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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 1-11011
THE FINOVA GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(State or other jurisdiction (I.R.S. employer
of incorporation) 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS:
Common Stock, $0.01 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
On March 17, 2003, the registrant had 122,041,162 shares of Common Stock ($0.01
par value) outstanding.
Aggregate market value of Common Stock held by nonaffiliates of the registrant
as of June 30, 2002 (based on its closing price per share on that date of $0.10)
was approximately $6.1 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement relating to 2003 Annual Meeting of Stockholders of The FINOVA
Group Inc. (but excluding information contained in that document furnished
pursuant to items 306 and 402(k) and (I) of SEC Regulation S-K) are incorporated
by reference into Part III of this report.
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TABLE OF CONTENTS
NAME OF ITEM
PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Optional Item. Executive Officers of Registrant 13
PART II
Item 5. Market Price for Registrant's Common Equity &
Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosure About
Market Risk 16
Item 8. Financial Statements & Supplemental Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 16
PART III
Item 10. Directors & Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
& Management 16
Item 13. Certain Relationships & Related Transactions 16
Item 14. Controls and Procedures 16
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 17
Signatures 19
PART I
ITEM 1. BUSINESS.
GENERAL
The following discussion relates to The FINOVA Group Inc. and its subsidiaries
(collectively "FINOVA" or the "Company"), including FINOVA Capital Corporation
and its subsidiaries ("FINOVA Capital"). FINOVA is a financial services holding
company. Through its principal operating subsidiary, FINOVA Capital, the Company
has provided a broad range of financing and capital markets products, primarily
to mid-size businesses. FINOVA Capital has been in operation since 1954.
As described below, the Company emerged from chapter 11 reorganization
proceedings on August 21, 2001. Since that time, the Company's business
activities have been limited to the orderly collection and liquidation of its
assets. The Company has not engaged in any new lending activities, except to
honor existing customer commitments and in certain instances, to restructure
financing relationships with existing customers in an effort to maximize the
liquidation value of its assets. Any cash flows generated from these activities
in excess of cash reserves permitted in the Company's debt agreements is used to
reduce the Company's obligations to its creditors.
FINOVA is a Delaware corporation incorporated in 1991. FINOVA's principal
executive offices are located at 4800 North Scottsdale Road, Scottsdale, Arizona
85251-7623, telephone (480) 636-4800.
CHAPTER 11 REORGANIZATION
On March 7, 2001, FINOVA, FINOVA Capital and seven of their subsidiaries (the
"Debtors") filed for protection pursuant to chapter 11, title 11, of the United
States Code in the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") to enable them to restructure their debt. On August 10,
2001, the Bankruptcy Court entered an order confirming FINOVA's Third Amended
and Restated Joint Plan of Reorganization (the "Plan"), pursuant to which the
Debtors restructured their debt, effective August 21, 2001 (the "Effective
Date").
The Plan is incorporated by reference from FINOVA's Current Reports on Form 8-K,
filed on June 22, 2001 and August 27, 2001, Exhibits 2.A and 2.B, respectively.
Pursuant to the Plan, Berkadia LLC ("Berkadia"), an entity jointly owned by
Berkshire Hathaway Inc. ("Berkshire") and Leucadia National Corporation
("Leucadia"), loaned $5.6 billion to FINOVA Capital on a senior secured basis
(the "Berkadia Loan"). The proceeds of the Berkadia Loan, together with cash on
hand and the issuance by FINOVA of approximately $3.25 billion aggregate
principal amount of 7.5% Senior Secured Notes maturing in 2009 (the "New Senior
Notes") were used to restructure the Company's debt. In addition, FINOVA issued
Berkadia 61,020,581 shares of common stock, representing 50% of FINOVA shares
outstanding after giving effect to implementation of the Plan.
Under the Plan, holders of allowed unsecured claims against FINOVA Capital
generally received (a) a cash payment equal to 70% of their general unsecured
claims (not including pre-petition or post-petition interest), (b) a cash
payment equal to the amount of accrued and unpaid pre-petition and post-petition
interest on those general unsecured claims and (c) New Senior Notes having an
aggregate principal amount equal to 30% of those general unsecured claims (not
including pre-petition and post-petition interest). Claims from holders of the 5
1/2% Convertible Trust Originated Preferred Securities (the "TOPrS") issued by
FINOVA Finance Trust were treated as allowed unsecured claims of FINOVA Capital
in an amount equal to 75% of the liquidation preference attributable to the
TOPrS and FINOVA's subordinated debentures related to the TOPrS were cancelled.
Upon implementation of the Plan, FINOVA Capital's debt was no longer publicly
held and following the Effective Date, it ceased to be a public company.
The Berkadia Loan bears interest payable monthly, at the Eurodollar Rate (as
defined in the Credit Agreement dated August 21, 2001 between FINOVA Capital and
Berkadia (the "Credit Agreement")), plus 2.25%. Principal is payable out of
available cash (as defined in the Credit Agreement). All unpaid principal and
accrued interest is due at maturity on August 20, 2006. FINOVA and substantially
all of its direct and indirect subsidiaries (except those that are contractually
prohibited from acting as a guarantor, the "Guarantors") have guaranteed FINOVA
Capital's repayment of the Berkadia Loan. The guarantees are secured by
substantially all of the Guarantors' assets.
The New Senior Notes mature in November 2009 and bear interest, payable
semi-annually, to the extent that cash is available for that purpose in
accordance with the Indenture governing the New Senior Notes (the "Indenture"),
at a fixed interest rate of 7.5% per annum. FINOVA's obligations with respect to
1
the payment of interest and principal under the New Senior Notes are secured by
a second-priority security interest in (a) all capital stock of FINOVA Capital,
(b) promissory notes of FINOVA Capital issued to FINOVA in the aggregate
principal amount of the New Senior Notes (the "Intercompany Notes") and (c)
certain other property of FINOVA that may be acquired from its subsidiaries in
the future. The Intercompany Notes are secured by a second-priority lien on the
assets of FINOVA Capital pledged to secure the Berkadia Loan. Substantially all
of FINOVA Capital's direct and indirect subsidiaries (except those that are
contractually prohibited from acting as a guarantor) have guaranteed FINOVA
Capital's repayment of the Intercompany Notes. The holders of the New Senior
Notes have no right to enforce their security interests until the Berkadia Loan
is fully repaid.
Because virtually all of the Company's assets are pledged to secure the
obligations under the Berkadia Loan and the Intercompany Notes, FINOVA's ability
to obtain additional or alternate financing is severely restricted. Berkadia has
no obligation to lend additional sums to or to further invest in the Company.
Accordingly, FINOVA intends to rely on internally generated cash flows to meet
its liquidity needs.
Permitted uses of cash are specified in the Credit Agreement and the Indenture.
Generally, the Company is permitted to use its cash in the following order:
first to fund its operating expenses, including payment of taxes, funding
customer commitments and payment of interest on the Berkadia Loan; then to pay
interest on the New Senior Notes; then to make optional purchases of the New
Senior Notes with the consent of Berkadia and otherwise in accordance with the
terms of the Indenture in an aggregate amount not to exceed $1.5 billion of cash
while the Berkadia Loan is outstanding, and thereafter in an amount not to
exceed $150 million per year. After repayment of the Berkadia Loan and the other
items noted above, ninety-five percent (95%) of the remaining available cash
will be used to make semi-annual prepayments of principal on the New Senior
Notes and five percent (5%) will be used for distributions to and/or repurchases
of stock from common stockholders. It should be noted that under governing law,
these distributions may not be made to stockholders as long as FINOVA has a
negative net worth (total liabilities in excess of total assets). Instead, these
payments will be retained by the Company for that purpose until legally
permitted by law or used to satisfy the Company's obligations, if necessary.
BASED ON THE COMPANY'S CURRENT FINANCIAL CONDITION, IT IS HIGHLY UNLIKELY THAT
THERE WILL BE FUNDS AVAILABLE TO FULLY REPAY THE OUTSTANDING PRINCIPAL ON THE
NEW SENIOR NOTES AT MATURITY OR TO PAY THE 5% DISTRIBUTION TO COMMON
STOCKHOLDERS. The Company has a negative net worth of $970.7 million as of
December 31, 2002 ($1.7 billion when the New Senior Notes are considered at
their principal amount due), the financial condition of many of its customers is
weakened, impairing their ability to meet obligations to the Company, much of
the Company's portfolio of owned assets is not income producing and the Company
is restricted from entering into new business activities or issuing new
securities to generate cash flow. For these reasons, THE COMPANY BELIEVES THAT
INVESTING IN FINOVA'S DEBT AND EQUITY SECURITIES INVOLVES A HIGH LEVEL OF RISK
TO THE INVESTOR.
In connection with its reorganization, FINOVA's Board of Directors was
reconstituted and is currently comprised of four directors designated by
Berkadia, two prior directors of FINOVA and one director designated by the
creditor's committee. The Berkadia designated directors are Ian M. Cumming,
Joseph S. Steinberg, R. Gregory Morgan and Thomas E. Mara; the continuing FINOVA
directors are G. Robert Durham and Kenneth R. Smith; and Thomas F. Boland was
designated by the creditor's committee. All directors are subject to reelection
annually by the stockholders, without regard to their original designation,
except that the Board of Directors is required to renominate Mr. Boland or
another director designated by holders of the New Senior Notes as long as the
outstanding balance of the New Senior Notes is greater than $500 million.
