-----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, AphknoqStFBFj+ASQyMFkU3q8tFQavuF6Vxv5RYCIYK6lMaF+P/voKDE5+l7n4iY z3DkYCZItWevkbvFSRly8A== /in/edgar/work/0000950147-00-500106/0000950147-00-500106.txt : 20001115 0000950147-00-500106.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950147-00-500106 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINOVA CAPITAL CORP CENTRAL INDEX KEY: 0000043960 STANDARD INDUSTRIAL CLASSIFICATION: [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: 767219 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 e-5652.txt QUARTERLY REPORT FOR THE QTR ENDED 9/30/00 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20594 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 Commission File Number 1-7543 FINOVA CAPITAL CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 94-1278569 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4800 North Scottsdale Road Scottsdale, AZ 85251-7623 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 480-636-4800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The Registrant meets the conditions set forth in General Instructions H (i) (a) and (b) of Form 10-Q and is therefore filing this from in the reduced format APPLICABLE ONLY TO CORPORATE ISSUERS: As of November 13, 2000, 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. 1 Condensed Consolidated Balance Sheets 1 Condensed Statements of Consolidated Operations 2 Condensed Statements of Consolidated Cash Flows 3 Notes to Interim Condensed Consolidated Financial Information 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Part II Other Information 18 Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K. 19 Signatures 20 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FINOVA CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) September 30, December 31, 2000 1999 ------------ ------------ ASSETS: Cash and cash equivalents $ 708,170 $ 100,344 Investment in financing transactions: Loans and other financing contracts 8,463,413 8,235,850 Leveraged leases 816,956 837,083 Operating leases 565,514 587,283 Direct financing leases 588,219 493,615 Financing contracts held for sale 167,983 ------------ ------------ 10,434,102 10,321,814 Less reserve for credit losses (257,702) (178,266) ------------ ------------ Net investment in financing transactions 10,176,400 10,143,548 Investments 433,035 435,680 Goodwill, net of accumulated amortization 242,838 264,014 Other assets 329,052 233,287 Investment in Discontinued Operations 1,457,897 2,702,236 ------------ ------------ $ 13,347,392 $ 13,879,109 ============ ============ LIABILITIES: Accounts payable and accrued expenses $ 109,697 $ 147,492 Interest payable 126,595 114,397 Senior debt 11,271,980 11,407,767 Deferred income taxes 313,940 461,252 ------------ ------------ 11,822,212 12,130,908 ------------ ------------ Commitments and contingencies SHAREOWNER'S EQUITY: Common stock, $1.00 par value, 100,000 shares authorized and 25,000 shares issued 25 25 Additional capital 1,173,995 1,173,995 Retained income 387,771 638,733 Accumulated other comprehensive income 53,750 33,812 Net advances to parent (90,361) (98,364) ------------ ------------ 1,525,180 1,748,201 ------------ ------------ $ 13,347,392 $ 13,879,109 ============ ============ See notes to interim consolidated condensed financial statements. 1 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (Dollars in Thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Interest earned from financing transactions $ 266,850 $ 233,037 $ 794,663 $ 641,016 Operating lease income 26,091 29,433 80,433 85,964 Interest expense (161,565) (117,738) (454,421) (330,680) Operating lease depreciation (15,974) (19,396) (49,046) (53,267) --------- --------- --------- --------- Interest margins earned 115,402 125,336 371,629 343,033 Volume-based fees 3,723 1,336 8,751 --------- --------- --------- --------- Operating margin 115,402 129,059 372,965 351,784 Provision for credit losses (111,237) (13,531) (141,347) (12,183) --------- --------- --------- --------- Net interest margins earned 4,165 115,528 231,618 339,601 (Losses) gains on investments and disposal of assets (90,042) 14,880 (55,549) 45,877 --------- --------- --------- --------- (85,877) 130,408 176,069 385,478 Operating expenses (29,466) (40,172) (122,228) (121,223) --------- --------- --------- --------- (Loss) income from continuing operations before income taxes (115,343) 90,236 53,841 264,255 Income tax benefit (expense) 45,278 (34,398) (18,757) (101,853) --------- --------- --------- --------- (Loss) income from continuing operations (70,065) 55,838 35,084 162,402 Discontinued operations, net of tax 11,803 14 (38,110) (940) Net loss on disposal of operations, net of tax (214,853) (214,853) --------- --------- --------- --------- NET (LOSS) INCOME $(273,115) $ 55,852 $(217,879) $ 161,462 ========= ========= ========= =========
See notes to interim consolidated condensed financial statements. 2 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in Thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------- 2000 1999 ----------- ----------- OPERATING ACTIVITIES: Income from continuing operations $ 35,084 $ 162,402 Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: Provision for credit losses 141,347 12,183 Depreciation and amortization 66,602 69,593 Deferred income taxes (160,204) 86,220 Write downs on investments and repossessed assets 109,004 Change in assets and liabilities, net of effects from companies purchased: Decrease in other assets 20,784 4,677 Decrease in accounts payable and accrued expenses (40,197) (68,363) Increase in interest payable 12,198 6,655 Other 2,111 1,462 Discontinued operations exclusive of income taxes (62,989) Net loss on disposal of operations exclusive of income taxes (355,423) (1,555) Adjustments to reconcile discontinued operations and loss on disposal of operations to net cash provided by discontinued operations: Other charges related to discontinued operations 394,722 Income tax benefit 165,449 615 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 328,488 273,889 ----------- ----------- INVESTING ACTIVITIES: Proceeds from sales of investments and assets 208,318 342,307 Proceeds from securitizations 764,607 Net proceeds from sale of Commercial Services 205,564 Principal collections on financing transactions and revolving credit facilities 1,547,440 1,325,491 Expenditures for investments and other income producing activities (106,964) (466,011) Expenditures for financing transactions and revolving credit facilities (2,364,403) (2,838,025) Net change in investment in discontinued operations 181,897 (315,942) Cash received in acquisition 20,942 Other 916 1,500 ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 437,375 (1,929,738) ----------- ----------- FINANCING ACTIVITIES: Net change in commercial paper and short-term borrowings 903,542 591,928 Long-term borrowings 225,000 1,788,592 Repayment of long-term borrowings (1,263,900) (591,791) Net contributions from (advances to) parent 10,405 (75,779) Dividends (33,084) (29,749) ----------- ----------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (158,037) 1,683,201 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 607,826 27,352 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 100,344 49,519 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 708,170 $ 76,871 =========== ===========
See notes to interim consolidated condensed financial statements. 3 FINOVA CAPITAL CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 NOTE A BASIS OF PREPARATION The consolidated financial statements present the financial position, results of operations and cash flows of FINOVA Capital Corporation and its subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned subsidiary of The FINOVA Group Inc. ("FINOVA Group"). The interim condensed consolidated financial information is unaudited. In the opinion of management all adjustments, consisting of normal recurring items, necessary to present fairly the financial position as of September 30, 2000, the results of operations for the quarter and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999, have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year. The enclosed financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made to reflect discontinued operations. These reclassifications resulted from the Company's decision in the third quarter to sell or liquidate some of its more broad based businesses and focus on providing financing through its niche based businesses. The businesses discontinued include Corporate Finance, Business Credit, Growth Finance (all of which are included under the caption "Corporate Finance"), Distribution & Channel Finance and Commercial Services. See Note F for more information on discontinued operations. NOTE B SIGNIFICANT ACCOUNTING POLICIES The Company reports other comprehensive income (loss) in accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Total comprehensive (loss) income was $(222.8) million and $57.6 million for the three months ended September 30, 2000 and 1999, respectively and $(197.9) million and $167.8 million for the nine months ended September 30, 2000 and 1999, respectively. The primary component of comprehensive (loss) income other than net income was a net unrealized gain on securities. NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes new accounting and reporting standards for derivative instruments. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- An Amendment of FASB Statement No. 133." SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the statement of financial position as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. These rules become effective for the Company on January 1, 2001. The Company is still assessing the impact of the adoption of SFAS 133 on its warrants held on private companies with "cashless exercise" features, pending final guidance to be issued by the FASB. The ongoing effects of adoption will depend on future market conditions. NOTE C SEGMENT REPORTING MANAGEMENT'S POLICY FOR IDENTIFYING REPORTABLE SEGMENTS FINOVA's reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. 4 RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS Management evaluates the business performance of each group based on total net revenue, income (loss) before allocations and managed assets. Total net revenue is operating margin plus (losses) gains on investments and disposal of assets. Income (loss) before allocations is (loss) income from continuing operations before income taxes and preferred dividends, excluding allocation of corporate overhead expenses and the unallocated portion of provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations. Information for FINOVA's reportable segments reconciles to FINOVA's consolidated totals as follows: Nine Months Ended September 30, ------------------------------ (Dollars in Thousands) 2000 1999 ------------ ----------- Total net revenue (loss): Commercial Finance $ 43,978 $ 38,167 Specialty Finance 172,985 278,298 Capital Markets 102,613 67,084 Corporate and other (2,160) 14,112 ------------ ----------- Consolidated total $ 317,416 $ 397,661 ============ =========== Income (loss) before allocations: Commercial Finance $ 33,113 $ 29,370 Specialty Finance 107,278 223,602 Capital Markets 20,200 19,827 Corporate and other, overhead and unallocated provision for credit losses (106,750) (8,544) ------------ ----------- Income from continuing operations before income taxes $ 53,841 $ 264,255 ============ =========== September 30, ------------------------------ 2000 1999 ------------ ----------- Managed assets: Commercial Finance $ 1,197,851 $ 985,039 Specialty Finance 8,619,691 7,802,280 Capital Markets 945,666 1,044,259 Corporate and other 64,725 56,480 ------------ ----------- Consolidated total 10,827,933 9,888,058 Less securitizations (393,831) (123,681) ------------ ----------- Investment in financing transactions $ 10,434,102 $ 9,764,377 ============ =========== NOTE D PORTFOLIO QUALITY The following table presents a distribution (by line of business) of the Company's investment in financing transactions before the reserve for credit losses at the dates indicated. 5 INVESTMENT IN FINANCING TRANSACTIONS BY LINE OF BUSINESS SEPTEMBER 30, 2000 (Dollars in Thousands)
Revenue Accruing Nonaccruing -------------------------------- ------------------------------ Market Rate Repossessed Repossessed Lease & Total Carrying (1) Impaired Assets (2) Impaired Assets Other Amount % ---------- -------- -------- -------- -------- ------- ----------- ------ Commercial Finance Group Rediscount Finance $1,185,457 $ 1,668 $ 639 $ 2,846 $ 7,241 $1,197,851 11.5 ---------- -------- -------- -------- -------- ------- ----------- ------ 1,185,457 1,668 639 2,846 7,241 1,197,851 11.5 ---------- -------- -------- -------- -------- ------- ----------- ------ Specialty Finance Group Transportation Finance 2,432,324 45,529 2,477,853 23.7 Resort Finance 1,406,885 148,207 14,877 140,923 6,976 1,717,868 16.5 Healthcare Finance 798,509 21,895 1,463 95,055 3,181 920,103 8.8 Franchise Finance 870,940 37,812 4,030 2,088 191 915,061 8.8 Communications Finance 691,183 3,910 34,085 729,178 7.0 Specialty Real Estate Finance 670,383 10,432 31,631 3,274 8,337 724,057 6.9 Commercial Equipment Finance 526,257 5,916 11,165 4,084 547,422 5.2 Public Finance 189,370 4,948 194,318 1.9 ---------- -------- -------- -------- -------- ------- ----------- ------ 7,585,851 222,256 47,971 333,760 28,566 7,456 8,225,860 78.8 ---------- -------- -------- -------- -------- ------- ----------- ------ Capital Markets Group Realty Capital 486,392 4,806 491,198 4.7 Mezzanine Capital 361,635 18,814 36,332 416,781 4.0 Investment Alliance 33,536 4,151 37,687 0.4 ---------- -------- -------- -------- -------- ------- ----------- ------ 881,563 22,965 41,138 945,666 9.1 ---------- -------- -------- -------- -------- ------- ----------- ------ Other 64,725 64,725 0.6 ---------- -------- -------- -------- -------- ------- ----------- ------ Total Continuing Operations (3) $9,717,596 $246,889 $ 48,610 $377,744 $ 35,807 $ 7,456 $10,434,102 100.0 ========== ======== ======== ======== ======== ======= =========== ======
NOTES: (1) Represents original or renegotiated market rate terms, excluding impaired transactions. (2) The Company earned income totaling $2.8 million on these repossessed assets year to date during 2000, including $1.8 million in Specialty Real Estate Finance, $0.7 million in Resort Finance, $0.1 million in Rediscount Finance and $0.1 million in Healthcare Finance. (3) Excludes $393.8 million of assets securitized which the Company manages, including $277.9 million in Commercial Equipment Finance and $115.9 million in Franchise Finance. 6 RESERVE FOR CREDIT LOSSES The reserve for credit losses at September 30, 2000 represents 2.4% of the Company's investment in financing transactions and securitized assets. Changes in the reserve for credit losses were as follows: Nine Months Ended September 30, --------------------------- 2000 1999 --------- --------- (Dollars in Thousands) Balance, beginning of period $ 178,266 $ 141,579 Provision for credit losses 141,347 12,183 Write-offs (62,930) (16,331) Recoveries 922 1,501 Reserves related to acquisitions 23,763 Other 97 4,047 --------- --------- Balance, end of period $ 257,702 $ 166,742 ========= ========= At September 30, 2000 the total carrying amount of impaired loans was $624.6 million, of which $246.9 million were revenue accruing. A reserve for credit losses of $94.6 million has been established for $193.5 million of nonaccruing impaired loans and $12.3 million has been established for $44.0 million of accruing impaired loans. Additionally, specific reserves of $4.9 million have been established for other accounts. As a result, 43.4% of FINOVA's reserve for credit losses was allocated to specific accounts. The remaining $145.9 million or 56.6% of the reserve for credit losses is designated for general purposes and represents management's best estimate of inherent losses in the portfolio considering delinquencies, loss experience and collateral. Actual results could differ from those estimates, and there can be no assurance that the reserves will be sufficient to cover portfolio losses. Additions to the general and specific reserves are reflected in current operations. Management may transfer reserves between the general and specific reserves as considered necessary. No reserves for credit losses are carried for discontinued operations because the assets of the discontinued operations have been written down to estimated net realizable value. NOTE E DISCONTINUED OPERATIONS On August 28, 2000 FINOVA completed the sale of substantially all the assets of its Commercial Services division to GMAC Commercial Credit LLC, a wholly owned subsidiary of General Motors Corporation, for approximately $235 million. The Commercial Services division is being accounted for as a discontinued operation. The sale resulted in an after-tax loss from disposition of $5.4 million, which included a $16.7 million after-tax charge for unamortized goodwill. The Company has recorded $11.4 million after-tax losses from discontinued operations. In connection with the sale, the Company retained a small portfolio, which was $30.5 million of net loans as of September 30, 2000. FINOVA has begun to implement a new strategic direction that will focus on core specialty niche businesses. In the third quarter, FINOVA decided to discontinue and offer for sale its Corporate Finance and Distribution & Channel Finance divisions. As a result of this decision, Corporate Finance and Distribution & Channel Finance are being reported as discontinued operations and, accordingly, their results of operations and financial positions are segregated for all periods in the accompanying consolidated financial statements. The Company has recorded $26.7 million in after-tax losses from discontinued operations and $209.5 million in after-tax losses from the disposal of discontinued operations for the nine months ended September 30, 2000. These losses represent the Company's estimate of operational losses to be incurred and the expected losses from disposition of the divisions. Actual losses could differ from those estimates and will be reflected as adjustments in future financial statements. No assurances can be given that the recorded losses will be sufficient to cover the actual operational losses and losses incurred upon disposition or winding down of the discontinued operations. 7 The losses are comprised of the following:
