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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
________Amendment No. 1__________
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to
___________
Commission file number: 1-5721
LEUCADIA NATIONAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
New York 13-2615557
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
315 Park Avenue South
New York, New York 10010
(212) 460-1900
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Shares, par value $1 per share New York Stock Exchange
Pacific Stock Exchange
7-3/4% Senior Notes due August 15, 2013 New York Stock Exchange
8-1/4% Senior Subordinated Notes due New York Stock Exchange
June 15, 2005
7-7/8% Senior Subordinated Notes due New York Stock Exchange
October 15, 2006
Securities registered pursuant to Section 12(g) of the Act:
None.
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(Title of Class)
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 Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x ].
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at February 22, 2002 (computed by reference to
the last reported closing sale price of the Common Stock on the New York Stock
Exchange on such date): $1,077,155,000.
On February 22, 2002, the registrant had outstanding 55,318,257 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
2001 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
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EXPLANATORY NOTE
This Report on Form 10-K/A amends and restates in its entirety Item 14 of the
Annual Report on Form 10-K of Leucadia National Corporation (the "Company") for
the fiscal year ended December 31, 2001:
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-------- -----------------------------------------------------------------
(a)(1)(2) Financial Statements and Schedules.
Report of Independent Accountants............................................................ F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 2001 and 2000.................................. F-2
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999........................................................................... F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999........................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999........................................................ F-6
Notes to Consolidated Financial Statements................................................. F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts............................................ F-34
(3) Executive Compensation Plans and Arrangements.
----------------------------------------------
1999 Stock Option Plan (filed as Annex A to the Company's Proxy
Statement dated April 9, 1999 (the "1999 Proxy Statement")).
Amended and Restated Shareholders Agreement dated as of December
16, 1997 among the Company, Ian M. Cumming and Joseph S.
Steinberg (filed as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (the
"1997 10-K")).
Leucadia National Corporation Senior Executive Annual Incentive
Bonus Plan (filed as Annex D to the Company's Proxy Statement
dated October 3, 1997 (the "1997 Proxy Statement")).
Employment Agreement made as of December 28, 1993 by and between
the Company and Ian M. Cumming (filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (the "1993 10-K")).
Amendment, dated as of May 5, 1999, to the Employment Agreement
made as of December 28, 1993 by and between the Company and Ian
M. Cumming (filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 (the
"2001 10-K")).
Employment Agreement made as of December 28, 1993 by and between
the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to
the 1993 10-K).
2
Amendment, dated as of May 5, 1999, to the Employment Agreement
made as of December 28, 1993 by and between the Company and
Joseph S. Steinberg (filed as Exhibit 10.21 to the 2001 10-K).
Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "1998 10-K")).
Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated as of December 30, 1999 (filed as Exhibit 10.16
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (the "1999 10-K")).
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17 to
the 1999 10-K).
Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of January 10, 2000 (filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (the "2000 10-K")).
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000 (filed as Exhibit 10.18
to the 2000 10-K).
Leucadia National Corporation Senior Executive Warrant Plan
(filed as Annex B to the 1999 Proxy Statement).
Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of December 20, 2001 (filed as Exhibit 10.28 to the
2001 10-K).
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001 (filed as Exhibit 10.29
to the 2001 10-K).
(b) Reports on Form 8-K.
-------------------
None.
(c) Exhibits.
--------
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to
the Company's Current Report on Form 8-K dated July 14,
1993).*
3.2 Amended and Restated By-laws as amended through February 23,
1999 (filed as Exhibit 3.2 to the 1998 10-K).*
4.1 The Company undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with
respect to long-term debt not filed herewith.
10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy
Statement).*
10.2 Articles and Agreement of General Partnership, effective as of
April 15, 1985, of Jordan/Zalaznick Capital Company (filed as
Exhibit 10.20 to the Company's Registration Statement No.
33-00606).*
--------
* Incorporated by reference.
3
10.3 Operating Agreement of The Jordan Company LLC, dated as of
July 23, 1998 (filed as Exhibit 10.3 to the 1998 10-K).*
10.4 Leucadia National Corporation Senior Executive Warrant Plan
(filed as Annex B to the 1999 Proxy Statement).*
10.5 Amended and Restated Shareholders Agreement dated as of
December 16, 1997 among the Company, Ian M. Cumming and Joseph
S. Steinberg (filed as Exhibit 10.4 to the 1997 10-K).*
10.6 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to
the 1998 10-K).*
10.7 Form of Amended and Restated Revolving Credit Agreement dated
as of June 27, 2000 between the Company, Fleet National Bank
as Administrative Agent, The Chase Manhattan Bank, as
Syndication Agent, and the Banks signatory thereto, with Fleet
Boston Robertson Stephens, Inc., as Arranger (filed as Exhibit
10.9 to the 2000 10-K).*
10.8 Form of First Amendment, dated as of August 10, 2001, to
Amended and Restated Revolving Credit Agreement dated as of
June 27, 2000 between the Company, Fleet National Bank as
Administrative Agent, The Chase Manhattan Bank, as Syndication
Agent, and the Banks signatory thereto, with Fleet Boston
Robertson Stephens, Inc., as Arranger (filed as Exhibit 10.8
to the 2001 10-K).*
10.9 Purchase Agreement among Conseco, Inc., the Company, Charter
National Life Insurance Company, Colonial Penn Group, Inc.,
Colonial Penn Holdings, Inc., Leucadia Financial Corporation,
Intramerica Life Insurance Company, Colonial Penn Franklin
Insurance Company and Colonial Penn Insurance Company dated as
of April 30, 1997 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997).*
10.10 Purchase Agreement among General Electric Capital Corporation,
the Company, Charter National Life Insurance Company, Colonial
Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of
June 30, 1997 (filed as Annex A to the 1997 Proxy Statement).*
10.11 Purchase Agreement by and among Allstate Life Insurance
Company, Allstate Life Insurance Company of New York, Charter
National Life Insurance Company, Intramerica Life Insurance
Company and the Company, dated February 11, 1998 (filed as
Exhibit 10.16 to the 1997 10-K).*
10.12 Leucadia National Corporation Senior Executive Annual
Incentive Bonus Plan (filed as Annex D to the 1997 Proxy
Statement).*
10.13 Stock Purchase Agreement by and between the Company and
Allstate Life Insurance Company dated as of December 18, 1998
(filed as Exhibit 10.14 to the 1998 10-K).*
10.14 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated as of December 30, 1999 (filed as Exhibit
10.16 to the 1999 10-K).*
10.15 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17
to the 1999 10-K).*
--------
* Incorporated by reference.
4
10.16 Deferred Compensation Agreement between the Company and Thomas
E. Mara dated as of January 10, 2000 (filed as Exhibit 10.17
to the 2000 10-K).*
10.17 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000 (filed as Exhibit
10.18 to the 2000 10-K).*
10.18 Employment Agreement made as of December 28, 1993 by and
between the Company and Ian M. Cumming (filed as Exhibit 10.17
to the 1993 10-K).*
10.19 Amendment, dated as of May 5, 1999, to the Employment
Agreement made as of December 28, 1993 by and between the
Company and Ian M. Cumming (filed as Exhibit 10.19 to the 2001
10-K).*
10.20 Employment Agreement made as of December 28, 1993 by and
between the Company and Joseph S. Steinberg (filed as Exhibit
10.18 to the 1993 10-K).*
10.21 Amendment, dated as of May 5, 1999, to the Employment
Agreement made as of December 28, 1993 by and between the
Company and Joseph S. Steinberg (filed as Exhibit 10.21 to the
2001 10-K).*
10.22 Commitment Letter dated February 26, 2001 among the Company,
Berkshire Hathaway Inc., Berkadia LLC, The FINOVA Group Inc.
and FINOVA Capital Corporation (filed as Exhibit 10.19 to the
2000 10-K).*
10.23 Management Services Agreement dated as of February 26, 2001
among The FINOVA Group Inc., the Company and Leucadia
International Corporation (filed as Exhibit 10.20 to the 2000
10-K).*
10.24 Leucadia National Corporation Guaranty to Fleet Securities,
Inc., as administrative agent, and the lenders from time to
time party to the Fleet Facility, dated as of August 21, 2001
(filed as Exhibit 4 to the Schedule 13D filed with the SEC on
August 28, 2001 in respect of Company Common Stock by
Berkshire Hathaway Inc. et al. (the "Berkshire Schedule
13D")).*
10.25 Berkadia Management LLC Operating Agreement, dated August 21,
2001, by and between BH Finance LLC and WMAC Investment
Corporation (filed as Exhibit 8 to the Berkshire Schedule
13D).*
10.26 Voting Agreement, dated August 21, 2001, by and among Berkadia
LLC, Berkshire Hathaway Inc., the Company and The FINOVA Group
Inc. (filed as Exhibit 10.J to the August 27, 2001 8-K).*
10.27 First Amended and Restated Berkadia LLC Operating Agreement,
dated August 21, 2001, by and among BHF Berkadia Member Inc.,
WMAC Investment Corporation and Berkadia Management LLC (filed
as Exhibit 11 to the Berkshire Schedule 13D).*
10.28 Deferred Compensation Agreement between the Company and Thomas
E. Mara dated as of December 20, 2001 (filed as Exhibit 10.28
to the 2001 10-K).*
10.29 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001 (filed as Exhibit
10.29 to the 2001 10-K).*
--------
* Incorporated by reference.
5
21 Subsidiaries of the registrant.
23.1 Consent of independent accountants with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form
S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682),
Form S-8 (File No. 33-61718) and Form S-8 (File No. 333-51494)
(filed as Exhibit 23.1 to the 2001 10-K).*
23.2 Independent Auditors' Consent from KPMG LLP, with respect to
the inclusion in this Annual Report on Form 10-K of the
financial statements of Jefferies Partners Opportunity Fund
II, LLC and with respect to the incorporation by reference in
the Company's Registration Statements on Form S-8 (No.
2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3
(No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No.
33-61682), Form S-8 (No. 33-61718) and Form S-8 (No.
333-51494) (filed as Exhibit 23.2 to the 2001 10-K).*
23.3 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K of
the consolidated financial statements of The FINOVA Group Inc.
and the financial statements of Berkadia LLC and with respect
to the incorporation by reference in the Company's
Registration Statements on Form S-8 (No. 2-84303), Form S-8
and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form
S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8
(No. 33-61718) and Form S-8 (No. 333-51494).
(d) Financial statement schedules.
-----------------------------
(1) Berkadia LLC combined financial statements as of December
31, 2001 and for the period from inception, February 26,
2001, to December 31, 2001.
(2) The FINOVA Group Inc. and subsidiaries consolidated
financial statements as of December 31, 2001 and 2000 and
for the years ended December 31, 2001, 2000 and 1999.