FINOVA's business is being operated under a Management Services Agreement with
Leucadia, which expires in 2011. Leucadia has designated its employees to act as
Chairman of the Board (Ian M. Cumming), President (Joseph S. Steinberg) and
Chief Executive Officer (Thomas E. Mara).
Upon emergence from bankruptcy, FINOVA adopted Fresh-Start Reporting in
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). With the adoption of
Fresh-Start Reporting, the Company's assets and liabilities were recorded at
their fair value, which resulted in material adjustments to carrying amounts. As
a result of Fresh-Start Reporting and changes in the Company's operations, the
consolidated financial statements for periods subsequent to August 31, 2001 (the
"Reorganized Company") will not be comparable to those of the Company for
periods prior to August 31, 2001 (the "Predecessor Company"). For financial
reporting purposes, the effective date of the Plan is considered to be the close
of business on August 31, 2001. For further details, see Annex A, Notes to
Consolidated Financial Statements, Note F "Fresh-Start Reporting."
2
CURRENT BUSINESS ACTIVITIES
Since emergence from chapter 11 in August 2001, the Company's business
activities have been limited to maximizing the value of its portfolio through
the orderly liquidation of its assets. These activities include collection
efforts pursuant to underlying contractual terms and may include efforts to
retain certain customer relationships and restructure or terminate other
relationships. The Company has not and does not expect to engage in any new
lending activities, except to honor existing customer commitments and in certain
instances, to restructure financing relationships with existing customers to
maximize value. FINOVA has sold portions of asset portfolios and will consider
future sales if buyers can be found at acceptable prices; however, there can be
no assurance that the Company will be successful in efforts to sell additional
assets. Any funds generated from these activities in excess of cash reserves
permitted in the Company's debt agreements are used to reduce FINOVA's
obligations to its creditors.
FINOVA has combined its former operating segments into one operating unit. As a
result of this combination, elimination of new business activities and
reductions in its asset portfolios, FINOVA has significantly reduced its work
force.
DEVELOPMENTS
On January 30, 2002, FINOVA and the New York Stock Exchange mutually agreed that
the exchange would suspend trading FINOVA's common stock, which had been traded
under the symbol "FNV," after the close of market on February 6, 2002. This
action was due to FINOVA's common stock trading below $1.00 per share for more
than 30 consecutive trading days. FINOVA's stock began trading over-the-counter
on February 7, 2002, under the symbol "FNVG."
In a series of transactions during 2002, the Company sold substantially all of
its investment alliance assets for $67.4 million, which resulted in a $6.7
million gain.
In March 2002, Congress enacted the Job Creation and Worker Assistance Act of
2002 ("Act"). The Act includes provisions allowing corporations to carryback
certain tax net operating losses ("NOLs") for longer periods and with fewer
limitations than had previously existed. The Company filed its 2001 corporate
tax return in June 2002 and made a special election available under Section 108
of the Internal Revenue Code of 1986 that resulted in the Company reducing its
tax basis in depreciable property. As a result of this election and related
filings, NOLs became available for carryback, thereby entitling the Company to a
refund of approximately $67 million. During the third quarter of 2002, the
Company received $36.0 million of this refund, which was recorded in accordance
with the provisions of SOP 90-7 as a direct addition to paid-in-capital.
Although there can be no assurance regarding the timing of the payment, the
Company anticipates receiving the remainder of the refund during 2003, which
also will be recorded as a direct addition to paid-in-capital. As a result of
the special election and carryback of NOLs, the Company did not utilize any of
its federal NOL carryforwards and credits to offset the cancellation of debt
income as contemplated in the Company's Form 10-K for December 31, 2001.
In April 2002, the Company completed the sale of approximately $485 million of
its franchise portfolio for approximately $490 million. This sale included
substantially all of FINOVA's performing franchise assets. In August 2002, the
Company completed the sale of an additional $67 million of the franchise
portfolio (primarily impaired assets) at their carrying value (net of reserves).
The Company will continue the orderly liquidation of its remaining franchise
assets.
On July 26, 2002, the U.S. District Court granted final approval for a
settlement in the consolidated class action securities suits filed against
FINOVA and several other defendants. FINOVA had funded its portion of the
settlement amount in 2001 and is released from further liability.
In August 2002, in accordance with the Credit Agreement and the Indenture, the
Company's Board of Directors, with Berkadia's consent, approved the use of up to
$300 million of cash to repurchase New Senior Notes rather than make mandatory
prepayments of the Berkadia Loan. In consideration for Berkadia's consent,
FINOVA and Berkadia agreed that they would share equally in the "Net Interest
Savings" resulting from any repurchase. Net Interest Savings is calculated as
the difference between (a) the reduction in interest expense on the New Senior
Notes (resulting from the repurchase of such New Senior Notes) and (b) the
increase in interest expense on the Berkadia Loan (resulting from the use of
cash to repurchase New Senior Notes and to pay 50% of the Net Interest Savings
to Berkadia rather than make mandatory prepayments of the Berkadia Loan). On
each date that interest is paid on the outstanding New Senior Notes (a "Note
Interest Payment Date"), 50% of the Net Interest Savings accrued since the last
Note Interest Payment Date will be paid to Berkadia. The other 50% of the Net
Interest Savings will be retained by FINOVA. Upon repayment in full of the
Berkadia Loan, Berkadia will not have the right to receive any Net Interest
Savings accruing after such repayment. Because it is highly unlikely there will
be sufficient funds to fully repay the New Senior Notes at maturity, the
Company, if it elects to repurchase additional New Senior Notes, intends to do
3
so only at substantial discounts to par. The agreement between FINOVA and
Berkadia was approved by the "Special Committee" of FINOVA's Board of Directors,
which is comprised solely of directors unaffiliated with Berkadia, Berkshire or
Leucadia.
During the third quarter of 2002, the Company repurchased $98.9 million (face
amount) of New Senior Notes at a price of 29.875% or $29.6 million, plus accrued
interest. The repurchase generated a net gain of $46.9 million ($69.4 million
repurchase discount, partially offset by $22.5 million of unamortized
fresh-start discount). During the fourth quarter of 2002, the Company
repurchased an additional $86.1 million (face amount) of New Senior Notes at a
price of 30.0% or $25.8 million, plus accrued interest. The repurchase generated
a net gain of $41.3 million ($60.2 million repurchase discount, partially offset
by $18.9 million of unamortized fresh-start discount). There can be no assurance
that the Company will repurchase any additional New Senior Notes or that
additional New Senior Notes will become available at an acceptable price.
On September 10, 2002, FINOVA announced the election of Thomas E. Mara as a
Director and Chief Executive Officer, effective September 9, 2002. Mr. Mara
replaced Lawrence S. Hershfield, who resigned from those positions to pursue
other opportunities.
Pursuant to the terms of the Credit Agreement, FINOVA Capital is required to
make mandatory quarterly prepayments of principal in an amount equal to the
excess cash flow (as defined in the Credit Agreement). In addition to mandatory
prepayments, the Company is permitted, with Berkadia's consent, to make
voluntary prepayments. During 2002, mandatory and voluntary prepayments totaled
$2.725 billion. Principal payments made to Berkadia since emergence from chapter
11 have reduced the Berkadia Loan to $2.175 billion as of December 31, 2002 and
$1.525 billion as of the filing of this report (including $650 million of
payments during the first quarter of 2003). The pace of loan repayments depends
on numerous factors, including the rate of collections from borrowers and asset
sales. There can be no assurance that the Berkadia Loan will continue to be
repaid at this pace.
In March 2003, the Company completed the sale of a portion of its rediscount
assets for $175.4 million of net cash proceeds and received a $17.8 million
participation in a performing loan, which resulted in a $4.4 million gain. These
assets were classified as held for sale as of December 31, 2002.
PORTFOLIO DESCRIPTIONS
To facilitate the orderly collection of its remaining asset portfolios, FINOVA
has combined its former operating segments into one operating unit; however, its
assets continue to be concentrated in a number of specific market niches. The
following niche descriptions include information regarding typical transaction
size. In some cases, FINOVA provided multiple financing transactions to a
borrower or to affiliates of a borrower, which significantly increased the
Company's total exposure to that borrower beyond the typical transaction size.
* COMMERCIAL EQUIPMENT - equipment leases and loans to a broad range of
mid-size companies. Specialty markets include emerging growth technology
industries (primarily biotechnology), electronics, telecommunications,
corporate aircraft, supermarket/specialty retailers and most heavy
industries. Typical transaction sizes ranged from $1 million to $20
million. In November 2002, the remaining corporate aircraft portfolio
($107.7 million carrying amount) was removed from this portfolio and
included in the transportation portfolio.
* COMMUNICATIONS - term financing to advertising and subscriber-supported
businesses, including radio and television broadcasting, cable television,
paging, outdoor advertising, publishing and emerging technologies such as
internet service providers and competitive local exchange carriers. Typical
transaction sizes ranged from $3 million to $40 million.
* CORPORATE FINANCE - cash flow-oriented and asset-based term and revolving
loan products for manufacturers, wholesalers, distributors, specialty
retailers and commercial and consumer service businesses. Typical
transaction sizes ranged from $2 million to $35 million. Corporate finance
was previously classified as a discontinued operation; however, upon
emergence from chapter 11, the remaining net assets were reclassified as
held for sale at their estimated net realizable value.