Distribution & Corporate Channel Commercial Finance Finance Services Total --------- -------- --------- --------- DISCONTINUED OPERATIONS, NET OF TAX $ (9,184) $(17,533) $ (11,393) $ (38,110) ========= ======== ========= ========= NET LOSS ON DISPOSAL OF OPERATIONS, NET OF TAX Net realizable value mark downs $(130,427) $(10,277) $(140,704) Goodwill written-off (33,083) (15,076) (16,725) (64,884) Proceeds in excess of assets sold 17,634 17,634 Accrued expenses (17,484) (3,142) (6,273) (26,899) --------- -------- --------- --------- $(180,994) $(28,495) $ (5,364) $(214,853) ========= ======== ========= =========
NOTE F SUBSEQUENT EVENT On November 10, 2000, FINOVA Group and Leucadia National Corporation executed a letter agreement for an equity investment by Leucadia. Pursuant to the letter agreement, Leucadia will purchase 10 million shares of a new series of convertible preferred stock of FINOVA Group at an aggregate purchase price of $250 million, or $25 per share. The convertible preferred stock will initially have an annual dividend of 14%, payable in additional shares of preferred stock. After five years, the dividends may be paid in cash or shares at the same rate. The preferred stock will be convertible into common stock at a price of $2.50 per share, subject to anti-dilution adjustments. The preferred stock will have the right to vote as a class with the common stock, and will have 20 votes per share, subject to New York Stock Exchange requirements. As a result, it is expected that Leucadia will have approximately a 45.2% equity ownership and a 52.5% voting interest in FINOVA Group, before dividends, distributions, if any, and warrants and assuming the rights offering described below if fully subscribed by other shareowners. Leucadia will receive a ten-year warrant to purchase, for an aggregate exercise price of $125 million, FINOVA Group common stock amounting to 20% of the outstanding equity of the Company at that time, with certain exceptions. The agreement includes a provision that provides for a distribution to common shareholders or holders of PIK Convertible Preferred and the Leucadia warrant in 2006, based upon the performance of FINOVA's loan and lease portfolio through 2005. The board of directors will determine the form of that distribution. As soon as practicable after completion of Leucadia's investment, FINOVA Group will conduct a rights offering in which existing shareholders will be permitted to purchase up to 6 million shares of the new series of convertible preferred stock at the same per share purchase price of $25. Leucadia will act as standby purchaser for the offering with respect to $100 million of that offering, for which it will be entitled to a fee of $5 million. Upon completion of the Leucadia investment, FINOVA Group's board of directors will consist of 10 persons, of whom 6 will be designated by Leucadia. Completion of the proposed transaction with Leucadia is contingent upon the negotiation and execution of definitive agreements with respect to the investment, as well as other customary conditions. The transaction is also subject to completion of a restructuring with holders of FINOVA's existing $4.7 billion in outstanding bank debt on terms acceptable to Leucadia and FINOVA. A copy of the letter agreement is included as Exhibit 10.A to this report. NOTE G COMMITMENT & CONTINGENCIES CREDIT AGREEMENTS FINOVA's credit agreements, pursuant to which an aggregate of $4.7 billion of indebtedness is outstanding, contain normal and customary financial covenants. Failure of FINOVA to comply with these covenants would result in a default under the credit agreements, unless waived by the lenders. If a default were to occur under the credit agreements and the lenders required repayment, such default would in turn result in a default under substantially all of FINOVA's other outstanding indebtedness. Under one of these covenants, the interest coverage test, FINOVA was in compliance at September 30, 2000. However, declines in average net income or higher interest costs in future quarter ends could help lead to a violation of that covenant. Inability of FINOVA to complete the transaction with Leucadia and FINOVA's banks or other transactions referred to above, adverse developments requiring an increase of bad debt reserves or the write-off of assets, the assertion by creditors of a default under FINOVA's credit agreements, or other adverse developments in FINOVA's business or results of operations could impair FINOVA's ability to fund operations and debt payment requirements for principal and interest. 8 LEGAL PROCEEDINGS Between March 29 and May 23, 2000, five shareowner lawsuits were filed against FINOVA Group and Samuel Eichenfield, FINOVA's former chairman, president, and chief executive officer; two of the lawsuits also named FINOVA Capital as a defendant, and one named three other executive officers. All of the lawsuits purport to be on behalf of the named plaintiffs (William K. Steiner, Uri Borenstein, Jerry Krim, Mark Kassis, and the Louisiana School Employees Retirement System), and others who purchased FINOVA Group common stock during the class period of July 15, 1999, through either March 26, 2000, or May 7, 2000. The suit brought by the Louisiana School Employees Retirement System also purports to be on behalf of all those who purchased FINOVA Capital 7.25% Notes which are due November 8, 2004, pursuant to the registration statement and prospectus supplement dated November 1, 1999. In an order by the U.S. District Court dated August 30, 2000, all five lawsuits were consolidated and captioned IN RE: FINOVA GROUP INC. SECURITIES LITIGATION. The court also selected the Louisiana School Employees Retirement System ("LSERS") as the lead plaintiff in the consolidated cases. LSERS filed its Amended Consolidated Complaint on September 29, 2000, naming FINOVA Group, FINOVA Capital, Samuel Eichenfield, Matthew Breyne, and Bruno Marszowski as defendants. The Consolidated Amended complaint generally alleges that the defendants made materially misleading statements regarding FINOVA's loss reserves, and otherwise violated the federal securities laws in an effort to bolster FINOVA Group's stock price, among other reasons. The complaint seeks unspecified damages for losses incurred by shareholders, plus interest, and other relief, and rescission with regard to the notes purchased. FINOVA believes the claims are without merit. FINOVA and the other defendants intend to vigorously defend against the claims. On October 30, 2000, FINOVA and the other defendants filed a motion to dismiss the complaint, which is now pending. Since consolidation of the original five shareowner lawsuits, other apparently related lawsuits have been initiated against the Company and current and former officers and directors. Two shareowner lawsuits were filed in the United States District Court for the Middle District of Tennessee, in which the plaintiffs (John Cartwright, Sirrom Partners and Sirrom G-1) assert claims relating to the Company's acquisition in 1999 of Sirrom Capital Corporation, and the exchange of shares of Sirrom stock for shares of FINOVA 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 appear related to the consolidated securities litigation because they also allege that the defendants made materially misleading statements regarding FINOVA's loss reserves, and otherwise violated the federal securities laws in an effort to reduce the total consideration provided to Sirrom shareowners at the time of the acquisition. The complaint seeks unspecified damages for losses incurred by shareholders, plus interest, and other relief. On October 23, the Company and the other defendants filed a motion to dismiss both complaints, or in the alternative to transfer venue of the actions to the U.S. District Court for the District of Arizona, where the consolidated securities litigation is pending. There have also been two shareholders' derivative lawsuits filed against current and former officers and directors, one in the United States District Court for the District of Arizona, and one in the Court of Chancery for Newcastle County, Delaware. Both complaints were filed on September 11, 2000, and both purport to be brought by the named plaintiffs (William Kass and Cindy Burkholter) derivatively on behalf of FINOVA Group against the officers and directors, alleging generally breaches of fiduciary and other duties as directors. As with the consolidated securities litigation, the allegations center generally on claims that there were materially misleading statements regarding FINOVA's loss reserves. Finally, another shareholder's derivative lawsuit was filed on September 13, 2000, in the Circuit Court for Davidson County, Tennessee, by Ronald Benkler, purportedly on behalf of Sirrom Capital Corporation, against several former officers of Sirrom Capital Corporation. The complaint alleges that the Sirrom officers breached various duties to Sirrom in connection with the acquisition of Sirrom by the Company in 1999, and the exchange of Sirrom stock for FINOVA Group stock as a result of the acquisition. Inasmuch as the allegations are similar or related to those asserted in the consolidated securities litigation, the Company believes that the claims are without merit, and the Company and the other defendants intend to vigorously defend against the claims. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 THE FOLLOWING DISCUSSION RELATES TO FINOVA CAPITAL CORPORATION AND ITS SUBSIDIARIES (COLLECTIVELY "FINOVA" OR THE "COMPANY"). FINOVA IS A WHOLLY OWNED SUBSIDIARY OF THE FINOVA GROUP INC. ("FINOVA GROUP"). RESULTS OF OPERATIONS For the nine months ended September 30, 2000, FINOVA reported a loss of $217.9 million compared to net income of $161.5 million for the nine months of 1999. The results for the nine months of 2000 included income from continuing operations of $35.1 million and net losses from discontinuing operations totaling $253.0 million compared to income from continuing operations for the first nine months of 1999 of $162.4 million and a net loss from discontinued operations for the same period of $0.9 million. DISCONTINUED OPERATIONS. The discontinued operations resulted from FINOVA Group's Board of Director's decision in the third quarter to sell or liquidate some of its more broad based businesses and focus more on providing financing through its niche based businesses. The businesses included in discontinued operations consist of Commercial Services (sold during the third quarter of 2000), Corporate Finance, Business Credit, Growth Finance (all of which are included under the caption "Corporate Finance") and Distribution & Channel Finance. Corporate Finance and Distribution & Channel Finance are actively being marketed for sale. The sale could be for all or portions of the businesses, and if only portions of the businesses are sold, the Company intends to liquidate the unsold portions in an orderly manner. The losses from discontinued operations in the first nine months of 2000 primarily consisted of charges to value the assets included in the businesses to be sold or liquidated at estimated net realizable amounts, including the write-off of unamortized goodwill and accrued retention and severance payments applicable to those businesses and the operating losses experienced by those businesses. Those losses were partially offset by the gain on sale of Commercial Services (net of goodwill write-off) and a gain of approximately $4.0 million from the sale of a portion of the collateral supporting the $70 million transaction written off in the Distribution & Channel Finance line of business in March 2000. See Note E of Notes to Interim Condensed Consolidated Financial Information for more information on discontinued operations. LOSS FROM CONTINUING OPERATIONS. The decrease in income from continuing operations was primarily due to the following: * Higher loss provisions to bolster the reserve for credit losses * Losses on investments and assets held for sale * Increases in the Company's cost of funds due to - Several reductions in credit ratings - Higher costs associated with borrowing under the Company's domestic commercial paper back-up bank facilities * Higher write-offs of financing contracts * An increase in the level of nonaccruing assets * The costs to exit the origination and sale of commercial real estate loans to the CMBS market in the second quarter of 2000. INTEREST MARGINS EARNED. Interest margins earned represents the difference between (a) interest and income earned from financing transactions and operating lease income and (b) interest expense and depreciation on operating leases. Interest margins earned in dollars were up 8.3% in the first nine months of 2000 compared to the first nine months of 1999 ($371.6 million vs. $343.0 million). The increase was due primarily to portfolio growth (managed assets) which increased by 3.7%, partially offset by a higher cost of funds in 2000. Portfolio growth resulted primarily from $4.2 billion of new business added during the 12 months ended September 30, 2000. Annualized portfolio growth for the first nine months of 2000 was 7.1%, excluding $168.0 million of commercial mortgage-backed securities (CMBS) loans held for sale at December 31, 1999. The lower growth rate in the first nine months of 2000, when compared to 25.6% in the same period for 1999, is primarily attributable to a higher beginning portfolio base and lower new business. New business for the nine months of 2000 is running 16.7% below new business for the first nine months of 1999 ($2.364 billion vs. $2.838 billion). Lower new business volumes are expected to continue as the Company focuses on managing its liquidity position by being selective in originating any new business over and above outstanding commitments. New business for the third quarter of 2000 was $619.0 million down 43.9% from $1.104 billion originated in the third quarter of 1999. The backlog of new business at September 30, 2000 declined to $1.683 billion from $1.987 billion at June 30, 2000. Most of the new business in 2000 was generated by the more niche focused Specialty Finance Group, which generally attracts higher returns than FINOVA's other segments. Interest margins earned as a percent of average earning 10 assets were 5.1% in the first nine months of 2000, down from 5.4% in the same period of 1999. The decrease was primarily due to a higher level of non-earning assets and investments, lower nonrecurring income and higher cost of funds, as noted above. Various downgrades of its senior debt ratings caused FINOVA's annual cost of funds (in the form of the all in spread over LIBOR) applicable to $4.5 billion in drawdowns under its domestic commercial paper back-up bank facilities to increase by 1.35%. The impact of the weighted average wider spreads over LIBOR on FINOVA's cost of funds for the first nine months of 2000 was approximately 0.50% VOLUME-BASED FEES. Volume-based fees historically were generated by FINOVA's Distribution & Channel Finance, Commercial Services and Realty Capital lines of business. Since Distribution & Channel Finance and Commercial Services are discontinued operations, the fees included in continuing operations apply only to Realty Capital. These fees are predominately based on volume-originated business rather than the balance of outstanding financing transactions during the period. Volume-based fees for the nine months ended September 30, 2000 were $1.3 million, down from $8.8 million reported in the first nine months of 1999. The decline in 2000 was due to Realty Capital exiting from the origination and sale of commercial real estate loans to the CMBS market in April 2000. PROVISION FOR CREDIT LOSSES. The provision for credit losses on continuing operations was higher in the first nine months of 2000 compared to the first nine months of 1999 ($141.3 million vs. $12.2 million) due to the need to bolster the reserve in light of increasing problem accounts and higher net write-offs in the first nine months of 2000 ($62.0 million compared to $14.8 million in the nine months of 1999). The largest portion of net write-offs in 2000 was from multiple customers in Mezzanine Finance totaling $40.7 million. Net write-offs as a percent of average managed assets were 0.78% annualized for the first nine months of 2000, up from 0.22% annualized for the same period of 1999. A discussion of the increase in problem accounts is included under Financial Condition, Liquidity and Capital Resources. FINOVA monitors developments affecting loans and leases in its portfolio, taking into account each borrower's financial developments and prospects, the estimated value of collateral, legal developments and other available information. Based upon that information, FINOVA adjusts its loan loss reserve and when considered appropriate writes down the value of the loans. Depending on developments, there is the possibility that the loan loss reserves and/or write downs will increase in the future. (LOSSES)/GAINS ON INVESTMENTS AND DISPOSAL OF ASSETS. The losses for the nine months of 2000 were primarily due to the write-off of equity positions in the Resort, Communication and Mezzanine Finance businesses as well as charges to write down repossessed assets in Resort Finance and residual positions in Transportation Finance. The most significant charge was in Resort Finance which wrote-off its $54.8 million equity investment in a major developer that has experienced a decline in earnings and a significant reduction in its net worth. The write down of residual positions in Transportation Finance totaled $17.9 million and principally related to assets held for sale or lease. The total charges of $109.0 million from the write-off of investments, repossessed assets and assets held for sale or lease were partially offset by gains of $53.5 million. Gains in the third quarter of 2000 included $4.8 million from the sale of the Company's remaining Healtheon stock; total gains from Healtheon in the nine months of 2000 were $20.7 million. While in the aggregate FINOVA has historically recognized gains on asset disposals, the timing and amount of these gains are sporadic in nature. There can be no assurance FINOVA will recognize gains in the future, depending, in part, on market conditions at the time of sale. OPERATING EXPENSES. Operating expenses were $122.2 million in the first nine months of 2000 compared to $121.2 million in the first nine months of 1999. The increase was principally due to nonrecurring expenses consisting of $11.8 million incurred to exit the origination and sale of commercial real estate loans to the CMBS market in the second quarter of 2000 and $7.6 million incurred for deferred compensation and executive severance. Excluding those nonrecurring charges, operating expenses declined by 17.2% in the nine months of 2000 from the comparable 1999 period ($100.4 million vs. $121.2 million). Operating efficiency, which is the ratio of operating expenses to operating margins, was 32.8% in the first nine months of 2000, compared to 34.5% in the same period of 1999. INCOME TAXES. Income taxes were lower for the first nine months of 2000 compared to the corresponding period in 1999 primarily due to the decrease in pre-tax income and beneficial IRS tax audit adjustments. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The following primarily relates to continuing operations, except as noted. Managed assets were $10.83 billion at September 30, 2000 compared to $10.44 billion at December 31, 1999. Included in managed assets at September 30, 2000 were $10.43 billion in funds employed and $393.8 million of securitized assets. The increase in managed assets was due to funded new business of $2.36 billion 11 for the nine months ended September 30, 2000, partially offset by prepayments and asset sales accompanied by normal portfolio amortization. The reserve for credit losses as it pertains to continuing operations increased to $257.7 million at September 30, 2000 from $178.3 million at December 31, 1999. As previously discussed, the reserve was bolstered in 2000 as a result of problem accounts. At September 30, 2000 and December 31, 1999, the reserve for credit losses was 2.4% and 1.7% of ending managed assets, respectively. The reserve for credit losses as a percent of nonaccruing assets declined to 61.2% at September 30, 2000, from 101.9% at December 31, 1999, due to the increase in nonaccruing assets. Nonaccruing assets increased to $421.0 million or 3.9% of ending managed assets at September 30, 2000 from $175.0 million or 1.7% at the end of 1999. The largest increases to nonaccruing during the nine months of 2000 occurred in Resort Finance ($125.9 million), Healthcare Finance ($56.1 million) and Communications Finance ($23.8 million). The increase in nonaccruing assets in Resort Finance principally relates to the addition of $23.5 million of working capital loans to eight related special-purpose project development entities and $117.4 million for Sunterra Corporation ("Sunterra") in the third quarter of 2000. The working capital loans to the eight related project development entities were classified as nonaccruing due to concerns over each of the borrower's financial condition and FINOVA's collateral coverage if a forced liquidation became necessary. The eight development entities are all special-purpose subsidiaries of the major resort developer in which FINOVA had the $54.8 million investment previously described. Sunterra filed bankruptcy in the second quarter of 2000 and has not made a payment in over 90 days; therefore, all Sunterra loans were classified as nonaccruing. The Sunterra loans are secured by marketable assets, primarily completed but unsold timeshare units, at 13 of Sunterra's approximately 90 resorts. Although payments on the $20 million of consumer timeshare receivables continue to be collected, these amounts are being held in segregated bank accounts pending a cash collateral agreement with Sunterra. Increases in nonaccruing assets in Healthcare Finance during the third quarter of 2000 were primarily related to the addition of three accounts, a special-purpose developer of an assisted living facility ($12.4 million), a dental practice management firm ($10.4 million), and a skilled nursing and assisted living developer ($9.6 million). The first is a senior secured real estate loan collateralized by a first lien on a 92-unit assisted living facility located in Connecticut. FINOVA has entered into a letter agreement to sell the facility for its carrying value, with FINOVA financing the purchase. The second loan is secured by all the assets of a dental practice management company. FINOVA and the borrower are evaluating an offer to purchase the practice for less than FINOVA's carrying value. The third is a participation facility in a healthcare entity that filed bankruptcy in June 2000. A plan of reorganization has not yet been presented to the lender group. A $31.7 million loan to a Southeast U.S.-based wireless messaging company represents the increase in nonaccruing assets in Communications Finance during the third quarter of 2000. The borrower is over 90 days delinquent on interest payments. The borrower has implemented a comprehensive expense reduction strategy with the intent of bringing interest current and is pursuing a sale or merger of the Company. Earning impaired assets increased during the nine months ended September 30, 2000 to $246.9 million from $108.8 million at December 31, 1999. The percentage of earning impaired assets to ending managed assets was 2.3% at September 30, 2000 compared to 1.0% at December 31, 1999. The largest additions to earning impaired assets were in Resort Finance ($148.2 million), Franchise Finance ($37.8 million) and Specialty Real Estate Finance ($10.4 million). Additions of $148.2 million in Resort Finance represent the balances of the obligations, other than the working capital loans, owed by seven of the eight related project developers mentioned above. These impaired, but still accruing, loans are secured by receivables and real property, which FINOVA believes are sufficient to repay the loans, including interest. The loans are considered impaired because the parent company of the special-purpose obligors has experienced a decline in earnings and a significant reduction in its net worth, which could possibly cause FINOVA to have to manage the underlying resort projects without support from the parent company. The Franchise Finance increase relates to loans to a Florida-based restaurant franchisee ($19.8 million) and an operator of a chain of casual-dining restaurants ($18 million). The franchisee is involved in ownership and operation of Denny's restaurants. FINOVA is pursuing the restructuring of the borrower's loan terms and extending certain loan schedules which contractually matured at the end of the third quarter. FINOVA has a participation in the second transaction, which is in forbearance with the lending group until March 2001. The increase in Specialty Real Estate Finance was attributable to a loan to a hotel operator ($10.4 million) secured principally by a 160-room hotel in Kissimmee, Florida. The borrower filed for bankruptcy during the third quarter. FINOVA is currently negotiating an agreement with the borrower involving the pledge of additional collateral. If the negotiations are successful, the combination of the hotel and excess pledged collateral should be adequate to cover FINOVA's exposure. The most significant decreases in earning impaired resulted from the migration to nonaccruing of the loans to Sunterra and Tower Air, discussed in the Company's prior quarterly report. There can be no assurance that any of the potential transactions noted above will be consummated on anticipated terms. 12 The 31-90 day delinquencies at September 30, 2000 increased to 1.35% of managed assets from 0.62% of managed assets at the end of 1999. The increases in 31-90 day delinquencies were in Healthcare Finance $41.8 million, Transportation Finance $26.1 million and Communications Finance $17.8 million. $12.5 million of the total $146.5 million of 31-90 day delinquent outstandings are included in earning impaired assets. At September 30, 2000, FINOVA had $11.27 billion of debt outstanding, representing 6.93 times the Company's equity base of $1.53 billion. At year-end 1999, FINOVA's debt was 6.47 times the equity base of $1.75 billion. FINOVA is restricted under its bank credit agreements from maintaining debt to equity above a 7.0 to 1.0 ratio. FINOVA is compliant with that covenant as calculated in accordance with those agreements, which nets cash and cash equivalents against outstanding debt, as of September 30, 2000. FINOVA's internally generated funds, available credit lines and asset sales have financed growth in funds employed and liquidity during the nine months ended September 30, 2000. During May and June 2000, FINOVA drew down $4.5 billion against domestic commercial paper back-up bank facilities and used the proceeds primarily for repayment of commercial paper maturing debt and to fund general operations. Of this amount, $2.1 billion is due May 15, 2001, although $500.0 million can be extended over a two year term-out if no default exists at that time. The other $2.4 billion is to be repaid over a three-year period from 2001 to 2003. FINOVA also has $150 million (Canadian) due under a bank facility that matures in July 2001. Term debt maturities over the next twelve months by quarter include $182.9 million in the fourth quarter of 2000, $242.0 million in the first quarter of 2001, $2.4 billion in the second quarter of 2001 (includes $2.1 billion of bank facilities, of which $500.0 million can be extended over a two year term-out if no defaults exist at that time) and $449.2 million in the third quarter of 2001. During the first nine months of 2000, FINOVA issued $225 million of new long-term borrowings and repaid $1.3 billion of long-term borrowings. Subsequent to September 30, 2000, FINOVA's credit ratings were further reduced. See Recent Developments and Business Outlook for further discussion of the rating agency downgrades. SEGMENT REPORTING FINOVA's business is organized into three market groups, which are also its reportable segments: Commercial Finance, Specialty Finance and Capital Markets. Management has not yet determined whether its reportable segments would be reorganized as a result of the recent announcement to discontinue several operations. Management principally relies on total revenue, income before allocations and managed assets in evaluating the business performance of each reportable segment. Total revenue is the sum of operating margin and (losses) gains on investments and disposal of assets. Income before allocations is income before income taxes, preferred dividends, corporate overhead expenses and the unallocated portion of the provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations. COMMERCIAL FINANCE. Commercial Finance currently only includes the Rediscount Finance business unit which provides financing through revolving credit facilities to finance companies. This segment previously included traditional asset-based businesses that provided financing through revolving credit facilities and term loans secured by assets such as receivables and inventories, as well as providing factoring and management services. In the third quarter of 2000, FINOVA announced that the Corporate Finance/Business Credit/Growth Finance and Distribution & Channel Finance business units would be discontinued. The Company also completed the sale of its Commercial Services business line to GMAC Commercial Credit LLC in the third quarter. For further discussion on activity previously reported within the Commercial Finance segment, see Discontinued Operations. Total net revenue was $44.0 million in 2000 compared to $38.2 million for the first nine months of 1999, an increase of 15.2%. The increase was primarily due to a 21.6% increase in managed assets over the last twelve months, partially offset by the effects of a higher cost of funds. Income before allocations increased to $33.1 million in the first nine months of 2000 from $29.4 million in 1999, primarily due to a higher level of managed assets, partially offset by a higher cost of funds and an increase in net write-offs. Net write-offs for the unit totaled $3.4 million in the first nine months of 2000 compared to $1.5 million in 1999. Net write-offs as an annualized percent of average managed assets for the business unit was 0.40% compared to 0.21% in the first nine months of 1999. Operating expenses as a percent of operating margin improved to 23.4% in 2000 from 25.7% in 1999 for the unit. Managed assets grew to $1.2 billion over the last twelve months from $985.0 million, an increase of 21.6%. The growth in managed assets was primarily due to increased net utilization under existing revolving commitments. The Company as a whole expects to significantly slow managed asset growth on an annual basis. There can be no assurance that FINOVA's asset base will grow. See Recent Developments and Business Outlook for further discussion. 13 SPECIALTY FINANCE. Specialty Finance provides a wide variety of lending products such as leases, loans, accounts receivable and cash flow based financing, as well as servicing and collection services to a number of highly focused industry specific niches. Total net revenue was $173.0 million in the first nine months of 2000 compared to $278.3 million in 1999. The decrease in net revenue was primarily due to the write-off of equity positions in Resort Finance and Communications as well as charges to write down repossessed assets in Resort Finance and residual positions in Transportation Finance. The most significant charge was in Resort Finance which wrote-off a $54.8 million equity investment in a major developer that has experienced a decline in earnings and a significant reduction in net worth. The write down of residual positions in Transportation Finance totaled $17.9 million and principally related to assets held for sale or lease. Also contributing to the decline in net revenue was the effects of higher cost of funds, and a lower level of gains from the disposal of assets partially offset by a higher level of managed assets. The segment experienced a 10.5% growth in managed assets over the last twelve months and 5.9% annualized growth during the first nine months of 2000. The lower gains were primarily attributable to the timing of assets coming off lease and the Company's ability to re-lease assets at end of term. While in the aggregate FINOVA has historically recognized gains on disposals, the timing and amount of these gains are sporadic in nature. Additionally, certain business units within this segment will sometimes receive equity interests to complement their financing arrangements. Depending on various factors, including management's discretion, FINOVA may opt to exercise and sell its position in these equities when permitted to do so. In the third quarter of 2000, FINOVA recorded a pre-tax unrealized gain of $63.7 million through other comprehensive income on the balance sheet related to a telecommunications stock. Income before allocations was $107.3 million for the nine months ended September 30, 2000 compared to income of $223.6 million for the same period in 1999. The decrease was primarily due to the charge-offs mentioned above, a higher cost of funds, lower gains and an increase in net write-offs of financing contracts, which rose to $17.7 million in 2000 from $8.4 million in 1999. Annualized net write-offs as a percentage of average managed assets for the group increased to 0.27% from 0.15% in 1999. Managed assets grew to $8.6 billion in 2000 from $7.8 billion in the same period of 1999, an increase of 10.5%. The growth in managed assets was driven by new business of $2.0 billion in 2000 compared to $2.4 billion in 1999. This growth was spread across most business units over the last twelve months, with Specialty Real Estate Finance being the only business experiencing a decline. The group as a whole experienced a decrease in backlog to $1.39 billion at September 30, 2000 from $1.68 billion at September 30, 1999. CAPITAL MARKETS. Capital Markets, in conjunction with institutional investors, provides debt and equity capital funding, third-party loan administration services and provided commercial mortgage banking services until those operations were terminated. Total net revenue was $102.6 million in 2000 compared to $67.1 million in 1999. The increase in net revenue was primarily attributable to the group's Mezzanine Capital unit, which experienced a $37.5 million increase in net revenue from $27.0 million in 1999 to $64.5 million for the nine months of 2000. The growth in Mezzanine Capital's net revenue was primarily due to an increased level of gains from the sale of equity and warrant positions. Gains from the sale of equity and warrant positions totaled $35.8 million in 2000 as compared to $9.0 million for the first nine months of 1999. The gains in 2000 included $20.7 million from the sale of the Company's position in Healtheon stock. FINOVA periodically assesses its position in this unit's investment portfolio and may opt to exercise and sell its position based on various factors, including management's discretion, when permitted to do so. Also contributing to the increase in net revenue was the continued growth of Realty Capital's bridge and mezzanine financing activities partially offset by a lower level of volume-based fees, advisory and consulting income and a higher cost of funds. The lower level of volume-based fees was due to Realty Capital's exit from the origination and sale of commercial real estate loans to the CMBS market in April 2000. The lower level of advisory and consulting income was primarily due to the sale of the Harris Williams & Co. business unit to its management in the second quarter of 2000. Realty Capital's bridge and mezzanine financing portfolio grew to $491.2 million by September 30, 2000 compared to $237.5 million at September 30, 1999. Income before allocations was $20.2 million in 2000 compared to income of $19.8 million in 1999. This increase was primarily attributable to the increased net revenue, offset by $40.7 million of net write-offs in the Mezzanine Capital portfolio as compared to $5.0 million in 1999, and $11.8 million of costs incurred in connection with Realty Capital's exit from the origination and sale of loans to the CMBS market. Managed assets declined to $945.7 million from $1.0 billion. Excluding Realty Capital's on-balance sheet CMBS loans, which totaled $313.8 million at September 30,1999, the group's asset grew by $215.2 million or 29.5%. This growth was primarily due to increased assets in Realty Capital's bridge and mezzanine financing products, partially offset by a decline in Mezzanine Capital's portfolio of $51.6 million. 