as provided in the Plan documents), after payment of quarterly interest on the Berkadia loan, except as described in the following sentence. While the Berkadia loan is outstanding and not in default, a liquidity feature of the Plan that was not included in the original proposal will require FINOVA to commit $75 million of available cash quarterly (up to a maximum of $1.5 billion in total) to repurchase New Senior Notes at a price not to exceed par plus accrued interest (subject to availability of New Senior Notes at or below the maximum price). Principal on the New Senior Notes will be paid out of available cash, after payment in full of the Berkadia loan. After payment in full of the Berkadia loan, 95% of available cash will be used to pay the New Senior Notes and 5% will be used for payments to FINOVA Group stockholders. The New Senior Notes also provide for payment under certain circumstances of up to $100 million in the aggregate of additional interest to holders of the New Senior Notes. Holders of general unsecured claims against FINOVA will also receive a cash payment of post petition interest upon the effective date of the Plan. Berkshire Hathaway owns approximately $1.4 billion of existing FINOVA bank and bond debt and therefore is expected to be a significant holder of New Senior Notes. Berkshire Hathaway will participate in FINOVA's quarterly repurchase of New Senior Notes pro rata to its interest in the New Senior Notes at the weighted average price paid in each quarterly repurchase. All other terms of the Plan are substantially the same as previously disclosed in FINOVA's February 28, 2001 filing on Form 8-K. The Bankruptcy Court has not approved the proposed Plan or the Disclosure Statement. The solicitation process will not begin until the Bankruptcy Court approves the Disclosure Statement and authorizes FINOVA to solicit the votes of creditors and stockholders in connection with the Plan. Thereafter, FINOVA will send the proposed Plan and Disclosure Statement to all creditors and stockholders who are entitled to vote on the Plan. 9 NOTE H COMMITMENT & CONTINGENCIES Legal Proceedings FINOVA is a party either as plaintiff or defendant to various actions, proceedings and pending claims, including legal actions, some of which involve claims for compensatory, punitive or other damages in significant amounts. Litigation often results from FINOVA's attempts to enforce its lending agreements against borrowers and other parties to those transactions. Litigation is subject to many uncertainties. It is possible that some of the legal actions, proceedings or claims could be decided against FINOVA. Other than the matters described below, FINOVA believes that any resulting liability for their litigation matters should not materially affect FINOVA's financial position, results of operations or cash flows. One or more of the following matters, for which nominal accruals have been made, could have a material adverse impact on FINOVA's financial position, results of operations or cash flow. Between March 29, 2000 and May 23, 2000, five shareowner lawsuits were filed against FINOVA Group and Samuel Eichenfield, FINOVA and FINOVA Group's former chairman, president, and chief executive officer; two of the lawsuits also named FINOVA as a defendant, and one named three other executive officers. All of the lawsuits purport to be on behalf of the named plaintiffs (William K. Steiner, Uri Borenstein, Jerry Krim, Mark Kassis, and the Louisiana School Employees Retirement System), and others who purchased FINOVA Group common stock during the class period of July 15, 1999, through either March 26, 2000, or May 7, 2000. The suit brought by the Louisiana School Employees Retirement System also purports to be on behalf of all those who purchased FINOVA's 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 for the District of Arizona dated August 30, 2000, these 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 Group, FINOVA, 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 Group's stock price, among other reasons. Among other things, the complaint seeks unspecified damages for losses incurred by shareowners, plus interest, and other relief, and rescission with regard to the notes purchased. Since consolidation of the original five shareowner lawsuits, other related lawsuits have been initiated against the Company and current and former officers and directors. Three shareowner lawsuits were filed in the United States District Court for the Middle District of Tennessee, in which the named plaintiffs (John Cartwright, Sirrom Partners and Sirrom G-1, and Caldwell Travel) 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 Group stock. The Cartwright complaint purports to be a class action lawsuit on behalf of all Sirrom shareowners that exchanged their Sirrom stock for FINOVA Group 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 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 complaints seek unspecified damages for losses incurred by shareowners, plus interest, and other relief. On January 4, 2001, the United States District Court for the Middle District of Tennessee granted a motion brought by FINOVA and the other defendants to transfer the Cartwright and Sirrom Partners cases to the United States District Court for the District of Arizona. The plaintiff in Caldwell Travel agreed to dismiss that case without prejudice. Pursuant to a Stipulation and Order entered in March 2001, the Cartwright case has been consolidated for all purposes with the previous five cases in the FINOVA Group Securities Litigation, and the Sirrom Partners case has been consolidated for all pre-trial purposes. The lead plaintiffs are scheduled to file a Second Amended Consolidated Complaint in May 2001, though the deadline may be extended. There have also been two shareowners' derivative lawsuits filed against current and former officers and directors of FINOVA Group, 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. These actions seek unspecified money damages and other relief. As with the consolidated securities litigation, the allegations center generally on claims that there were materially misleading statements regarding FINOVA's loss reserves. In both of these actions, the plaintiffs have agreed to a stay of all proceedings pending the final determination of the motion to dismiss in the consolidated securities litigation. 10 Finally, another shareowner'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 Group stock as a result of the acquisition. The plaintiffs have agreed to a stay of discovery in this case, pending the final determination of the motion to dismiss the consolidated securities litigation. FINOVA believes the claims in all of these securities and derivative cases are without merit. FINOVA and the other defendants intend to vigorously defend against these claims. On March 6, 2001, one of FINOVA's subsidiaries, FINOVA (Canada) Capital Corporation, had an involuntary Petition for Receiving Order filed against it in the Ontario, Canada, Superior Court of Justice in Bankruptcy. The action was filed by the Bank of Nova Scotia, as agent for the lenders on a $150 million (Canadian) bank facility. That same day, the courts in Canada issued a temporary injunction prohibiting transfers of assets out of the Canadian subsidiary to its other affiliates. FINOVA has not received service of process in those proceedings, but has agreed to refrain from transferring assets to its affiliates without court order. On March 7, 2001, FINOVA Group, FINOVA and seven of their subsidiaries filed voluntary petitions for protection from creditors pursuant to Chapter 11, Title 11, United States Code, in the United States Bankruptcy Court for the District of Delaware. The other subsidiaries were FINOVA (Canada) Capital Corporation, FINOVA Capital plc, FINOVA Loan Administration Inc., FINOVA Mezzanine Capital Inc., FINOVA Portfolio Services, Inc., FINOVA Technology Finance Inc., and FINOVA Trust Finance. FINOVA obtained orders from the bankruptcy court on the first day permitting FINOVA to continue its operations in the ordinary course including honoring its obligations to borrowers. The orders also permit the Filing Entities to pay certain prepetition expenses and claims, such as to employees (other than executive officers, with exceptions), taxing authorities and foreign trade vendors. The cases will be jointly administered. On May 2, 2001, FINOVA and the other filing subsidiaries filed a proposed Joint Plan of Reorganization and Disclosure Statement which are currently pending before the Bankruptcy Court. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS. -------------- COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 TO THE THREE MONTHS ENDED MARCH 31, 2000 The following discussion relates to FINOVA Capital Corporaton and its subsidiaries (collectively "FINOVA" or the "Company"). FINOVA is a wholly owned subsidiary of The FINOVA Group Inc. ("FINOVA Group"). FINOVA Group is a financial services holding company. Through its principal operating subsidiary, FINOVA, FINOVA Group has provided a broad range of financing and capital markets products, primarily to mid-size businesses. FINOVA Capital has been in operation since 1954. On March 7, 2001, FINOVA Group, FINOVA Capital Corporation and seven of their subsidiaries filed for protection pursuant to Chapter 11, Title 11, of the United States Code to enable them to restructure their debt (the "Reorganization Proceedings"). Historically, the Company has relied upon borrowed funds together with internal cash flow to finance its operations. Profit has largely been recorded from the spread between the cost of borrowing and the rates paid by its customers, less operating costs. The Company also generates revenues through loan servicing and related activities and the sale of assets. Beginning late in the first quarter of 2000, a series of events impeded FINOVA's access to lower cost capital in the public and private markets. Those events have generally been described in FINOVA's Form 10-K for the year ended December 31, 2000 (the "2000 10-K") that has been filed with the Securities and Exchange Commission. Recent Developments and Business Outlook On May 2, 2001, FINOVA Group, FINOVA and their subsidiaries that filed for protection pursuant to Chapter 11 filed a proposed Joint Plan of Reorganization and a Disclosure Statement (the "Plan") with the United States Bankruptcy Court for the District of Delaware. The Plan contemplates implementation of a comprehensive restructuring transaction with Berkadia LLC, a joint venture of Berkshire Hathaway Inc. and Leucadia National Corporation, that was first announced on February 27, 2001. As more fully described in the Plan, Berkadia has committed to make a $6 billion loan to FINOVA, subject to conditions. The loan proceeds, together with cash on hand, will fund a cash disbursement to general unsecured creditors of FINOVA equal to 60% of their claims, an increase from the approximately 54% cash payment originally proposed. In addition, FINOVA Group will issue ten-year New Senior Notes equal to 40% of the general unsecured claims against FINOVA. The New Senior Notes will be secured by a second lien on the stock of FINOVA. Interest on the New Senior Notes will be payable semi-annually out of available cash (calculated as provided in the Plan documents), after payment of quarterly interest on the Berkadia loan, except as described in the following sentence. While the Berkadia loan is outstanding and not in default, a liquidity feature of the Plan that was not included in the original proposal will require FINOVA to commit $75 million of available cash quarterly (up to a maximum of $1.5 billion in total) to repurchase New Senior Notes at a price not to exceed par plus accrued interest (subject to availability of New Senior Notes at or below the maximum price). Principal on the New Senior Notes will be paid out of available cash, after payment in full of the Berkadia loan. After payment in full of the Berkadia loan, 95% of available cash will be used to pay the New Senior Notes and 5% will be used for payments to FINOVA Group stockholders. The New Senior Notes also provide for payment under certain circumstances of up to $100 million in the aggregate of additional interest to holders of the New Senior Notes. Holders of general unsecured claims against FINOVA will also receive a cash payment of post petition interest upon the effective date of the Plan. Berkshire Hathaway owns approximately $1.4 billion of existing FINOVA bank and bond debt and therefore is expected to be a significant holder of New Senior Notes. Berkshire Hathaway will participate in FINOVA's quarterly repurchase of New Senior Notes pro rata to its interest in the New Senior Notes at the weighted average price paid in each quarterly repurchase. All other terms of the Plan are substantially the same as