* FRANCHISE - equipment, real estate and acquisition financing for operators
of established franchise concepts. Typical transaction sizes generally
ranged from $500 thousand to $40 million. During 2002, approximately $552
million of these assets were sold in multiple transactions.
* HEALTHCARE - real estate, working capital and equipment financing products
for the U.S. healthcare industry. Transaction sizes typically ranged from
$500 thousand to $35 million.
* INVESTMENT ALLIANCE - equity and debt financing for businesses in
partnership with institutional investors and selected fund sponsors.
Typical transaction sizes ranged from $2 million to $15 million. During the
fourth quarter of 2001, FINOVA classified these assets as held for sale,
and in February 2002, completed the sale of substantially all remaining
assets.
* MEZZANINE CAPITAL - secured subordinated debt with warrants to mid-size
North American companies for expansion capital, buyouts or
recapitalization. Typical transaction sizes ranged from $2 million to $15
million.
4
* PUBLIC - tax-exempt term financing to non-profit corporations,
manufacturers and state and local governments. Typical transaction sizes
ranged from $2 million to $15 million. In January 2002, the remaining
assets of the public portfolio were combined with the specialty real estate
portfolio.
* REDISCOUNT - revolving credit facilities to the independent consumer
finance industry, including direct loan, automobile, mortgage and premium
finance companies. Typical transaction sizes ranged from $1 million to $35
million or more, and in some instances exceeded $100 million. In March
2003, rediscount assets with a carrying amount of $188.8 million were sold
for $175.4 million of net cash proceeds and received a $17.8 million
participation in a performing loan, resulting in a net gain of $4.4
million.
* RESORT - acquisition, construction and receivables financing for timeshare
resorts, second home communities and fractional interest resorts. Typical
transaction sizes ranged from $5 million to $35 million or more, and in
some instances exceeded $100 million.
* SPECIALTY REAL ESTATE - senior term acquisition and bridge/interim loans
from $5 million to $30 million or more on hotel and resort properties.
Through this division, FINOVA also provided equity investments in
credit-oriented real estate sale-leasebacks.
* TRANSPORTATION - structured equipment loans, direct financing, operating
and leveraged leases and acquisition financing for domestic and
international commercial and cargo airlines, railroads and operators of
other transportation-related equipment. Typical transaction sizes ranged
from $5 million to $30 million or more, and in some instances exceeded $100
million.
PORTFOLIO COMPOSITION
The following table details the composition and carrying amounts of the
Company's total financial assets at December 31, 2002:
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REVENUE REVENUE NONACCRUING NONACCRUING OWNED TOTAL
ACCRUING ACCRUING IMPAIRED LEASES ASSETS & FINANCIAL
ASSETS IMPAIRED LOANS & OTHER INVESTMENTS ASSETS %
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Resort $ 895,577 $ 113,000 $ 115,450 $ 31,680 $ 3,500 $ 1,159,207 31.4
Transportation 308,998 175,064 69,703 162,345 716,110 19.4
Specialty Real Estate 409,557 22,358 104,535 3,487 14,826 554,763 15.0
Rediscount 109,467 5,017 302,838 8,169 425,491 11.5
Healthcare 53,563 208,524 4,474 488 267,049 7.2
Communications 32,587 3,383 190,783 3,770 389 230,912 6.2
Commercial Equipment 70,952 18,651 15,177 6,155 110,935 3.0
Franchise 4,626 16,944 76,818 51 5,145 103,584 2.8
Corporate Finance 16,993 36,207 1,844 55,044 1.5
Mezzanine Capital 20,245 1,375 20,488 1,487 3,532 47,127 1.3
Other Portfolios 17,211 4,032 4,954 26,197 0.7
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS $ 1,630,778 $ 471,075 $ 1,249,358 $ 143,874 $ 201,334 $ 3,696,419 100.0
Reserve for credit losses (540,268)
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TOTAL (1) $ 3,156,151
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NOTES:
(1) Excludes $147.6 million of assets sold that the Company manages, including
$55.9 million in commercial equipment and $91.7 million in franchise.
----------------------------------------
5
The following table details the composition and carrying amounts of the
Company's total financial assets at December 31, 2001:
- -----------------------------------------------------------------------------------------------------------------------------
REVENUE REVENUE NONACCRUING NONACCRUING OWNED TOTAL
ACCRUING ACCRUING IMPAIRED LEASES ASSETS & FINANCIAL
ASSETS IMPAIRED LOANS & OTHER INVESTMENTS ASSETS %
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Resort $ 1,120,198 $ 42,403 $ 290,709 $ 2,222 $ 3,500 $ 1,459,032 22.6
Transportation 450,736 288,181 302,723 1,041,640 16.1
Franchise 547,610 8,012 183,411 1,517 5,046 745,596 11.6
Rediscount 426,433 33,647 245,643 37,052 742,775 11.5
Specialty Real Estate 502,982 27,893 74,061 15,686 26,413 647,035 10.0
Healthcare 294,383 254,171 1,978 19,083 569,615 8.8
Communications 145,207 4,899 208,939 8 359,053 5.6
Commercial Equipment 246,006 7,822 50,263 5,900 20,386 330,377 5.1
Corporate Finance 48,023 133,645 2,596 184,264 2.9
Mezzanine Capital 73,700 1,296 27,995 18,363 121,354 1.9
Public 77,127 12,614 89,741 1.4
Investment Alliance 2,977 1,919 66,917 71,813 1.1
Other Portfolios 21,346 4,103 64,020 89,469 1.4
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS $ 3,505,992 $ 576,708 $ 1,771,551 $ 71,054 $ 526,459 $ 6,451,764 100.0
Reserve for Credit Losses (1,019,878)
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TOTAL (1) $ 5,431,886
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NOTES:
(1) Excludes $233.6 million of assets sold that the Company manages, consisting
of $130.9 million in commercial equipment and $102.7 million in franchise.
-----------------------------------------
The following table presents balances and changes to the reserve for credit
losses:
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REORGANIZED COMPANY PREDECESSOR COMPANY
---------------------------------------- -------------------
YEAR ENDED FOUR MONTHS ENDED EIGHT MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 AUGUST 31, 2001
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of period $ 1,019,878 $ 256,324 $ 578,750
Provision for credit losses (339,986) 777,500 230,772
Write-offs (190,021) (35,877) (558,052)
Recoveries 50,033 21,729 4,964
Other 364 202 (110)
- ---------------------------------------------------------------------------------------------------
Balance, end of period $ 540,268 $ 1,019,878 $ 256,324
===================================================================================================
For the year ended December 31, 2002, the Company recorded a $340.0 million
negative provision for credit losses to reduce its reserve for credit losses.
The negative provision was primarily related to proceeds received from
collections, prepayments and asset sales in excess of recorded carrying amounts
(net of reserves); reversal of reserves established after September 11 on
certain portfolios (primarily resort and specialty real estate) due to the less
than anticipated negative impact on these portfolios; and recoveries of amounts
previously written off. Partially offsetting these reversals were new impairment
reserves established on specific accounts.
For the year ended December 31, 2001, the Company recorded a $777.5 million
provision for credit losses to increase its reserve for credit losses primarily
due to the weakened economy, the events of September 11 and management's
concerns regarding the full collection of certain transactions within its
portfolio.
6
A summary of the reserve for credit losses by impaired and other assets is as
follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
(Dollars in thousands)
Reserves on impaired assets $438,172 $ 636,661
Other reserves 102,096 383,217
- --------------------------------------------------------------------------------
Reserve for credit losses $540,268 $1,019,878
================================================================================
Several of the Company's accounting policies pertain to the ongoing
determination of impairment reserves on financing assets and the carrying amount
valuation of other financial assets. For a detailed discussion of the Company's
accounting policies and reserve for credit losses, see Annex A, Notes to
Consolidated Financial Statements, Note B "Significant Accounting Policies" and
Note D "Reserve for Credit Losses."
Determination of impairment reserves and carrying amounts rely, to a great
extent, on the estimation and timing of future cash flows. FINOVA's cash flow
estimates assume that its asset portfolios are collected in an orderly fashion
over time. These cash flows do not represent estimated recoverable amounts if
FINOVA were to liquidate its asset portfolios over a short period of time.
Management believes that a short-term asset liquidation could have a material
negative impact on the Company's ability to recover recorded asset amounts.
FINOVA's process of determining impairment reserves and carrying amounts
includes a periodic assessment of its portfolios on a transaction by transaction
basis. Cash flow estimates are based on current information and numerous
assumptions concerning future general economic conditions, specific market
segments, the financial condition of the Company's customers and FINOVA's
collateral. In addition, assumptions are sometimes necessary concerning the
customer's ability to obtain full refinancing of balloon obligations or
residuals at maturity. Commercial lenders have become more conservative
regarding advance rates and interest margin requirements have increased. As a
result, the Company's cash flow estimates assume FINOVA incurs refinancing
discounts for certain transactions.
Changes in facts and assumptions have resulted in, and may in the future result
in, significant positive or negative changes to estimated cash flows and
therefore, impairment reserves and carrying amounts.
The carrying amounts and reserve for credit losses recorded on FINOVA's
financial statements reflect the Company's expectation of collecting less than
the full contractual amounts owed by some of its customers and recovering less
than its original investment in certain owned assets. The Company continues to
pursue collection of full contractual amounts and original investments, where
appropriate, in an effort to maximize the value of its asset portfolios.