14 RECENT DEVELOPMENTS AND BUSINESS OUTLOOK On March 27, 2000, FINOVA Group announced the retirement of its Chairman, President and Chief Executive Officer, Samuel L. Eichenfield, for personal and health reasons. Following Mr. Eichenfield's retirement as a director and officer, the FINOVA Group board of directors elected Matthew M. Breyne as a director, President and Chief Executive Officer of FINOVA Group. FINOVA's board of directors elected Mr. Breyne as Chairman, President and Chief Executive Officer of FINOVA. He previously served as President and Chief Operating Officer of FINOVA and continues to serve as a director of that company. FINOVA also announced that it would take a special $80 million pre-tax charge to earnings in the first quarter of 2000 to bolster loss reserves and provide for payment of deferred compensation and executive severance. The additional loss reserves related to a $70 million loss on a major customer in the Distribution and Channel Finance line of business which is now included as part of the loss from discontinued operations. The remainder of the charge was used to provide for payment of deferred compensation and executive severance for Mr. Eichenfield. On May 5, 2000, FINOVA renewed a $500 million, 364-day revolving credit agreement for another year to 2001. Two additional 364-day commercial paper back-up facilities aggregating $1.6 billion were scheduled to renew on May 16, 2000. FINOVA received commitments to renew approximately $1.1 billion of these facilities. The $1.1 billion, along with the $500 million renewal on May 5th and $2.4 billion previously in place, was not adequate to provide dollar-for-dollar coverage on $4.3 billion of commercial paper outstanding. As a result, FINOVA exercised its term-out option under the $1.6 billion of facilities, which are payable on May 15, 2001 and also drew down its other commercial paper back-up bank facilities as discussed in Financial Condition, Liquidity and Capital Resources. On May 8, 2000, FINOVA announced that it had engaged Credit Suisse First Boston to assist in the exploration of strategic alternatives with financial, strategic and other potential partners. Since that time FINOVA has had discussions with a substantial number of persons concerning the possibility of an acquisition of the entire ownership of FINOVA or a substantial equity ownership position. As described in Note G of the Notes to Interim Condensed Consolidated Financial Information, on November 10, 2000, FINOVA Group entered into a letter agreement with respect to an equity infusion of up to $350 million by Leucadia National Corporation. During July 2000, FINOVA structured a securitization with Chase Securities acting as structuring agent, which includes a commitment to purchase up to $500 million of loans on a revolving basis until February 2001, which may be extended by mutual agreement, and is funded through a commercial paper conduit. As with FINOVA's other securitizations, other events, such as the performance of the portfolio or of FINOVA, could result in termination of the securitizations. If the securitization is terminated or not extended, loan collections will thereafter be applied to reduce the securitization balance rather than to fund the obligations to the underlying borrowers, which would become the obligation of FINOVA. Proceeds to FINOVA through the first two fundings of the Chase securitization aggregated approximately $475 million. This securitization requires, among other things, that a back-up servicer be appointed by November 29, 2000. Due to the potential sale of the Corporate Finance assets, the Company has not yet engaged a back-up servicer although it is presently engaged in negotiations with a prospective backup servicer. If a backup servicer is not engaged by November 29, 2000, Chase would have the ability to retain collections on the securitized loans, thereby constraining liquidity further. The securitization assets were originated through FINOVA's Corporate Finance division. An additional $300 million securitization, structured by Morgan Stanley Dean Witter earlier this year, was not funded and currently is not available for future funding, pending satisfaction of certain conditions. The Company has been in negotiations with Morgan Stanley Dean Witter to seek a revision of these conditions, although the outcome is uncertain. On August 28, 2000, FINOVA completed the sale of substantially all the assets of its Commercial Services division to GMAC Commercial Credit LLC, a wholly owned subsidiary of General Motors Corporation, for approximately $235 million. In light of the events since March 2000, the credit rating agencies downgraded the senior debt and commercial paper credit ratings for FINOVA. Including the October 31st downgrades, the credit ratings for FINOVA are as follows: Senior Debt Commercial Paper ----------- ---------------- Moody's Investors Service Inc. B1 NP Standard & Poor's Ratings Group BB B Fitch IPCA B B The Company decided in the third quarter to sell or liquidate some of its more broad based businesses and focus on providing financing through its niche based businesses. The Company has decided to discontinue and actively market for sale its Corporate Finance and Distribution & Channel Finance businesses. A sale could be for all or parts of the businesses, and if only parts of the business are sold, the Company intends to orderly liquidate the unsold portions. 15 FINOVA has engaged Jay Alix & Associates, a nationally recognized financial consulting firm, to assist in connection with the development of strategic and financial planning, including re-negotiation of its bank debt. FINOVA's credit agreements, pursuant to which an aggregate of $4.7 billion of indebtedness is outstanding, contain normal and customary financial covenants. Failure of FINOVA to comply with these covenants would result in a default under the credit agreements, unless waived by the lenders. If a default were to occur under the credit agreements and the lenders required repayment, such default would in turn result in a default under substantially all of FINOVA's other outstanding indebtedness. Under one of these covenants, the interest coverage test, FINOVA was in compliance at September 30, 2000. However, declines in average net income or higher interest costs in future quarter ends could help lead to a violation of that covenant. On November 10, 2000, FINOVA Group announced that it entered into a letter agreement with Leucadia National Corporation with respect to an equity investment in FINOVA Group that, if consummated, would improve the Company's liquidty. See Note F to Notes to Interim Condensed Consolidated Financial Information. Pending consummation of the transaction with Leucadia, FINOVA expects to use cash flow from operations and if consented to by Leucadia, proceeds from securitizations and proceeds from other asset sales to satisfy its debt obligations and operational needs, and to fund reduced amounts of new business. In May 2001, FINOVA is obligated to repay approximately $2.1 billion of borrowings ($500 million of which may be extended over a two year term-out if no default exists at that time) under FINOVA's credit facilities, which is in addition to other debt maturities. These repayments will require additional asset sales, new financing arrangements, infusion of debt or equity or similar arrangements. The transaction with Leucadia will involve negotiations with the banks concerning the timing and amount of those repayments among other items. Inability of FINOVA to complete the transaction with Leucadia and FINOVA's banks or other transactions referred to above, adverse developments requiring an increase of bad debt reserves or the write-off of assets, the assertion by creditors of a default under FINOVA's credit agreements, or other adverse developments in FINOVA's business or results of operations could impair FINOVA's ability to fund operations and debt payment requirements for principal and interest. FINOVA's ability to seek new business has been adversely affected by the events noted above. It continues to do so by emphasizing customer service and focusing on selected market niches. The Company as a whole expects to significantly slow managed asset growth on an annual basis. There can be no assurance that FINOVA's asset base will grow. 16 NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes new accounting and reporting standards for derivative instruments. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- An Amendment of FASB Statement No. 133." SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the statement of financial position as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. These rules become effective for the Company on January 1, 2001. The Company is still assessing the impact of the adoption of SFAS 133 on its warrants held on private companies with "cashless exercise" features, pending final guidance to be issued by the FASB. The ongoing effects of adoption will depend on future market conditions. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements, such as estimates of gain or loss and other predictions or forecasts. FINOVA assumes no obligation to update those statements to reflect actual results, changes in assumptions or other factors. The forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those predicted. Those factors include: * FINOVA's ability to address its financing requirements in light of its existing debt obligations and market conditions. * Pending and potential litigation relating to charges to earnings. * The results of efforts to implement FINOVA's business strategy, including the ability to successfully conclude its evaluation of strategic alternatives and to conclude proposed transactions. * The ability to attract and retain key personnel and customers. * Conditions that adversely impact FINOVA's borrowers and their ability to meet their obligations to FINOVA. * The adequacy of FINOVA's loan loss reserves. * Actual results in connection with continuing or discontinued operations and the disposition of assets. * Other risks detailed in FINOVA's SEC reports, including on page 15 of FINOVA's 10-K for 1999. In addition, FINOVA's financial condition, liquidity and future results of operations will be materially affected by the results of negotiations seeking a restructuring of its credit facilities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK One of the major elements in determining FINOVA's success as a commercial finance company is its ability to access capital and the cost of that capital. The events that have transpired in 2000 have adversely affected FINOVA's ability to access the capital markets and has significantly increased its cost of capital. The total impact on its annual cost of capital cannot be accurately determined at this time because the sources of capital and respective costs are uncertain. One borrowing cost that can be quantified is the Company's $4.5 billion bank facility where the all in spread over LIBOR has increased rates by 1.35% during 2000 which effectively increases the annual interest expense on those borrowings by $60.8 million. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Between March 29 and May 23, 2000, five shareowner lawsuits were filed against FINOVA Group and Samuel Eichenfield, FINOVA Group's former chairman, president, and chief executive officer; two of the lawsuits also named FINOVA as a defendant, and one named three other executive officers. 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 7.25% Notes which are due November 8, 2004, pursuant to the registration statement and prospectus supplement dated November 1, 1999. In an order by the U.S. District Court dated August 30, 2000, all five lawsuits were consolidated and captioned IN RE: FINOVA GROUP INC. SECURITIES LITIGATION. The court also selected the Louisiana School Employees Retirement System ("LSERS") as the lead plaintiff in the consolidated cases. LSERS filed its Amended Consolidated Complaint on September 29, 2000, naming FINOVA 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. The complaint seeks unspecified damages for losses incurred by shareholders, plus interest, and other relief, and rescission with regard to the notes purchased. FINOVA believes the claims are without merit. FINOVA and the other defendants intend to vigorously defend against the claims. On October 30, 2000, FINOVA and the other defendants filed a motion to dismiss the complaint, which is now pending. Since consolidation of the original five shareowner lawsuits, other apparently related lawsuits have been initiated against the Company and current and former officers and directors. Two shareowner lawsuits were filed in the United States District Court for the Middle District of Tennessee, in which the plaintiffs (John Cartwright, Sirrom Partners and Sirrom G-1) assert claims relating to the Company's acquisition in 1999 of Sirrom Capital Corporation, and the exchange of shares of Sirrom stock for shares of FINOVA 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 appear related to the consolidated securities litigation because they also allege that the defendants made materially misleading statements regarding FINOVA's loss reserves, and otherwise violated the federal securities laws in an effort to reduce the total consideration provided to Sirrom shareowners at the time of the acquisition. The complaint seeks unspecified damages for losses incurred by shareholders, plus interest, and other relief. On October 23, the Company and the other defendants filed a motion to dismiss both complaints, or in the alternative to transfer venue of the actions to the U.S. District Court for the District of Arizona, where the consolidated securities litigation is pending. There have also been two shareholders' derivative lawsuits filed against current and former officers and directors, one in the United States District Court for the District of Arizona, and one in the Court of Chancery for Newcastle County, Delaware. Both complaints were filed on September 11, 2000, and both purport to be brought by the named plaintiffs (William Kass and Cindy Burkholter) derivatively on behalf of FINOVA Group against the officers and directors, alleging generally breaches of fiduciary and other duties as directors. As with the consolidated securities litigation, the allegations center generally on claims that there were materially misleading statements regarding FINOVA's loss reserves. Finally, another shareholder's derivative lawsuit was filed on September 13, 2000, in the Circuit Court for Davidson County, Tennessee, by Ronald Benkler, purportedly on behalf of Sirrom Capital Corporation, against several former officers of Sirrom Capital Corporation. The complaint alleges that the Sirrom officers breached various duties to Sirrom in connection with the acquisition of Sirrom by the Company in 1999, and the exchange of Sirrom stock for FINOVA Group stock as a result of the acquisition. Inasmuch as the allegations are similar or related to those asserted in the consolidated securities litigation, the Company believes that the claims are without merit, and the Company and the other defendants intend to vigorously defend against the claims. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed herewith: Exhibit No. Document ----------- -------- 4 1992 Stock Incentive Plan, as amended.+ 10.A Letter Agreement Between Leucadia National Corporation and The FINOVA Group Inc., dated November 10, 2000. 12 Computation of Ratio of Income to Fixed Charges (interim period). 27 Financial Data Schedule 99 The FINOVA Group Earnings Release dated November 14, 2000. ---------- + Relating to management compensation (b) Reports on Form 8-K: A report on Form 8-K dated August 28, 2000 was filed by Registrant which reported under Item 5 Other Events, for the sale of substantially all the assets of Commercial Services Division. 19 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: November 14, 2000 By: /s/ Bruno A. Marszowski ------------------------------------- Bruno A. Marszowski, Senior Vice President, Chief Financial Officer and Controller Principal Financial and Accounting Officer 20 FINOVA CAPITAL CORPORATION COMMISSION FILE NUMBER 1-7543 EXHIBIT INDEX SEPTEMBER 30, 2000 FORM 10-Q Exhibit No. Document - ----------- -------- 4 1992 Stock Incentive Plan, as amended. 10.A Letter Agreement Between Leucadia National Corporation and The FINOVA Group Inc., dated November 10, 2000. 12 Computation of Ratio of Income to Fixed Charges (interim period). 