(3) Jefferies Partners Opportunity Fund II, LLC financial
statements as of December 31, 2001 and 2000 and for the
years ended December 31, 2001 and 2000 and for the period
from date of funding, May 20, 1999 through December 31,
1999 (included in Item 14(d) to the 2001 10-K).*
--------
* Incorporated by reference.
6
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
LEUCADIA NATIONAL CORPORATION
March 21, 2002 By: /s/ Barbara L. Lowenthal
-----------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
7
FINANCIAL STATEMENTS
Berkadia LLC (a joint venture between Berkshire
Hathaway Inc. and Leucadia National Corporation)
Year ended December 31, 2001
Berkadia LLC
Financial Statements
Year ended December 31, 2001
Contents
Report of Independent Auditors.............................................2
Audited Financial Statements
Balance Sheet..............................................................3
Statement of Operations and Changes in Members' Equity.....................4
Statement of Cash Flows....................................................5
Notes to Financial Statements..............................................6
2
Report of Independent Auditors
The Members of Berkadia LLC
We have audited the accompanying balance sheet of Berkadia LLC (the "Company")
as of December 31, 2001, and the related statements of operations and changes in
members' equity and cash flows for the period from February 26, 2001 to December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Berkadia LLC at December 31,
2001 and the results of its operations and its cash flows for the period then
ended, in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
March 1, 2002
Berkadia LLC
Balance Sheet
December 31, 2001
(In thousands)
ASSETS
Cash $ 1
Equity investment in FINOVA shares -
Loan receivable due from FINOVA, net of discount 4,631,476
Interest and facility fee receivable 15,244
-----------
Total assets $ 4,646,721
===========
LIABILITIES & MEMBERS' ACCUMULATED DEFICIT
Liabilities:
Long-term debt $ 4,900,000
Interest and facility fee payable 8,486
-----------
Total liabilities 4,908,486
Members' accumulated deficit (261,765)
-----------
Total liabilities and members' accumulated deficit $ 4,646,721
===========
See accompanying notes to financial statements.
3
Berkadia LLC
Statement of Operations and Changes in Members' Equity
For the Period from February 26, 2001 to December 31, 2001
(In thousands)
Revenue
Interest income and amortization of loan discount $ 136,734
---------
Total revenue 136,734
Expenses
Equity loss in FINOVA 188,800
Interest expense 57,990
---------
Total expenses 246,790
---------
Net loss (110,056)
Members' equity, beginning of period -
Distributions to members (151,709)
---------
Members' accumulated deficit, December 31, 2001 $(261,765)
=========
See accompanying notes to financial statements.
4
Berkadia LLC
Statement of Cash Flows
For the Period from February 26, 2001 to December 31, 2001
(In thousands)
Net cash flows from operating activities
Net loss $ (110,056)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Equity loss in FINOVA 188,800
Amortization of loan discount (40,276)
Net change in:
Receivables (15,244)
Payables 8,486
-----------
Net cash provided by operating activities 31,710
Net cash flows from investing activities
Loan to FINOVA, net (5,480,000)
Loan repayment from FINOVA 700,000
-----------
Net cash used by investing activities (4,780,000)
Net cash flows from financing activities
Issuance of long-term debt 5,600,000
Repayment of long-term debt (700,000)
Distributions to members (151,709)
-----------
Net cash provided by financing activities 4,748,291
-----------
Net increase in cash 1
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at December 31, 2001 $ 1
===========
Supplemental disclosure of noncash investing activities
Allocation of loan receivable due from FINOVA to equity investment in FINOVA shares
$ 188,800
===========
See accompanying notes to financial statements.
5
Berkadia LLC
Notes to the Financial Statements
December 31, 2001
1. Formation and Nature of Operations
Berkadia LLC (the "Company") was formed on February 26, 2001 as a joint venture
between Berkshire Hathaway Inc. ("Berkshire") and Leucadia National Corporation
("Leucadia"). Berkshire and Leucadia, and their respective wholly owned
affiliates who hold the interests in the Company, are referred to as the
"Members". The principal business purpose of the Company was to fulfill its
commitment to lend up to $6,000,000,000 on a senior secured basis to FINOVA
Capital Corporation ("FINOVA Capital"), the principal operating subsidiary of
The FINOVA Group Inc. ("FINOVA"), to facilitate a chapter 11 restructuring of
the outstanding debt of FINOVA and its principal subsidiaries. On August 10,
2001, the bankruptcy court confirmed the chapter 11 reorganization plan for the
FINOVA companies (the "Plan"). On August 21, 2001, the effective date of the
Plan, the Company lent $5,600,000,000 par amount on a senior secured basis to
FINOVA Capital (the "Berkadia Loan") and received 61,020,581 newly issued shares
of common stock of FINOVA (the "Shares"), representing 50% of the outstanding
stock of FINOVA. The Berkadia Loan is collateralized by substantially all of the
assets of FINOVA and its subsidiaries and guaranteed by FINOVA and substantially
all of the subsidiaries of FINOVA. The Company borrowed the entire amount
required to finance the Berkadia Loan from a consortium of lenders led by Fleet
Bank (the "Fleet Loan"). The Fleet Loan is guaranteed, 90% by Berkshire Hathaway
and 10% by Leucadia (with Leucadia's guarantee being secondarily guaranteed by
Berkshire), and is also secured by the Company's pledge of the Berkadia Loan.
The Company was paid a $60,000,000 commitment fee by FINOVA Capital upon
execution of the commitment in February 2001, and a $60,000,000 funding fee upon
funding of the Berkadia Loan on August 21, 2001. Under the operating agreement
governing the Company, Berkshire and Leucadia share equally in the commitment
fee, funding fee and any proceeds realized from the Shares. All income related
to the Berkadia Loan, after payment of interest on the Fleet Loan, is allocated
90% to Berkshire and 10% to Leucadia. To date, all cash received by the Company,
after payment of any financing costs, has been distributed to the Members. In
addition, FINOVA Capital has reimbursed the Company and the Members, for all
fees and expenses incurred in connection with the their commitments. Fees
reimbursed to the Company aggregated $11,950,000 during 2001.
6
Berkadia LLC
Notes to the Financial Statements
December 31, 2001
1. Formation and Nature of Operations (continued)
The Members have not contributed any equity capital to the Company, and the
Company does not currently anticipate that any capital contributions will be
required in the future. Should any amounts become due and payable under the
Fleet Loan, and if the Company does not have sufficient liquidity to meet those
obligations, then the Members would be required to make capital contributions in
amounts sufficient to satisfy the Company's obligations under the Fleet Loan.
Such capital contributions would be made 90% by Berkshire and 10% by Leucadia.
Decisions concerning the management of the business and affairs of the Company
generally require the consent of all Members. However, Berkshire makes any and
all decisions with respect to the Berkadia Loan in its sole and absolute
discretion.
Upon FINOVA's emergence from Bankruptcy, each of Berkshire and Leucadia
designated two persons to serve on FINOVA's reconstituted board of directors.
From and after the effective date of the Plan, the Company, Berkshire and
Leucadia are not entitled to designate FINOVA board members. Pursuant to the
terms of its operating agreement, Berkadia will vote the Shares as unanimously
agreed to by its Members. However, if the Members are unable to agree, then
Berkadia will vote one-half of the Shares as directed by Berkshire and one-half
of the Shares as directed by Leucadia.
2. Significant Accounting Policies
(a) Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States ("GAAP") requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities at the date of the financial
statements and (iii) the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Loan Receivable from FINOVA: The Berkadia Loan is carried net of unamortized
discount related to the commitment fee, the funding fee and the amount of the
Berkadia Loan allocated to Berkadia's investment in the Shares. The discount
will be accreted into investment income over the life of the Berkadia Loan under
the effective interest method. As of December 31, 2001, a reserve for losses on
the Berkadia Loan was not deemed necessary.
7
Berkadia LLC
Notes to the Financial Statements
December 31, 2001
2. Significant Accounting Policies (continued)
(c) Investment in FINOVA Shares: Berkadia accounts for its investment in the
Shares under the equity method. Under the equity method, Berkadia recognizes its
proportionate share of FINOVA's net income or loss. As of September 30, 2001,
application of the equity method was suspended after operating losses of FINOVA
reduced the carrying amount of Berkadia's equity interest in FINOVA to zero.
(d) Income taxes: The Company does not file an income tax return. Each Member is
responsible for the tax liability, if any, deriving from the taxable income
allocated to such Member. Accordingly, no provision for income taxes has been
reflected in these financial statements.
3. Berkadia Loan
The Berkadia Loan bears interest payable monthly, at the Eurodollar Rate plus
2.25%. All unpaid principal and accrued interest is due at maturity on August
20, 2006. For the period ended December 31, 2001, the weighted average interest
rate was 5.06%. FINOVA and substantially all of its direct and indirect
subsidiaries (except those that are contractually prohibited from acting as a
guarantor) have guaranteed FINOVA Capital's repayment of the Berkadia Loan. The
guarantees are secured by substantially all of the assets of FINOVA and its
subsidiaries.
The terms of the Berkadia Loan permit FINOVA to retain a reserve of cash and
cash equivalents in an amount not to exceed the sum of (a) 125% of the projected
operating expenses for the next fiscal quarter, (b) unfunded customer
commitments expected to be funded over the next two fiscal quarters, (c) taxes
payable during the next fiscal quarter, (d) interest, loan fees and other
amounts due on the Berkadia Loan during the next fiscal quarter, (e) an amount
equal to all payments of principal, interest or fees relating to other permitted
indebtedness that will, by their terms, become due and payable in cash during
the next fiscal quarter, and (f) such other reserves as are necessary in
FINOVA's good faith judgment and as approved in advance by the Company for the
operations of FINOVA. Any amount in excess of the cash reserve is paid to the
Company to reduce the principal amount of the loan on a quarterly basis. For the
quarter ended September 30, 2001, FINOVA determined that the amount in excess of
the cash reserve totaled $700,000,000, and such amount was repaid to the Company
on October 9, 2001. In January 2002, the Company received $500,000,000 of
additional principal payments from FINOVA. In February 2002, with the consent of
the Company, FINOVA prepaid $500,000,000 of additional principal on the Berkadia
Loan.
8
Berkadia LLC
Notes to the Financial Statements
December 31, 2001
3. Berkadia Loan (continued)
The terms of the Berkadia Loan agreement require FINOVA to maintain at all
times, a ratio of Collateral Value (as defined in the Berkadia Loan agreement)
to the loan balance of not less than 1.25 to 1. As of December 31, 2001, FINOVA
was in compliance with this covenant.