previously disclosed in FINOVA's February 28, 2001 filing on Form 8-K. The Bankruptcy Court has not approved the proposed Plan or the Disclosure Statement. The solicitation process will not begin until the Bankruptcy Court approves the Disclosure Statement and authorizes FINOVA to solicit the votes of their creditors and stockholders in connection with the Plan. Thereafter, FINOVA will send the proposed Plan and Disclosure Statement to all creditors and stockholders who are entitled to vote on the Plan. 12 Results of Operations The results for the first quarter of 2001 reflected a continuation of trends noted in the 2000 10-K. These results were adversely impacted by some of the events of 2000 and a continued softening of the U.S. economy. The more significant impacts were increases in delinquencies and nonaccruing assets, higher cost of funds (resulting in lower interest margins earned), increased operating costs and the inability to recognize tax benefits. For the first quarter of 2001, FINOVA reported a loss of $67.8 million compared to net income of $11.4 million in the first quarter of 2000. The results for the first quarter of 2001 included a net loss from continuing operations of $49.1 million compared to net income of $48.5 million in the first quarter of 2000, and a net loss from discontinued operations in the 2001 quarter of $18.7 million compared to a net loss of $37.2 million in the first quarter of 2000. A discussion of the largest variances in the individual profit and loss categories is as follows: Continuing Operations Loss from Continuing Operations. The decline in results in the first quarter of 2001 when compared to the same quarter in 2000 was primarily due to the following: . Higher loss provisions to bolster the reserve for credit losses. . A higher level of nonaccruing assets. . Lower gains on investments and disposal of assets. . Increases in the Company's cost of funds. . An increase in the level of nonaccruing assets due in part to the weakening economy. . Higher expenses primarily related to the Reorganization Proceedings. . The inability to recognize any federal and state income tax benefits in 2001. Interest margins earned. Interest margins earned represents the difference between (a) interest, fee, lease and other income earned from financing transactions and (b) interest expense and depreciation on operating leases. Interest margins earned in the first quarter of 2001 dropped by $69.7 million to $66.0 million from $135.7 million in the first quarter of 2000 due to a higher level of nonaccruing assets, a higher cost of funds and a reduction in the managed assets. Interest margins earned as a percentage of average earning assets declined to 3.1% in the first quarter of 2001 from 5.6% in the comparable 2000 quarter. The higher cost of funds was the result of the events of 2000, primarily the various downgrades of FINOVA's senior debt and the elimination of its commercial paper program resulting in draw downs under its back-up bank facilities. This caused the Company's cost of funds applicable to $4.5 billion of bank debt to increase by 1.16% (over the comparable 2000 period) up to March 7, 2001, the bankruptcy filing date. The portfolio (ending managed assets) declined to $9.88 billion at March 31, 2001 from $10.54 billion at March 31, 2000. The reduction was primarily due to lower new business ($277.4 million in 2001 compared to $914.0 million in the first quarter of 2000) and to portfolio runoff. The new business in the first quarter of 2001 included the funding of approximately $176 million from available lines of credit, $150 million of which was in the Resort Finance line of business. As the Company indicated in the 2000 Form 10-K, it has effectively eliminated new business development activities and for the foreseeable future, intends to focus on managing and maximizing the value of its existing portfolio. Those efforts will include the continued collection of its portfolio pursuant to contractual terms and may include efforts to retain certain customer relationships, restructure or terminate other relationships or sell certain assets if buyers can be found at attractive prices. The Company will continue to fund its backlog of commitments, which declined to $1.85 billion at March 31, 2001 from $1.97 billion at March 31, 2000. Historically, the amount reported as committed backlog was FINOVA's estimate of expected draw downs of the total commitments outstanding, especially the available lines of credit. Assuming full utilization, the total amount of available lines of credit at March 31, 2001 was $2.98 million, including discontinued operations. The available backlog increased from the $2.7 billion at December 31, 2000, primarily due to pay downs on lines of credit, resulting in increased availability. Provision for credit losses. The provision for credit losses on continuing operations was higher by $40.9 million in the first quarter of 2001 compared to the first quarter of 2000 ($61.8 million vs. $20.9 million) due to increases in problem accounts and higher net write-offs during the period ($22.4 million in the first quarter of 2001 vs. $13.8 million in the first quarter of 2000). The businesses with the highest level of net write-offs during the 2001 quarter were Mezzanine Capital ($10.7 million), Rediscount Finance ($7.4 million) and Healthcare Finance ($3.1 million). Net write-offs as a percent of managed assets in the 2001 first quarter were 0.87% annualized compared to 0.53% for the first quarter of 2000. A discussion of the increase in problem accounts is included under "Financial Condition, Liquidity and Capital Resources." 13 FINOVA monitors developments affecting loans and leases in 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 reserves and when considered appropriate, writes down the values of the loans. Depending on developments, there is the possibility that the loan loss reserves and/or write-downs will increase in the future. Gains on investments and disposal of assets. Gains for the first quarter of 2001 were $13.6 million compared to $21.0 million for the 2000 first quarter. Gains in the 2001 quarter were generated by Commercial Equipment Finance ($15.2 million), Mezzanine Capital ($4.7 million) and Communications Finance ($3.2 million). The largest gain was from the sale of stock of Corvis Corp., which generated a gain of $15.6 million. These gains were partially offset by losses on residuals in Transportation Finance ($5.1 million) and further write-down of Realty Capital's assets held for sale to fair value (5.1 million). Operating expenses. For the first quarter of 2001, operating expenses declined slightly to $55.0 million from $56.8 million in the comparable 2000 quarter. The decrease was primarily due to the cost savings resulting from a reduction in employees (551 at March 31, 2001, compared to 1,114 at March 31, 2000) and lower goodwill amortization ($394 thousand vs. $4.2 million), partially offset by accruals and payments made in connection with employee retention plans and higher professional fees relating to events since March 2000. The higher professional services included increased accounting, legal fees and investment banking fees. Reorganization items. Reorganization items reflect income and expense items that are directly associated with the reorganization, as compared to those from the ongoing operations of the business as required by generally accepted accounting principles for entities in reorganization under the Bankruptcy Code. For the first quarter of 2001, reorganization items included the charge-off of debt origination costs ($15.1 million), professional services fees ($9.6 million), the full amortization of debt discounts ($7.9 million) partially offset by gains from cash settled interest rate swap terminations ($22.2 million) and interest earned ($0.8 million) on the cash retained and invested as a result of the moratorium on payment of interest and principal applicable to FINOVA's outstanding debt. Income taxes. Income taxes were provided during the first quarter of 2001 in spite of losses before income taxes for the period, due to taxable income being generated by foreign operations (primarily in the United Kingdom and Canada). Income tax benefits were offset by an increase in the valuation allowance during the 2001 quarter because of the uncertainty of being able to utilize either state or federal net operating loss carryforwards. This also applies to discontinued operations, which provided income taxes on income from foreign operations while recording net pre-tax losses for the period. The effective income tax rates in the first quarter of 2000 were 39.4% for continuing operations and 40.0% for discontinued operations. Discontinued Operations During the third quarter of 2000, FINOVA Group's Board of Directors approved the sale or liquidation of some of its more broad based businesses so the Company could focus more on its niche-based businesses. The businesses included in discontinued operations consist of Commercial Services (substantially sold during the third quarter of 2000), Corporate Finance (which includes Business Credit and Growth Finance) and Distribution & Channel Finance. During the first quarter of 2001, $309 million of Corporate Finance assets were sold. Sales of additional assets could occur for all or portions of the discontinued business assets. To the extent assets are not sold, the Company intends to liquidate the remaining assets in an orderly manner. Losses from discontinued operations in 2001 were $18.7 million (after-tax) and primarily consisted of $12.8 million of charges to value the assets to be sold or liquidated at estimated net realizable amounts, the effects of higher nonaccruing assets and operating losses. Nonaccruing assets in discontinued operations were $433.2 million at March 31, 2001, down $53 million from $486.2 million at December 31, 2000 and up by $293.6 million from $139.6 million at March 31, 2000. Losses in the first quarter of 2000 were principally due to a pre-tax charge to earnings to replenish loss reserves after a write-off of a loan to a single customer in the Distribution & Channel Finance line of business. Financial Condition, Liquidity and Capital Resources The following primarily relates to continuing operations, except as noted. Managed assets were $9.88 billion at March 31, 2001 compared to $10.54 billion at December 31, 2000. Included in managed assets at March 31, 2001 were $9.56 billion in funds employed and $321.6 million of securitized assets. The decrease in managed assets was due to prepayments and asset sales accompanied by normal portfolio amortization, partially offset by funded new business of $277.4 million for the three months ended March 31, 2001. 14 The reserve for credit losses as it pertains to continuing operations increased to $618 million at March 31, 2001 from $578.8 million at December 31, 2000. At March 31, 2001 and December 31, 2000, the reserve for credit losses was 6.5% and 5.7% of ending managed assets, respectively. The reserve for credit losses as a percent of nonaccruing assets declined to 53% at March 31, 2001, from 62.8% at December 31, 2000, due to the increase in nonaccruing assets. Nonaccruing assets increased to $1.17 billion or 11.8% of ending managed assets at March 31, 2001 from $921.4 million or 8.7% at the end of 2000. The largest increases to nonaccruing assets during the three months of 2001 occurred in Transportation Finance ($85.1 million), Commercial Equipment Finance ($53.8 million), Mezzanine Capital ($50.4 million), Communications Finance ($45.1 million) and Realty Capital ($10.6 million). The $85.1 million increase in nonaccruing assets in Transportation Finance involved eight aircraft-secured transactions and one engine-secured transaction. The single largest transaction ($28.2 million) moving to nonaccrual in the first quarter was a 1988 B757 on lease to a scheduled carrier. The other moves to nonaccrual involved two MD-82 aircraft ($21.0 million) on lease to a carrier in bankruptcy at March 31, and subsequent to March 31, leased to the acquirer of that carrier; three 727-200 aircraft ($18.8 million) on operating leases to a scheduled carrier; another MD-82 aircraft ($12.0 million) formerly on lease to a carrier in bankruptcy and sold subsequent to March 31; three DC-9-30 aircraft ($10.6 million) in process of being returned; two 727-200 aircraft ($9.6 million) out on operating leases. FINOVA wrote-off $550 thousand in the first quarter and established $1.45 million of specific reserves on these new nonaccruals. The $53.8 million increase in nonaccruing assets in Commercial Equipment Finance was principally due to the addition of a $41.9 million loan to a corporate aircraft charter operator who is experiencing cash flow problems. The balance of the increase was due to the addition of five other accounts affected by the slowing