27 Financial Data Schedule 99 The FINOVA Group Earnings Release dated November 14, 2000. EX-4 2 ex_4.txt 1992 STOCK INCENTIVE PLAN Exhibit 4 The FINOVA Group Inc. 1992 STOCK INCENTIVE PLAN (INCLUDING 2000 AMENDMENTS) Section 1. Purpose. A. Purpose. Through this Plan, FINOVA seeks to attract, The Plan retain and motivate officers, employees and directors. helps align the The Plan's incentives helps align their efforts with interest of our the profitability of the Company and increases in executives shareholder value. and shareholders. B. Defined Terms. Section 11 contains a Glossary of many defined terms used in this Plan. The Plan defines other terms in the text as they appear. Section 2. Administration of the Plan. A. Committee. The Human Resources Committee of the Board or any other committee designated by the Board (the "Committee") will administer the Plan, unless otherwise determined by the Board. The Committee must contain at least two Outside Directors. Unless the Committee contains only Outside Directors, it will appoint a subcommittee to act on all Awards to Section 16 Officers, except as otherwise permitted by Section 162(m). Each Committee member serves at the pleasure of the Board. If no Committee is appointed to administer the Plan, the Board will act in its place. The B. Powers. The Committee may grant Awards under the Plan Committee to officers, employees and directors of the Company and has broad its Affiliates. Among other things, and subject to the powers to terms of the Plan, the Committee may determine in its administer the sole discretion: Plan. 1. The officers, employees and directors to receive Awards, except Awards to Non-Employee Directors can only be made as permitted by Section 7; 2. The timing and form of each Award, including Options (ISOs or NQs), Restricted Stock (including PBRS), Stock Appreciation Rights, or any combination thereof; 3. The number of Shares underlying an Award; 4. The terms of any Award, including any exercise price, vesting restriction (including vesting or lapse of restrictions in installments), forfeiture, expiration date, or conditions for exercise; 5. Any performance goals or conditions to be satisfied in connection with an Award, including goals based on the performance of the individual, Company or any Affiliate, division or department; 6. Whether and how to adjust the terms of any Award at any time, in whole or in part, including accelerating the vesting or exercisability, changing the number of Shares subject to the Award, changing the performance goals or measurements for performance-based Awards, or waiving or relaxing any term; 7. Whether and how to defer Shares and other amounts payable on an Award; 8. Whether and how amounts due for any Award may be settled in cash, Shares or otherwise; 9. Whether and how an Award may be transferred to other persons or entities, before or after vesting; the Committee may permit transfer of outstanding as well as future Awards; and 10. Whether and how to cash out all or part of an Award or its underlying Shares by paying the holder the difference, in cash or Stock, between the Fair Market Value over the exercise price times the number of Shares to be cashed out. B. Agreements/Notice of Awards. Awards will be evidenced by written agreements, the terms and provisions of which may differ. The Company will deliver a copy of the agreement promptly following the grant. The Company may sign the agreements by facsimile signature. C. Administration of the Plan. The Committee will supervise the administration of the Plan. It may adopt, alter and repeal administrative rules, guidelines and practices for the Plan. It may interpret the Plan and the terms of any Award and related agreement. The Committee D. Committee Action/Delegation. The Committee may act only may delegate by a majority of its then-current members, except it certain matters. may: (1) delegate to one or more officers of the Company or its Affiliates the authority to make decisions permitted under the Plan and by law, (2) authorize a subcommittee to act in its place if consistent with the Plan and law, and (3) authorize one or more of its members or officers of the Company or any Affiliate to execute and deliver documents on behalf of the Committee or any subcommittee. The Committee, however, can not delegate to any officer under (1) above decisions under the Plan with respect to Section 16 Officers. Any other reference in this Plan to the Committee will not preclude any delegated authority permitted by this section. E. Discretion to Act. The Committee and persons with delegated authority may act in their sole discretion when granting an Award or, if permitted by the Plan, after the grant. All decisions made by the Committee or under delegated authority will be binding on all persons, including the Company and Plan participants. -2- Section 3. Stock Subject to Plan. The number of A. General Authorization. For Plan years beginning on or initial after January 1, 1997, the Committee may continue to authorized grant Awards for Shares in each calendar year Shares in a (including partial years) totaling two and one-half year generally percent (2.5%) of the Common Stock of the Company remains the outstanding as of the first day of that year, subject same as the to adjustment as provided in the Plan. Any available former Plan. Shares not granted in a year will be available for grant in a future year, but only if those Shares are Awarded to new officers, employees or directors in connection with the merger with or the acquisition of all or substantially all the stock or assets of another corporation or other entity by the Company or its Affiliates. The Committee may award up to 500,000 shares of Preferred Stock under the Plan. The Committee may issue Shares authorized and unissued Shares or "treasury Shares" to satisfy any Award. B. Limitations. Subject to adjustment as provided in the Plan, the Committee may award a maximum of 5,000,000 shares of Common Stock as Incentive Stock Options over the life of the Plan, and it may grant Awards for a maximum of 1,000,000 Shares to any one participant in any calendar year. Canceled and replacement Awards for a participant will count against that individual award limitation. C. Adjustment in Amount. The Shares available under the Plan will be increased by the number of Shares (1) of Forfeited, unused Restricted Stock that are forfeited, (2) underlying an or cashed-out Option (and related SAR, if any) that terminates for Shares can be any reason without being exercised, or (3) underlying a reused. Stock Appreciation Right that is exercised for cash. D. Change in Corporate Structure. The Committee or Board may adjust or substitute in its discretion the Shares reserved for issuance under the Plan, the number and exercise price of any outstanding Options and SARs, and the number of Shares subject to other Awards in the event of any change in corporate structure of the Company. Those changes include any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, or extraordinary distribution regarding the Stock. The number of Shares subject to an Award, however, must always be a whole number. Section 4. Options. A. Date of Grant. The grant of an Option occurs on the day the Committee selects the person to participate in the grant, determines the number of Shares subject to the Option, and specifies the terms of the Option. Options are NQ's unless B. ISOs and NQs. The Committee may award Incentive Stock designated as Options only to employees of the Company and its ISO's. subsidiaries (as permitted by Section 422). The Option agreement must note whether the Option is an ISO or NQ. If an Option is not designated as an ISO, or even if so -3- captioned it does not qualify as an ISO, it will be a Non-Qualified Stock Option. No term of the Plan relating to an Incentive Stock Option can be interpreted, amended or altered, nor can any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 or, without the written consent of the option holder, to disqualify his or her ISOs under that section. C. Terms. Options are subject to the following terms, and such additional terms selected by the Committee: 1. Price. The Committee will state in the Option agreement the Option price (or formula for determining the price) per Share purchasable under No Options that Option. The Option price must be no less than are awarded the Fair Market Value of the Stock on the date of at less than grant. fair market value or for 2. Term. All Options expire no later than 10 years terms over 10 after the grant date. years. 3. Method of Exercise. The Plan and Option agreement determine when holders may exercise all or part of their options. The holder must give the Company written notice stating the number of Shares to be purchased under the Option. The holder must pay the full purchase price for the Shares purchased at the time of exercise. The Company may determine the permitted forms of notice and payment. The Company will not issue any Shares until full payment has been made. Full payment 4. Use of Stock for Payment. If approved by the is due on Committee, holders may pay for Options with Option payment in full or unrestricted Stock already exercise. owned by the holder of the same class as the Stock subject to the Option. The Committee may permit payment for an NQ with Restricted Stock of the same class, based on the Fair Market Value of the Stock on the exercise date. In that case, Shares issued under the Option equal to the number of Restricted Shares used will become Restricted Shares with the same terms as the surrendered Restricted Shares, unless the Committee determines otherwise. The 5. Transferability/Restrictions on Transfer. Holders Committee may not transfer options except as permitted by may permit the Committee or this Plan. A holder may transfer transfer of Options by will, the laws of descent and Awards. distribution, or under a domestic relations order (as defined by the Code or by ERISA) (collectively, by "Will"). Except as noted above, all Stock Options are exercisable during the optionee's lifetime only by the optionee or his or her guardian or legal representative. In those events, the term "holder," "optionee," and "participant" include the guardian and legal representative of the optionee and any person or entity receiving an option by Will or permitted transfer. The Committee cannot permit transfer of ISOs other than by Will, unless the transfer would not terminate ISO status. -4- 6. Termination of Employment. After Termination of Employment, participants may exercise Options, to Employees the extent then exercisable or as accelerated by may generally the Committee, during the periods noted below, exercise unless otherwise permitted by the Committee or the Options after Option Agreement. In no event, however, will the they leave Option be exercisable after expiration of the FINOVA within original Option term. An ISO exercised after the the following exercise periods permitted by the Code will be periods: treated as an NQ. Death - 1 year (a) Death. One year from the date of death. If Disability - 3 the optionee dies after Termination of years Employment during the periods referenced in Retirement - 3 Section 4.C.6(b), that period will be years extended to the extent necessary to permit Termination exercise within one year from the date of for Cause - death. Options expire Other reasons (b) Disability or Retirement. Three years from - - - 3 months the Termination of Employment due to Disability or Retirement. (c) Terminations for Cause. The Option will terminate and will not be exercisable. "Cause" means (i) conviction of a felony, (ii) dishonesty in fulfilling one's employment duties or (iii) willful and deliberate failure to perform those duties in any material respect. (d) Terminations Not for Cause, Death, Disability or Retirement. Three months from the Termination of Employment. 7. Cash Out for Change in Control. During the first 60 days after a Change in Control (the "Exercise Period"), an optionee may elect, by written notice to the Company, to be paid in cash the Spread for each Share underlying his or her outstanding Options, even if not then exercisable, in lieu of payment of the exercise price for the Options. The payment will be made within 30 days of that notice. The rights under this Section 4.C.7 supersede all other provisions of the Plan, but will not exist if the Committee states that at the time of the grant. The "Spread" is the amount the Change in Control Price per Share on the date of election exceeds the exercise price per Share. Section 16 Officers may not make the election provided for by this paragraph for Options granted within 6 months of a Change in Control. In that case, the Options will automatically be canceled in exchange for a cash payment equal to the Spread multiplied by the number of Shares underlying the Options. That payment will be made on the day that is 6 months and 1 day after the grant of the Options. 8. Rights as a Shareholder. The holder of an Option will have all the rights of a shareholder of the Company for that class or series of Stock (including, if applicable, the right to vote the -5- securities and the right to receive dividends) when the holder gives written notice of exercise, pays for the Shares and, if requested, gives the representation described in Section 10.A. Section 5. Stock Appreciation Rights. A. Grant and Exercise. The Committee may grant Stock Appreciation Rights with all or part of any Option Award, either at or after the grant (at the time of grant only for ISOs). A Stock Appreciation Right will terminate and not be exercisable on the termination or exercise of the related Option, and vice versa. To exercise an SAR, the holder must surrender the applicable part of the related Option and comply with procedures established by the Committee. B. Terms. Stock Appreciation Rights are subject to the following terms, and any additional terms selected by the Committee: 1. Same as Options. SARs are exercisable only at the times and to the extent the related Options are exercisable. Exercise of an SAR cancels 2. Payment for SARs. Upon exercise of an SAR, an the underlying optionee the Company will pay cash, Shares or both Option and equal to the amount the Fair Market Value of each vice versa. Share exceeds the Option price of the related Option, multiplied by the number of Shares for which the SAR is exercised. The Committee will determine the form of payment. 3. Transferability of SARs. Holders may transfer SARs only to the extent permitted for the underlying Option. 4. Cash Out for Change in Control. The provisions of Section 4.C.7 also apply to SARs. Section 6. Restricted Stock. A. Section 16 Officers. Unless otherwise provided by the Committee, awards of Restricted Stock to Section 16 PBRS Awards Officers will only be PBRS Awards which comply with the can base performance-based compensation requirements of Section performance 162(m). Unless otherwise determined by the Committee, on various the performance goals for the PBRS Awards will be based factors. on the following factors: total shareholder return (alone or in comparison with one or more indices), revenues (gross or net), earnings per share, expenses, margin (gross or net), changes in stock price, funds or asset turnover, market share, net income (before or after taxes), return on assets, equity, capital, investment, or sales (actual or pro forma), operating margin, net revenue growth, or cash flow. The Committee may decline to use any or all of those performance goals and it may apply these performance measures singly or in any combination. It may also link them to performance of the Company, its Affiliates or any division, department or individual. The Committee may not forgive satisfaction of -6- any performance condition specified for officers subject to Section 162(m), nor may it increase an Award to those officers over amounts provided for by the initial grant, unless permitted by Section 162(m). The Committee must certify attainment of the performance results if required by Section 162(m). B. Awards and Certificates. The Committee may determine the form Restricted Stock may take, including book-entry registration or issuance of one or more stock certificates. Restricted Stock will be registered in the name of the participant. Restricted Stock certificates will bear an appropriate legend referring to the restrictions on that Award. The legend will read essentially: The transferability of this certificate and the shares of stock represented hereby are subject to the terms (including forfeiture) of the 1992 Stock Incentive Plan and a Restricted Stock Agreement. Copies of the Plan and Agreement are on file at the offices of The FINOVA Group Inc. The Company's most recent principal address will also be included in the legend, but the failure to update the address in the event of a change will have no effect on the restrictions on those Shares. The Company will hold any certificates evidencing Restricted Stock until the restrictions lapse, unless otherwise determined by the Committee. The Committee may also require, as a condition to an Award, that the participant deliver one or more stock powers and, if appropriate, SEC Forms 144 or other applicable forms, executed in blank, relating to the Restricted Stock. C. Terms. Restricted Stock is subject to the following terms and any other terms selected by the Committee: 1. No Transfer. Except as permitted by the Plan, Committee or Restricted Stock agreement, the participant may not transfer, sell, assign, pledge or otherwise encumber the Restricted Stock during the period set by the Committee beginning on the date of the Award (the "Restriction Period"). 2. Rights as a Shareholder. Except as provided by the Plan, Committee or Restricted Stock agreement, the Restricted Stock participant will have all the rights of a can not be shareholder for the same class or series of Stock transferred as the Restricted Stock, including, if applicable, during the the right to vote the Shares and to receive any Restriction cash dividends. If the Committee requires in the Period, with Restricted Stock agreement, and subject to Section limited 10.F, (a) cash dividends on the Restricted Stock exceptions. will be automatically deferred and reinvested in additional Restricted Stock, and (b) Stock dividends will be paid in the form of Restricted Stock of the same class as the dividend. 