4. Investment in FINOVA Shares
At the effective date of the Plan, the Company transferred $5,540,000,000 in
cash to FINOVA Capital, representing the $5,600,000,000 loan reduced by the
funding fee of $60,000,000. As indicated above, in exchange for these funds, the
Company received a $5,600,000,000 note from FINOVA Capital and the FINOVA
Shares. The Company allocated the $5,540,000,000 cash transferred, reduced
further by the $60,000,000 commitment fee, between its investment in the
Berkadia Loan and the Shares, based upon the respective relative fair values of
the Berkadia Loan and the Shares. As a result, the Berkadia Loan was recorded at
an initial value of $5,291,200,000, which is net of a discount related to the
commitment and funding fees of $120,000,000 and the cost allocated to the Shares
of $188,800,000.
As discussed in Note 2, the Company accounted for its investment in the Shares
pursuant to the equity method. Principally as a result of the terrorist attacks
on September 11, 2001, FINOVA recorded substantial operating losses. The
Company's share of those losses reduced its investment in the Shares to zero.
The following table provides certain summarized data with respect to FINOVA at
December 31, 2001 and for the period from the effective date of the Plan through
December 31, 2001.
FINOVA
-------------------------
(in thousands)
Assets $ 6,504,025
Liabilities $ 7,624,594
Net deficit $ (1,120,569)
Total revenues $ 191,779
Net loss $ (1,142,300)
9
Berkadia LLC
Notes to the Financial Statements
December 31, 2001
5. Fleet Loan
The Fleet Loan bears interest payable monthly, at a rate generally equal to the
cost of funds for the lenders' conduit facilities plus 0.25%. The lenders' cost
of funds rate is expected to be substantially equal to the Eurodollar Rate that
is used to determine the interest rate on the Berkadia Loan. For the period
ended December 31, 2001, the weighted average interest rate was 3.04%. All
unpaid principal and accrued interest is due at maturity on August 20, 2006.
Pursuant to the Fleet Loan agreement, any principal payments received by the
Company on the Berkadia Loan must be used to make principal payments on the
Fleet Loan. The Fleet Loan agreement restricts the Company's ability to incur
additional indebtedness, liens or to make other investments, which restrictions
are consistent with the business purpose and operations of the Company. The
Berkadia Loan is pledged as collateral to secure the Fleet Loan. In addition, if
the asset value of FINOVA (as defined in the Fleet Loan agreement) is not equal
to at least 1.2 times the Fleet Loan balance as of the end of any month, then
the Company is required to pay principal on the Fleet Loan in an amount that is
sufficient to comply with this ratio. As of December 31, 2001, the asset value
of FINOVA was greater than 1.2 times the Fleet Loan balance.
6. Members' Capital
For the period ended December 31, 2001, the Company distributed substantially
all of its available cash to its Members, aggregating $151,709,000. Of this
amount, $88,536,000 was distributed to Berkshire Members and $63,173,000 to
Leucadia Members.
10
Report of Independent Auditors
The Board of Directors and Shareowners of The FINOVA Group Inc.
We have audited the accompanying consolidated balance sheets of The FINOVA
Group Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related statements of consolidated operations, shareowners' equity and
cash flows for the four month period ended December 31, 2001, the eight month
period ended August 31, 2001, and each of the two years in the period ended
December 31, 2000. These financial statements are the responsibility of The
FINOVA Group Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The FINOVA Group
Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their
consolidated operations and their cash flows for the four month period ended
December 31, 2001, the eight month period ended August 31, 2001, and each of
the two years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that The FINOVA Group Inc. will continue as a going concern. As more fully
described in Note A "Nature of Operations and Chapter 11 Reorganization," since
emerging from bankruptcy on August 21, 2001, the Company has incurred
substantial operating losses and has a negative net worth as of December 31,
2001. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Ernst & Young LLP
Phoenix, Arizona
March 1, 2002
A-18
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(Dollars in thousands)
Reorganized Predecessor
Company Company
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents................................................... $ 1,027,241 $ 699,228
Financing Assets:
Loans and other financing contracts, net.................................... 5,020,426 7,835,698
Direct financing leases..................................................... 354,958 557,471
Leveraged leases............................................................ 196,813 803,581
----------- -----------
Total financing assets...................................................... 5,572,197 9,196,750
Less reserve for credit losses.............................................. (1,019,878) (578,750)
----------- -----------
Net financing assets........................................................ 4,552,319 8,618,000
----------- -----------
Other Financial Assets:
Assets held for sale........................................................ 420,025 421,956
Operating leases............................................................ 190,925 561,698
Assets held for the production of income.................................... 151,872 235,170
Investments................................................................. 116,745 285,934
Net assets of discontinued operations....................................... 1,162,223
----------- -----------
Total other financial assets................................................ 879,567 2,666,981
----------- -----------
Total Financial Assets...................................................... 5,431,886 11,284,981
Other assets................................................................ 44,898 59,460
Goodwill, net of accumulated amortization................................... 45,417
----------- -----------
$ 6,504,025 $12,089,086
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Berkadia Loan............................................................... $ 4,900,000 $
Senior debt--Reorganized Company (principal amount due of $3.25 billion).... 2,489,082
Senior debt--Predecessor Company............................................ 10,997,687
----------- -----------
Total debt.................................................................. 7,389,082 10,997,687
Accounts payable and accrued expenses....................................... 223,155 257,713
Deferred income taxes, net.................................................. 12,357 49,202
----------- -----------
Total Liabilities........................................................... 7,624,594 11,304,602
----------- -----------
Commitments and contingencies...............................................
Company-obligated mandatory redeemable convertible preferred securities of
subsidiary trust solely holding convertible debentures of FINOVA, net of
expenses ("TOPrS")........................................................ 111,550
Shareowners' Equity:
Common stock, $0.01 par value, 400,000,000 shares authorized and 125,873,000
and 64,849,000 shares issued, respectively................................ 1,259 648
Additional capital.......................................................... 16,928 1,107,575
Accumulated deficit......................................................... (1,142,300) (283,435)
Accumulated other comprehensive income...................................... 4,080 15,154
Common stock in treasury, 3,832,000 and 3,554,000 shares, respectively...... (536) (167,008)
----------- -----------
Total Shareowners' Equity................................................... (1,120,569) 672,934
----------- -----------
$ 6,504,025 $12,089,086
=========== ===========
See notes to consolidated financial statements.
A-19
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands, except per share data)
Reorganized Predecessor Company
Company --------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended ------------------------
Dec. 31, 2001 Aug. 31, 2001 2000 1999
------------- ------------- ----------- -----------
Revenues:
Interest income....................................... $ 131,710 $ 400,764 $ 831,594 $ 707,730
Rental income......................................... 18,791 52,067 95,018 96,241
Operating lease income................................ 18,098 51,068 105,457 114,083
Fees and other income................................. 23,180 70,461 117,590 98,577
------------ ----------- ----------- -----------
Total Revenues........................................ 191,779 574,360 1,149,659 1,016,631
------------ ----------- ----------- -----------
Expenses:
Interest expense...................................... 178,374 436,445 628,839 465,256
Operating lease and other depreciation................ 24,010 59,882 65,919 67,835
Provision for credit losses........................... 777,500 230,772 643,000 22,390
Net loss (gain) on financial assets................... 281,608 320,934 168,589 (67,886)
Operating expenses.................................... 71,795 134,074 399,412 168,697
Net reorganization expense............................ 46,527
------------ ----------- ----------- -----------
Total Expenses........................................ 1,333,287 1,228,634 1,905,759 656,292
------------ ----------- ----------- -----------
(Loss) income from continuing operations before
income taxes and preferred dividends (1,141,508) (654,274) (756,100) 360,339
Income tax (expense) benefit.......................... (792) 2,765 213,173 (138,316)
------------ ----------- ----------- -----------
(Loss) income from continuing operations before
preferred dividends................................. (1,142,300) (651,509) (542,927) 222,023
Preferred dividends, net of tax....................... 3,074 3,782 3,782
------------ ----------- ----------- -----------
(Loss) income from continuing operations.............. (1,142,300) (654,583) (546,709) 218,241
Discontinued operations, net of tax benefit
(expense) of ($1,359), $18,198 and $1,998........... 2,980 (55,397) (2,997)
Net loss on disposal of operations, net of tax benefit
of $0 and $150,664.................................. (17,997) (337,711)
------------ ----------- ----------- -----------
(Loss) income before extraordinary item............... (1,142,300) (669,600) (939,817) 215,244
Extraordinary item-gain on debt discharge............. 28,750
------------ ----------- ----------- -----------
Net (Loss) Income..................................... $ (1,142,300) $ (640,850) $ (939,817) $ 215,244
============ =========== =========== ===========
Basic (loss) earnings per share:
(Loss) income from continuing operations.............. $ (9.36) $ (10.28) $ (8.96) $ 3.64
Loss from discontinued operations..................... (0.23) (6.45) (0.05)
Extraordinary item.................................... 0.45
------------ ----------- ----------- -----------
Net (loss) earnings per share......................... $ (9.36) $ (10.06) $ (15.41) $ 3.59
------------ ----------- ----------- -----------
Adjusted weighted average shares outstanding.......... 122,041,000 63,677,000 60,994,000 59,880,000
============ =========== =========== ===========
Diluted (loss) earnings per share:
(Loss) income from continuing operations.............. $ (9.36) $ (10.28) $ (8.96) $ 3.45
Loss from discontinued operations..................... (0.23) (6.45) (0.04)
Extraordinary item.................................... 0.45
------------ ----------- ----------- -----------
Net (loss) earnings per share......................... $ (9.36) $ (10.06) $ (15.41) $ 3.41
------------ ----------- ----------- -----------
Adjusted weighted average shares outstanding.......... 122,041,000 63,677,000 60,994,000 64,300,000
============ =========== =========== ===========
Dividends per common share............................ $ $ $ 0.54 $ 0.68
============ =========== =========== ===========
See notes to consolidated financial statements.
A-20
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Reorganized
Company
Four Months
Ended
Dec. 31, 2001
-------------
Operating Activities:
Net (loss) income............................................................ $(1,142,300)
Extraordinary item--gain on debt discharge...................................
Discontinued operations, net of tax..........................................
Net loss on disposal of operations, net of tax...............................
-----------
(Loss) income from continuing operations..................................... (1,142,300)
Adjustments to reconcile (loss) income from continuing operations to net
cash (used) provided by continuing operations:
Net adjustment to assets & liabilities related to Fresh- Start Reporting..
Provision for credit losses............................................... 777,500
Net cash gain on disposal of financial assets............................. (35,906)
Non-cash charge-offs of financial assets.................................. 317,514
Non-cash reorganization items.............................................
Depreciation and amortization............................................. 25,625
Impairment charge-off of goodwill.........................................