economy. Specific reserves of $2.0 million have been assigned against the total new nonaccruing assets. The Mezzanine Capital portfolio has been negatively affected by the weakening economy resulting in more restrictive policies by senior lenders regarding subordinated debt. In addition, the lack of equity support from the traditional equity sponsors of many mezzanine transactions has resulted in a liquidity crisis for a number of our borrowers. The increase in nonaccruing accounts at quarter-end can be largely attributed to the following: violations of senior debt covenants on four transactions totaling $7.1 million leading to payment blockage; three transactions totaling $13.7 million for which the equity sponsors have indicated an unwillingness to provide additional support resulting in a liquidity crisis for those borrowers; one transaction for $10.8 million on which the senior lenders are in disagreement over the borrowing base components; and the weakening economy has severely impacted the business plans of six borrowers totaling $23.8 million, resulting in short to long term liquidity issues. Specific reserves of $30.4 million have been allocated to the $58.1 million of new nonaccruing assets. The $45.1 million increase in the Communications Finance nonaccruing assets is represented by five accounts in six different market niches. The largest increase comes from the internet sector, as two accounts totaling $19.8 million moved into nonaccrual status. Also moving to nonaccruing was a $14.2 million loan to a radio and TV station operator serving numerous markets. An $8.6 million loan to a paging operator was moved into the nonaccrual category in the first quarter. Although interest payments were being made, the move was appropriate in light of the significant softening in the paging industry and the likelihood of a bankruptcy filing. One customer in the cable and security monitoring industry went over 90 days delinquent in payments at the end of March 2001. For these new nonaccrual accounts, specific reserves of $13.8 million have been established as of March 31, 2001. The increase in nonaccruing assets in Realty Capital of $10.6 million was primarily attributable to one account for $7.8 million secured by five low-rise office buildings in Orlando, Florida. The properties are experiencing significant occupancy shortages and the transaction matures in the second quarter. The Company designated the Realty Capital unit as being held for sale in the fourth quarter of 2000 and took a charge to write-down its assets to estimated fair value. A revaluation increased the markdown by $5.1 million in the first quarter of 2001. Earning impaired assets increased during the three months ended March 31, 2001 to $308.1 million, or 3.1% of ending managed assets, from $235.8 million, or 2.2% of ending managed assets at December 31, 2000. The largest additions to earning impaired assets were in Rediscount Finance ($32.1 million), Healthcare Finance ($28.7 million), Resort Finance ($17.0 million), Realty Capital ($22.5 million) and Mezzanine Capital ($13.1 million). The increase in Rediscount Finance represents one account which operates as a consumer sales finance company based in Florida. The account is considered impaired due to an out of formula condition with the underlying collateral of automobile finance contracts. The increase in Healthcare Finance is attributable to two accounts. One is a participation in a bank facility to finance an operator of skilled nursing and assisted living facilities in California, Texas, and Arizona. The facility is secured by all the assets of the company. The other Healthcare transaction is also a participation for an operator of assisted living facilities. The transaction matured at the end of March with no established plan for refinancing. The increase in Realty Capital is primarily attributable to one account secured by a two-story R&D/Office complex in California. The account was moved to earning impaired status as a result of losing one of its major tenants. The increase in Resort 15 Finance represents one golf-oriented resort in Florida. Sales of timeshare intervals have lagged expectations which in turn has slowed the repayment of FINOVA's acquisition facility. The increase in Mezzanine Capital was primarily attributable to one account ($9.3 million) involved with the paging industry. Although the account continues to pay in a timely manner, the significant softening in the paging industry, along with the uncertainty about the future direction of paging, warranted this classification. There can be no assurance that any of the potential transactions noted above will be consummated on anticipated terms. The carrying amount of FINOVA's accounts that were 31-90 days delinquent in payment at March 31, 2001 increased to 1.6% of managed assets, from 1.2% of managed assets at the end of 2000. The increases in 31-90 day delinquent accounts were in Transportation Finance ($46.8 million), Resort Finance ($22.6 million) and Franchise Finance ($9.9 million). FINOVA's internally generated funds and asset sales financed liquidity during the three months ended March 31, 2001. On February 27, 2001, FINOVA announced a moratorium on repayments of principal on its outstanding bank and bond debt. On March 7, 2001, FINOVA filed for protection from its creditors as noted above to enable it to restructure the timing of its debt repayments. The Reorganization Proceedings seek to enable FINOVA to restructure the debt maturities, among other items. No principal or interest payments will be made on the debt until the Plan defining repayment terms has been approved by the court. In 2001, substantially all of FINOVA's interest rate swaps were terminated, as a result of the Reorganization Proceedings. Historically, FINOVA entered into derivative transactions as part of its interest rate risk management policy of match funding its assets and liabilities. Therefore, FINOVA's asset and liabilities are not match funded going forward. At termination, the interest rate swaps had an estimated value of approximately $70 million, of which $18.2 were cash settled and amortized into income and included as a reorganization item in first quarter's results. Pursuant to the Company's various agreements, the institutions exercised their right to offset the amounts due to the Company relative to approximately $50 million of the cash termination value of the swaps, against the amount due by the Company on the debt outstanding. No swap termination gains have been recognized on these swaps since the amounts have not been approved by the bankruptcy court. At March 31, 2001, FINOVA had $11.1 billion of debt outstanding representing 16.9 times the Company's common equity base of $649.2 million. As a result of its moratorium on debt payments, its subsequent filing of Bankruptcy under Chapter 11 and defaults under various financial covenants under its bank agreements, FINOVA is in default under its debt agreements. 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 derivative instruments, 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. FINOVA adopted the provisions of SFAS 133, as amended, on January 1, 2001, which resulted in an immaterial impact on FINOVA's consolidated results of operations and financial position. Special Note Regarding Forward-Looking Statements Certain statements in this report are "forward-looking," in that they do not discuss historical fact, but instead note future expectations, projections, intentions or other items. These forward-looking statements include matters in the sections of this report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosure About Market Risk." They are also made in documents incorporated in this report by reference, or in which this report may be incorporated, such as a prospectus. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause FINOVA's actual results or performance to differ materially from those contemplated by the forward-looking statements. Many of those factors are noted in conjunction with the forward- looking statements in the text. Other important factors that could cause actual results to differ include: 16 . The results of FINOVA's efforts to implement its business strategy, including successful completion of the Reorganization Proceedings. Failure to fully implement its business strategy might result in adverse effects, including materially adverse impacts on its financial position and results of operations. The current focus on maximizing portfolio values and liquidity while minimizing or eliminating new business generation will likely result in financial results that differ materially from prior periods. . The effect of economic conditions and the performance of FINOVA's borrowers. Economic conditions in general or in particular market segments could impact the ability of FINOVA's borrowers to operate or expand their businesses, which might result in decreased performance, impacting repayment of their obligations. The rate of borrower defaults or bankruptcies may increase. Economic conditions could adversely affect FINOVA's ability to realize gains from sales of assets and investments and estimated residual values. Those items could be particularly sensitive to changing market conditions. Certain changes in fair market values must be reflected in FINOVA's reported financial results. . The cost of FINOVA's capital. That cost has increased significantly as a result of the events of 2000 and will increase further if the Berkadia transaction is consummated. The impact of these developments will be a significant reduction in profit margins. . Loss of employees. FINOVA must retain a sufficient number of employees to continue to monitor and collect its portfolio. Failure to do so could result in additional losses. . Changes in air worthiness directives. These changes could have a significant impact on airplane values, especially FINOVA's portfolio of airplanes, which are of an older vintage. . Changes in government regulations, tax rates and similar matters. For example, government regulations could significantly increase the cost of doing business or could eliminate certain tax advantages of some of FINOVA's financing products. The current financial condition of FINOVA also makes it difficult to record potential tax benefits that may never be recognized. . Necessary technological changes, such as implementation of information management systems, may be more difficult, expensive or time consuming than anticipated. . Potential liabilities associated with dispositions of assets or lines of business. . Changes in interest rates could adversely affect financial results. . Other risks detailed in FINOVA's other SEC reports or filings. FINOVA does not intend to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. FINOVA cannot predict the risk from reliance on forward- looking statements in light of the many factors that could affect their accuracy. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ----------------------------------------------------------------- FINOVA's primary market risk has been exposure to the volatility of interest rates. FINOVA sought to manage interest rate risk and preserve income through a diversified borrowing base and a matched funding policy. A diversified borrowing base consisted of short and long-term debt with a fixed or variable rate. FINOVA's matched funding policy required that floating-rate assets be financed with similar floating-rate liabilities and fixed-rate assets be financed with similar fixed-rate liabilities. Under the matched funding policy, the difference between floating-rate assets and floating-rate liabilities was managed to not exceed 3% of total assets for any extended period. As a result of the developments described in the Company's 2000 10-K, the Company cannot determine the nature of its borrowing base or achieve a matched funding policy. In addition, substantially all of the Company's interest rate swap agreements were terminated as a result of the bankruptcy filing. During the pendancy of the bankruptcy, the interest rate which will be applied to the Company's debt obligations is also uncertain. Since approximately 50% of the Company's assets earn at a floating-rate, any decline in market rates could adversely affect the Company since it would earn less on its assets while the nature of its financing costs is uncertain. Alternatively, any increase in market rates would increase its return on floating-rate assets; however, if its financing costs also become floating any potential increases in asset returns could be offset by rising costs of capital. Until a plan of reorganization is approved and its financing costs determined, the Company does not expect to be able to mitigate its exposure to changes in interest rates. Under the terms of Berkadia's commitment, the New Senior Notes will be fixed-rate obligations, at the weighted average rate of the existing debt (excluding default interest or penalties, if any). If LIBOR is above 6%, the Berkadia Loan will be a floating-rate loan; if LIBOR is below 6%, the Berkadia Loan will be fixed at 9%. If this transaction is consummated, a successful strategy to mitigate the Company's exposure to changes in market interest rates could be developed; however, no assurance can be given that the Company will be able to implement any such strategy at an acceptable cost or will seek to do so. In addition, no assurance can be given that the transaction will be consummated. 