3. Forfeiture of Restricted Stock. Except as provided by this Plan, the Committee or the Restricted Stock agreement, a participant will forfeit all Shares of Restricted Stock still subject to restriction upon his or her Termination of Employment. -7- 4. Certificates Upon Vesting. Upon expiration of the Restriction Period without a prior forfeiture, the Company will deliver unlegended certificates for those Shares to the participant. Section 7. Non-Employee Director Awards. A. Automatic Grants. Each Non-Employee Director who has served on the Board continuously since the commencement Non-Employee of his or her term will receive an annual (including Directors receive partial years) grant of Non-Qualified Options to Options for 4,000 purchase 3,000 Shares of Common Stock. The grant will Shares on occur automatically on the third Thursday of August election and during that director's term. Each Non-Employee Director 3,000 Shares each will also be awarded NQs to purchase 4,000 shares of year of service. Common Stock on joining the Board. The exercise price for those grants will equal the Fair Market Value on the date of grant. B. Election for Retainer Payments. In addition to the Awards authorized by Section 7.A, each Non-Employee Director may from time to time elect to receive, in lieu of all or part of the cash retainer otherwise payable to that director, (1) Restricted Stock ("Directors Retainer Shares") with a Fair Market Value Directors may equal to the amount of the retainer payment to be paid elect to receive on that date, (2) Non-Qualified Options to purchase all or part of Common Stock with a Fair Market Value as of that their annual payment date equal to two and one-half times the amount retainer in of the retainer payment ("Directors Retainer Options"), Restricted Stock or (3) a combination of the above. The Committee may or Options. establish minimum thresholds for election of any alternative other than cash. C. Directors Retainer Shares. Except as permitted by the Plan, Committee or Restricted Stock Agreement, Directors may not transfer Retainer Shares until the day before the next annual meeting of the Company's shareholders. Those Shares will be forfeited to the Company if the director ceases to be a Board member prior to that date except as otherwise provided by this Plan. D. Directors Retainer Options. Except as provided below, Directors Retainer Options may be exercised in whole or in part commencing on the day before the next annual meeting of shareholders and ending ten years after the date of grant. If the director ceases to be a Board member before the Directors Retainer Option becomes exercisable, the Option becomes void, except as provided by this Plan. The exercise price will be the Fair Market Value of the Shares on the date of grant. E. Death, Disability or Retirement of a Director. If a participant ceases to be a Board member due to death, Disability or Retirement as a director at the end of a term or upon a Change in Control, then any Directors Retainer Shares and Directors Retainer Options will immediately vest and become exercisable, as the case may be. Any restriction on transfer imposed by this Plan and any risk of forfeiture will cease on any of those events. -8- F. Expiration of Directors Retainer Options. Directors Retainer Options that are exercisable but have not been exercised expire six months after the date the director ceases to be a Board member, except as noted below. If the Board membership ceases due to death, Disability or Retirement as a director at the end of a term, those Options may be exercised for two years after termination of Board membership, and if the director dies within the six month or two year periods noted above, the Options may be exercised at any time within two years after the death. Nothing in this paragraph permits exercise of any Options beyond the original ten year term. G. Allocation of Shares. If the number of Shares available for future grants under the Plan is not sufficient to make all automatic grants required to be made on that date, then all Non-Employee Directors entitled to a grant on that date will share proportionately in the available Options. In addition, no elections under Section 7.B can be made until all automatic grants for that date have been made, and the directors who have elected to receive all or any portion of their retainer under that subsection will share ratably in the number of remaining available Shares. H. Other Terms. Except as expressly provided in this Section 7, any Award granted under this Section will be subject to the terms of the Plan, including those contained in Sections 4, 6 and 8, as appropriate. Section 8. Change in Control Provisions. A. Impact of Event. Notwithstanding any other provision in this Plan to the contrary, if a Change of Control occurs: Awards vest and 1. Options and SARs. Any unvested or unexercisable can be exercised Options and SARs outstanding as of the date of the if a Change in Change in Control become fully vested and Control occurs. exercisable to the full extent of the original grant, without regard to the three month limit on exercisability imposed by Section 4.C.6(d) of the Plan. 2. Restricted Stock. The restrictions on Restricted Stock lapse, and it will become free of all restrictions (other than those imposed by the securities laws). The Restricted Stock will fully vest immediately, including full vesting of the maximum number of Shares or payouts as if maximum performance conditions or goals were achieved, as applicable. B. Definition of Change in Control. For purposes of the Plan, a "Change in Control" means the happening of any of the following events: 1. Acquisition. An acquisition by any person, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of SEC Rule 13d-3) of 20% or more of either (a) the -9- then outstanding common stock (the "Outstanding Common Stock") or (b) the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors (the "Outstanding Voting Securities") of the Company. Exception. No Change of Control will have occurred for any acquisition (i) directly from the Company or any Affiliate, other than one by exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company or Affiliate, (ii) by the Company or any Affiliate, (iii) by any employee benefit plan or related trust sponsored or maintained by the Company or any Affiliate, or (iv) by any corporation pursuant to a transaction that complies with clauses (a), (b) and (c) of the Exception contained in subsection 3 of this Section 8.B; or 2. Change in the Board. A change in the composition of the Board so that the members who as of January 1, 1997 constitute the Board (the "Incumbent Board") cease for any reason to be at least a majority of the Board. Any person who becomes a Board member after January 1, 1997 whose election or nomination for election was approved by at least a majority of the Incumbent Board will also be a member of the Incumbent Board, unless his or her initial assumption of office occurs due to either an actual or threatened election contest (as those terms are used in SEC Rule 14a-11 or SEC Regulation 14A) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or 3. Corporate Transaction. The Company's shareholders approve a reorganization, merger, consolidation or sale or other disposition of all or substantially all the assets of the Company (a "Corporate Transaction"). Exception. If all of the following apply, the instance will not be a Corporate Transaction: (a) all or substantially all of the beneficial owners of the Company's Outstanding Common Stock or Outstanding Voting Securities, respectively, immediately prior to the Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the Outstanding Common Stock and the Outstanding Voting Securities of the corporation resulting from the Corporate Transaction (including any corporation that owns the Company or all or substantially all of the Company's assets directly or indirectly) in substantially the same proportions as their ownership immediately prior to the Corporate Transaction, (b) no Person (other than the Company, any employee benefit plan -- or related trust -- of the Company or the corporation resulting from the Corporate Transaction) will beneficially own, directly or indirectly, 20% or more of the Outstanding Common Stock or Outstanding Voting Securities, except to the extent that ownership existed prior to the Corporate -10- Transaction, and (c) members of the Incumbent Board constitute at least a majority of the board of directors resulting from the Corporate Transaction, or 4. Liquidation/Dissolution of the Company. The shareholders of the Company approve a complete liquidation or dissolution of the Company. C. Change in Control Price. For purposes of this Plan, "Change in Control Price" means the higher of (1) the highest reported sales price, regular way, of a Share in any transaction reported on the NYSE Composite Tape, on any other national exchange listing the Shares or on NASDAQ during the 60 days ending on the date of the Change in Control or (2) if the Change in Control results from a tender or exchange offer or a Corporate Transaction, the highest price per Share paid in that tender or exchange offer or Corporate Transaction. For Incentive Stock Options and Stock Appreciation Rights relating to ISOs, the Change in Control Price will be in all cases the Fair Market Value of the Stock on the date the ISO or SAR is cashed out. To the extent the consideration paid in any Change in Control transaction consists of all or in part securities or other non-cash consideration, the Board will determine the value of the securities or non-cash consideration in its discretion. Section 9. Effective Date/Term/Amendment/Termination. A. Effective Date. This amended Plan is effective upon approval by the Board. Those changes necessary for The Board may qualification under Section 162(m) or Section 422 will amend the Plan not be effective until those changes are ratified and but may not approved by a majority of the Company's shareholders adversely impact who vote on the matter at a meeting with a quorum existing Awards, present. All Awards outstanding on the effective date with certain of these amendments to this Plan will remain exceptions. outstanding and will become subject to the terms of this Plan as amended. B. Termination. The Plan terminates on December 31, 2002. Awards outstanding as of the date the Plan terminates will not be affected or impaired by that termination. C. Changes to the Plan/Restrictions. The Board may amend, alter or discontinue the Plan, including to incorporate changes in law, tax and accounting rules, or other developments, and to grant Awards that qualify for beneficial treatment under those changes. No change can be made, however, that would (1) impair the rights of a participant granted before that date without the participant's consent, except for a change made to cause the Plan to qualify for exemptions provided by then-current law, including exemptions relating to securities and taxation, or (2) disqualify the Plan from the exemptions provided by SEC Rule 16b-3 or for favorable tax treatment under Sections 162(m) or 422. No amendment -11- can be made without approval of the Company's shareholders if their approval is required by law or is necessary to maintain the exemptions under Rule 16b-3 or Sections 162(m) or 422. No term of the Plan can be interpreted, amended or altered, nor can any discretion or authority to act under the Plan be exercised so as to disqualify the Plan under Sections 162(m) or 422 or Rule 16b-3. D. Changes to Prior Awards/Restrictions. The Committee may amend the terms of any Award granted before that date, prospectively or retroactively, but no amendment can impair the rights of any holder without the holder's consent, except as noted in this Section 9. The Committee may also substitute new Options for previously granted Options, including previously granted Options having higher exercise prices. Section 10. General Provisions. A. No Intent to Transfer. The Committee may require each person acquiring an Award or the underlying Shares to represent to and agree with the Company in writing that the person is acquiring the Award or Shares without a view to the distribution thereof. All Shares or other securities issued under the Plan will be subject to stop transfer orders and other restrictions imposed by the Committee, including restrictions imposed by law, SEC or stock exchange rules or other restrictions. The certificates for Shares or other Awards may contain any legend the Committee deems appropriate regarding any restrictions on transfer or otherwise. B. Other Compensation Permitted. Nothing in this Plan will prevent the Company or any Affiliate from adopting other or additional compensation arrangements for their employees. C. No Employment Rights. Nothing in this Plan or any Award will confer on any employee any right to continued employment, nor will either interfere with the right of the Company or any Affiliate to terminate the employment of any employee at any time. D. Taxes. The participant must pay to the Company or make arrangements satisfactory to the Company regarding the payment of any Federal, state, local and foreign taxes of any kind required by law to be withheld regarding any Award. The participant must satisfy that tax obligation no later than when the amount becomes Holders must includible in the person's gross income for Federal pay taxes due income tax purposes. Unless otherwise determined by the on Awards. Company, withholding obligations may be settled with Stock, including Stock that is part of the Award giving rise to the tax obligation. The obligations of the Company under the Plan are conditional on satisfaction of these taxes. The Company and its Affiliates may deduct any taxes due from any payment otherwise due the participant if permitted by law. E. Right of First Refusal. At the time of grant, the Committee may require -12- that the participant offer to the Company the right to purchase Shares resulting from an Award (or if the Committee permits transfer, of the Award itself) that the participant wishes to sell, transfer, assign, pledge or otherwise encumber. The Company will have the right to purchase the Shares (or Award) at the then Fair Market Value of the Shares, subject to terms the Committee specifies at the time of grant. F. Reinvestment of Dividends Subject to Availability. The reinvestment of dividends in additional Restricted Stock can only occur if sufficient Shares are available under Section 3 for that reinvestment (taking into account then outstanding Awards). G. Beneficiary Designation. The Committee will establish procedures for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid. H. Governing Law. The Plan and all Awards made and actions taken under the Plan will be governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflicts of law principles. I. Unfunded Status of Plan. The Board intends that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may create trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or make payments. Unless the Committee otherwise determines, however, the existence of those trusts or arrangements shall be consistent with the unfunded status of the Plan. Section 11. Definitions. As used in this Plan: "Affiliate" means a corporation or other entity controlled by the Company and designated by the Committee as eligible to participate in this Plan. "Award" means an Option, Stock Appreciation Right or Restricted Stock grant issued under the Plan. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, and any successor provisions. The Code includes its related rules. "Committee" is defined in Section 2.A. "Common Stock" means the common stock, par value $.01 per share, of the Company. "Company" or "FINOVA" means The FINOVA Group Inc., a Delaware corporation. -13- "Disability" means permanent and total disability under the Company's policies as they then exist. The Committee may amend or interpret, for purposes of the Plan, the Company's disability policies in its discretion. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor provisions. The Exchange Act includes its related rules, as they may be amended. "Fair Market Value" as of any given date depends on whether the Stock is immediately resold. The resale price is the fair market value if the participant resells that Stock in an arms-length transaction on the open market on the same date the Fair Market Value is to be determined. In all other cases, the Fair Market Value is the average of the high and low reported sales prices of the Stock on the given date. The reported sales price will be determined in the following order, as applicable: the NYSE Composite Tape, any other national stock exchange listing the stock, NASDAQ, or if the Stock's sales are not regularly reported by any of the above, by the Committee in its good faith discretion. For any day that is not a trading day on the national securities markets, the previous trading day will determine Fair Market Value. "Incentive Stock Option" or "ISO" means any Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. "Including" even if not capitalized, means including without limitation. "Non-Employee Director" means a director who is not otherwise an employee of the Company or any Affiliate and has not been so employed for any part of the preceding fiscal year. "Non-Qualified Option" or "NQ" means any Option that is not an ISO. "Option" means an option granted under Section 4 or 7. "Outside Director" means a director who satisfies the requirements of an "outside director" as defined in Section 162(m) and who otherwise satisfies the requirements of a "non-employee director" under Rule 16b-3. "Plan" means this 1992 Stock Incentive Plan, as it may be amended. "Performance Based Restricted Stock" or "PBRS" means Restricted Stock with performance conditions other than the mere passage of time or continued employment or service which satisfy the requirements as performance-based compensation under Section 162(m). "Preferred Stock" means preferred stock, par value $.01, of the Company. "Restricted Stock" means an Award granted under Section 6 or 7.C. "Retirement" means (A) retirement from active employment as defined in a pension plan of the Company or an Affiliate, (B) retirement under an employment contract -14- with the Company or an Affiliate, or (C) termination of employment (or service as a non-employee director) at or after age 55 under circumstances that the Committee in its sole discretion deems to be retirement. "SEC" means the Securities and Exchange Commission or any successor. "Section 16 Officer" means any officer (including any employee director) subject to the insider trading and reporting requirements of Section 16 of the Exchange Act. Non-Employee Directors are not Section 16 Officers for purposes of this Plan. "Section 162(m)" means Section 162(m) of the Code. "Section 422" means Section 422 of the Code. "Shares" or "Stock" means the Common Stock or Preferred Stock, as the case may be. "Stock Appreciation Right" or "SAR" means a right granted under Section 5. "Termination of Employment" means the termination of the participant's employment with the Company or an Affiliate. It also occurs if the participant is employed by a division, department or Affiliate that ceases its affiliation with the Company. In any case, the participant will not incur a Termination of Employment if he or she immediately becomes an employee of the Company or another Affiliate following that event. -15- EX-10.A 3 ex10_a.txt LETTER AGREEMENT Exhibit 10.A LEUCADIA NATIONAL CORPORATION 315 Park Avenue South New York, NY 10010-3679 November 10, 2000 The FINOVA Group Inc. 4800 North Scottsdale Road Scottsdale, Arizona 85251 Gentlemen: This letter agreement sets forth the principal terms and conditions on which Leucadia National Corporation or a subsidiary ("Leucadia") would be willing to invest up to $350 million in The FINOVA Group Inc. ("Finova"). 