Deferred income taxes, net................................................ 2,401
Other amortization........................................................ 7,666
Change in assets and liabilities, net of effects from companies purchased:
Decrease (increase) in other assets....................................... 17,337
Increase (decrease) in accounts payable and accrued expenses.............. 26,945
-----------
Net Cash (Used) Provided by Continuing Operating Activities.................. (3,218)
-----------
Investing Activities:
Proceeds from disposals of leases and other owned assets..................... 169,896
Proceeds from sales of investments........................................... 40,698
Proceeds from sales of financial assets...................................... 15,473
Proceeds from securitizations................................................
Collections from financial assets............................................ 901,385
Expenditures for financial assets............................................ (326,547)
Acquisitions, net of cash received...........................................
Recoveries of loans previously written off................................... 21,729
-----------
Net Cash Provided (Used) by Investing Activities............................. 822,634
-----------
Financing Activities:
Proceeds from draw down on backup facilities.................................
Net change in commercial paper and short-term borrowings.....................
Proceeds from issuance of term notes.........................................
Repayments of term notes.....................................................
Proceeds from Berkadia Loan..................................................
Repayments of Berkadia Loan.................................................. (700,000)
Repayments of indebtedness subject to chapter 11 proceedings.................
Proceeds from exercise of stock options......................................
Common stock purchases for treasury..........................................
Dividends....................................................................
-----------
Net Cash (Used) Provided by Financing Activities............................. (700,000)
-----------
Net Cash Provided (Used) by Discontinued Operations..........................
-----------
Increase in Cash and Cash Equivalents........................................ 119,416
Cash and Cash Equivalents, Beginning of Period............................... 907,825
-----------
Cash and Cash Equivalents, End of Period..................................... $ 1,027,241
===========
Predecessor Company
--------------------------------------
Eight Months Years Ended December 31,
Ended ------------------------
Aug. 31, 2001 2000 1999
------------- ----------- -----------
Operating Activities:
Net (loss) income............................................................ $ (640,850) $ (939,817) $ 215,244
Extraordinary item--gain on debt discharge................................... (28,750)
Discontinued operations, net of tax.......................................... (2,980) 55,397 2,997
Net loss on disposal of operations, net of tax............................... 17,997 337,711
----------- ----------- -----------
(Loss) income from continuing operations..................................... (654,583) (546,709) 218,241
Adjustments to reconcile (loss) income from continuing operations to net
cash (used) provided by continuing operations:
Net adjustment to assets & liabilities related to Fresh- Start Reporting.. 62,851
Provision for credit losses............................................... 230,772 643,000 22,390
Net cash gain on disposal of financial assets............................. (48,679) (62,592) (70,633)
Non-cash charge-offs of financial assets.................................. 369,613 231,181 2,613
Non-cash reorganization items............................................. 44,386
Depreciation and amortization............................................. 66,104 89,607 89,854
Impairment charge-off of goodwill......................................... 193,337
Deferred income taxes, net................................................ (7,195) (374,800) 114,886
Other amortization........................................................ 16,427 43,790 21,195
Change in assets and liabilities, net of effects from companies purchased:
Decrease (increase) in other assets....................................... (139,822) 29,473 34,051
Increase (decrease) in accounts payable and accrued expenses.............. (102,535) (9,960) (2,778)
----------- ----------- -----------
Net Cash (Used) Provided by Continuing Operating Activities.................. (162,661) 236,327 429,819
----------- ----------- -----------
Investing Activities:
Proceeds from disposals of leases and other owned assets..................... 59,857 112,556 132,958
Proceeds from sales of investments........................................... 60,781 147,672 61,378
Proceeds from sales of financial assets...................................... 329,085 110,676 504,138
Proceeds from securitizations................................................ 302,751
Collections from financial assets............................................ 1,911,044 1,963,831 2,538,862
Expenditures for financial assets............................................ (591,723) (2,982,158) (4,771,253)
Acquisitions, net of cash received........................................... (85,278)
Recoveries of loans previously written off................................... 4,964 1,018 1,830
----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities............................. 1,774,008 (343,654) (1,617,365)
----------- ----------- -----------
Financing Activities:
Proceeds from draw down on backup facilities................................. 4,690,990
Net change in commercial paper and short-term borrowings..................... (3,876,971) (305,030)
Proceeds from issuance of term notes......................................... 225,000 3,443,592
Repayments of term notes..................................................... (1,446,800) (809,245)
Proceeds from Berkadia Loan.................................................. 5,600,000
Repayments of Berkadia Loan..................................................
Repayments of indebtedness subject to chapter 11 proceedings................. (7,827,398)
Proceeds from exercise of stock options...................................... 171 27,689
Common stock purchases for treasury.......................................... (89,272)
Dividends.................................................................... (33,084) (40,835)
----------- ----------- -----------
Net Cash (Used) Provided by Financing Activities............................. (2,227,398) (440,694) 2,226,899
----------- ----------- -----------
Net Cash Provided (Used) by Discontinued Operations.......................... 824,648 1,146,905 (988,527)
----------- ----------- -----------
Increase in Cash and Cash Equivalents........................................ 208,597 598,884 50,826
Cash and Cash Equivalents, Beginning of Period............................... 699,228 100,344 49,518
----------- ----------- -----------
Cash and Cash Equivalents, End of Period..................................... $ 907,825 $ 699,228 $ 100,344
=========== =========== ===========
A-21
THE FINOVA GROUP INC.
Supplemental Disclosure
As part of the consideration for the $5.6 billion senior secured loan received
from Berkadia, FINOVA issued Berkadia 61,020,581 shares of common stock,
representing 50% of FINOVA's shares outstanding after giving effect to the
implementation of the Plan.
In accordance with the Plan, holders of FINOVA's unsecured indebtedness
received a cash payment equal to 70% of their unsecured claim and New Senior
Notes having an aggregate principal amount equal to the remaining 30% of the
unsecured claim. This resulted in a non-cash exchange of $3.22 billion of old
senior notes or other debt for $3.22 billion in New Senior Notes. Holders of
TOPrS received a cash payment equal to 52.5% of the liquidation preference
attributable to the TOPrS and New Senior Notes having an aggregate principal
amount equal to 22.5% of the liquidation preference attributable to the TOPrS.
This resulted in a non-cash exchange of the TOPrS for New Senior Notes in the
amount of $25.9 million and a non-cash extraordinary gain on debt discharge in
the amount of $28.8 million. The New Senior Notes are shown on the balance
sheet at $2.49 billion in accordance with Fresh-Start Reporting (See Note C
"Fresh-Start Reporting"), but FINOVA's repayment obligation is $3.25 billion.
For the four months ended December 31, 2001, FINOVA received income tax refunds
of approximately $1.6 million, and for the eight months ended August 31, 2001,
paid income taxes of approximately $5.7 million. No income tax was paid in 2000
and in 1999, income tax paid was approximately $6.0 million.
FINOVA paid interest of $138.0 million for the four months ended December 31,
2001 and $535.4 million for the eight months ended August 31, 2001. Interest of
$767.2 million and $521.9 million was paid for the years ended December 31,
2000 and 1999, respectively.
See notes to consolidated financial statements.
A-22
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY
(Dollars in thousands)
Accumulated
Accumulated Other Common Total
Common Additional (Deficit) Comprehensive Stock in Shareowners'
Stock Capital Income Income Treasury Equity
------ ----------- ----------- ------------- --------- ------------
Balance, January 1, 1999 (Predecessor) $ 585 $ 765,050 $ 515,057 $ 686 $(114,147) $ 1,167,231
------ ----------- ----------- -------- --------- -----------
Comprehensive income:
Net income........................................ 215,244 215,244
Net change in unrealized holding gains (losses)... 37,054 37,054
Net change in foreign currency translation........ (3,928) (3,928)
-----------
Comprehensive income............................. 248,370
-----------
Net change in unamortized amount of restricted stock
and other.......................................... (4,825) (4,825)
Issuance of common stock............................ 63 354,960 355,023
Dividends........................................... (40,835) (40,835)
Purchase of shares.................................. (89,272) (89,272)
Shares used in connection with employee benefit
plans.............................................. (5,664) 33,353 27,689
------ ----------- ----------- -------- --------- -----------
Balance, December 31, 1999 (Predecessor)............ 648 1,109,521 689,466 33,812 (170,066) 1,663,381
------ ----------- ----------- -------- --------- -----------
Comprehensive loss:
Net loss.......................................... (939,817) (939,817)
Net change in unrealized holding gains (losses)... (22,709) (22,709)
Net change in foreign currency translation........ 4,051 4,051
-----------
Comprehensive loss............................... (958,475)
-----------
Net change in unamortized amount of restricted stock
and other.......................................... 941 941
Dividends........................................... (33,084) (33,084)
Shares used in connection with employee benefit
plans.............................................. (2,887) 3,058 171
------ ----------- ----------- -------- --------- -----------
Balance, December 31, 2000 (Predecessor)............ 648 1,107,575 (283,435) 15,154 (167,008) 672,934
------ ----------- ----------- -------- --------- -----------
Comprehensive loss:
Net loss before reorganization and fresh-start
reporting........................................ (597,085) (597,085)
Net change in unrealized holding gains (losses)... (19,000) (19,000)
Net change in foreign currency translation........ (540) (540)
-----------
Comprehensive loss............................... (616,625)
-----------
Net change in unamortized amount of restricted stock
and other.......................................... 11,956 11,956
Shares cancelled from employee benefit plans........ (11,263) (11,263)
Effect of reorganization and fresh-start reporting.. 611 (1,102,631) 880,520 4,386 177,735 (39,379)
------ ----------- ----------- -------- --------- -----------
Balance, August 31, 2001 (Reorganized).............. 1,259 16,900 (536) 17,623
------ ----------- ----------- -------- --------- -----------
Comprehensive loss:.................................
Net loss.......................................... (1,142,300) (1,142,300)
Net change in unrealized holding gains (losses)... 6,999 6,999
Net change in foreign currency translation........ (2,919) (2,919)
-----------
Comprehensive loss............................... (1,138,220)
-----------
Other............................................... 28 28
------ ----------- ----------- -------- --------- -----------
Balance, December 31, 2001 (Reorganized)............ $1,259 $ 16,928 $(1,142,300) $ 4,080 $ (536) $(1,120,569)
====== =========== =========== ======== ========= ===========
See notes to consolidated financial statements.
A-23
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in thousands in tables, except per share data)
A. Nature of Operations and Chapter 11 Reorganization
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 Group 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. FINOVA is a Delaware corporation, incorporated in 1991.
The Company's current business activities are limited to maximizing the value
of its portfolio through the orderly collection of its receivables. These
activities include continued collection of its portfolio pursuant to
contractual terms and may include efforts to retain certain customer
relationships and restructure or terminate other relationships. FINOVA is no
longer engaged in any new lending activities, except to honor previously
existing customer commitments. Any cash generated from these activities in
excess of cash reserves permitted in the Company's debt agreements is used to
pay down FINOVA's obligations to its creditors. Operations have been
restructured to more efficiently manage these collection efforts. The Company
will consider the sale of certain portfolios if buyers can be found at
appropriate prices.