During 2002, the Company's detailed quarterly portfolio assessments identified
significant additional impairment within its transportation portfolio, resulting
in additional markdowns. The current state of the aircraft industry includes
significant excess capacity for both new and used aircraft and lack of demand
for certain classes and configurations of aircraft in the portfolio.
Accordingly, the Company reduced the useful lives and anticipated scrap values
of various aircraft and reduced its estimates regarding its ability to lease or
sell certain returned aircraft.
FINOVA has a significant number of aircraft that are off lease and anticipates
that additional aircraft will be returned as leases expire or operators are
unable or unwilling to continue making payments. For many of these aircraft,
scrap value was assumed, but for certain aircraft, the Company elected (or
anticipates electing upon return of the aircraft) to park and maintain the
aircraft under the assumption that they will be re-leased or sold in the future
despite the lack of demand for those aircraft today. While the current inactive
market makes it difficult to quantify, the Company believes that the recorded
values determined under this methodology significantly exceed the values that
the Company would realize if it were to liquidate those aircraft today.
The process of determining appropriate carrying amounts for these aircraft is
particularly difficult and subjective, as it requires the Company to estimate
future demand, lease rates and scrap values for assets for which there is
currently little or no demand. The Company re-assesses its estimates and
assumptions each quarter. In particular, the Company assesses market activity
and the likelihood that certain aircraft types, which are forecast to go back on
lease in the future, will in fact be re-leased, and may further reduce carrying
amounts if it is determined that such re-leasing is unlikely to occur or that
lower market values have been established.
7
At December 31, 2002, the Company's transportation portfolio consisted of the
following aircraft:
- -------------------------------------------------------------------------------------------------
APPROXIMATE
NUMBER OF AVERAGE AGE
AIRCRAFT TYPE AIRCRAFT PASSENGER CARGO (YEARS)
- -------------------------------------------------------------------------------------------------
Airbus 300 8 4 4 13
Boeing 727 34 9 25 25
Boeing 737 33 33 18
Boeing 747 15 8 7 21
Boeing 757 9 9 10
Boeing 767 1 1 16
McDonnell Douglas DC 8 and DC 9 34 25 9 29
McDonnell Douglas DC 10 20 8 12 24
McDonnell Douglas MD series 30 30 17
Regional jets, corporate aircraft and turbo props 47 44 3 12
- -------------------------------------------------------------------------------------------------
Total 231 171 60 20
=================================================================================================
At December 31, 2002, 82 aircraft with a carrying value of $409.2 million were
operated by U.S. domiciled carriers and 80 aircraft with a carrying value of
$233.8 million were operated by foreign carriers. Additionally, 69 aircraft with
a carrying value of $48.8 million were off-lease, classified as held for the
production of income and were parked at various storage facilities in the United
States and Europe. Some of these aircraft are periodically placed in rental
agreements with payments based on aircraft usage, commonly known as
power-by-the-hour agreements. Often there is no minimum rental due and future
cash flows are difficult to project. FINOVA's railroad portfolio (all domestic)
and other transportation equipment had a carrying value of $24.3 million at
December 31, 2002.
At December 31, 2001, 117 aircraft with a carrying value of $550.4 million were
operated by U.S. domiciled carriers and 82 aircraft with a carrying value of
$355.7 million were operated by foreign carriers. Additionally, 63 aircraft with
a carrying value of $107.9 million were off-lease, classified as held for the
production of income and were parked at various storage facilities in the United
States and Europe. FINOVA's railroad portfolio (all domestic) and other
transportation equipment had a carrying value of $27.6 million at December 31,
2001.
In addition to the concentrated exposures within the transportation portfolio,
the Company has certain geographic concentrations within its resort portfolio.
At December 31, 2002 and 2001, the carrying amount of the resort portfolio by
state was as follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
(Dollars in thousands)
Florida $ 299,458 25.8% $ 289,143 19.8%
California 162,245 14.0% 114,278 7.8%
Nevada 138,455 12.0% 243,165 16.7%
Hawaii 138,418 11.9% 168,696 11.6%
Arizona 117,780 10.2% 213,421 14.6%
Other (less than 10%) 302,851 26.1% 430,329 29.5%
- --------------------------------------------------------------------------------
Total $ 1,159,207 100.0% $ 1,459,032 100.0%
================================================================================
Changes in geographic concentrations during 2002 were due to the amount of
fundings (under existing customer commitments) and portfolio runoff within
individual states as compared to the net runoff for the total portfolio.
CUSTOMER REQUIREMENTS
FINOVA Capital's financing contracts and leases generally require the customer
to pay taxes, license fees and insurance premiums and to perform maintenance and
repairs at the customer's expense. Contract payment rates for existing customers
are based on several factors, including the cost of borrowed funds, term of
contract, creditworthiness of the prospective customer, type and nature of
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In true lease transactions, lessees are
granted an option to purchase the equipment at the end of the lease term at its
then fair market value and, in some cases, are granted an option to renew the
8
lease at its then fair rental value. The extent to which lessees exercise their
options to purchase leased equipment varies from year to year, depending on,
among other factors, the state of the economy, the financial condition of the
lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
FINOVA Capital's portfolio management personnel generally perform detailed
reviews and assessments of customer financial statements to analyze financial
performance and trends, conduct periodic assessments, appraisals and/or
verification of the underlying collateral, seek to identify issues concerning
strengths, weaknesses and vulnerabilities of the customer, seek to resolve
outstanding issues with the customer, and periodically review and address
covenant compliance issues.
Intensive quarterly evaluations of borrower performance are an important aspect
of the portfolio management review process. In conjunction with this process,
portfolio managers update anticipated portfolio cash flows. These evaluations
and cash flows serve as a significant component in the determination of
portfolio impairment.
DELINQUENCIES AND WORKOUTS
FINOVA Capital monitors the timing of payments on its accounts and has
established detailed policies and procedures for collection of delinquencies.
These policies and procedures are generally employed, unless in the opinion of
management, an alternate course is warranted. Generally, for term loans and
leases, when an invoice is ten days past due, the customer is contacted and a
determination is made as to the extent of the problem, if any. A commitment for
immediate payment is pursued and the account is observed closely. If
satisfactory results are not obtained as a result of communication with the
customer, guarantors, if any, are usually contacted to advise them of the
situation and the potential obligation under the guarantee agreement. If an
invoice for principal or interest becomes 31 days past due, it is reported as
delinquent. A notice of default is generally sent prior to an invoice becoming
45 days past due if satisfactory discussions are not in progress. Between 60 and
90 days past the due date, if satisfactory negotiations are not underway,
outside counsel may be retained to help protect FINOVA Capital's rights and to
pursue its remedies.
Accounts are generally classified as "nonaccruing" when the earlier of the
following events occur: (a) the borrower becomes 90 days past due on the payment
of principal or interest or (b) when, in the opinion of management, a full
recovery of income and principal becomes doubtful. Impairment reserves may be
required even when payments are current, if it is probable that the borrower
will not be able to make all payments pursuant to the terms of its contract.
When an account is classified as nonaccruing, all accrued and unpaid interest is
reversed and future income recognition is indefinitely suspended. Foreclosed or
repossessed assets are generally considered to be nonaccruing and are reported
as such unless they generate sufficient cash to result in a market rate of
return. Those accounts are periodically reviewed and write-downs are taken as
deemed necessary. While pursuing collateral and obligors, FINOVA Capital
generally continues to negotiate the restructuring or other settlement of the
debt, as it believes appropriate.
GOVERNMENTAL REGULATION
FINOVA Capital's domestic activities, including the financing of its operations,
are subject to a variety of federal and state regulations, such as those imposed
by the Federal Trade Commission, the Securities and Exchange Commission, the
Internal Revenue Service, the Consumer Credit Protection Act, the Equal Credit
Opportunity Act and the Interstate Land Sales Full Disclosure Act. Additionally,
a majority of states have ceilings on interest rates that are charged to
customers in financing transactions. Some of FINOVA Capital's financing
transactions and servicing activities are subject to additional government
regulation. For example, aircraft financing is regulated by the Federal Aviation
Administration and communications financing is regulated by the Federal
Communication Commission. FINOVA Capital's international activities are also
subject to a variety of laws and regulations of the countries in which business
is conducted. FINOVA's operations during the reorganization proceedings were
also subject to oversight by the bankruptcy court, which has retained
jurisdiction to resolve claims resulting from that restructuring.
EMPLOYEES
At December 31, 2002, the Company had 319 employees compared to 497 and 1,098 at
December 31, 2001 and 2000, respectively. The decrease is attributable to the
substantial liquidation of certain portfolios, sales of certain businesses,
combination of certain business units, the Company's efforts to trim operating
expenses, reorganization of the Company and attrition caused by the events of
the past three years. FINOVA believes it continues to retain sufficient
personnel to operate in the ordinary course. None of these employees are covered
by collective bargaining agreements. FINOVA believes its employee relations
remain satisfactory.
9
FINOVA recognizes that a substantial unanticipated reduction in employees could
increase internal control risk; however, the Company believes it has
significantly mitigated this concern through reallocation of responsibilities
throughout the organization. The Company believes that qualified individuals
have been appointed to manage the Company's operations.