1. PREFERRED STOCK INVESTMENT. Leucadia will purchase 10 million shares of a new series of convertible preferred stock of Finova at a purchase price of $25.00 per share (the "PIK Preferred Stock"). The principal terms of the PIK Preferred Stock will be as follows: (a) FIVE YEAR PAY-IN-KIND: Cumulative dividends will be payable quarterly in additional shares of PIK Preferred Stock at the rate of 14% per annum during the first five years after issuance. (b) COUPON: Beginning in the sixth year, at Finova's option, cumulative dividends will be payable quarterly either: (i) in cash, in an amount equal to the greater of: (x) a rate of 14% per annum or (y) ten times the amount of any cash dividend paid or payable per share of Common Stock; or (ii) in additional shares of PIK Preferred Stock at the rate of 14% per annum. (c) CONVERSION: For a period from June 30, 2006 until the tenth anniversary of the date of issuance of the PIK Preferred Stock, each share of PIK Preferred Stock will be convertible, at the option of the holder, into ten shares of Common Stock at a conversion price of $2.50 per share of Common Stock (which number and price will be subject to normal anti-dilution adjustments). (d) VOTING: The PIK Preferred Stock will vote as one class with the common stock and will have twenty (20) votes per PIK Preferred Stock share, subject to New York Stock Exchange approval, or such lesser number of votes (but not less than ten votes) per PIK Preferred Share, as the New York Stock Exchange requires. (e) PREFERENCE RIGHTS: The PIK Preferred Stock will have a liquidation preference of $25.00 per share, plus accrued but unpaid dividends thereon. (f) REGISTRATION RIGHTS: The PIK Preferred Stock will be entitled to demand and incidental registration rights. 2. RIGHTS OFFERING. As soon as practicable after the closing, Finova will conduct a rights offering whereby existing shareholders will be permitted to purchase up to 6 million shares of PIK Preferred Stock at a price of $25.00 per share ($150 million aggregate). The rights shall be transferable, and Leucadia shall act as standby underwriter of the offering with respect to $100 million of the offering. As compensation for agreeing to act as standby underwriter, Finova will pay Leucadia $ 5 million upon distribution of the rights. The FINOVA Group Inc. November 10, 2000 Page 2 3. LEUCADIA WARRANT. Leucadia will receive a ten-year warrant to purchase for an aggregate exercise price of $125 million such number of shares of Common Stock that will represent 20% of the outstanding shares of Common Stock immediately after exercise, assuming for the purposes of such calculation the conversion and exercise of all outstanding securities which are or will be convertible or exercisable into shares of Common Stock (other than any securities issued or issuable in a merger, acquisition or public offering for cash at fair value, in respect of "out of the money" employee and director stock options, in respect of trust originated preferred securities issued by FINOVA Finance Trust ("TOPrS"), or as may otherwise be agreed to by Leucadia and Finova), and taking into account the exercise of the Leucadia Warrant itself. 4. SHARING OF "UPSIDE" AND "DOWNSIDE" OF CERTAIN COLLECTIONS. The Common Stockholders, on the one hand, and holders of PIK Preferred Stock and of the Leucadia Warrant (collectively, the "Other Equity") on the other hand, will share in the collection, based on a December 31, 2005 measurement date, of the (i) gross Investment in Financing Transactions as reflected on Finova's June 30, 2000 consolidated balance sheet (the "June 30 Balance Sheet"), (ii) Investments as reflected on the June 30 Balance Sheet, (iii) Offlease Aircraft as reflected in the June 30, 2000 Balance Sheet and (iv) the amount of any unfunded commitments existing as of June 30, 2000 to the extent such commitments are ultimately funded (collectively, the "Portfolio") in such amount that will yield 50% of the Sharing Amount (as defined below) being attributed to the Common Stockholders and 50% of the Sharing Amount being attributed to the Other Equity. The amount to be shared (the "Sharing Amount") will be $780 million PLUS the after tax gain, if any, or MINUS the after tax loss, if any, (in each case using a 40% tax rate) actually realized in the collection of the Portfolio. If the Sharing Amount is negative, it will be grossed-up by dividing the Sharing Amount by 60%. For purposes of determining the Sharing Amount, unrealized gains and unrealized losses on the balance of the Portfolio remaining outstanding at December 31, 2005 will be estimated by the Board of Directors of Finova and approved by a majority of the directors unaffiliated with Leucadia. The Board of Directors will determine the form of the distribution to securityholders, which will be payable by May 31, 2006 to Common Stockholders, if the Sharing Amount is a positive number, or to the Other Equity holders, if the Sharing Amount is a negative number. Once the Sharing Amount has been determined, if it is a positive number, the Sharing Amount to be distributed (the "Distribution") to the Common Stockholders shall be in an amount, which, together with the Common Stockholders' equity interest in the Company MULTIPLIED by the undistributed portion of the Sharing Amount remaining in the Company, will equal 50% of the Sharing Amount. A recipient's equity interest in the Company shall be determined on a common stock equivalent basis. If the Sharing Amount is a negative number, the Distribution to the Other Equity holders shall be in an amount which, when the Distribution is subtracted from the product of (x) the Other Equity holders' equity interest in the Company MULTIPLIED BY (y) the sum of (i) the Sharing Amount (expressed as a positive number) PLUS (ii) the Distribution, will equal 50% of the Sharing Amount (expressed as a positive number). The FINOVA Group Inc. November 10, 2000 Page 3 Any Distribution Amount to be paid to the Other Equity holders will be allocated pro rata to the relative equity interests in the Company of the PIK Preferred Stockholders and the Leucadia Warrant holder. 5. REFINANCING OF EXISTING BANK DEBT. Leucadia's offer and Finova's acceptance is contingent upon Leucadia and the Company completing a refinancing or restructuring with the Company's lenders of the existing $4.7 billion in outstanding bank debt (the "Refinancing") upon terms acceptable to Leucadia and the Company. Promptly following execution of this agreement, Finova will notify the Banks of this agreement and request the Banks to commence such negotiation. Simultaneously with the Bank negotiations, Leucadia and Finova will commence negotiations of a mutually acceptable definitive agreement with respect to the Preferred Stock Investment and the other matters outlined in this agreement, which shall contain normal and customary representations, covenants, conditions and indemnities. 6. ADDITIONAL CONDITIONS TO CONSUMMATION OF THE PREFERRED STOCK INVESTMENT. The obligation of Leucadia and Finova to consummate the Preferred Stock Investment, in addition to customary closing conditions, will be subject to receipt of required regulatory approvals (including the expiration or termination of any waiting periods under the Hart-Scott-Rodino Anti-trust Improvements Act of 1976, as amended), exemption of Leucadia from Finova's existing rights plan, approval by the Board of Directors of Finova of each element of the transaction with Leucadia for purposes of Article IX of Finova's Certificate of Incorporation, and the absence of any applicable law or regulation and no judgment, injunction, order or decree prohibiting consummation of the Preferred Stock Investment and the other transactions contemplated hereby. The parties hereto agree to fully cooperate to promptly make all requisite regulatory filings and to work together to obtain required regulatory approvals. 7. EXCLUSIVITY. To allow time for negotiation of the Refinancing, from and after the date hereof until the termination of exclusivity pursuant to the terms of this agreement and except as expressly permitted by the following provisions of this paragraph, Finova shall not, directly or indirectly, through any representative or otherwise, solicit or entertain offers from, negotiate with or in any manner encourage, discuss, accept or consider (including furnishing any information to any other party) any proposal of any other person or entity relating to (i) any merger, consolidation, share exchange, recapitalization, business combination or other similar transaction, (ii) any sale, lease or exchange, mortgage, pledge, transfer or other disposition of 20% or more of the assets of Finova, in a single transaction or in a series of transactions or (iii) any tender offer, exchange offer for securities of Finova or any purchase or other acquisition of beneficial ownership of 20% or more of the equity of Finova (or securities convertible into 20% or more of the equity of Finova) (an "Acquisition Proposal"); provided, however, that nothing contained in this paragraph shall prohibit Finova's Board of Directors from furnishing information to, or entering into discussions or negotiations with, any person that makes an unsolicited bona fide, fully financed, written Acquisition Proposal which relates to the acquisition by another entity of all of the equity of Finova, The FINOVA Group Inc. November 10, 2000 Page 4 whether by merger, tender offer or otherwise, if and only to the extent that (A) Finova's Board of Directors, after consultation with independent legal counsel, determines in good faith that such action is necessary for Finova's Board of Directors to comply with its fiduciary duties to Finova's stockholders under applicable law, (B) Finova's Board of Directors determines in good faith after consultation with a nationally recognized expert with experience in appraising the terms and conditions of such unsolicited Acquisition Proposal, that such unsolicited Acquisition Proposal after taking into account the strategic benefits to be derived from the transaction with Leucadia and the long-term prospects of Finova, would, if consummated, result in a transaction more favorable to Finova's stockholders from a financial point of view (any such more favorable bona fide unsolicited Acquisition Proposal being referred to as a "Superior Proposal"), (C) the meeting of Finova's stockholders, if required to consummate the transaction with Leucadia, shall not have occurred and (D) prior to taking such action, Finova (i) notifies Leucadia of any Acquisition Proposal (including, without limitation, the material terms and conditions thereof and the identity of the person making the Acquisition Proposal) as promptly as practicable (but in no case later than 24 hours) after receipt thereof, (ii) provides Leucadia with a copy of any written Acquisition Proposal, (iii) thereafter informs Leucadia on a prompt basis of the status of any discussion or negotiations with such a third party and any material changes to the terms and conditions of such Acquisition Proposal, (iv) promptly gives Leucadia a copy of any information delivered to such person which has not been previously been reviewed by Leucadia and (v) receives from such person an executed confidentiality agreement in reasonably customary form and in any event containing terms at least as stringent as those contained in the confidentiality agreement to which Leucadia is a party. Finova agrees to notify any investment banker or other representative of the substance of this agreement for the purpose of terminating any solicitation efforts that previously took place. The exclusivity provision of this agreement (but not the break up fee provision of this agreement) shall expire (i) if a definitive agreement with respect to the Preferred Stock Investment is not executed by Finova and Leucadia by December 8, 2000; (ii) if a term sheet for the Refinancing (which shall have been agreed to by Finova and Leucadia) (the "Term Sheet") is not presented to the agent banks for Finova's outstanding bank debt (the "Agent Banks") by December 20, 2000; and (iii) if the Agent Banks do not recommend approval of the Term Sheet (as such Term Sheet may be amended from time to time with the approval of Finova and Leucadia) to the lenders by February 27, 2001. 8. BREAK UP FEE. If Finova accepts an offer from any party other than Leucadia relating to an Acquisition Proposal whether through direct purchase of stock or assets, merger, consolidation or otherwise, within one year from the date of this agreement, then Finova shall pay to Leucadia in immediately available funds, at Leucadia's option, either (i) $15 million or (ii) an amount equal to the product of 3 million multiplied by the excess of (x) the fair market value of the consideration to be paid for each share of Common Stock of Finova pursuant to such Acquisition Proposal over (y) $2.50. 9. STOCKHOLDER APPROVAL. If Finova stockholder approval is required in order to implement the actions contemplated by this agreement, the Board of Directors of Finova shall recommend that stockholders approve the Preferred Stock Investment; provided, however, that the Board of Directors of Finova may withdraw such recommendation if Finova enters into an agreement for an Acquisition Proposal which complies with the provisions of paragraph 7 of this Agreement. If such stockholder approval is not received, Leucadia shall receive the break-up fee. The FINOVA Group Inc. November 10, 2000 Page 5 10. ACCESS TO INFORMATION. From and after the date of this agreement, Finova will provide Leucadia with complete access to Finova's facilities, books and records, and personnel. The parties shall make their respective personnel available to each other in Phoenix, Arizona or New York, New York and shall cause their personnel to cooperate with the other in establishing a mutually acceptable plan for the Refinancing. 11. NO EXTRAORDINARY TRANSACTIONS. During the term of the exclusivity period of this agreement, Finova agrees that, without the consent of Leucadia, except in the ordinary course of business, Finova will not enter into any agreement for or take any action related to (i) the sale of assets,(ii) the sale of securities, (iii) any financings or refinancings, (iv) any reorganization, recapitalization, dissolution or liquidation of Finova, (v) the material amendment to any existing, or entering into any new, employment, severance or other employee benefit arrangements or (vi) other material matters; PROVIDED, HOWEVER, that Finova may enter into an agreement for an Acquisition Proposal which complies with the provisions of paragraph 7 of this agreement. 12. BOARD REPRESENTATION. Upon consummation of the Preferred Stock Investment, designees of Leucadia shall have six seats out of the ten-member Board of Directors, which designees shall be distributed evenly among the three classes of members of the Board of Directors. Finova will take all necessary corporate action to increase the size of its Board of Directors to ten (10) members and obtain all necessary resignations for existing directors to enable the Leucadia designees to be appointed to the Board of Directors. 13. MANAGEMENT FEE. Upon consummation of the Preferred Stock Investment, Leucadia will receive a management fee of $5 million per year, payable quarterly, for a period of five years from consummation of the Preferred Stock Investment. 14. NO PUBLIC DISCLOSURE. Except as may be required by law, without the prior consent of the other party, neither Leucadia nor Finova shall make any public announcement with respect to, or otherwise disclose, the existence of this letter or the terms of the possible transaction. 15. COSTS AND EXPENSES. All costs and expenses (including legal, accounting and other advisory fees and disbursements) incurred in connection with this Agreement, the conduct of any due diligence review and the preparation and delivery of the definitive agreements and related documentation shall be borne by Leucadia to the extent incurred by it and by Finova to the extent incurred by it. 16. GOVERNING LAW; MISCELLANEOUS. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. This Agreement supercedes all prior discussions and correspondence between the parties and their affiliates in respect of the transactions described herein. This Agreement may only be amended by a written instrument signed by the parties. This Agreement may not be assigned by the parties without the prior consent of the other parties. The FINOVA Group Inc. November 10, 2000 Page 6 17. SPECIFIC PERFORMANCE; EQUITABLE RELIEF. The parties agree that their remedies for any breach of this Agreement include, without limitation, specific performance and injunctive relief. The FINOVA Group Inc. November 10, 2000 Page 7 Please acknowledge by your signature below that you wish to proceed in accordance with the terms of this proposal and that you agree to be bound by the terms of this agreement. Very truly yours, LEUCADIA NATIONAL CORPORATION By: /s/ Joseph S. Steinberg ----------------------------------- Name: Joseph S. Steinberg Title: President Accepted and Agreed To: THE FINOVA GROUP INC. By: /s/ Matthew M. Breyne ----------------------------------- Name: Matthew M. Breyne Title: President and Chief Executive Officer Date: November 10, 2000 --------------------------------- EX-12 4 ex_12.txt COMPUTATION OF RATIO OF INCOME Exhibit 12 FINOVA CAPITAL CORPORATION COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES (Dollars in Thousands) NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2000 1999 -------- -------- Income from continuing operations before income taxes $ 53,841 $264,255 Add fixed charges: Interest expense 454,421 330,680 One-third rentals 3,335 2,433 -------- -------- Total fixed charges 457,756 333,113 -------- -------- Income as adjusted $511,597 $597,368 -------- -------- Ratio of income to fixed charges 1.12 1.79 ======== ======== EX-99 5 ex99.txt EARNINGS RELEASE Exhibit 99 CONTACT: Stuart Tashlik Senior V.P. 480-636-5355 THE FINOVA GROUP INC. ANNOUNCES THIRD QUARTER RESULTS SCOTTSDALE, ARIZ., NOV. 14, 2000 - The FINOVA Group Inc. (NYSE:FNV) today announced a net loss of $274.1 million ($4.49 per diluted share) for the quarter ended Sept. 30, 2000, compared to net income of $54.9 million ($0.86 per diluted share) for the third quarter of 1999. Of the loss, $203.1 million ($3.33 per diluted share) was related to FINOVA's Commercial Services, Corporate Finance, Business Credit, Growth Finance and Distribution & Channel Finance business units, which are being accounted for as discontinued operations and $71 million ($1.16 per diluted share) relating to continuing operations. For the nine months ended Sept. 30, 2000, the company reported a net loss of $220.7 million ($3.62 per diluted share) compared to net income of $158.6 million ($2.52 per diluted share) for the first nine months of 1999. The year-to-date results reflects a $253.0 million ($4.15 per diluted share) loss from discontinued operations and income of $32.2 million ($0.53 per diluted share) from continuing operations.