To facilitate the orderly collection of its remaining asset portfolios, 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. As of
December 31, 2001, the Company had 497 employees compared to 1,098 and 1,465 at
December 31, 2000 and 1999, respectively.
On February 26, 2001, FINOVA and FINOVA Capital entered into a commitment with
Berkadia LLC ("Berkadia"), an entity jointly owned by Berkshire Hathaway Inc.
("Berkshire") and Leucadia National Corporation ("Leucadia"), pursuant to which
Berkadia committed to lend the Company $6 billion to facilitate a chapter 11
restructuring of the outstanding debt of FINOVA and its principal subsidiaries.
As contemplated in the commitment with Berkadia, 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").
Upon emergence from bankruptcy, the Company adopted Fresh-Start Reporting,
which has resulted in the consolidated financial statements for the periods
subsequent to August 31, 2001 (the "Reorganized Company") not being 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, although the Company
emerged from its reorganization proceedings on August 21, 2001. The results of
operations from August 21, 2001 through August 31, 2001 were not significant.
Going Concern
Inadequate access to new capital and a prolonged weakening of the U.S. economy
have had an increasingly negative impact on FINOVA. The terrorist attacks on
September 11 accelerated this trend and further deteriorated the quality of
assets. The Company estimated the impact of the terrorist attacks as of
September 30, 2001, resulting in charges to provide additional loss reserves
and to write down various owned assets, all of
A-24
THE FINOVA GROUP INC.
which resulted in a substantial negative net worth. While FINOVA continues to
pay its obligations as they become due, the ability of the Company to continue
as a going concern is dependent upon many factors, particularly the ability of
its borrowers to repay their obligations to FINOVA and the Company's ability to
realize the value of its portfolio, including aircraft. Unless the Company's
current financial condition significantly improves, it is highly unlikely the
Company will be able to repay the New Senior Notes in their entirety at
maturity in November 2009. The accompanying consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
Chapter 11 Reorganization
The following is a brief overview of the provisions of the Plan. This overview
should be read in conjunction with the Plan, which is incorporated by reference
in FINOVA's Current Reports on Form 8-K, filed on June 22, 2001 and August 10,
2001, Exhibits 2.A and 2.B, respectively.
Berkadia 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 the general unsecured
claims against FINOVA Capital (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 51/2% Convertible Trust Originated
Preferred Securities (the "TOPrS") issued by FINOVA Finance Trust received (a)
a cash payment equal to 52.5% of the liquidation preference attributable to the
TOPrS (not including pre-petition and post-petition dividends), (b) a cash
payment equal to 75% of accrued and unpaid pre-petition and post-petition
dividends attributable to the TOPrS and (c) New Senior Notes having an
aggregate principal amount equal to 22.5% of the liquidation preference
attributable to the TOPrS (not including pre-petition and post-petition
dividends). FINOVA's subordinated debentures related to the TOPrS have been
cancelled and FINOVA Finance Trust has been dissolved pursuant to the Plan.
Upon implementation of the Plan, FINOVA Capital's debt was no longer publicly
held, and 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 the payment of interest and principal under the New Senior Notes are secured
by a second-priority security interest in (a) all of the 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
A-25
THE FINOVA GROUP INC.
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 paid.
Because virtually all of the Company's assets are pledged to secure the
obligations under the Berkadia Loan and 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 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 in
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 shareowners. It should be noted that these
distributions cannot be made to shareowners so long as FINOVA has an
accumulated deficit. Instead, these payments will be held until legally
permitted for that purpose under corporate law or used to satisfy the Company's
debts if necessary. These restrictions also apply to the shareowner payments
noted below.
If payment in full is made of the outstanding principal of the New Senior Notes
and payments are made to FINOVA common shareowners in an aggregate amount equal
to 5.263% (5%/95% as noted above) of the aggregate principal amount of the New
Senior Notes, ninety-five percent (95%) of any available cash will be used to
pay contingent interest to holders of New Senior Notes in an aggregate amount
of up to $100 million (as such amount may be reduced to reflect a decrease in
the principal amount of New Senior Notes outstanding as a result of repurchases
by FINOVA) and five percent (5%) of such remaining available cash will be used
for distributions to and/or repurchases of stock from common shareowners, if
those payments can be made to shareowners, as noted above. Contingent interest
payments will terminate in 2016. FINOVA's obligation to make the contingent
interest payments is not secured.
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 and the related 5% distribution to common
shareowners or to make any contingent interest payments. The Company has a
negative net worth of $1.1 billion as of December 31, 2001 ($1.9 billion when
the New Senior Notes are considered at their principal amount due), the
financial condition of many of its customers has 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 the
Company's debt and equity securities involves a high level of risk to the
investor.
FINOVA's Board of Directors was reconstituted and is comprised of four
directors designated by Berkadia, two prior directors of FINOVA and one
director designated by the Official Committee of Creditors. The Berkadia
designated directors are Ian M. Cumming, Joseph S. Steinberg, Lawrence S.
Hershfield and R. Gregory Morgan; the continuing FINOVA directors are G. Robert
Durham and Kenneth R. Smith; and Thomas F. Boland was designated by the
Committee of Creditors. All directors are subject to reelection annually by the
shareowners, without regard to their original designation.
A-26
THE FINOVA GROUP INC.
FINOVA's business is being operated under a 10-year Management Services
Agreement with Leucadia. Leucadia has designated its employees to act as
Chairman of the Board (Ian M. Cumming), President (Joseph S. Steinberg) and
Chief Executive Officer (Lawrence S. Hershfield).
Developments Since Emergence From Chapter 11
The September 11 terrorist attacks resulted in a tremendous loss of life and
property and have significantly affected the U.S. and world economies. Some of
FINOVA's asset portfolios are concentrated within industries that have been
adversely affected by these events, especially those operating in the
transportation, resort and hotel industries. FINOVA has developed estimates of
the impact these attacks will have on its portfolios, resulting in charges to
provide additional loss reserves and to write down various owned assets.
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. As a result, the Company
paid Berkadia $700 million on October 9, 2001 and an additional $500 million on
January 7, 2002. On February 7, 2002, with Berkadia's consent, the Company made
a voluntary prepayment of $500 million, reducing the loan balance to $3.9
billion. Loan repayments are unlikely to continue at this pace.
In December 2001, the Company completed a sale of certain leveraged leases in
its transportation portfolio for approximately $125.2 million, which
approximated the carrying amount at the time of sale. Previously, these assets
had been classified as held for sale and written down by $100.8 million to
their estimated sales price. The tax gain of $319 million realized from the
sale was fully offset by the current year's tax loss.
In a series of transactions during late 2001 and the first quarter of 2002, the
Company sold substantially all of its investment alliance assets for $89.7
million, which resulted in a $6.7 million gain. These assets had previously
been classified as held for sale and their carrying amount was reduced in 2001
by $51.4 million.
B. Significant Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. Those 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. Significant estimates
include anticipated amounts and timing of future cash flows used in the
calculation of Fresh-Start Reporting adjustments and the reserve for credit
losses, measurement of impairment, selection of appropriate discount rates used
in net present value calculations, determination of fair values of certain
financial instruments for which there is not an active market, residual
assumptions for leasing transactions, and the determination of appropriate
valuation allowances against deferred tax assets. Actual results could differ
from those estimated.
Consolidation Policy
The consolidated financial statements present the financial position, results
of operations and cash flows of The FINOVA Group Inc. and its subsidiaries,
including FINOVA Capital. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States. All significant intercompany balances have been eliminated in
consolidation. Certain amounts for prior periods have been reclassified to be
consistent with 2001 presentation.
Portfolio Policies
The following policies are considered by the Company to be among the most
critical accounting policies and those that could most significantly impact the
consolidated financial statements. The application of these policies rely upon
management discretion and the use of estimates.
A-27
THE FINOVA GROUP INC.
The risk adjusted interest rates utilized in Fresh-Start Reporting are now
considered to be the contractual rates for purposes of calculating net present
value of cash flows in the determination of fair values and impairment.
Assets Held for the Production of Income. Assets held for the production of
income include off-lease and returned assets previously the subject of
financing transactions that are currently being made available for new
financing transactions. Assets held for the production of income are carried at
amortized cost with adjustments for impairment, if any, recorded in operations.
Depreciation of these assets is charged to operations over their estimated
remaining useful lives. The determination of impairment is often dependent upon
the estimation of anticipated future cash flows discounted at appropriate
market rates to determine net present value.
Assets Held for Sale. Assets held for sale are comprised of assets previously
classified as financing transactions and other financial assets that management
does not have the intent and/or ability to hold to maturity. Assets held for
sale are revalued at least quarterly at the lower of cost or market less
anticipated selling expenses, with the adjustment, if any, recorded in current
operations. The determination of impairment is often dependent upon the
estimation of anticipated future cash flows discounted at appropriate market
rates to determine net present value.
Impaired Loans. In accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"), a loan becomes impaired when it is
probable that the Company will be unable to collect all amounts due, including
principal and interest payments, in accordance with the original contractual
terms. Impairment reserves are recorded when the current carrying amount of a
loan exceeds the greater of (a) net present value of expected cash flows from
the borrower, discounted at the original effective interest rate of the
transaction or (b) net fair value of collateral. Accruing impaired loans are
paying in accordance with the current modified loan agreement or have adequate
collateral protection. The process of measuring impairment requires judgment
and estimation, and the eventual outcomes may differ from the estimated amounts.
Impairment of Owned Assets. In accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," an owned asset is considered
impaired if the undiscounted cash flows are less than the carrying amount of
the asset. SFAS No. 144 provides several acceptable methods for measuring the
amount of the impairment. FINOVA's typical practice is to compare the carrying
amount of the asset to the present value of the estimated future cash flows,
using an appropriate discount rate. The process of measuring impairment
requires judgment and estimation, and the eventual outcomes may differ from the
estimated amounts.
Investments. The Company's investments include debt and equity securities and
partnership interests. At acquisition, marketable debt and equity securities
are designated as either (a) held to maturity, which are carried at amortized
cost adjusted for other than temporary impairment, if any, (b) trading, which
are carried at estimated fair value, with unrealized gains and losses reflected
in results of operations or (c) available for sale, which are carried at
estimated fair value using the specific identification method, with unrealized
gains and losses reflected as a separate component of shareowners' equity.
Partnerships are accounted for under either the cost or equity method depending
on the Company's level of ownership in the investee. Under the equity method,
the Company recognizes its share of income or losses of the partnership in the
period in which they are earned or incurred. Under the cost method, the Company
recognizes income based on distributions received.