All employees are covered by a severance program, which has been approved by the
Board of Directors and continues with no fixed expiration date. The Company has
also developed an annual performance-based incentive program for all employees.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking," in that they do not
discuss historical fact, but instead note future expectations, projections,
intentions or other items. Forward-looking statements are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include assumptions, estimates and valuations
implicit in the financial statements and related notes as well as matters
discussed in the sections of this report captioned "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 7a. Quantitative and Qualitative Disclosure About Market Risk." They are
also made in documents incorporated in this report by reference, or in which
this report may be incorporated.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this report, the
words "estimate," "expects," "anticipates," "believes," "plans," "intends" and
similar expressions are intended to identify forward-looking statements that
involve known and unknown risks and uncertainties. Risks, uncertainties and
other factors may cause FINOVA's actual results or performance to differ
materially from those contemplated by the forward-looking statements. Many of
these factors are discussed in this report and include, but are not limited to:
* The extent to which FINOVA is successful in implementing its business
strategy, including the efforts to maximize the value of its portfolio
through orderly collection or sales of assets. Portfolio decisions are
based on estimates of asset value and actual results may differ from the
estimated amounts. Failure to fully implement its business strategy might
result in adverse effects, impair the Company's ability to repay
outstanding secured debt and other obligations and have a materially
adverse impact on its financial position and results of operations. The
current focus on maximizing portfolio values and the absence of new
business generation will cause future financial results to differ
materially from prior periods. Similarly, adoption of Fresh-Start Reporting
upon emergence from bankruptcy has resulted in revaluation of certain
assets and liabilities and other adjustments to the financial statements,
so that prior results are not indicative of future expectations.
* Several of the Company's accounting policies pertain to the ongoing
determination of portfolio impairment. These amounts rely, to a great
extent, on the estimation and timing of future cash flows. Actual results
may differ from the estimates.
* The effect of economic conditions and the performance of FINOVA's
borrowers. Economic conditions in general or in particular market segments
could impair the ability of FINOVA's borrowers to operate or expand their
businesses, which might result in decreased performance, adversely
affecting their ability to repay their obligations. The rate of borrower
defaults or bankruptcies may increase. Changing economic conditions could
adversely affect FINOVA's ability to realize estimated cash flows.
* The cost of FINOVA's capital has increased significantly since the first
quarter of 2000 and will continue to negatively impact results. Failure to
comply with its credit obligations could result in additional increases in
interest charges. In addition, changes in interest rate indices may
negatively impact interest margin due to lack of matched funding of the
Company's assets and liabilities.
* Loss of employees. FINOVA must retain a sufficient number of employees with
relevant knowledge and skills to continue to monitor, collect and sell its
portfolio. Failure to do so could result in additional losses. Retention
incentives intended to retain that employee base may not be successful in
the future.
* Conditions affecting the Company's aircraft portfolio, including changes in
Federal Aviation Administration directives and conditions affecting the
demand for used aircraft and the demand for aircraft spare parts. FINOVA's
aircraft are often of older vintage and contain configurations of engines,
avionics, fuel tanks and other components that may not be as high in demand
as other available aircraft in that class. Future demand for those aircraft
may decrease further as newer or more desirable aircraft and components
become available.
* Changes in government regulations, tax rates and similar matters. For
example, government regulations could significantly increase the cost of
doing business or could eliminate certain tax advantages of some FINOVA
financing transactions. The Company has not recorded a benefit in its
10
financial statements for its existing tax attributes and estimated future
tax deductions since it does not expect to generate the future taxable
income needed to use those tax benefits. The Company may never be able to
use those tax attributes.
* Necessary technological changes, such as implementation of information
management systems, may be more difficult, expensive or time consuming to
implement than anticipated.
* Potential liabilities associated with dispositions of assets.
* The accuracy of information relied upon by FINOVA, which includes
information supplied by its borrowers or prepared by third parties, such as
appraisers. Inaccuracies in that information could lead to inaccuracies in
the estimates.
* As the portfolio declines, increasing concentrations of financial assets in
certain industries such as resort and transportation could make the overall
portfolio more subject to changes in performance in those industries.
* Other risks detailed in this and FINOVA's other SEC reports or filings.
FINOVA does not intend to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements. FINOVA cannot predict the risk from reliance on forward-looking
statements in light of the many factors that could affect their accuracy.
INVESTOR INFORMATION
FINOVA is subject to the informational requirements of the Securities Exchange
Act of 1934 (the "Exchange Act"). Accordingly, FINOVA files periodic reports,
proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Those reports, proxy statements and other information
may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth
Street, NW, Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
issuers that file electronically.
You can access financial and other information on FINOVA's website. The address
is www.finova.com. FINOVA makes available, free of charge, copies of its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act within two business days after filing that material
with the SEC.
ITEM 2. PROPERTIES.
FINOVA's principal executive offices are located at 4800 North Scottsdale Road,
Scottsdale, Arizona 85251-7623, telephone (480) 636-4800. FINOVA Capital
operates various additional offices in the United States and one in Europe. All
of these properties are leased. As part of the reorganization proceedings, the
Company rejected a number of its leases for office properties (including its
primary operating headquarters in Scottsdale). During 2002, the Company
finalized negotiations on its Scottsdale headquarters and all other rejected
leases.
As a result of the continued liquidation and sale of assets, FINOVA has
consolidated operations and reduced staffing, resulting in the need for less
office space. FINOVA has terminated all or a portion of multiple operating lease
contracts and ceased using significant portions of several office locations.
While the Company pursues subleasing opportunities, it continues to incur costs
under these operating lease contracts without receiving economic benefit. As of
December 31, 2002, a liability was recorded for the estimated fair value of
future rental payments, net of anticipated subrentals and lease termination
damages on office space the Company is no longer using. See Annex A, Notes to
Consolidated Financial Statements, Note S "Costs Associated with Exit or
Disposal Activities" for more information.
ITEM 3. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
FINOVA is a party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts.
11
Litigation often results from FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties. It is possible that some of the legal actions,
proceedings or claims could be decided against FINOVA. Other than the claims
noted below, FINOVA believes that any resulting liability from its legal
proceedings should not materially affect FINOVA's financial position, results of
operations or cash flows. The following claims could have a material adverse
impact on FINOVA's financial position, results of operations or cash flow.
If any legal proceedings result in a significant adverse judgment against the
Company, which is not anticipated, it is unlikely that FINOVA would be able to
satisfy that liability due to its financial condition. As previously noted, due
to the Company's financial condition, it does not expect that it can satisfy all
its secured debt obligations at maturity. Attempts to collect on those judgments
could lead to future reorganization proceedings of either a voluntary or
involuntary nature.
BANKRUPTCY
On March 7, 2001, FINOVA, FINOVA Capital and seven of their subsidiaries filed
voluntary petitions for protection from creditors pursuant to chapter 11, title
11, United States Code, in the Bankruptcy Court. The other subsidiaries were
FINOVA (Canada) Capital Corporation, FINOVA Capital plc, FINOVA Loan
Administration Inc., FINOVA Mezzanine Capital Inc., FINOVA Portfolio Services,
Inc., FINOVA Technology Finance Inc. and FINOVA Finance Trust.
The Debtors' Third Amended and Restated Joint Plan of Reorganization was
confirmed by the Bankruptcy Court and became effective on August 21, 2001, upon
consummation of the Berkadia Loan. See Annex A, Notes to Consolidated Financial
Statements, Note A "Nature of Operations and Chapter 11 Reorganization" for more
information regarding the reorganization proceedings.
Certain post-confirmation proceedings continue in the Bankruptcy Court relating
to proofs of claims filed by creditors or alleged creditors, as well as
administrative claims and claims for damages for rejected executory contracts.
Many of these claims relate to pre-petition litigation claims and it is possible
that some of the claims could be decided against FINOVA. Many of those claims
are for amounts substantially in excess of amounts, if any, that FINOVA believes
it owes the creditor. FINOVA intends to vigorously defend against these claims.
SECURITIES LITIGATION
All of the stockholder and derivative lawsuits discussed in the Company's Annual
Report on FINOVA's Form 10-K for the year ended December 31, 2001 and in other
SEC filings have now been settled or dismissed and are no longer pending against
the Company, including the dismissal on September 13, 2002 of the BENKLER VS.
MILLER and SIRROM PARTNERS VS. FINOVA cases noted in FINOVA's prior SEC filings.
FINOVA funded its portion of the settlement amount in 2001 and is released from
further liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
12
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who serve as
executive officers of FINOVA. Messrs. Cumming, Steinberg and Mara serve pursuant
to the Management Services Agreement with Leucadia, which is discussed more
fully in Item 1. Business. "Chapter 11 Reorganization." Messrs. Gray, Lieberman
and Tashlik are "at will" employees and may be terminated at any time.
NAME AGE POSITION AND BACKGROUND
- ------------------- --- ----------------------------------------------
Ian M. Cumming 62 Chairman of the Board of FINOVA since 2001.
Director and Chairman of the Board of Leucadia
since 1978.
Joseph S. Steinberg 59 Director and President of FINOVA since 2001.
Director of Leucadia since 1978 and President
of Leucadia since 1979.
Thomas E. Mara 57 Director and Chief Executive Officer of FINOVA
since 2002. Executive Vice President of
Leucadia since 1980 and Treasurer of Leucadia
since 1993.
Glenn E. Gray 49 Chief Operating Officer of FINOVA since 2002.