Three Months Ended Nine Months Ended Sept. 30 Sept. 30 ------------------ ------------------ In Millions Net of Tax 2000 1999 2000 1999 ---------- ------- ------- ------- ------- Income (loss) from continuing operations $ (71.0) $ 54.9 $ 32.3 $ 159.5 Income (loss from discontinued operations 11.8 (38.1) (0.9) Net loss on disposal of operations (214.9) (214.9) ------- ------- ------- ------- Net income (loss) $(274.1) $ 54.9 $(220.7) $ 158.6 ======= ======= ======= =======
During the third quarter, FINOVA began to implement a new strategic direction, focusing on core specialty niche businesses. On Aug. 28, 2000, the company completed the sale of substantially all assets of its Commercial Services division to GMAC Commercial Credit LLC, a wholly owned subsidiary of General Motors Corporation, for approximately $235 million. In addition, FINOVA's Corporate Finance (includes Business Credit and Growth Finance) and Distribution & Channel Finance divisions have been offered for sale. The company is also trimming operating expenses to reflect the dispositions of these business units. FINOVA President and Chief Executive Officer Matt Breyne said, "Divesting these business units will strengthen our balance sheet, improve liquidity, and assist in addressing $2.1 billion of principal payments due in May 2001 under the company's credit facilities, of which $500 million can be extended over a two year term-out if no defaults exist at that time. We continue to evaluate FINOVA's entire product line to help assure that we move forward with the most profitable, highest franchise value businesses." CONTINUING OPERATIONS FINOVA reported a loss from continuing operations of $71.0 million for the third quarter of 2000 compared to income of $54.9 million in the third quarter of 1999. The reduction was primarily due to higher loss provisions, losses applicable to charge-offs of investments and assets held for sale, a significant increase in the cost of funds and an increase in nonaccruing accounts. Cost of funds increased due to credit rating reductions during 2000. The impact is reflected in the $9.9 million decline in interest margins earned for the quarter ($115.4 million in the third quarter of 2000 vs. $125.3 million in the third quarter of 1999) despite portfolio growth of $669.7 million. The reduction in credit ratings since Mar. 31, 2000 included: Senior Debt Commercial Paper ----------------- ------------------ From To From To ---- ---- ---- ---- Moody's Baa B1 P-2 NP S&P A- BB A-2 B Fitch A B F-1 B The impact of these downgrades and the company's decision to exercise term-out options under its $4.7 billion of back-up bank facilities was an increase in floating-rate borrowing costs. The all in spread over LIBOR was approximately 1.27% higher than the comparable spreads in the third quarter of 1999 (all in spread of 1.48% in 2000 vs. 0.21% in 1999). As a result, interest margins earned annualized as a percent of average earning assets declined to 4.8% in the third quarter of 2000 from 5.7% in the comparable 1999 period. Loss provisions increased to $111.2 million, up $97.7 million over the comparable quarter of 1999, to bolster the reserve for credit losses. The reserve was increased to 2.4% of ending managed assets (up from 1.7% at June 30, 2000), reflecting the increase in problem accounts. Nonaccruing assets increased to $421.0 million at Sept. 30, 2000, up from $229.3 million at June 30, 2000. The most significant increase during the quarter ($127.1 million) occurred in FINOVA's Resort Finance division due primarily to $117.4 million related to Sunterra Corporation, which was classified as accruing impaired at June 30, 2000, as well as $23.5 million to eight related project development entities managed by a developer that has experienced a decline in earnings and a significant reduction it its net worth. Other increases in nonaccruing assets included $32.5 million in Healthcare Finance and $31.7 million in Communications Finance. Nonaccruing assets as a percent of ending managed assets increased to 3.9% from 2.1% at June 30, 2000. Accruing impaired assets increased to $246.9 million at Sept. 30, largely due to an additional $148.2 million outstanding from the eight related Resort Finance project development entities. Other increases included $37.8 million in Franchise Finance and $10.4 million in Specialty Real Estate Finance. Net write-offs of financing contracts were $30.8 million ($17.8 million in Mezzanine Capital) in the third quarter of 2000 compared to $8.0 million in the 1999 period. While nonaccruing and accruing impaired assets have increased, FINOVA believes that significant collateral exists to secure the recent additions. Losses on investments and disposal of assets totaled $90.0 million for the quarter, consisting of a $109.0 million loss from the charge-off of investments, repossessed assets and equipment held for sale or lease, partially offset by gains of $19.0 million from sales of equity securities and residuals coming off lease. The largest charge-off was a $54.8 million equity investment in the major Resort Finance developer mentioned above. Transportation Finance also had charge-offs of $17.9 million, principally related to assets held for sale or lease. The gains during the third quarter of 2000 included $4.8 million from FINOVA's remaining investment in Healtheon/WebMD. Operating expenses were lower during the third quarter of 2000 when compared to the 1999 quarter, ($29.5 million vs. $40.2 million) principally due to the reversal of sales and management incentive accruals together with an overall lower level of expenses resulting from the reduced activities of the company. The efficiency ratio (operating expenses as a percent of operating margins) was 25.5% in the third quarter of 2000, compared to 31.1% in the third quarter of 1999. DISCONTINUED OPERATIONS Results from discontinued operations for the quarter and first nine months of 2000 included income from operations, net of tax of $11.8 million in the third quarter and a loss of $38.1 million for the nine months of 2000. The net loss for the nine-month period was due to write-offs taken during the first six months of 2000, the largest of which was $70 million taken on a Distribution & Channel Finance customer in the first quarter of 2000. The loss on disposing of the discontinued operations was $214.9 million and included the following:
Distribution Corporate & Channel Commercial Finance Finance Services Total ------- ------- ------- ------- In Millions NET LOSS ON DISPOSAL OF OPERATIONS, NET OF TAX Net realizable value markdowns $(130.4) $ (10.3) $ $(140.7) Goodwill written off (33.1) (15.1) (16.7) (64.9) Proceeds in excess of assets sold 17.6 17.6 Accrued expenses (17.5) (3.1) (6.3) (26.9) ------- ------- ------- ------- $(181.0) $ (28.5) $ (5.4) $(214.9) ======= ======= ======= =======
LETTER AGREEMENT WITH LEUCADIA NATIONAL CORPORATION On Nov. 10, 2000, FINOVA and Leucadia National Corporation signed a letter agreement under which Leucadia would invest up to $350 million in FINOVA. The agreement is subject to reaching a mutually satisfactory arrangement with FINOVA's bank group and certain other customary conditions, including regulatory approvals. FINOVA, Leucadia and Jay Alix & Associates are currently working together to present a comprehensive plan to the bank group. The letter agreement will be filed as an exhibit to FINOVA's Sept. 30, 2000 10-Q. The FINOVA Group Inc., through its principal operating subsidiary, FINOVA Capital Corporation, is one of the nation's leading financial services companies focused on providing a broad range of capital solutions primarily to midsize business. FINOVA is headquartered in Scottsdale, Ariz. with business offices throughout the U.S. and London, U.K., and Toronto, Canada. For more information, visit the company's website at www.finova.com. THIS NEWS RELEASE CONTAINS FORWARD-LOOKING STATEMENTS SUCH AS ESTIMATES OF GAINS OR LOSSES, AS WELL AS OTHER PREDICTIONS OR FORECASTS. FINOVA ASSUMES NO OBLIGATION TO UPDATE THOSE STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS OR OTHER FACTORS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THOSE FACTORS INCLUDE FINOVA'S ABILITY TO ADDRESS ITS FINANCING REQUIREMENTS IN LIGHT OF ITS EXISTING DEBT OBLIGATIONS AND MARKET CONDITIONS; PENDING AND POTENTIAL LITIGATION RELATED TO CHARGES TO EARNINGS; THE RESULTS OF EFFORTS TO IMPLEMENT BUSINESS STRATEGY, INCLUDING THE ABILITY TO SUCCESSFULLY CONCLUDE ITS EVALUATION OF STRATEGIC ALTERNATIVES AND THE PENDING TRANSACTION WITH LEUCADIA; THE ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL AND CUSTOMERS; CONDITIONS THAT ADVERSELY IMPACT FINOVA'S BORROWERS AND THEIR ABILITY TO MEET THEIR OBLIGATIONS TO FINOVA; ACTUAL RESULTS IN CONNECTION WITH CONTINUING OR DISCONTINUED OPERATIONS AND THE DISPOSITION OF ASSETS; THE ADEQUACY OF FINOVA'S LOAN LOSS RESERVES AND OTHER RISKS DETAILED IN FINOVA'S SEC REPORTS, INCLUDING PAGE 15 OF FINOVA'S 10-K FOR 1999. ## The FINOVA Group Inc. And Consolidated Subsidiaries Summary of Consolidated Operations (Unaudited) (Dollars in Thousands, except per share data)
Quarter Ended Nine Months Ended Sept. 30, Sept. 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Interest earned from financing transactions $ 266,850 $ 233,037 $ 794,663 $ 641,016 Operating lease income 26,091 29,433 80,433 85,964 Interest expense (161,565) (117,738) (454,421) (330,680) Operating lease depreciation (15,974) (19,396) (49,046) (53,267) ------------ ------------ ------------ ------------ Interest margins earned 115,402 125,336 371,629 343,033 Volume-based fees 3,723 1,336 8,751 ------------ ------------ ------------ ------------ Operating margin 115,402 129,059 372,965 351,784 Provision for credit losses (111,237) (13,531) (141,347) (12,183) (Losses) gains on investments and disposal of assets (90,042) 14,880 (55,549) 45,877 Operating expenses (29,466) (40,172) (122,228) (121,223) ------------ ------------ ------------ ------------ (Loss) income from continuing operations before income taxes and preferred dividends (115,343) 90,236 53,841 264,255 Income tax benefit (expense) 45,278 (34,398) (18,757) (101,853) ------------ ------------ ------------ ------------ (Loss) income from continuing operations before preferred dividends (70,065) 55,838 35,084 162,402 Preferred dividends, net of tax (946) (946) (2,837) (2,837) ------------ ------------ ------------ ------------ (Loss) income from continuing operations (71,011) 54,892 32,247 159,565 Discontinued operations, net of tax 11,803 14 (38,110) (940) Net loss on disposal of operations, net of tax (214,853) (214,853) ------------ ------------ ------------ ------------ Net (loss) income $ (274,061) $ 54,906 $ (220,716) $ 158,625 ============ ============ ============ ============ Basic (loss) earnings per share: (Loss) income from continuing operations $ (1.16) $ 0.90 $ 0.53 $ 2.68 Discontinued operations (3.33) (4.15) (0.02) ------------ ------------ ------------ ------------ Net (loss) income (4.49) 0.90 (3.62) 2.66 ------------ ------------ ------------ ------------ Adjusted weighted average shares outstanding 61,018,000 60,860,000 60,976,000 59,540,000 ============ ============ ============ ============ Diluted (loss) earnings per share: (Loss) income from continuing operations $ (1.16) $ 0.86 $ 0.53 $ 2.53 Discontinued operations (3.33) (4.15) (0.01) ------------ ------------ ------------ ------------ Net (loss) income (4.49) 0.86 (3.62) 2.52 ------------ ------------ ------------ ------------ Adjusted weighted average shares outstanding 61,018,000 65,024,000 60,976,000 64,103,000 ============ ============ ============ ============ Dividends declared per common share $ 0.18 $ 0.18 $ 0.54 $ 0.50 ============ ============ ============ ============
The FINOVA Group Inc. Selected Consolidated Continuing Operations Financial Data and Ratios (Unaudited) (A) (Dollars in Thousands)
As of Sept. 30 -------------------------- As of Dec. 31 2000 1999 1999 ----------- ----------- ----------- FINANCIAL POSITION: Ending funds employed $10,434,102 $ 9,764,377 $10,321,813 Securitizations (B) 393,831 123,681 121,322 ----------- ----------- ----------- Total managed assets 10,827,933 9,888,058 10,443,135 Reserve for credit losses 257,702 166,742 178,266 Nonaccruing assets 421,007 169,390 174,993 Accruing impaired assets 246,889 92,664 108,764 Nonaccruing assets as a % of managed assets (C) 3.9% 1.7% 1.7% Reserve for credit losses as a % of: Ending managed assets (C) 2.4% 1.7% 1.7% Nonaccruing assets 61.2% 98.4% 101.9% Problem assets 38.6% 63.6% 62.8% Total assets $13,356,734 $12,594,882 $13,889,889 Total debt 11,271,980 10,289,419 11,407,767 Preferred securities 111,550 111,550 111,550 Common shareowners' equity 1,430,631 1,591,699 1,663,381 Backlog 1,682,538 2,233,922 1,905,531 Common shares repurchased 1,815,000 1,833,241 Leverage (debt to common and preferred equity) 7.3x 6.0x 6.4x For the Quarter Ended For the Nine Months Ended Sept. 30, Sept. 30, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- PERFORMANCE HIGHLIGHTS: Average managed assets $10,819,855 $ 9,517,230 $10,644,576 $ 9,054,845 Average earning assets (C) 9,667,845 8,871,143 9,705,134 8,450,478 New business 619,047 1,104,375 2,364,403 2,838,025 Fee-based volume 746,663 193,579 1,693,797 Net write-offs 30,793 7,952 62,008 14,830 Net write-offs (annualized as a % of average managed assets) 1.14% 0.33% 0.78% 0.22% Operating margin (annualized as a % of average earning assets) 4.8% 5.8% 5.1% 5.6% Interest margins earned (annualized as a % of average earning assets) 4.8% 5.7% 5.1% 5.4% Operating expenses as a % of operating margin 25.5% 31.1% 32.8% 34.5% Return (annualized on average common) Equity (67.9)% 14.0% (17.8)% 14.6%
- ---------- (A) Averages for the periods presented are based on month-end balances except for the weighting of acquisitions, which are based on days outstanding. (B) Securitizations are assets sold under securitization agreements and managed by the Company. (C) Average earning assets equal average funds employed less average deferred taxes on leveraged leases and average nonaccruing assets. EX-27 6 fds.xfd FINANCIAL DATA SCHEDULE
9 9-MOS Jan-01-2000 Dec-31-2000 Sep-30-2000 13,347,392 708,170 0 0 0 0 0 0 10,434,102 (257,702) 0 0 550,232 11,271,980 0 0 25 1,525,155 13,347,392 875,096 0 0 454,421 0 0 420,675 141,347 0 122,228 53,841 0 0 0 (217,879) 0 0 5.1 421,007 0 0 0 178,266 (62,930) 922 257,702 0 0 0
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