The carrying values of equity securities and partnership interests are
periodically reviewed for impairment, which if identified, is recorded as a
charge to operations. The impairment analysis for investments utilizes various
valuation techniques involving the use of estimates and management judgment and
the eventual outcomes may differ from the estimates.
A-28
THE FINOVA GROUP INC.
Net Assets of Discontinued Operations. Upon emergence from chapter 11, the
Company reclassified its net assets of discontinued operations to assets held
for sale. This decision reflects management's intention to manage all assets of
the Company as one operating unit. These assets were reclassified at their then
current net realizable values.
During the third quarter of 2000, FINOVA's Board of Directors approved a plan
to discontinue and offer for sale its corporate finance, distribution & channel
and commercial services businesses. As a result, the Company reported these
divisions as discontinued operations in accordance with Accounting Principles
Board Opinion ("APB") No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Accordingly, the revenues,
costs and expenses, assets and liabilities expected to be assumed by an
acquiring entity, and cash flows of these discontinued operations were excluded
from the respective captions in the consolidated balance sheet and statements
of consolidated operations and cash flows presented. The net assets of
discontinued operations represented reasonable estimates of the net realizable
values of those businesses. These estimates were based on market conditions,
interest rates and other factors that could differ significantly from actual
results.
Nonaccruing Assets. 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. Due to a
variety of factors, accounts may be classified as impaired even though the
borrower is current on principal and interest payments.
Receivable Sales. In accordance with SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
subsequently amended by SFAS No. 140, when the Company sells receivables, it
may retain subordinated interests, which are retained interests in the
transferred receivables. These receivable transfers are accounted for as sales
when legal and effective control of the transferred receivables is surrendered.
Gain or loss on the sale of the receivables depends in part on the previous
carrying amount of the financial assets involved in the transfer, allocated
between the receivables sold and the retained interests based on their relative
fair value at the date of transfer. Active markets with quoted prices for
retained interests generally do not exist. Therefore, the Company estimates
fair value based on the present value of future estimated cash flows and key
assumptions, i.e. net credit losses, prepayments and discount rates
commensurate with the risks involved. In general, the servicing fees earned are
approximately equal to the cost of servicing; therefore, no material servicing
assets or liabilities have been recognized in those transactions.
FINOVA's retained interests in transferred receivables are generally treated as
assets available for sale, which are carried at estimated fair value using the
specific identification method with unrealized gains and losses being recorded
as a component of accumulated other comprehensive income within the equity
section of the balance sheet; however, in accordance with the Emerging Issues
Task Force ("EITF") Issues No. 99-20 "Reorganization of Interest Income and
Impairment on Purchase and Retained Beneficial Interests in Securitized
Financial Assets," if a decline in value is considered other than temporary,
the valuation adjustment is recorded through the statement of operations. These
retained interests are carried on the balance sheet within investments.
During the periods in which FINOVA had assets classified as discontinued
operations, the transferred receivables that related to these operations were
recorded within discontinued operations.
Reserve for Credit Losses. The reserve for credit losses is established for
estimated credit impairment on individual assets and inherent credit losses in
the Company's loan and financing lease portfolios. These reserves are not
established for assets held for sale, assets held for the production of income
or other owned assets, including assets on operating leases and residuals, as
these asset classes are subject to other accounting, which requires direct
write down for impairment. The provision for credit losses is the charge to
operations to increase
A-29
THE FINOVA GROUP INC.
the reserve for credit losses to the level that management estimates to be
adequate considering delinquencies, loss experience and collateral. Other
factors considered include changes in geographic and product mix, size of the
portfolio and current economic conditions. Impairment reserves are created if
the carrying amount of the assets exceed the estimated recovery, which is
measured by estimating the present value of expected future cash flows, market
value or the fair value of collateral. This includes the use of significant
estimates and assumptions regarding future customer performance, amount and
timing of future cash flows and collateral coverage. Accounts are either
written off or written down and charged to the reserve when the actual loss is
determinable, after giving consideration to the customer's financial condition
and the value of the underlying collateral, including any guarantees.
Recoveries of amounts previously written off as uncollectable increase the
reserve for credit losses.
Residual Values. FINOVA has a significant investment in residual values in its
leasing portfolio. These residual values represent estimates of the value of
leased assets at the end of contract terms and are initially recorded based
upon appraisals or estimates. Residual values are periodically reviewed to
determine that recorded amounts are appropriate.
Revenue Recognition. For loans and other financing contracts, earned income is
recognized over the life of the contract, using the effective interest method.
Leases that are financed by nonrecourse borrowings and meet certain other
criteria are classified as leveraged leases. For leveraged leases, aggregate
rental receivables are reduced by the related nonrecourse debt service
obligation including interest ("net rental receivables"). The difference
between (a) the net rental receivables and (b) the cost of the asset less
estimated residual value at the end of the lease term is recorded as unearned
income. Earned income is recognized over the life of the lease at a constant
rate of return on the positive net investment, which includes the effects of
deferred income taxes.
For operating leases, earned income is recognized on a straight-line basis over
the lease term and depreciation is taken on a straight-line basis over the
estimated useful lives of the leased assets.
Origination fees, net of direct origination costs, are deferred and amortized
over the life of the originated asset as an adjustment to yield. As a result of
FINOVA's elimination of new business activities, no new origination fees are
anticipated.
Original issue discounts are established when equity interests are received in
connection with a funded loan and are based on the fair value of the equity
interest. The assigned value is amortized to income over the term of the loan
as an adjustment to yield.
Fees received in connection with loan commitments, extensions, waivers and
restructurings are recognized as income over the term of the loan as an
adjustment to yield. Fees on commitments that expire unused are recognized at
expiration.
Income recognition is generally suspended for leases, loans and other financing
contracts at the earlier of the date at which payments become 90 days past due,
or when, in the opinion of management, a full recovery of income and principal
becomes doubtful and the account is determined to be impaired. Income
recognition is resumed only when the lease, loan or other financing contract
becomes contractually current and performance is demonstrated to be resumed.
A-30
THE FINOVA GROUP INC.
General Corporate Policies
Cash Equivalents. FINOVA classifies short-term investments with original
maturities of three months or less from the time of purchase as cash
equivalents. Cash and cash equivalents included short-term investments of
$947.8 million and $644.0 million at December 31, 2001 and 2000, respectively.
Deferred Income Taxes. Deferred tax assets and liabilities are recorded for
estimated future tax effects attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax law. A valuation allowance is recorded if it is more likely than
not that a deferred tax asset will not be realized.
Derivative Financial Instruments. The Company does not currently have material
derivative financial instruments. Historically, the Company used derivative
financial instruments as part of its interest rate risk management policy of
match funding its assets and liabilities. The derivative instruments used
included interest rate swaps and, to a lesser extent, treasury locks, options,
futures and swaptions, which were subject to hedge accounting determination.
Goodwill. As of December 31, 2001, FINOVA did not have any goodwill recorded in
its financial statements. Historically, FINOVA amortized the excess of cost
over the fair value of net assets acquired ("goodwill") on a straight-line
basis primarily over 20 to 25 years. Amortization totaled $1.6 million, $16.3
million and $16.1 million for the eight months ended August 31, 2001 and the
years ended December 31, 2000 and 1999, respectively.
Upon emergence from chapter 11, the Company implemented Fresh-Start Reporting,
which resulted in the charge-off of the remaining goodwill balance of $43.4
million. At December 31, 2000, management evaluated the impairment of goodwill,
resulting in a charge-off of $193.3 million. Additionally, in connection with
adjusting the discontinued businesses to net realizable value in September
2000, $107.3 million of goodwill was charged off and included in the loss on
disposal of operations.
Foreign Currency. Foreign currency denominated financial statements are
translated into U.S. dollars in accordance with the guidelines established in
SFAS No. 52 "Foreign Currency Translation." The current exchange rate is used
to translate the assets and liabilities of the foreign companies. Revenues and
expenses are translated at the average exchange rates during each reporting
period. Any resulting translation adjustments are reported as a component of
shareowners' equity.
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,"
FINOVA implemented Fresh-Start Reporting upon emergence from chapter 11. This
resulted in material adjustments to the historic carrying amounts of the
Company's assets and liabilities to record them at their current fair values.
The resulting values were dependent upon the use of estimates and many other
factors and valuation methods, including estimating the present value of future
cash flows discounted at appropriate risk adjusted market rates, traded market
prices and other applicable ratios and valuation techniques believed by the
Company to be indicative of fair value.
The fair value adjustments to revenue accruing loans and financing leases will
accrete into interest income utilizing the effective interest method over the
life of the transactions. If transactions are classified as nonaccruing, the
Company's policy is to suspend income accretion.
The fair value adjustment to the New Senior Notes will be amortized to interest
expense over the life of the debt utilizing the effective interest method.
A-31
THE FINOVA GROUP INC.
As a result of Fresh-Start Reporting and the changes in the Company's
operations, the consolidated financial statements for 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"). For financial reporting purposes, the effective date of
the Plan is considered to be the close of business on August 31, 2001, although
the Company emerged from its reorganization proceedings on August 21, 2001. The
results of operations from August 21, 2001 through August 31, 2001 were not
significant.
Furniture, Equipment and Leasehold Improvements. The Company's general policy
is to report furniture, equipment and office leasehold improvements at cost,
less accumulated depreciation and amortization, computed on a straight-line
method over the estimated useful lives of the assets. Assets are periodically
reviewed for impairment and adjustments, if any, are charged to current
operations. During 2001, the Company determined various leasehold and other
fixed assets to be permanently impaired as a result of rejecting a number of
lease arrangements.
(Loss) Earnings Per Share. Basic (loss) earnings per share exclude the effects
of dilution and are computed by dividing (loss) income available to common
shareowners by the weighted average amount of common stock outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if options, convertible preferred securities or other contracts to issue
stock were exercised or converted into common stock. These calculations are
presented for the four months ended December 31, 2001, the eight months ended
August 31, 2001 and the years ended December 31, 2000 and 1999 on the
Statements of Consolidated Operations and are more fully discussed in Note N
"(Loss) Earnings Per Share."
As a result of the Plan, all stock incentive plans, outstanding stock options,
stock appreciation rights and restricted stock were cancelled. Additionally,
the convertible preferred securities were restructured in the reorganization
and ceased to exist. As a result, the differences between basic (loss) earnings
per share and diluted (loss) earnings per share were eliminated for the
Reorganized Company.
Recently Issued Accounting Standards. In June 1999, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of SFAS No.
133" ("SFAS 133"). On January 1, 2001, FINOVA adopted the provision of SFAS No.
133, as amended, which resulted in an immaterial impact on FINOVA's
consolidated results of operations and financial position.