Previously, Senior Vice President - Division
Manager or similar positions of FINOVA and
FINOVA Capital for more than five years.
Richard Lieberman 43 Senior Vice President, General Counsel &
Secretary of FINOVA since 2001. Previously,
Vice President - Deputy General Counsel or
similar positions of FINOVA and FINOVA Capital
for more than five years.
Stuart A. Tashlik 46 Senior Vice President and Chief Financial
Officer of FINOVA since 2001. Previously,
Senior Vice President or similar positions of
FINOVA and FINOVA Capital for more than five
years.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS.
FINOVA's common stock previously traded on the New York Stock Exchange under the
symbol "FNV." On January 30, 2002, FINOVA and the New York Stock Exchange
mutually agreed that the exchange would suspend trading FINOVA's common stock
after the close of market on February 6, 2002. This action was due to FINOVA's
common stock trading below $1.00 per share for more than 30 consecutive trading
days. FINOVA's stock began trading over-the-counter on February 7, 2002 under
the symbol "FNVG."
Upon emergence from chapter 11 in 2001, FINOVA's existing shares of common stock
continued to remain outstanding. In accordance with the Plan, FINOVA issued
3,000 shares of common stock to a creditor under the Plan and 61,020,581 shares
of common stock to Berkadia. The shares issued to Berkadia represented 50% of
FINOVA's shares outstanding after giving effect to implementation of the Plan.
At December 31, 2002 and 2001, FINOVA had approximately 122,041,000 shares of
common stock outstanding.
The shares issued to Berkadia were additional consideration for its $5.6 billion
loan to FINOVA Capital. The issuance to Berkadia relied on the private offering
exemption contained within Section 4(2) of the Securities Act of 1933, as
amended, and was a condition to Berkadia making the privately negotiated loan.
The additional shares issued pursuant to the Plan were issued in reliance on
Section 1145 of chapter 11, title 11 of the United States Code.
The following table summarizes the high and low market prices as reported on the
New York Stock Exchange Composite Tape (January 1, 2001 to February 6, 2002) and
the OTC Stock Exchange as reported by Commodity Systems Inc. (February 7, 2002
to December 31, 2002). The over-the-counter market quotations reflect
inter-dealer prices, without retail markup, markdown or commission, and may not
represent actual transactions.
SALES PRICE RANGE OF COMMON STOCK
-------------------------------------------
2002 2001
------------------ ------------------
Quarters: HIGH LOW HIGH LOW
------- ------- ------- -------
First $0.9400 $0.1800 $3.0000 $0.8125
Second 0.3400 0.0600 5.5300 1.2000
Third 0.1600 0.0600 4.3800 0.9700
Fourth 0.3700 0.0600 1.5000 0.5000
In November 2000, the Company suspended the payment of cash dividends. FINOVA
anticipates it will not pay dividends in the foreseeable future, except as
provided in the Plan. In accordance with the Plan, distributions to stockholders
will not occur until the Berkadia Loan is fully repaid. Furthermore,
distributions may not be made to stockholders as long as FINOVA has a negative
net worth (total liabilities in excess of total assets). Instead, these payments
will be retained by the Company for that purpose until legally permitted by law
or used to satisfy the Company's obligations, if necessary.
FINOVA's Certificate of Incorporation prohibits persons (except Berkadia and its
affiliates) from acquiring 5% or more of Corporation Securities (as defined)
unless the purchase is approved by the Board of Directors. Those restrictions
did not apply to the acquisition of shares in connection with the reorganization
proceedings. The restrictions will remain in effect until the earlier of (a) the
repeal of Section 382 of the Internal Revenue Code (or any comparable successor
provision) and (b) the beginning of the taxable year of the Company to which
certain tax benefits may no longer be carried forward.
As of March 17, 2003, there were approximately 16,600 holders of record of The
FINOVA Group Inc.'s common stock. The closing price of the common stock on that
date was $0.16.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data obtained or derived from
the audited consolidated financial statements of FINOVA for the year ended
December 31, 2002, the four months ended December 31, 2001, the eight months
ended August 31, 2001 and each of the years ended December 31, 2000, 1999 and
1998. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of FINOVA and the Notes to
Consolidated Financial Statements included in Annex A, as well as the rest of
this report. Prior year amounts have been reclassified to conform to 2002
presentation.
14
As a result of Fresh-Start Reporting and changes in the Company's operations,
the consolidated financial statements of the Company for the periods subsequent
to August 31, 2001 (the "Reorganized Company") will not be comparable to those
of the Company for periods prior to August 31, 2001 (the "Predecessor Company").
- -----------------------------------------------------------------------------------------------------------------------------------
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------------ ------------------------------------------------------------
FOUR MONTHS EIGHT MONTHS YEARS ENDED DECEMBER 31,
YEAR ENDED ENDED ENDED -------------------------------------------
DEC. 31, 2002 DEC. 31, 2001 AUG. 31, 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
OPERATIONS:
Interest margin $ (69,950) $ (10,605) $ 78,033 $ 454,901 $ 483,540 $ 404,515
Provision for credit losses 339,986 (777,500) (230,772) (643,000) (22,390) (48,470)
Net (loss) gain on financial assets (81,479) (281,608) (320,934) (168,589) 67,886 27,912
Portfolio expenses (46,859) (8,523) (12,521) (13,777) (10,887) (8,549)
General and administrative expenses (108,407) (63,272) (121,553) (385,635) (157,810) (138,579)
Gain from extinguishment of debt,
net of fresh-start discount 88,237
Income (loss) from continuing
operations 121,472 (1,142,300) (654,583) (546,709) 218,241 142,661
Net income (loss) 121,472 (1,142,300) (640,850) (939,817) 215,244 160,341
Diluted earnings (loss) from
continuing operations per share $ 1.00 $ (9.36) $ (10.28) $ (8.96) $ 3.45 $ 2.41
Diluted adjusted weighted average
shares outstanding 122,041,000 122,041,000 63,677,000 60,994,000 64,300,000 60,705,000
Dividends per common share $ $ $ $ 0.54 $ 0.68 $ 0.60
FINANCIAL POSITION:
Total financial assets (before
reserves) $ 3,696,419 $ 6,451,764 $ 7,587,606 $11,863,731 $13,602,614 $10,021,344
Nonaccruing assets 1,393,232 1,842,605 1,329,654 1,407,539 295,123 205,233
Reserve for credit losses (540,268) (1,019,878) (256,324) (578,750) (178,266) (141,579)
Total assets 3,759,008 6,504,025 8,302,956 12,089,086 13,889,889 10,228,374
Berkadia Loan 2,175,000 4,900,000 5,600,000
Senior debt - Reorganized
Company (1) 2,381,643 2,489,082 2,479,139
Senior debt - Predecessor Company 10,997,687 11,407,767 8,394,578
Convertible preferred securities 111,550 111,550 111,550
Stockholders' equity (970,749) (1,120,569) 17,623 672,934 1,663,381 1,167,231
RATIOS:
Nonaccruing assets as a % of total
financial assets (before reserves) 37.7% 28.6% 17.5% 11.9% 2.2% 2.0%
Reserve for credit losses as a % of:
Total financing assets 17.4% 18.3% 4.1% 6.3% 1.9% 2.0%
Nonaccruing assets 38.8% 55.3% 19.3% 41.1% 60.4% 69.0%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Senior debt - Reorganized Company is net of a fresh-start discount of
$686,306, $761,396 and $771,339 at December 31, 2002, December 31, 2001 and
August 31, 2001, respectively. The Company remains obligated for the full
principal amount, which was $3,067,949 at December 31, 2002 and $3,250,478
at December 31, 2001 and August 31, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See pages 1 - 14 of Annex A.
15
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
See page 14 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTAL DATA.
1. Financial Statements - See Item 15 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included in Annex A,
Supplemental Selected Financial Data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL
DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning FINOVA's directors will be incorporated by reference
from FINOVA's Proxy Statement issued in connection with its 2003 Annual Meeting
of Shareholders (the "Proxy Statement").
For information regarding FINOVA's executive officers, see the Optional Item in
Part I, following Item 4.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be incorporated by reference from the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item will be incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item will be incorporated by reference from the
Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under
the Exchange Act) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act are recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) Documents filed.
1) Financial Statements.
The following financial information of FINOVA is included
in Annex A: PAGE
----
Management's Discussion and Analysis of Financial Condition
and Results of Operations A-1
Quantitative and Qualitative Disclosure about Market Risk A-14
Report of Independent Auditors A-15
Consolidated Balance Sheets A-16
Statements of Consolidated Operations A-17
Statements of Consolidated Cash Flows A-18
Statements of Consolidated Stockholders' Equity A-20
Notes to Consolidated Financial Statements A-21
Supplemental Selected Financial Data (unaudited) A-56
2) All schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or related
notes.
3) Exhibits.