18 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ------------------------- See Part I, Item 1, Note H for a discussion of pending legal proceedings. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ----------------------------------------- (a) The following exhibits are filed herewith: Exhibit No. Document - ------------- --------------------------------------------------------------- 12 Computation of Ratio of (Losses) Income to Fixed Charges (interim period). 4.0.1 Letter Agreement among Berkadia LLC, Berkshire Hathaway Inc., Leucadia National Corporation, FINOVA and FINOVA Group, dated May 2, 2001, including summaries of proposed terms and conditions for the $6 billion Senior Secured Credit Facility and the New Senior Notes (incorporated by reference from FINOVA Group's Report on Form 10-Q for the quarter ended March 31, 2001, Exhibit 4.0.1). (b) Reports on Form 8-K: A report on Form 8-K dated May 8, 2001 was filed by Registrant which reported under Item 5 the filing by the Company and its subsidiaries in the Bankruptcy Court of a proposed Joint Plan of Reorganization and Disclosure Statement. 20 FINOVA CAPITAL CORPORATION SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FINOVA CAPITAL CORPORATION (Registrant) Dated: May 15, 2001 By: /s/ Bruno A. Marszowski ---------------------------------------------------- Bruno A. Marszowski, Senior Vice President, Chief Financial Officer and Controller Principal Financial and Accounting Officer 21 FINOVA CAPITAL CORPORATION COMMISSION FILE NUMBER 1-7543 EXHIBIT INDEX MARCH 31, 2001 FORM 10-Q Exhibit No. Document - ------------- ------------------------------------------------------------- 12 Computation of Ratio of (Losses) Income to Fixed Charges (interim period). 4.0.1 Letter Agreement among Berkadia LLC, Berkshire Hathaway Inc., Leucadia National Corporation, FINOVA and FINOVA Group, dated May 2, 2001, including summaries of proposed terms and conditions for the $6 billion Senior Secured Credit Facility and the New Senior Notes (incorporated by reference from FINOVA Group's Report on Form 10-Q for the quarter ended March 31, 2001, Exhibit 4.0.1). 22 EX-4.0.1 2 dex401.txt LETTER AGREEMENT Exhibit 4.0.1 Berkadia LLC 1440 Kiewit Plaza Omaha, Nebraska 68131 May 2, 2001 The FINOVA Group Inc. FINOVA Capital Corporation 4800 North Scottsdale Road Scottsdale, Arizona 85251-7623 Ladies and Gentlemen: Pursuant to and as contemplated by the commitment letter (the "Commitment Letter") dated as of February 26, 2001 by and among Berkadia LLC, Berkshire Hathaway Inc., Leucadia National Corporation, The FINOVA Group Inc. ("FNV") and FINOVA Capital Corporation ("Borrower"), we hereby confirm that the attached Senior Secured Credit Facility term sheet and Summary of Terms of New Senior Notes (the "Term Sheets") are acceptable to Berkshire and Leucadia to be included as part of the plans of reorganization filed by FNV, Borrower and their subsidiaries (together, the "Debtors") that have filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the "Court"). We and you agree that: (i) the Term Sheets shall replace Annex I and Exhibit A to Annex I to the Commitment Letter, respectively, effective upon the earlier to occur of (a) the approval of the Commitment Letter and the Term Sheets by the Court, or (b) the effective date of plans of reorganization of the Debtors that satisfy and incorporate the terms and conditions set forth in the Commitment Letter and the Term Sheets, and (ii) this letter and the Term Sheets do not amend or modify the Commitment Letter in any respect unless and until the occurrence of either of the events described in clause (a) or (b) of paragraph (i). Very truly yours, BERKADIA LLC By: /s/ Marc D. Hamburg Name: Marc D. Hamburg Title: Manager BERKSHIRE HATHAWAY INC. By: /s/ Marc D. Hamburg Name: Marc D. Hamburg Title: Vice President LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando Name: Joseph A. Orlando Title: Vice President Acknowledged and Agreed this 2nd day of May, 2001 THE FINOVA GROUP INC. By: /s/ William J. Hallinan Name: William J. Hallinan Title: President & CEO FINOVA CAPITAL CORPORATION By: /s/ William J. Hallinan Name: William J. Hallinan Title: President & CEO 2 $6,000,000,000 SENIOR SECURED CREDIT FACILITY Summary of Terms And Conditions This Summary of Terms and Conditions outlines certain terms of the Facility referred to in the Commitment Letter dated February 26, 2001 among The FINOVA Group Inc. ("FNV"), FINOVA Capital Corporation (the "Company" or the "Borrower"), Lender, Berkshire and Leucadia (the "Commitment Letter"). This Summary of Terms and Conditions is part of and subject to the Commitment Letter. Certain capitalized terms used herein are defined in the Commitment Letter. Borrower: The Company. Guarantors: FNV and all of FNV's direct and indirect subsidiaries other than (i) the Company and (ii) any special purpose subsidiary that is contractually prohibited (as of February 26, 2001) from acting as a guarantor (the "Guarantors"). Lender: Berkadia LLC ("Lender"). The Facility: A five-year amortizing term loan made to the Borrower in a single drawing on the Closing Date in a principal amount of $6,000,000,000 (the "Term Loan"), mandatorily prepayable with cash flows as set forth under "Prepayments." The final maturity date for the Term Loan will be five years from the Closing Date. Closing Date: On or before August 31, 2001. Purpose: Proceeds of the Term Loan will be used solely to repay a portion of the pre-petition debt of the Company and its subsidiaries in accordance with the Plan. Interest: The Term Loan will bear interest at the greater of the following rates: (i) the current LIBO rate (for a period not to exceed six months and to be determined prior to execution of the loan documentation) as quoted by Telerate Page 3750, adjusted for reserve requirements, if any, applicable to Lender's source of funds and subject to customary change of circumstance provisions and reserve requirements applicable to Lender and Lender's provider of funds (the "LIBO Rate"), plus 3% per annum; and (ii) 9% per annum. The interest rate shall be reset daily and interest shall be calculated on the basis of the actual number of days elapsed in a 360-day year. Interest shall be payable quarterly. 3 Default Interest: During the continuance of an event of default (as defined in the loan documentation), the Term Loan (including unpaid interest and unpaid default interest) will bear interest at an additional 2% per annum. Prepayments: Following the (i) payment of or funding of a reserve for accrued interest on the Term Loan, (ii) payment of operating expenses and taxes of FNV, the Company and their respective subsidiaries, (iii) funding of reasonable reserves for (a) revolving and unfunded commitments existing at the Closing Date and acceptable to Lender, (b) commitments otherwise acceptable to Lender and (c) general corporate purposes of FNV, the Company and their respective subsidiaries, (iv) payment of accrued interest on the Senior Notes, and (v) provided no default has occurred, or would result therefrom, payment of up to $75 million in any three- month period to purchase Senior Notes at a purchase price not to exceed par plus accrued and unpaid interest thereon, mandatory prepayments of the Term Loan without premium thereon shall be required in an amount equal to the aggregate net positive amount of each of (x) 100% of the net sale proceeds from asset sales, (y) 100% of excess cash flow (to be defined in the loan documentation) and (z) 100% of net proceeds from insurance and condemnation, in each case received by FNV, the Company or any of its subsidiaries, except to the extent any special purpose subsidiary is subject (as of February 26, 2001) to a contractual restriction on making distributions to its parent entity. In no event shall the Company or its subsidiaries make any prepayment on the Term Loan out of any refinancing or issuance of securities. Security: All amounts owing by and the obligations of the Company under the Term Loan and the Guarantors in respect thereof will be secured by (i) a first priority perfected pledge of (x) all notes owned by the Company and the Guarantors and (y) all capital stock, securities, partnership and LLC interests owned by the Company and the Guarantors and (ii) a first priority perfected security interest in all other assets owned by the Company and the Guarantors, including, without limitation, accounts, inventory, equipment, investment property, instruments, chattel paper, real estate, leasehold interests, contracts, patents, copyrights, trademarks and other general intangibles, subject to customary exceptions for transactions of this type. Conditions Precedent The loan documentation will contain conditions to the to the Closing: closing of the Facility customarily found in loan agreements for similar financings and transactions of this type and other conditions deemed by Lender to be appropriate to the specific transaction and in any event including without limitation: 4 . All documentation relating to the Facility shall be in form and substance satisfactory to the Company and its counsel and Lender and its counsel. Guarantees in form and substance satisfactory to the Lender and its counsel shall have been executed and delivered by the Guarantors, and shall be in full force and effect. . FNV and the Company shall not be in default of any of their obligations under the Commitment Letter. . The terms and conditions of, and documentation relating to the Senior Notes, the principal terms of which are outlined on Exhibit A to this Annex I together with any changes thereto as may be agreed to by Lender, shall be satisfactory to Lender, including in the case of such debt the extent of subordination, security, absence of guarantees, amortization, maturity, prepayments, limitations on remedies and acceleration, covenants, events of default, interest rate and other intercreditor arrangements. All conditions precedent to the issuance of the Senior Notes shall have been satisfied or, with the prior approval of Lender, waived and the Senior Notes shall be issued concurrently with the closing of the Facility. . FNV, the Company and certain of their subsidiaries (the "Debtors") shall have filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (the "Chapter 11 Cases") in the Bankruptcy Court and (i) all motions and other documents to be filed with and submitted to the Bankruptcy Court in connection with the Facility and the Management Agreement, the fees and transactions contemplated thereby and the approval thereof and (ii) the plan of reorganization of each of the Debtors shall be in form and substance reasonably satisfactory to Lender. . An order of the Bankruptcy Court granting approval and confirmation of the Plan of each of the Debtors shall have been entered and have become final and nonappealable (the "Final Order"), which Final Order and plans shall provide for, among other things, (i) borrowing under the Facility, including first priority liens on all collateral thereunder, (ii) the use of proceeds of the Facility to make the Existing Debt Repayment, (iii) issuance of the Senior Notes , (iv) the distribution on a pro-rata basis of $115 5 million principal amount of FNV's 5-1/2% Convertible Subordinated Debentures due 2016 to the holders of FNV's outstanding Trust Originated Preferred Securities ("TOPrS"), (v) the adoption by each of FNV and the Company of a Certificate of Incorporation and By-laws in form and substance acceptable to Lender, (vi) the designees of Lender constituting not less than a majority of the Boards of Directors of FNV and the Company, at least two (2) of the remaining members of which shall be selected from the current Board of Directors of FNV as of the date hereof, (vii) the issuance by FNV to Lender, and/or Berkshire and Leucadia (the "Berkadia Parties") and/or their subsidiaries for no additional consideration of shares of common stock of FNV such that such parties will own, in the aggregate, 51% (or a lesser amount as agreed by the Berkadia Parties) of the outstanding equity of FNV on a fully diluted basis (and an allocation of consideration for such issuance to the capital of FNV in an amount equal to the aggregate par value represented by such equity interests so that such equity interests are fully paid and