During 2001, FASB issued SFAS No. 141, "Business Combinations," No. 142,
"Goodwill and Other Intangible Assets," No. 143, "Accounting for Asset
Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS Nos. 141 and 142 have no current impact on the
Company. SFAS No. 143 establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and associated
asset retirement costs. SFAS No. 144 supercedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets To Be Disposed
Of," and APB Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," and amends ARB No. 51,
"Consolidated Financial Statements."
The Emerging Issues Task Force ("EITF") issued EITF 99-20, "Reorganization of
Interest Income and Impairment of Purchased and Retained Beneficial Interests
in Securitized Financial Assets," which was effective for all fiscal quarters
beginning after March 15, 2001. The provisions of this EITF are to be applied
to the accounting for interest income and impairment of beneficial interests in
securitization transactions that involve contractual cash flows. The Company
adopted the provisions in 2001, which resulted in an immaterial impact on its
consolidated results of operations and financial position.
A-32
THE FINOVA GROUP INC.
Compensation and Benefit Policies
Pension and Other Benefits. Trusteed, noncontributory pension plans cover
substantially all FINOVA employees. Benefits are based primarily on final
average salary and years of service. Funding policies provide that payments to
pension trusts shall be at least equal to the minimum funding required by
applicable regulations.
Other post-retirement benefit costs are recorded during the period the
employees provide service to FINOVA. Post-retirement obligations are funded as
benefits are paid.
Post-employment benefits are any benefits other than retirement benefits.
Generally, FINOVA records post-employment benefit costs if payment of the
benefits is probable and the amount of the benefits can be reasonably estimated.
Employees are covered by severance arrangements with the Company. Severance
accruals are recorded when management has approved a formal plan of termination
and communicated with the employee.
As of December 31, 2001, employees were also covered by retention plans
approved by the Bankruptcy Court during the reorganization proceedings. The
retention program ended in February 2002. The costs associated with the
retention plans were charged to operations. The Company recorded $6.6 million,
$12.2 million and $21.6 million in retention expense during the four months
ended December 31, 2001, the eight months ended August 31, 2001 and the year
ended December 31, 2000, respectively.
Savings Plan. FINOVA maintains The FINOVA Group Inc. Savings Plan (the "Savings
Plan"), a qualified 401(k) program. The Savings Plan is available to
substantially all employees. Beginning in 2002, the employee may elect
voluntary wage deductions ranging from 0% to 30% of taxable compensation. Prior
to 2002, the employee could elect from 0% to 15% of taxable compensation. The
Company's matching contributions are based on employee pre-tax salary
deductions, up to a maximum of 100% of the first 6% of salary contributions.
C. 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," the Company adopted Fresh-Start
Reporting upon emergence from chapter 11. The Company adopted Fresh-Start
Reporting because, as a result of implementation of the Plan, holders of the
Company's existing common stock immediately before filing and confirmation of
the Plan retained less than 50% of the common stock of the emerging entity and
the Company's reorganization value at emergence was less than its post-petition
liabilities and allowed claims. Fresh-Start Reporting resulted in material
adjustments to the historical carrying amounts of the Company's assets and
liabilities. FINOVA's gross assets are recorded at their reorganization value,
which was primarily determined based upon the present value of estimated future
cash flows, discounted at appropriate risk adjusted market rates for similar
loans and leases. Allocation of the adjustment to individual assets was
determined in a manner similar to the accounting provisions applied for
business combinations under purchase accounting. The New Senior Notes were
recorded based upon the trading price of the New Senior Notes shortly after
they were issued. The resulting shareowners' equity value of $17.6 million at
August 31, 2001, was based on the consideration of many factors and various
valuation methods, including the fair values of assets and liabilities,
discounted cash flows, selected publicly traded company market multiples and
other applicable ratios and valuation techniques believed by the Company and
its financial advisors to be representative of the Company's business and
industry.
The adjustment of assets and liabilities to fair values resulted in a net
charge to earnings of $62.9 million during the eight-month period ended August
31, 2001. This net charge to earnings was included in the net reorganization
expense line on the Statement of Consolidated Operations.
A-33
THE FINOVA GROUP INC.
Fresh-Start BALANCE SHEET
(Dollars in thousands)
(Unaudited)
The effect of the Plan and the implementation of Fresh-Start Reporting on the
Company's balance sheet as of August 31, 2001 was as follows:
Reorganized
Predecessor Reorganization Company
Company Plan (Before Fresh-Start
August 31, 2001 Adjustments Fresh-Start) Adjustments
--------------- -------------- ------------ -----------
ASSETS
Cash and cash equivalents................ $ 3,623,751 $(2,715,926)(a)(b)(c) $ 907,825 $
Financing Assets:
Loans and other financing contracts, net. 6,371,233 6,371,233 (805,158)(f)
Direct financing leases.................. 458,892 458,892 (47,029)(f)
Leveraged leases......................... 221,122 221,122 (4,200)(f)
----------- ----------- ---------- -----------
Total financing assets................... 7,051,247 7,051,247 (856,387)(f)
Less reserve for credit losses........... (707,521) (707,521) 451,197(f)
----------- ----------- ---------- -----------
Net financing assets..................... 6,343,726 6,343,726 (405,190)
----------- ----------- ---------- -----------
Other Financial Assets:
Assets held for sale..................... 330,185 342,554(c) 672,739 (6,530)(f)
Operating leases......................... 478,511 478,511 (132,398)(f)
Investments.............................. 286,017 (2,791)(a)(c) 283,226 (79,718)(f)
Assets held for the production of income. 262,771 262,771 (85,855)(f)
Net assets of discontinued operations.... 322,558 (322,558)(c)
----------- ----------- ---------- -----------
Total other financial assets............. 1,680,042 17,205 1,697,247 (304,501)
----------- ----------- ---------- -----------
Total Financial Assets................... 8,023,768 17,205 8,040,973 (709,691)
Other assets............................. 156,923 17,475(a)(c)(d) 174,398 (110,549)(f)(g)
Goodwill, net of accumulated amortization 43,410 43,410 (43,410)(g)
----------- ----------- ---------- -----------
$11,847,852 $(2,681,246) $9,166,606 $ (863,650)
=========== =========== ========== ===========
LIABILITIES AND SHAREOWNERS'
EQUITY
Liabilities:
Berkadia Loan............................ $ $ 5,600,000(a) $5,600,000 $
Senior debt.............................. 10,993,901 (7,743,423)(a)(b) 3,250,478 (771,339)(f)
----------- ----------- ---------- -----------
Total debt............................... 10,993,901 (2,143,423) 8,850,478 (771,339)
Accounts payable and accrued expenses.... 651,344 (449,745)(a)(b)(c)(d) 201,599 (5,361)(f)
Deferred income taxes, net............... 34,055 34,055 (24,099)(f)
----------- ----------- ---------- -----------
Total Liabilities........................ 11,679,300 (2,593,168) 9,086,132 (800,799)
----------- ----------- ---------- -----------
Convertible Preferred Securities......... 111,550 (111,550)(b)
Shareowners' Equity:
Common stock............................. 648 611(e) 1,259
Additional capital....................... 1,119,531 (611)(e) 1,118,920 (1,102,020)(f)
Accumulated deficit...................... (880,520) 26,327(a)(b)(d) (854,193) 854,193(f)
Accumulated other comprehensive loss..... (4,386) (2,855)(c) (7,241) 7,241(g)
Common stock in treasury................. (178,271) (178,271) 177,735(f)
----------- ----------- ---------- -----------
Total Shareowners' Equity................ 57,002 23,472 80,474 (62,851)
----------- ----------- ---------- -----------
$11,847,852 $(2,681,246) $9,166,606 $ (863,650)
=========== =========== ========== ===========
Reorganized
Company
August 31, 2001
---------------
ASSETS
Cash and cash equivalents................ $ 907,825
Financing Assets:
Loans and other financing contracts, net. 5,566,075
Direct financing leases.................. 411,863
Leveraged leases......................... 216,922
----------
Total financing assets................... 6,194,860
Less reserve for credit losses........... (256,324)
----------
Net financing assets..................... 5,938,536
----------
Other Financial Assets:
Assets held for sale..................... 666,209
Operating leases......................... 346,113
Investments.............................. 203,508
Assets held for the production of income. 176,916
Net assets of discontinued operations....
----------
Total other financial assets............. 1,392,746
----------
Total Financial Assets................... 7,331,282
Other assets............................. 63,849
Goodwill, net of accumulated amortization
----------
$8,302,956
==========
LIABILITIES AND SHAREOWNERS'
EQUITY
Liabilities:
Berkadia Loan............................ $5,600,000
Senior debt.............................. 2,479,139
----------
Total debt............................... 8,079,139
Accounts payable and accrued expenses.... 196,238
Deferred income taxes, net............... 9,956
----------
Total Liabilities........................ 8,285,333
----------
Convertible Preferred Securities.........
Shareowners' Equity:
Common stock............................. 1,259
Additional capital....................... 16,900
Accumulated deficit......................
Accumulated other comprehensive loss.....
Common stock in treasury................. (536)
----------
Total Shareowners' Equity................ 17,623
----------
$8,302,956
==========
A-34
THE FINOVA GROUP INC.
Notes to Fresh-Start Balance Sheet:
a) Reflects the receipt of proceeds from the $5.6 billion Berkadia Loan, which
was used together with cash on hand and the issuance of $3.25 billion of New
Senior Notes to restructure the Company's existing senior indebtedness and
repay all accrued and unpaid pre-petition and post-petition interest. The
restructuring of senior indebtedness included offsetting amounts owed of
$51.4 million, which represented FINOVA cash held by various institutions
exercising their right of offset.
b) Holders of the TOPrS issued by FINOVA Finance Trust received (i) a cash
payment equal to 52.5% of the liquidation preference attributable to TOPrS,
(ii) a cash payment equal to 75% of accrued and unpaid pre-petition and
post-petition dividends attributable to TOPrS and (iii) New Senior Notes
having an aggregate principal amount equal to 22.5% of the liquidation
preference attributable to TOPrS. As a result, FINOVA recorded a gain on
discharge of indebtedness of $28.8 million. FINOVA's subordinated debentures
related to TOPrS have been cancelled and FINOVA Finance Trust has been
dissolved pursuant to the Plan.
c) Upon emergence from chapter 11, the net assets of discontinued operations
were reclassified into continuing operations and all former segments of the
Company have been dissolved. This decision reflects management's intention
to manage all assets as one operating unit, with an emphasis on orderly
collection of its portfolio.
d) In connection with the Plan, the Company has rejected a number of lease
agreements for its office space. Management is exploring alternative
facilities for its operations and is in negotiation with some of its current
landlords to determine whether acceptable concessions can be made for
continued use of all or portions of the space at those facilities. FINOVA
has written off $15.1 million in fixed assets and leasehold improvements
related to offices that would be closed as a result of rejecting certain
lease agreements. Additionally, FINOVA has accrued for potential lease
damages associated with these rejected lease agreements.
e) FINOVA issued Berkadia 61,020,581 shares of common stock, representing 50%
of the shares of FINOVA common stock outstanding after giving effect to the
implementation of the Plan, including the issuance of a small number of
additional shares in settlement of a claim.
f) Reflects the adjustments made to historical carrying amounts of assets,
liabilities and shareowners' equity to record them at fair value. The
adjustment to assets totaled $863.7 million, of which $365.4 million will
amortize into income over the life of the transactions, assuming the
individual borrowers continue to pay their obligations according to
contractual terms. The borrower's obligation to make payments to the Company
is not affected by this adjustment.