INCORPORATED BY REFERENCE FROM:
-------------------------------
REPORT ON DATE
EXHIBIT FORM FILED EXHIBIT
- ------- ---- ----- -------
(2.A) Third Amended and Restated Joint Plan of Reorganization of Debtors
Under Chapter 11 of the Bankruptcy Code. 8-K 6/22/01 10.A
(2.B) Revised Technical Amendments to Third Amended and Restated Joint
Plan of Reorganization. 8-K 8/27/01 2.B
(3.A) Amended and Restated Certificate of Incorporation of FINOVA. 8-K 8/27/01 3.A
(3.B) Amended and Restated Bylaws of FINOVA. 8-K 8/27/01 3.B
(4.A) Form of Common Stock Certificate. 10-K 3/15/02 4.A
(4.B) Relevant provisions of FINOVA's Certificate of Incorporation and
Bylaws included in Exhibits 3.A and 3.B above are incorporated by 3.A and
reference. 3.B
(4.C) Long-term debt instruments with principal amounts not exceeding 10%
of FINOVA's total consolidated assets are not filed as exhibits to
this report. FINOVA will furnish a copy of these agreements to the SEC
on request.
(10.A) Credit Agreement, dated as of August 21, 2001, by and between FINOVA
Capital and Berkadia. 8-K 8/27/01 10.A
(10.B) Indenture, dated as of August 22, 2001, between FINOVA and The Bank of
New York, as trustee (the "Indenture Trustee"), with respect to
FINOVA's 7.5% Senior Secured Notes Maturing 2009 with Contingent
Interest Due 2016, including the form of Senior Secured Note. 8-K 8/27/01 10.B
(10.C) Form of Intercompany Notes by FINOVA Capital payable to FINOVA. 8-K 8/27/01 10.C
(10.D) Collateral Trust Agreement, dated as of August 21, 2001, among FINOVA,
FINOVA Capital, Berkadia, Wilmington Trust Company, as collateral
trustee (the "Collateral Trustee"), the Indenture Trustee and each
grantor from time to time party thereto. 8-K 8/27/01 10.D
(10.E) Guaranty, dated as of August 21, 2001, by FINOVA in favor of Berkadia. 8-K 8/27/01 10.E
17
INCORPORATED BY REFERENCE FROM:
-------------------------------
REPORT ON DATE
EXHIBIT FORM FILED EXHIBIT
- ------- ---- ----- -------
(10.F) Guaranty, dated as of August 21, 2001, by certain subsidiaries of
FINOVA Capital (the "Subsidiary Guarantors"), in favor of Berkadia. 8-K 8/27/01 10.F
(10.G) Pledge Agreement, dated as of August 21, 2001, by FINOVA, in favor of
the Collateral Trustee. 8-K 8/27/01 10.G
(10.H) Pledge and Security Agreement, dated as of August 21, 2001, by FINOVA
Capital and the Subsidiary Guarantors, in favor of the Collateral
Trustee. 8-K 8/27/01 10.H
(10.I.1) Novation Agreement and Amendment to Registration Rights Agreement,
dated as of August 23, 2002, among FINOVA, Berkadia and Berkadia
Equity Holdings LLC. *
(10.J) Voting Agreement, dated as of August 21, 2001, among FINOVA, Berkadia,
Berkshire and Leucadia. 8-K 8/27/01 10.J
(10.K) Amended and Restated Management Agreement among FINOVA, FINOVA Capital
and Leucadia, dated April 3, 2001.+ 10-K 4/26/01 10.T.1
(10.L) Form of Letter for 2002 Bonus Program.+ 10-K 3/15/02 10.L
(10.M.1) Severance Plan.+ 10-K 3/15/02 10.M.1
(10.M.2) Enhanced Severance Plan.+ 10-K 3/15/02 10.M.2
(10.N) FINOVA's policies regarding compensation of directors are incorporated
by reference from the 2003 Proxy Statement.+
(10.O) Compensation Agreement and Release for Stuart A. Tashlik dated March
15, 2001.+ 10-K/A 4/26/01 10.E.6
(10.P) Letter Agreement between FINOVA and Richard Lieberman dated July 9,
2001.+ 10-K 3/15/02 10.W
(10.Q) Executive Severance Plan, Tier III.+ 10-K 3/15/02 10.X
(10.R) Corporate Finance Long-term Retention and Incentive Plan *
(12) Computation of Ratio of Income (Loss) to Fixed Charges and Preferred
Stock Dividends. *
(21) Subsidiaries. *
(23) Consent of Independent Auditors from Ernst & Young LLP. *
(99.A) Order entered August 10, 2001 confirming the Third Amended and
Restated Joint Plan of Reorganization, as amended and supplemented. 8-K 8/27/01 99.B
- ----------
* Filed with this report
+ Relating to management compensation
b) Reports on Form 8-K.
None.
18
THE FINOVA GROUP INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAME AND TITLE DATE SIGNATURE
-------------- ---- ---------
PRINCIPAL EXECUTIVE OFFICER:
Thomas E. Mara March 17, 2003 /s/ Thomas E. Mara
Chief Executive Officer and a Director ---------------------------
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Stuart A. Tashlik March 19, 2003 /s/ Stuart A. Tashlik
Senior Vice President and Chief Financial Officer ---------------------------
DIRECTORS:
Thomas F. Boland March 18, 2003 /s/ Thomas F. Boland
---------------------------
Ian M. Cumming March 19, 2003 /s/ Ian M. Cumming
---------------------------
G. Robert Durham March 18, 2003 /s/ G. Robert Durham
---------------------------
R. Gregory Morgan March 20, 2003 /s/ R. Gregory Morgan
---------------------------
Kenneth R. Smith March 19, 2003 /s/ Kenneth R. Smith
---------------------------
Joseph S. Steinberg March 18, 2003 /s/ Joseph S. Steinberg
---------------------------
19
CERTIFICATIONS
I, Thomas E. Mara, Chief Executive Officer of The FINOVA Group Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of The FINOVA Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 19, 2003
/s/ Thomas E. Mara
----------------------------------------
Thomas E. Mara
Chief Executive Officer
20
CERTIFICATIONS
I, Stuart A. Tashlik, Chief Financial Officer of The FINOVA Group Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of The FINOVA Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 19, 2003
/s/ Stuart A. Tashlik
----------------------------------------
Stuart A. Tashlik
Chief Financial Officer
21
ANNEX A
THE FINOVA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
PAGE
----
Management's Discussion and Analysis of Financial Condition
and Results of Operations A-1
Quantitative and Qualitative Disclosure about Market Risk A-14
Consolidated Financial Statements:
Report of Independent Auditors A-15
Consolidated Balance Sheets A-16
Statements of Consolidated Operations A-17
Statements of Consolidated Cash Flows A-18
Statements of Consolidated Stockholders' Equity A-20
Notes to Consolidated Financial Statements A-21
Supplemental Selected Financial Data (unaudited) A-56
A-i
THE FINOVA GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion relates to The FINOVA Group Inc. and its subsidiaries
(collectively "FINOVA" or the "Company"), including FINOVA Capital Corporation
and its subsidiaries ("FINOVA Capital"). FINOVA, a financial services holding
company, is a Delaware corporation, incorporated in 1991. Through its principal
operating subsidiary, FINOVA Capital, the Company has provided a broad range of
financing and capital markets products, primarily to mid-size businesses.
FINOVA's business is being operated under a Management Services Agreement with
Leucadia National Corporation ("Leucadia"), which expires in 2011. Leucadia has
designated its employees to act as Chairman of the Board (Ian M. Cumming),
President (Joseph S. Steinberg) and Chief Executive Officer (Thomas E. Mara).
FINOVA Capital has been in operation since 1954.
On March 7, 2001, FINOVA, FINOVA Capital and seven of their subsidiaries (the
"Debtors") filed for protection pursuant to chapter 11, title 11, of the United
States Code in the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") to enable them to restructure their debt. On August 10,
2001, the Bankruptcy Court entered an order confirming FINOVA's Third Amended
and Restated Joint Plan of Reorganization (the "Plan"), pursuant to which the
Debtors restructured their debt, effective August 21, 2001 (the "Effective
Date").
The Plan is incorporated by reference from FINOVA's Current Reports on Form 8-K,
filed on June 22, 2001 and August 27, 2001, Exhibits 2.A and 2.B, respectively.
CURRENT BUSINESS ACTIVITIES
Since emergence from chapter 11 in August 2001, the Company's business
activities have been limited to maximizing the value of its portfolio through
the orderly liquidation of its assets. These activities include collection
efforts pursuant to underlying contractual terms and may include efforts to
retain certain customer relationships and restructure or terminate other
relationships. The Company has not and does not expect to engage in any new
lending activities, except to honor existing customer commitments and in certain
instances, to restructure financing relationships with existing customers to
maximize value. FINOVA has sold portions of asset portfolios and will consider
future sales if buyers can be found at acceptable prices; however, there can be
no assurance that the Company will be successful in efforts to sell additional
assets. Any funds generated from these activities in excess of cash reserves
permitted in the Company's debt agreements are used to reduce FINOVA's
obligations to its creditors.
FINOVA has combined its former operating segments into one operating unit;
accordingly, no segment information by unit is maintained. As a result of this
combination, elimination of new business activities and reductions in its asset
portfolios, FINOVA has significantly reduced its work force.
DEVELOPMENTS
On January 30, 2002, FINOVA and the New York Stock Exchange mutually agreed that
the exchange would suspend trading FINOVA's common stock, which had been traded
under the symbol "FNV," after the close of market on February 6, 2002. This
action was due to FINOVA's common stock trading below $1.00 per share for more
than 30 consecutive trading days. FINOVA's stock began trading over-the-counter
on February 7, 2002, under the symbol "FNVG."
In a series of transactions during 2002, the Company sold substantially all of
its investment alliance assets for $67.4 million, which resulted in a $6.7
million gain.