non- assessable), (viii) the release, in form and substance satisfactory to Lender, Leucadia and Berkshire, of each Indemnified Party (as defined in the Commitment Letter) from any and all claims or liabilities that any creditor or other party in interest has or could have had in connection with or arising out of the Chapter 11 Cases, the Commitment Letter, the Management Agreement and/or any action, authority, event or transaction contemplated by any of the foregoing, (ix) such other terms as shall be acceptable to Lender in its reasonable discretion, and (x) such other terms as are requested by Lender following the initial date of filing of the Plan and that do not adversely affect the holders of claims against or interests in any of the debtors in the Chapter 11 Cases. . The amounts of the allowed general unsecured claims, the allowed secured claims and the amount of disputed claims against FNV, the Company and their subsidiaries in the Chapter 11 Cases as of the effective date of the Plan shall be satisfactory to Lender. Lender shall be satisfied with the liabilities and capitalization of the Company, FNV and their subsidiaries after giving effect to the plans of reorganization of the Debtors. . All fees and expenses (including reasonable fees and expenses of counsel) required to be paid or reimbursed to Lender, Berkshire and Leucadia on or before the Closing Date shall have been paid. 6 . Lender shall be satisfied in its reasonable judgment that (i) there shall not occur as a result of the funding of the Facility, a default (or any event which with the giving of notice or lapse of time or both would be a default) under any debt instruments and other material agreements of FNV, the Company or any of their respective subsidiaries that exist following the effective date of the plans of reorganization of the Debtors, and (ii) that each of FNV and the Company are solvent after giving effect to the funding of the Term Loan and the issuance of the Senior Notes. . Lender shall be satisfied that FNV, the Company and their respective subsidiaries will be able to meet their respective obligations under all employee and retiree welfare plans of such entities, that such employee benefit plans are, in all material respects, funded in accordance with the minimum statutory requirements, that no material "reportable event" (as defined in ERISA, but excluding events for which reporting has been waived) has occurred as to any such employee benefit plan and that no termination of, or withdrawal from, any such employee benefit plan has occurred or is contemplated that could result in a material liability. Lender shall have reviewed and be satisfied with all employee benefit plans of FNV, the Company and their respective subsidiaries. . Lender shall have received satisfactory opinions of counsel to FNV and the Company, addressing such matters as Lender shall reasonably request, including, without limitation, the enforceability of all loan documentation, compliance with all laws and regulations (including Regulations T, U and X of the Board of Governors of the Federal Reserve System), the perfection of all security interests purported to be granted and no conflicts with material agreements. . There shall not have occurred any change, occurrence or development that could, in Lender's reasonable opinion, result in a material adverse change in (i) the business, condition (financial or otherwise), operations, performance, properties, assets, liabilities (actual or contingent) or prospects of FNV, the Company and their respective subsidiaries taken as a whole since December 31, 2000 (other than the commencement and continuation 7 of the Chapter 11 Cases and the consequences that would normally result therefrom), (ii) the ability of the Company to perform its obligations under the loan documentation, (iii) the ability of the Guarantors (other than Guarantors as to which Lender, in its reasonable judgment, is satisfied that their inability, individually or in the aggregate, to perform their obligations is not material) to perform their obligations under the loan documentation or (iv) the ability of Lender to enforce the loan documentation (any of the foregoing being a "Material Adverse Change"). . There shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that (i) could reasonably be expected to result in a Material Adverse Change or, if adversely determined, could reasonably be expected to result in a Material Adverse Change or (ii) restrains, prevents or imposes or can reasonably be expected to impose materially adverse conditions upon the Facility, the plans of reorganization of the Debtors or the transactions contemplated thereby. All necessary governmental and material third party consents and approvals necessary in connection with the Facility, the plans of reorganization of the Debtor and the transactions contemplated thereby shall have been obtained (without the imposition of any conditions that are not reasonably acceptable to Lender) and shall remain in effect, and all applicable governmental filings have been made and all applicable waiting periods shall have expired without in either case any action being taken by any competent authority; and no law or regulation shall be applicable in the judgment of Lender that restrains, prevents or imposes materially adverse conditions upon the Facility or the transactions contemplated thereby. . No information shall have come to the attention of Lender that leads Lender to determine that, and Lender shall not have become aware of any fact or condition not disclosed to them prior to the date hereof which leads Lender to determine that, the Company's or any of its subsidiaries' condition (financial or otherwise), operations, performance, properties, assets, liabilities (actual or contingent) or prospects are different in any material adverse respect from that known to Lender as of this date. 8 . Lender shall have a valid and perfected first priority lien on and security interest in the collateral referred to above under "Security" (other than collateral which Lender is satisfied in its reasonable judgment is not material, individually or in the aggregate); all filings, recordations and searches necessary or desirable in connection with such liens and security interests shall have been duly made; and all filing and recording fees and taxes shall have been duly paid. . Lender shall be satisfied with the amount, types and terms and conditions of all insurance and bonding maintained by the Company and its subsidiaries, and Lender shall have received endorsements naming Lender as an additional insured and loss payee under all insurance policies to be maintained with respect to the properties of the Company and its subsidiaries forming part of Lender's collateral. . Lender shall be satisfied with all environmental matters relating to the Company or its business or assets, and shall have received such environmental review reports as Lender may request, in form and substance satisfactory to it, as to any environmental hazards or liabilities to which the Company and its subsidiaries may be subject, and Lender shall be satisfied with the amount and nature of any such hazards or liabilities and with the Company's plans with respect thereto. . The Management Agreement shall be in full force and effect, and there shall be no cause for termination thereunder. . There shall not exist or have occurred any defaults, prepayment events or creation of liens under debt instruments that exist following the effective date of the Plan or otherwise as a result of the Facility, the plans of reorganization of the Debtors, or the transactions contemplated thereby. . FNV shall have granted registration rights to the Berkadia Parties and/or their affiliates relating to the shares of common stock of FNV issued pursuant to the Plan in form and substance reasonably satisfactory to the Berkadia Parties. 9 Conditions Precedent to On the funding date of the Term Loan (if the Loan: different from the closing date of the Facility) (i) there shall exist no default under the loan documentation, (ii) the representations and warranties of the Company and each Guarantor therein shall be true and correct immediately prior to, and after giving effect to, funding, and (iii) the making of the Term Loan shall not violate any requirement of law and shall not be enjoined, temporarily, preliminarily or permanently. Representations and The loan documentation will contain Warranties: representations and warranties customarily found in loan documentation for similar financings and transactions of this type and other representations and warranties deemed by Lender appropriate to the specific transaction (which will be applicable to FNV, the Company and their respective subsidiaries) including, without limitation with respect to: valid existence, requisite power, due authorization, no conflict with agreements or applicable law, enforceability of loan documentation, validity, priority and perfection of security interests and enforceability of liens, accuracy of financial statements and all other information provided, compliance with law, absence of Material Adverse Change, no default under the loan documentation, absence of material litigation, ownership of properties and necessary rights to intellectual property, no burdensome restrictions and inapplicability of Investment Company Act or Public Utility Holding Company Act. Affirmative and Financial The loan documentation will contain affirmative Covenants: and financial covenants customarily found in loan documentation for similar financings and transactions of this type and other covenants deemed by Lender appropriate to the specific transaction (which will be applicable to FNV, the Company and their respective subsidiaries), including, without limitation, the following: . Comply in all material respects with laws (including, without limitation, ERISA and environmental laws), pay taxes, maintain all necessary licenses and permits and trade names, trademarks, patents and other intellectual property, preserve corporate existence, maintain accurate books and records, maintain properties, maintain appropriate and adequate insurance, permit inspection of properties, books and records, use loan proceeds as specified and provide further assurances as required. . Perform obligations under leases, contracts and other agreements. 10 . Conduct all transactions with affiliates on terms reasonably equivalent to those obtainable in arm's length transactions, including, without limitation, restrictions on management fees to affiliates. . Maintain with a bank satisfactory to Lender main cash concentration accounts and blocked accounts into which all cash flows of the Borrower and proceeds of collateral are paid and which are swept daily (and with respect to accounts at other banks, which will be limited, blocked account agreements in form and substance acceptable to Lender have been executed). . Financial covenants, including, but not limited to, minimum EBITDA, minimum net worth, minimum fixed charge coverage, minimum interest coverage, maximum leverage (measured on a balance sheet debt to EBITDA basis) and maximum capital expenditures. . Maintain a loan-to-collateral value ratio of no greater than 1:1.75. For purposes of this covenant, "collateral" (i) shall only include the value of the tangible assets of the Company and the Guarantors that have been specifically identified by the Company and that are subject to a perfected, first priority security interest in favor of the Lender (and shall exclude all assets of (a) any special purpose subsidiary of the Company that is subject to contractual or legal restrictions on making distributions to its parent entity and (b) any Guarantor for which the Company does not exercise sole voting control and/or for which all of the capital stock is not subject to a perfected, first priority pledge to Lender) and (ii) shall be net of all specific and general reserves. Negative Covenants: The loan documentation will contain negative covenants customarily found in loan documentation for similar financings and transactions of this type (which will be applicable to FNV, the Company and their respective subsidiaries). Each of FNV, the Company and their respective subsidiaries shall agree that (i) except pursuant to the Plan, or (ii) without the consent of Lender, it will not: . Incur or assume any debt (whether or not non- recourse) other than the Term Loan or the Senior Notes (as the case may be); give any guaranties; create any liens, charges or encumbrances; incur additional lease obligations; merge or consolidate with any other person, 11 or change the nature of business or corporate structure or create any new subsidiaries or amend its charter or by-laws; sell, lease or otherwise dispose of assets (including, without limitation, in connection with a sale leaseback transaction), except for asset