In March 2002, Congress enacted the Job Creation and Worker Assistance Act of
2002 ("Act"). The Act includes provisions allowing corporations to carryback
certain tax net operating losses ("NOLs") for longer periods and with fewer
limitations than had previously existed. The Company filed its 2001 corporate
tax return in June 2002 and made a special election available under Section 108
of the Internal Revenue Code of 1986 that resulted in the Company reducing its
tax basis in depreciable property. As a result of this election and related
filings, NOLs became available for carryback, thereby entitling the Company to a
refund of approximately $67 million. During the third quarter of 2002, the
Company received $36.0 million of this refund, which was recorded in accordance
with the provisions of SOP 90-7 as a direct addition to paid-in-capital.
Although there can be no assurance regarding the timing of the payment, the
Company anticipates receiving the remainder of the refund during 2003, which
also will be recorded as a direct addition to paid-in-capital. As a result of
the special election and carryback of NOLs, the Company did not utilize any of
its federal NOL carryforwards and credits to offset the cancellation of debt
income as contemplated in the Company's Form 10-K for December 31, 2001.
A-1
THE FINOVA GROUP INC.
In April 2002, the Company completed the sale of approximately $485 million of
its franchise portfolio for approximately $490 million. This sale included
substantially all of FINOVA's performing franchise assets. In August 2002, the
Company completed the sale of an additional $67 million of the franchise
portfolio (primarily impaired assets) at their carrying value (net of reserves).
The Company will continue the orderly liquidation of its remaining franchise
assets.
On July 26, 2002, the U.S. District Court granted final approval for a
settlement in the consolidated class action securities suits filed against
FINOVA and several other defendants. FINOVA had funded its portion of the
settlement amount in 2001 and is released from further liability.
In August 2002, in accordance with the Credit Agreement and the Indenture, the
Company's Board of Directors, with Berkadia's consent, approved the use of up to
$300 million of cash to repurchase New Senior Notes rather than make mandatory
prepayments of the Berkadia Loan. In consideration for Berkadia's consent,
FINOVA and Berkadia agreed that they would share equally in the "Net Interest
Savings" resulting from any repurchase. Net Interest Savings is calculated as
the difference between (a) the reduction in interest expense on the New Senior
Notes (resulting from the repurchase of such New Senior Notes) and (b) the
increase in interest expense on the Berkadia Loan (resulting from the use of
cash to repurchase New Senior Notes and to pay 50% of the Net Interest Savings
to Berkadia rather than make mandatory prepayments of the Berkadia Loan). On
each date that interest is paid on the outstanding New Senior Notes (a "Note
Interest Payment Date"), 50% of the Net Interest Savings accrued since the last
Note Interest Payment Date will be paid to Berkadia. The other 50% of the Net
Interest Savings will be retained by FINOVA. Upon repayment in full of the
Berkadia Loan, Berkadia will not have the right to receive any Net Interest
Savings accruing after such repayment. Because it is highly unlikely there will
be sufficient funds to fully repay the New Senior Notes at maturity, the
Company, if it elects to repurchase additional New Senior Notes, intends to do
so only at substantial discounts to par. The agreement between FINOVA and
Berkadia was approved by the "Special Committee" of FINOVA's Board of Directors,
which is comprised solely of directors unaffiliated with Berkadia, Berkshire or
Leucadia.
During the third quarter of 2002, the Company repurchased $98.9 million (face
amount) of New Senior Notes at a price of 29.875% or $29.6 million, plus accrued
interest. The repurchase generated a net gain of $46.9 million ($69.4 million
repurchase discount, partially offset by $22.5 million of unamortized
fresh-start discount). During the fourth quarter of 2002, the Company
repurchased an additional $86.1 million (face amount) of New Senior Notes at a
price of 30.0% or $25.8 million, plus accrued interest. The repurchase generated
a net gain of $41.3 million ($60.2 million repurchase discount, partially offset
by $18.9 million of unamortized fresh-start discount). There can be no assurance
that the Company will repurchase any additional New Senior Notes or that
additional New Senior Notes will become available at an acceptable price.
On September 10, 2002, FINOVA announced the election of Thomas E. Mara as a
Director and Chief Executive Officer, effective September 9, 2002. Mr. Mara
replaced Lawrence S. Hershfield, who resigned from those positions to pursue
other opportunities.
Pursuant to the terms of the Credit Agreement, FINOVA Capital is required to
make mandatory quarterly prepayments of principal in an amount equal to the
excess cash flow (as defined in the Credit Agreement). In addition to mandatory
prepayments, the Company is permitted, with Berkadia's consent, to make
voluntary prepayments. During 2002, mandatory and voluntary prepayments totaled
$2.725 billion. Principal payments made to Berkadia since emergence from chapter
11 have reduced the Berkadia Loan to $2.175 billion as of December 31, 2002 and
$1.525 billion as of the filing of this report (including $650 million of
payments during the first quarter of 2003). The pace of loan repayments depends
on numerous factors, including the rate of collections from borrowers and asset
sales. There can be no assurance that the Berkadia Loan will continue to be
repaid at this pace.
In March 2003, the Company completed the sale of a portion of its rediscount
assets for $175.4 million of net cash proceeds and received a $17.8 million
participation in a performing loan, which resulted in a $4.4 million gain. These
assets were classified as held for sale as of December 31, 2002.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires FINOVA to use estimates and assumptions
that affect reported amounts of assets and liabilities, revenues and expenses
and disclosure of contingent assets and liabilities. These estimates are subject
to known and unknown risks, uncertainties and other factors that could
materially impact the amounts reported and disclosed in the financial
statements. The Company believes the following to be among the most critical
judgment areas in the application of its accounting policies. Additional
accounting polices are discussed in Notes to Consolidated Financial Statements,
Note B "Significant Accounting Polices."
A-2
THE FINOVA GROUP INC.
CARRYING AMOUNTS, IMPAIRMENT AND USE OF ESTIMATES
Several of the Company's accounting policies pertain to the ongoing
determination of impairment reserves on financing assets and the carrying amount
valuation of other financial assets. Determination of impairment reserves and
carrying amounts rely, to a great extent, on the estimation and timing of future
cash flows. FINOVA's cash flow estimates assume that its asset portfolios are
collected in an orderly fashion over time. These cash flows do not represent
estimated recoverable amounts if FINOVA were to liquidate its asset portfolios
over a short period of time. Management believes that a short-term asset
liquidation could have a material negative impact on the Company's ability to
recover recorded asset amounts.
FINOVA's process of determining impairment reserves and carrying amounts
includes a periodic assessment of its portfolios on a transaction by transaction
basis. Cash flow estimates are based on current information and numerous
assumptions concerning future general economic conditions, specific market
segments, the financial condition of the Company's customers and FINOVA's
collateral. In addition, assumptions are sometimes necessary concerning the
customer's ability to obtain full refinancing of balloon obligations or
residuals at maturity. Commercial lenders have become more conservative
regarding advance rates and interest margin requirements have increased. As a
result, the Company's cash flow estimates assume FINOVA incurs refinancing
discounts for certain transactions.
Changes in facts and assumptions have resulted in, and may in the future result
in, significant positive or negative changes to estimated cash flows and
therefore, impairment reserves and carrying amounts.
Impairment of financing assets is recorded through the Company's reserve for
credit losses, and accounting rules permit the reserve for credit losses to be
increased or decreased as facts and assumptions change. Impairment of other
financial assets is marked down directly against the asset's carrying amount.
Accounting rules permit further markdown if changes in facts and assumptions
result in additional impairment; however, most of these assets (except certain
investments and assets held for sale, which may be marked up for subsequent
events) may not be marked up if subsequent facts and assumptions result in a
projected increase in value. Recoveries of previous markdowns are recorded
through operations when realized.
The carrying amounts and reserve for credit losses recorded on FINOVA's
financial statements reflect the Company's expectation of collecting less than
the full contractual amounts owed by some of its customers and recovering less
than its original investment in certain owned assets. The Company continues to
pursue collection of full contractual amounts and original investments, where
appropriate, in an effort to maximize the value of its asset portfolios.
During 2002, the Company's detailed quarterly portfolio assessments identified
significant additional impairment within its transportation portfolio, resulting
in additional markdowns. The current state of the aircraft industry includes
significant excess capacity for both new and used aircraft and lack of demand
for certain classes and configurations of aircraft in the portfolio.
Accordingly, the Company reduced the useful lives and anticipated scrap values
of various aircraft and reduced its estimates regarding its ability to lease or
sell certain returned aircraft.
FINOVA has a significant number of aircraft that are off lease and anticipates
that additional aircraft will be returned as leases expire or operators are
unable or unwilling to continue making payments. In accordance with the
provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," FINOVA has recorded impairment losses on owned aircraft by
calculating the present value of estimated cash flows. For many of these
aircraft, scrap value was assumed, but for certain aircraft, the Company elected
(or anticipates electing upon return of the aircraft) to park and maintain the
aircraft under the assumption that they will be re-leased or sold in the future
despite the lack of demand for those aircraft today. While the current inactive
market makes it difficult to quantify, the Company believes that the recorded
values determined under this methodology significantly exceed the values that
the Company would realize if it were to liquidate those aircraft today.
The process of determining appropriate carrying amounts for these aircraft is
particularly difficult and subjective, as it requires the Company to estimate
future demand, lease rates and scrap values for assets for which there is
currently little o