sales for cash where seller retains no residual interest in such assets and proceeds are applied as set forth under "Prepayments;" give a negative pledge on any assets in favor of any person other than Lender; permit to exist any consensual encumbrance on the ability of any subsidiary to pay dividends or other distributions to the Company; or permit to exist any restrictions on the ability of the Company to prepay the Term Loan. . Prepay, redeem, purchase, defease, exchange, refinance or repurchase any debt including, without limitation, the Senior Notes, except to fund the commitment to spend up to $75 million per three-month period to repurchase Senior Notes as contemplated under clause (v) of "Prepayments," or amend or modify any of the terms of any such debt or other similar agreements, or other material agreements, entered into or binding upon FNV, the Company or their respective subsidiaries. . Make any loans or advances, capital contributions or acquisitions (except to fund existing commitments not discharged in the Chapter 11 Cases) or form any joint ventures or partnerships or make any other investments in subsidiaries or any other person. . Make or commit to make any payments in respect of warrants, options, repurchase of stock, dividends or any other distributions to shareholders, except the commitment contemplated under the terms of the Senior Notes following the payment in full of the Term Loan. . Permit any change in ownership or control of the Company or any of its respective subsidiaries or any change in accounting treatment or reporting practices, except as required by GAAP and as permitted by the loan documentation. . Redeem or otherwise acquire any shares of its capital stock, or issue or sell any securities (other than the issuance of the Senior Notes, pursuant to the exercise of options or conversion of outstanding securities or otherwise pursuant to the Plan) or grant any option, 12 warrant or right relating to its capital stock or split, combine or reclassify any of its capital stock, other than pursuant to a stock option plan adopted following the effective date of the Plan and reasonably acceptable to Berkadia. . Make any material amendment to any existing or enter into any new employment, consulting, severance, change in control or similar agreement or establish any new compensation or benefit or commission plans or arrangements for directors or employees. . Merge, amalgamate or consolidate with any other entity in any transaction, sell all or any substantial portion of its business or assets, or acquire all or substantially all of the business or assets of any other entity, other than acquisitions of businesses in connection with foreclosures in the ordinary course of business and mergers or consolidations wholly-owned subsidiaries of the Company. . File any petition for voluntary reorganization or enter into any reorganization plan or recapitalization, dissolution or liquidation of the Company. . Take any action that would have a material impact on the consolidated federal income tax return filed by FNV as the common parent, make or rescind any express or deemed material election relating to taxes, settle or compromise any material claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to taxes, enter into any material tax ruling, agreement, contract, arrangement or plan, file any amended tax return, or, except as required by applicable law or GAAP or in accordance with past practices, make any material change in any method of accounting for taxes or otherwise or any tax or accounting practice or policy. . Enter into any contract, understanding or commitment that restrains, restricts, limits or impedes the ability of FNV or any of its subsidiaries to compete with or conduct any business or line of business in any geographic area. . Permit FNV to engage in any business or activity, or hold any assets, other than holding the capital stock of the Company. 13 . Pay any management or similar fees, other than pursuant to the Management Agreement. Financial Reporting Requirements: The Company shall provide: (i) monthly consolidated financial statements of FNV, the Company and their respective subsidiaries, including balance sheet, income statement and cash flow statement within 30 days of month-end, certified by the chief financial officer of FNV or the Company, as appropriate; (ii) quarterly consolidated and consolidating financial statements of FNV, the Company and its subsidiaries within 45 days of quarter-end, certified by the chief financial officer of FNV or the Company, as appropriate; (iii) annual audited consolidated and consolidating financial statements of FNV, the Company and their subsidiaries within 90 days of year-end, certified with respect to such consolidated statements by independent certified public accountants acceptable to Lender; (iv) copies of all reports on Form 10-K, 10-Q or 8-K filed by FNV or the Company with the Securities and Exchange Commission; (v) projections for the balance of the term of the Facility provided annually and annual business and financial plans provided in each case at least 30 days prior to fiscal year-end, with the business and financial plans being updated quarterly; (vi) periodic compliance certificates; and (vii) periodic certifications as to collateral value, loan and asset classification and reserves. Other Reporting Requirements: The loan documentation will contain other reporting requirements customarily found in loan documentation for similar financings and transactions of this type and other reporting requirements deemed by Lender appropriate to the specific transaction, including, without limitation, with respect to litigation, contingent liabilities, defaults, ERISA or environmental events and potential defaults or events of default relating to loans or assets held by the Company and its subsidiaries at such times and in form and substance as is satisfactory to Lender. Events of Default: The loan documentation will contain events of default customarily found in loan documentation for similar financings and transactions of this type and other events of default deemed by Lender appropriate to the specific transaction (which will be applicable to FNV, the Company and their respective subsidiaries), including, without limitation, failure to make payments when due, defaults or accelerations under other indebtedness, noncompliance with covenants, breaches of representations and warranties, bankruptcy and insolvency events, failure to satisfy or stay execution of judgments in excess of specified amounts, the existence of 14 certain materially adverse employee benefit or environmental liabilities, impairment of loan documentation or security, Material Adverse Change, actual or asserted invalidity of the guarantees, the security documents or the liens of Lender, change of ownership or control, and defaults under material contracts, including the Management Agreement. Indemnification: The Company shall indemnify and hold harmless Lender, Berkshire and Leucadia and each of their respective affiliates, officers, directors, employees, members, managers, agents, advisors, attorneys and representatives of each (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and disbursements of counsel), joint or several, that may be incurred by or asserted or awarded against any Indemnified Party (including, without limitation, in connection with or relating to any investigation, litigation or proceeding or the preparation of any defense in connection therewith), in each case arising out of or in connection with or by reason of the Facility, the loan documentation or any of the transactions contemplated thereby, or any actual or proposed use of the proceeds of the Facility, except to the extent such claim, damage, loss, liability or expense is found in a final non- appealable judgment by a court of competent jurisdiction (or admitted by an Indemnified Party pursuant to a written settlement agreement) to have resulted primarily from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this paragraph applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by FNV, the Company, any of their respective directors, securityholders or creditors, an Indemnified Party or any other person, or an Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Company further agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract, tort or otherwise) to the Company or any of its securityholders or creditors for or in connection with the transactions contemplated hereby, except for direct damages (as opposed to special, indirect, consequential or punitive damages (including, without limitation, any loss of profits, business or anticipated savings)) determined in a final non-appealable judgment by a court of competent jurisdiction (or admitted by an Indemnified Party pursuant to a written settlement agreement) to have resulted primarily from such Indemnified Party's gross negligence or willful misconduct and any liability of any Indemnified Party shall be limited to the amount of fees actually received hereunder by such Indemnified Party. 15 Expenses: FNV, the Company and each of their respective subsidiaries shall jointly and severally pay all (i) reasonable costs and expenses of Lender, Berkshire and Leucadia (including all reasonable fees, expenses and disbursements of outside counsel) in connection with the preparation, execution and delivery of the loan documentation and the funding of all loans under the Facility, and all search, filing and recording fees, incurred or sustained by Lender, Berkshire and Leucadia in connection with the Facility, the loan documentation or the transactions contemplated thereby, the administration of the Facility and any amendment or waiver of any provision of the loan documentation and (ii) costs and expenses of Lender, Berkshire and Leucadia (including fees, expenses and disbursements of counsel) in connection with the enforcement of any of their rights and remedies under the loan documentation. Miscellaneous: The loan documentation will include standard yield protection provisions (including, without limitation, provisions relating to compliance with risk-based capital guidelines, increased costs and payments free and clear of withholding taxes) relating to Lender and Lender's provider of funds. 16 Fees and Expenses: Commitment Fee: A commitment fee of $60,000,000 shall be due and payable to Lender upon execution of the Commitment Letter. Funding Fee: A funding fee of $60,000,000 shall be due and payable to Lender upon the closing of and borrowing under the Facility. Termination Fee: A termination fee of $60,000,000 shall be due and payable to Lender if the Company does not borrow under the Facility for any reason (including the termination of Lender's obligations under the Commitment Letter, whether or not the Facility agreements have been entered) unless the Company's failure to borrow is solely due to (x) the failure by Lender to fund in violation of its obligations under the Commitment Letter or, (y) following confirmation of the Plan by the Bankruptcy Court, a Material Adverse Change has occurred or a due diligence condition relating to environmental, insurance or employee matters has not been satisfied. Reimbursement Fees: All fees, if any, and expenses incurred from time to time by Lender and its affiliates relating to its financing for the Facility shall be due and payable to Lender or such affiliates when incurred by Lender or such affiliates. Facility Fee: An annual facility fee in an amount equal to 25 basis points times the outstanding principal amount of the Term Loan, payable monthly, shall be due and payable to Lender, commencing on the date of borrowing under the Facility. Governing Law and Submission to Jurisdiction: State of New York. 17 SUMMARY OF TERMS OF NEW SENIOR NOTES Issuer The FINOVA Group Inc. ("FNV Group"). --------- Aggregate Principal Amount................ Approximately $4.44 billion, representing 40% of the aggregate amount of Allowed General Unsecured Claims (as defined in the Joint Plan of Reorganization (the "Plan") of FNV Group and the debtors named therein) against FINOVA Capital Corporation ("FNV Capital"). ----------- Term.................... Ten (10) years, subject to prepayment as described below. Annual Interest Rate................... The weighted average of the annual interest rates on FNV Capital's bank debt and bond indebtedness outstanding on the Petition Date (as defined in the Plan) , will be determined (as of a date within five days prior to the Effective Date (as defined in the Plan) (the "Measurement Date") as follows: ---------------- For each fixed rate obligation, the established rate in effect at the Measurement Date, without giving effect to any default rate, penalty or facility or other fees or any change in rates due to the failure to elect interest rates or periods from and after the Petition Date, will be multiplied by the total principal amount of the obligation outstanding at the Petition Date, reduced by any amounts that the Debtors have the right to set-off against such obligation; For each floating rate obligation, (x) the specified index in effect at the Measurement Date (or, if more than one index is specified, the selected index will be the one that will result in the lowest rate) (the "Index Rate"), plus the specified spread over the Index Rate, in each case without giving effect to any default rate, penalty or facility or other fees or any change in rates due to the failure to elect interest rates or periods from and after the Petition Date and without regard to any limitation on the selection of indices upon a default or otherwise, will be multiplied by (y) the total principal amount of the obligation outstanding at the Petition Date, reduced by any amounts that the Debtors have the right to set-off against such obligation. The sum of such amounts will be divided by the aggregate principal amount of all bank and bond indebtedness outstanding at the Petition Date, reduced by any amounts that the Debtors have the right to set- off against such obligations. The quotient of such calculation shall be the annual interest rate the New Senior Notes will bear. If the Measurement Date were April 26, 2001, the annual interest rate would be 6.037%. 18 Payment................. Interest will be paid on semi-annual interest payment dates if and to the extent that (i) FNV Group has available cash on such dates for that purpose as described below under clause SECOND of the "Use of ----- Cash" covenant and (ii) no default or event of default ---- has occurred and is continuing on such dates under the credit agreement pursuant to which Berkadia LLC ("Berkadia") will make a $6 billion five-year -------- amortizing senior secured term loan (the "Berkadia -------- Loan") to FNV Capital (the "Berkadia Credit ---- --------------- Agreement"). --------- Each $1,000 principal amount of the New Senior Notes issued under the Plan (whether issued on the Effective Date or later) will entitle the holder thereof to receive such holder's pro rata share of an aggregate of up to $100 million of additional interest ("Contingent Interest") in respect of all New Senior ------------------- Notes issued under the Plan (whether issued on the Effective Date or later). Contingent Interest will be paid on semi-annual interest payment dates if and to the extent that FNV Group has available cash on such dates for that purpose as described below under clause Eighth of the "Use of Cash" covenant until the first ------ ----------- to occur of (i) the payment of an aggregate of $100 million in Contingent Interest (as such amount may be reduced as described below under clause Eighth of the ------ "Use of Cash" covenant) or (ii) 15 years after the ----------- Effective Date of the Plan. Principal will be paid on semi-annual principal payment dates if and to the extent that FNV Group has available cash on such dates for that purpose as described below under clause Sixth of the "Use of Cash" covenant. ----- ----------- Optional Prepayment.............. Subject to compliance with the "Use of Cash" covenant, FNV Group will have the option to prepay the principal of the New Senior Notes, in whole or in part, at any time and from time to time, without premium or penalty, by delivering to the indenture trustee under the New Senior Notes indenture (the "Indenture --------- Trustee") an amount equal to the principal to be ------- repaid, plus interest from the last interest payment date on which interest was paid to the prepayment date; provided that such prepayment will not release FNV Group from its obligations to pay Contingent Interest with respect to the New Senior Notes so prepaid. Priority and Collateral Security... FNV Group will grant to the Indenture Trustee for the benefit of the holders of the New Senior Notes (other than with respect to FNV Group's obligation under the New Senior Notes Indenture to pay Contingent Interest) a security interest in all of the capital stock of FNV Capital, which shall be junior to the first priority perfected security interest granted to Berkadia as described below and which shall be released upon payment in full of all interest (other than Contingent Interest) on and principal of the New Senior Notes. Until such time as all obligations under the Berkadia Loan and related guarantees are paid in full or otherwise satisfied, the security interest to be granted to the Indenture Trustee will be junior to the perfected, first priority security interest in the capital stock of FNV Capital granted to Berkadia to secure FNV Group's guarantee of the Berkadia Loan. The Indenture Trustee and the holders of the New Senior Notes will 19 have no right to take action to enforce or otherwise realize on the security interest held by the Indenture Trustee unless and until all obligations under the Berkadia Loan and related FNV Group guarantee have been paid in full or otherwise satisfied or released. Neither the indenture governing the New Senior Notes nor the pledge agreement effecting the grant of the security interest (the "Pledge Agreement") will ---------------- restrict the sale of collateral, other than as required by the Trust Indenture Act of 1939, as amended. The payment of Contingent Interest will not be secured by the security interest or otherwise. Contingent Interest shall constitute general unsecured obligations of FNV Group. Covenants............... The indenture governing the New Senior Notes will contain the following covenants: Use of Cash To the extent not prohibited by the Berkadia Credit Agreement, FNV Group will, and will cause its subsidiaries including FNV Capital to, apply the aggregate net positive amount of each of (x) 100% of the net sale proceeds from asset sales, (y) 100% of excess cash flow (to be defined in the indenture) and (z) 100% of net proceeds from insurance and condemnation, in each case received by FNV Group or any of its subsidiaries, except to the extent any special purpose subsidiary is subject to a contractual restriction (which existed on February 26, 2001) or legal restriction on making distributions to its parent entity, to the following purposes in the following order: First: ----- For FNV Group or any of its subsidiaries (a) to pay or to fund its operating expenses, taxes, reasonable reserves for revolving commitments, unfunded commitments and general corporate purposes (which reserve amounts shall be determined in good faith by the entity setting such reserves), (b) to pay when due interest on and principal of Permitted Indebtedness (as defined below) of such entity (other than, in the case of FNV Capital, the Berkadia Loan or, in the case of FNV Group, the New Senior Notes and the 5-1/2% Convertible Subordinated Debentures due 2016 of FNV Group (the "Group Subordinated Debentures")), the ----------------------------- payment of each of which is provided for specifically below), (c) to pay when due interest on and principal of any Refinancing Indebtedness (as defined below) incurred to refinance the Permitted Indebtedness described in clause (b), (d) to pay or to fund a reserve to pay interest when due on the Berkadia Loan, and (e) to (i) make payments excluded from the definition of Restricted Payments (as defined below) under the proviso contained in the definition of Restricted Payments (provided that any payments described in clause (v) of such proviso shall not exceed $1 million per year) and (ii) fund reasonable reserves, if any, for interest and Compounded Interest (as defined in the indenture governing the Group Subordinated Debentures) on the Group Subordinated Debentures solely to permit the payment of interest and Compounded Interest thereon at 20 the end of an Extension Period (as defined in the indenture governing the Group Subordinated Debentures) and to pay accrued and unpaid interest and Compounded Interest on the Group Subordinated Debentures on the expiration of any Extension Period that has lasted for 20 consecutive quarters; provided that FNV Capital and its subsidiaries may make distributions to any parent entity, including FNV Group, which entity shall use such distributions, plus any other cash it has available for this purpose, to satisfy its obligations under this clause First (it being understood that the ----- listing of subclauses (a) through (e) herein shall be for ease of reference only and shall not imply any priority of allocation or payment within this clause First); ----- Second: ------ to make distributions to FNV Group, which shall use such distributions plus any other cash it has available for this purpose, to pay accrued and unpaid interest on the New Senior Notes when due; Third: ----- commencing with the first calendar quarter following the Effective Date, and continuing for each subsequent calendar quarter until the earlier of (i) payment in full of the Berkadia Loan and (ii) the fifth anniversary of the Effective Date, to make distributions to FNV Group, which shall use such distributions plus any other cash it has available for this purpose, to spend $75 million per quarter (or such greater amount as may be consented to by Berkadia) to purchase New Senior Notes (including the Contingent Interest in respect of such New Senior Notes) at a purchase price not to exceed par plus accrued and unpaid interest thereon (the "Maximum ------- Price") through (a) tender offers announced during a ----- quarter, (b) open market purchases and/or (c) privately negotiated transactions, in all cases at FNV Group's discretion; provided that additional such purchases may be made at FNV Group's discretion during any quarter to satisfy FNV Group's obligation hereunder for future quarters and, if and to the extent that such purchases cannot be effected at or below the Maximum Price during any such quarter, such purchases shall not be required for such quarter and FNV Group shall not carry over into any following quarter any obligation to make purchases hereunder in excess of $75 million per quarter; and provided further, that no purchase of New Senior Notes shall be made under this clause Third if a default or an event ----- of default under the Berkadia Credit Agreement has occurred, is continuing or would result therefrom; Fourth: ------ to make distributions to FNV Capital, or in the case of FNV Group to make contributions to FNV Capital, which shall use such distributions or contributions, plus any other cash it has available for this purpose, to repay principal of the Berkadia Loan as required under the Berkadia Credit Agreement; Fifth: ----- to the extent not already funded or paid pursuant to clause First above, to make distributions to FNV ----- Group, which shall use such distributions plus 21 any other cash it has available for this purpose, to pay or to fund a reserve to pay accrued and unpaid interest on the then-outstanding Group Subordinated Debentures; Sixth: ----- until the New Senior Notes are paid in full, to make distributions to FNV Group, (A) 95% of which FNV Group will use to repay principal of the New Senior Notes until the principal of the New Senior Notes has been paid in full and/or, at FNV Group's option, to prepay all or part of the New Senior Notes as described under "Optional Prepayment," and/or to purchase by tender ------------------- offer, market purchases or privately negotiated transactions or otherwise all or part of the New Senior Notes (including the Contingent Interest in respect of such New Senior Notes), and (B) 5% of which FNV Group will use to make Restricted Payments (unless the making of any such Restricted Payments would be an "Impermissible Restricted Payment" (as defined below), -------------------------------- in which event FNV Group shall retain such amounts and any retained amounts shall accumulate and shall be used to make Restricted Payments at such time or from time to time, as such Restricted Payments are not Impermissible Restricted Payments); Seventh: ------- until an amount equal to 5.263% of the aggregate principal amount of the New Senior Notes issued under the Plan (whether on the Effective Date or later) has been used to make Restricted Payments to FNV Group's common stockholders under clause Sixth or, after ----- repayment of the New Senior Notes, has been used to make "Deemed Restricted Payments" (as defined below), -------------------------- to make Deemed Restricted Payments (unless the making of such Deemed Restricted Payments would be an "Impermissible Deemed Restricted Payment," (as defined --------------------------------------- below) in which event FNV Group shall retain such amounts and any retained amounts shall accumulate and shall be used to make Deemed Restricted Payments at such time or from time to time, as such Deemed Restricted Payments are not Impermissible Deemed Restricted Payments); and Eighth: ------ until an aggregate of up to $100 million (as such amount may be reduced to reflect a decrease in the principal amount of New Senior Notes outstanding as a result of purchases (but not prepayments or repayments) by FNV Group under clause Third and clause ----- Sixth above) has been paid as Contingent Interest, to ----- make distributions to FNV Group (i) 95% of which will be used to pay Contingent Interest and (ii) 5% of which will be used by FNV Group to make Deemed Restricted Payments) (unless the making of such Deemed Restricted Payments would be an Impermissible Deemed Restricted Payment, in which event FNV Group shall retain such amounts and any retained amounts shall accumulate and shall be used to make Deemed Restricted Payments at such time or from time to time, as such Deemed Restricted Payments are not Impermissible Deemed Restricted Payments);. provided that, notwithstanding the foregoing, it shall not be a default of this 22 "Use of Cash" covenant if a subsidiary does not make distributions to its parent entity as set forth in First through Eighth above if such dividends or distributions would be Impermissible Restricted Payments or Impermissible Deemed Restricted Payments. Funding and payments in respect of any Refinancing Indebtedness (as defined below) will have the same priority in this "Use of Cash" covenant as corresponds to the Indebtedness so refinanced. "Deemed Restricted Payments means any payments to FNV -------------------------- Group's stockholders that would have been Restricted Payments prior to repayment of the New Senior Notes. "Impermissible Deemed Restricted Payments" means a ---------------------------------------- Deemed Restricted Payment that, if made by FNV Group or any of its subsidiaries, would render such entity insolvent, would be a fraudulent conveyance by such entity or would not be permitted to be made by such entity under applicable law. "Impermissible Restricted Payments" means a Restricted --------------------------------- Payment that, if made by FNV Group or any of its subsidiaries, would render such entity insolvent, would be a fraudulent conveyance by such entity or would not be permitted to be made by such entity under applicable law. Limitation on Restricted Payments FNV Group will not, directly or indirectly, make any Restricted Payments, other than Restricted Payments permitted under the "Use of Cash" covenant described ----------- above. "Restricted Payment" means (i) the declaration or ------------------ payment of any dividend or the making of any distribution on account of FNV Group's equity interests (other than dividends or distributions payable in equity interests of FNV Group) and (ii) the purchase, redemption or other acquisition or retirement for value of any equity interests of FNV Group, other than redemptions, acquisitions or retirements in exchange for equity interests of FNV Group; provided, however, -------- ------- that Restricted Payments shall not include (i) repurchase of shares to eliminate fractional shares or odd-lots, whether pursuant to a reverse stock-split, odd-lot tender offer or otherwise; (ii) cash payments in lieu of issuance of fractional shares in connection with the exercise of any warrants, rights, options or other securities convertible into or exchangeable for FNV Group equity interests, (iii) the deemed repurchase of FNV Group's equity interests by FNV Group on the cashless exercise of stock options; (iv) payments or distributions to dissenting shareholders pursuant to applicable law, pursuant to or in connection with a consolidation, merger or transfer of assets; or (v) repurchases, redemptions, acquisitions or retirements of equity interests of FNV Group from employees, directors or officers of FNV Group and its subsidiaries. 23 Limitation on Incurrence of Indebtedmess FNV Group will not, and will not permit any of its subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, for or with respect to (collectively, "incur") any ----- Indebtedness other than Permitted Indebtedness or Permitted Nonrecourse Indebtedness. "Indebtedness" means any indebtedness in respect of ------------ borrowed money. "Permitted Indebtedness" means (A) Indebtedness ---------------------- outstanding (or deemed outstanding under the Plan) on the Effective Date of the Plan, including the Berkadia Loan and the New Senior Notes; (B) Refinancing Indebtedness; (C) Indebtedness at any time outstanding of up to $25 million, excluding Indebtedness outstanding under clause (A) or (B); (D) Foreclosure Indebtedness and (E) intercompany Indebtedness between or among FNV Group and/or any of its subsidiaries. "Foreclosure Indebtedness" means Indebtedness of any ------------------------ person either (i) existing at the time that such person becomes a subsidiary of FNV Group or any of its subsidiaries provided that such person becomes a subsidiary of FNV Group as a result of a pre-existing bona fide obligation to FNV Group or any of its subsidiaries, (ii) assumed in connection with the acquisition of assets from any such person provided that such person had a pre-existing bona fide obligation to FNV Group or any of its subsidiaries or (iii) incurred to refinance (as defined below) any Indebtedness described in (i) or (ii) above, subject to the same limitations contained in the proviso to the definition of Refinancing Indebtedness below. "Refinancing Indebtedness" means Indebtedness of FNV ------------------------ Group or any of its subsidiaries that is incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) (collectively, "refinance") any Indebtedness --------- issued under the Plan and/or outstanding or deemed to be outstanding on the Effective Date of the Plan or incurred in compliance with the New Senior Notes Indenture (including Indebtedness of FNV Group that refinances Indebtedness of any subsidiary and Indebtedness of any subsidiary that refinances Indebtedness of another subsidiary) including Indebtedness that refinances Refinancing Indebtedness; provided, however, that (a) such Refinancing -------- ------- Indebtedness is incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate accreted value) not exceeding the then outstanding amount of the Indebtedness being refinanced, plus a reasonable premium and reasonable costs and expenses paid or incurred in connection with such refinancing (b) except with respect to Refinancing Indebtedness incurred to refinance (i) the New Senior Notes, (ii) Foreclosure Indebtedness or (iii) Permitted Indebtedness not issued under the Plan, such Refinancing Indebtedness shall not have a weighted average life to maturity or maturity date that is earlier than the Indebtedness being refinanced and (c) if the Indebtedness being refinanced is subordinate to the New Senior Notes, then such Refinancing Indebtedness shall be subordinate to the New Senior 24 Notes at least to the same extent. The accretion of interest with respect to Indebtedness issued with original issue discount shall not constitute an incurrence of additional Indebtedness. "Permitted Nonrecourse Indebtedness" means Indebtedness ---------------------------------- incurred in connection with the acquisition or lease (as lessor) of equipment or real estate (a) that is secured solely by the equipment or real estate acquired or leased, (b) with respect to which the holder of such Indebtedness has recourse only to such equipment or real estate, and (c) which is otherwise nonrecourse to FNV Group or any subsidiary thereof, provided that all proceeds of such Indebtedness, less reasonable expenses incurred in connection with such acquisition or lease, are used as provided in the "Use of Cash" covenant. ----------- Limitation on Issuance of Capital Stock of Subsidiaries. FNV Group will not permit FNV Capital to issue any additional equity interests to any person other than to FNV Group and will not permit any other subsidiary of FNV Group to issue any preferred equity interests to any person other than to FNV Group or a subsidiary thereof, except that preferred equity interests may be issued such that the liquidation preference of such preferred equity interests is equal to the amount of Indebtedness that would be permitted to be incurred under the "Limitation on Incurrence of Indebtedness" ---------------------------------------- covenant. Mergers and Consolidations FNV Group will not, directly or indirectly, consolidate or merge with or into another person (whether or not FNV Group is the surviving person) unless the person formed by or surviving any such consolidation or merger (if other than FNV Group) assumes all of the obligations under the New Senior Notes and the indenture and immediately after such consolidation or merger there is no default or event that, with the passage of time or notice or both, would be a default under the indenture. No Payment Restrictions Affecting Subsidiaries FNV Group and its subsidiaries will not permit their respective subsidiaries to create any restriction on the ability of any subsidiary to make Restricted Payments, to make loans or advances to its parent entity or to transfer any property or assets to its parent entity, except for restrictions pursuant to (i) the New Senior Notes, (ii) the Berkadia Loan, (iii) contracts as of February 26, 2001 restricting special purpose subsidiaries, (iv) applicable law, (v) Refinancing Indebtedness containing restrictions no more restrictive, taken as a whole, than those contained in the Indebtedness so refinanced, (vi) Permitted Indebtedness described in clause C or D of the definition of Permitted Indebtedness, provided restrictions contained therein are no more restrictive, taken as a whole, than restrictions contained in any Permitted Indebtedness, or (vii) Permitted Nonrecourse Indebtedness incurred by any special purpose subsidiary. 25 The right to receive Contingent Interest under the New Senior Notes shall not constitute any equity interest or indebtedness of FNV Group for purposes of the indenture. The covenants described under "Limitation on ------------- Restricted Payments," "Limitation on Incurrence of ------------------- --------------------------- Indebtedness," "Limitation on Issuance of Capital ------------ --------------------------------- Stock of FNV Subsidiaries" and "No Payment -------------------------- ---------- Restrictions Affecting Subsidiaries" will no longer ----------------------------------- apply to FNV Group or its subsidiaries upon payment in full of all interest on (other than Contingent Interest) and principal of the New Senior Notes. Event of Default........ Each of the following will constitute an "Event of -------- Default": (i) default in the payment of all or any part ------- of the unpaid principal, if any, and accrued and unpaid interest, if any, on the New Senior Notes at maturity; (ii) failure by FNV Group or any of its subsidiaries to observe or perform in all material respects the provisions of the "Payment" covenant and of clauses ------- First, Second, Fourth, Fifth, Sixth, Seventh, and ----- ------ ------- ----- ----- ------- Eighth of the "Use of Cash" covenants for 30 days; ------ ----------- (iii) failure by FNV Group to observe or perform in all material respects any other covenant or agreement on the part of FNV Group contained in the New Senior Notes, the indenture or the Pledge Agreement if that failure is not remedied within 60 days after written notice is given to FNV Group by the trustee or to FNV Group and the trustee by the holders of at least 25% in aggregate principal amount of the New Senior Notes then outstanding, specifying such default, requiring that it be remedied and stating that such notice is a "Notice ------ of Default" under the indenture; and (iv) certain ---------- events of bankruptcy, dissolution or reorganization of FNV Group or FNV Capital. Book-Entry; Delivery New Senior Notes will be represented by one or more and Form.............. permanent global notes in definitive, fully registered form, deposited with the Indenture Trustee as custodian for, and registered in the name of, a nominee of the Depository Trust Company. 26 EX-12 3 dex12.txt COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES EXHIBIT 12 FINOVA CAPITAL CORPORATION. COMPUTATION OF RATIO OF (LOSSES) INCOME TO FIXED CHARGES (Dollars in Thousands)
Three Months Ended March 31, ------------------------------- 2001 2000 ------------------------------- (Loss) income from continuing operations before income taxes $(46,729) $ 80,086 Add fixed charges: Interest expense 172,550 141,815 One-third rentals 1,123 1,270 ------------------------------- Total fixed charges 173,673 143,085 ------------------------------- (Loss) income from continuing operations as adjusted $126,944 $223,171 ------------------------------- Ratio of (loss) income from continuing operations to fixed charges 0.73 1.56 ===============================
-----END PRIVACY-ENHANCED MESSAGE-----