The adjustment to reduce the carrying amount of the New Senior Notes by
$771.3 million represents a discount on the principal amount based upon the
fair value of that obligation. This discount will be amortized to interest
expense over the life of the New Senior Notes. Although the August 31, 2001
Reorganized Company balance sheet reflects the New Senior Notes at $2.48
billion, the Company's repayment obligation is the principal amount of $3.25
billion.
g) In accordance with Fresh-Start Reporting guidelines, certain assets,
including goodwill and deferred debt origination costs were reduced to zero.
Additionally, all unrealized equity items including foreign currency
translation and unrealized gains and losses were reduced to zero and
recognized through operations.
Net Reorganization Expense
Net reorganization expense for the eight months ended August 31, 2001 includes
income and expenses recognized or incurred by FINOVA related to the
reorganization. The components of net reorganization expense included fair
value adjustments of assets and liabilities related to Fresh-Start Reporting
($62.9 million) and professional service and other fees ($26.0 million),
partially offset by interest income earned on cash retained for interest and
debt payments deferred during the bankruptcy period ($42.4 million).
A-35
THE FINOVA GROUP INC.
D. Total Financial Assets
Total financial assets represents the Company's portfolio of investment
activities, primarily consisting of secured financing to commercial and real
estate enterprises principally under financing contracts (such as loans and
other financing contracts, direct financing leases and leveraged leases). In
addition to its financing contracts, the Company has to a lesser extent, other
financial assets including assets held for sale, owned assets (such as
operating leases and assets held for the production of income) and investments
(debt and equity securities and partnership interests). The following
discussion provides a breakdown of the Company's investment activities. At
December 31, 2001 and 2000, the carrying amount of total financial assets was
$6.5 billion and $11.9 billion (before reserve for credit losses), respectively.
In conjunction with Fresh-Start Reporting, the Company recorded a $709.7
million charge to the historic carrying amounts of its total financial assets
to record them at their reorganization value. Reorganization value was
primarily determined based upon the present value of estimated future cash
flows, discounted at appropriate risk adjusted market rates for similar loans
and leases and other assets. Allocation of the adjustment to individual assets
was determined in a manner similar to the accounting provisions applied for
business combinations under purchase accounting. The charge was comprised of a
$365.4 million adjustment to financing assets that was to accrete into interest
income over the life of the transactions, assuming the individual borrowers
continue to pay their obligations according to contractual terms and a $344.3
million permanent write down to other financial assets (such as operating
leases, investments and assets held for sale and the production of income). At
December 31, 2001, the Company suspended the accretion on $151.3 million due to
the underlying assets being classified as nonaccruing.
Diversification of Credit Risk
The following table provides the percentage composition of FINOVA's total
financial assets (before reserve for credit losses):
Percent of Total
Carrying Amount
----------------
2001 2000
----- -----
Resort............... 22.6 15.5
Transportation....... 16.1 22.1
Franchise............ 11.6 7.8
Rediscount........... 11.5 10.3
Specialty Real Estate 10.0 6.0
Healthcare........... 8.8 7.3
Communications....... 5.6 6.4
Commercial Equipment. 5.1 4.4
Corporate Finance.... 2.9 9.8
Mezzanine Capital.... 1.9 3.1
Public............... 1.4 1.5
Investment Alliance.. 1.1 1.0
Realty Capital....... 3.6
Other................ 1.4 1.2
----- -----
100.0 100.0
===== =====
As indicated in the table above, FINOVA's total financial assets are
concentrated in several specialized industries and accordingly, are subject to
normal lending risk of general economic downturns and additional risk of
economic downturns within individual sectors of the economy. Additionally, the
Company has completed
A-36
THE FINOVA GROUP INC.
multiple financial transactions with individual borrowers and their affiliates,
resulting in an increased total exposure to that borrower beyond the typical
transaction size and increased concentration risk to economic events affecting
the industries of such borrowers and their affiliates. Several of the Company's
portfolios including resort, transportation and rediscount have exposures
exceeding $100 million. At December 31, 2001, the carrying value of the
Company's top ten aggregate exposures to borrowers and their affiliates totaled
approximately $1.1 billion and represented 16.8% of total financial assets
(before reserves).
At December 31, 2001, the Company's transportation portfolio consisted of the
following aircraft:
Approximate
Number of Average Age
Aircraft Type Aircraft Passenger Cargo (years)
------------- --------- --------- ----- -----------
Airbus 300...................... 9 5 4 13
Boeing 727...................... 40 9 31 25
Boeing 737...................... 36 36 18
Boeing 747...................... 14 8 6 20
Boeing 757...................... 9 9 9
Boeing 767...................... 1 1 15
DC 8 and DC 9................... 40 35 5 28
DC 10........................... 21 9 12 23
L1011........................... 1 1 27
MD series....................... 31 31 16
Regional jets and turbo aircraft 60 52 8 11
--- --- -- --
Total........................... 262 196 66 19
=== === == ==
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 represented off-lease assets classified
as held for the production of income, which were parked at various storage
facilities in the United States and Europe. These aircraft are periodically
placed on rental agreements in which payments are based on the usage of the
aircraft, commonly known as a power-by-the-hour agreement. Often there is no
minimum rental due and future cash flows are difficult to project. FINOVA's
railroad portfolio (all with counterparties located in the United States) and
other transportation equipment had a carrying value of $27.6 million.
At December 31, 2001, financial assets in the resort portfolio ($1.5 billion)
were secured by properties concentrated in Florida, Nevada, Arizona and Hawaii,
representing approximately 19.8%, 16.7%, 14.6% and 11.6%, respectively, of the
total portfolio.
At December 31, 2001, the rediscount portfolio ($742.8 million) was
geographically concentrated in Texas, South Carolina and Florida, representing
20.4%, 19.9% and 11.7%, respectively, of the total portfolio. The rediscount
portfolio's customer base is primarily concentrated within the subprime
automobile and direct consumer loan industries, which represented 43.1% and
49.7% of the total portfolio, respectively.
All other geographic concentrations within the resort and rediscount portfolios
were below 10% of each portfolio's total exposure.
A-37
THE FINOVA GROUP INC.
Contractual Maturity of Financing Assets
The following table presents the contractual maturities of the Company's
portfolio of financing assets (excluding estimated residual values of $468.9
million and unearned income relating to leasing transactions of $470.0 million)
at December 31, 2001. This information should not be regarded as the Company's
projection of cash flows. Actual cash flows are likely to be materially
different.
2002 2003 2004 2005 2006 Thereafter
---------- ---------- ---------- -------- -------- ----------
Loans and other financing
contracts:
Fixed interest rate............. $ 319,210 $ 281,784 $ 272,833 $197,964 $204,641 $ 669,004
Floating interest rate.......... 957,842 704,020 755,190 476,732 96,120 85,086
Leases, primarily at fixed interest
rate:
Leveraged leases................ 3,015 3,177 4,348 8,190 7,223 70,668
Direct financing leases......... 62,128 51,759 43,672 33,699 33,436 231,482
---------- ---------- ---------- -------- -------- ----------
$1,342,195 $1,040,740 $1,076,043 $716,585 $341,420 $1,056,240
========== ========== ========== ======== ======== ==========
Financing Assets
Loans and other financing contracts, excluding certain other contracts
classified as held for sale at December 31, consisted of the following:
2001 2000
---------- ----------
Receivables................................... $5,481,574 $8,303,515
Accrued interest.............................. 117,255 109,104
Unearned income............................... (578,403) (576,921)
---------- ----------
Total loans and other financing contracts, net $5,020,426 $7,835,698
========== ==========
FINOVA has a substantial number of loans and leases with payments that
fluctuate with changes in interest rates, primarily prime interest rates and
the London interbank offer rates ("LIBOR"). The total carrying amount of loans
and leases with floating interest rates was $3.2 billion and $4.6 billion at
December 31, 2001 and 2000, respectively.
Income earned from financial transactions with floating interest rates was
approximately $93.2 million, $293.3 million, $505 million and $356 million for
the four months ended December 31, 2001, the eight months ended August 31, 2001
and the years ended December 31, 2000 and 1999, respectively. Adjustments
resulting from changes in interest rates can have a significant effect on
income earned from financing transactions.
Direct financing leases at December 31, consisted of the following:
2001 2000
--------- ---------
Rental receivables........... $ 456,176 $ 674,890
Estimated residual values.... 119,210 148,926
Unearned income.............. (220,428) (266,345)
--------- ---------
Total direct financing leases $ 354,958 $ 557,471
========= =========
A-38
THE FINOVA GROUP INC.
Leveraged leases at December 31, (excluding transportation leveraged leases
classified as assets held for sale as of June 2001) consisted of the following:
2001 2000
--------- -----------
Rental receivables................................ $ 941,644 $ 2,991,130
Principal and interest payable on nonrecourse debt (845,023) (2,563,081)
--------- -----------
Net rental receivables............................ 96,621 428,049
Estimated residual values......................... 349,718 874,334
Unearned income................................... (249,526) (498,802)
--------- -----------
Investment in leveraged leases.................... 196,813 803,581
Less deferred taxes from leveraged leases......... (136,055) (483,319)
--------- -----------
Net investment in leveraged leases................ $ 60,758 $ 320,262
========= ===========
The components of income from leveraged leases, after the effects of interest
on nonrecourse debt and other related expenses were as follows:
Reorganized Predecessor Company
Company --------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended ------------------------
Dec. 31, 2001 Aug. 31, 2001 2000 1999
------------- ------------- ------- -------
Lease and other income, net $2,999 $6,587 $46,251 $60,936
Income tax expense......... 1,223 2,733 16,832 24,136
At December 31, 2001, FINOVA had unfunded customer commitments of approximately
$1.1 billion compared to $2.7 billion at December 31, 2000. Because of the
primarily revolving nature of its commitments, the Company is unable to
estimate with certainty how much of the commitments will be funded.
Historically, in the aggregate, actual funding has been significantly below the
commitment amounts. Funding is typically dependent upon certain conditions
precedent and the availability of eligible collateral. In the event of a
contractual customer default, FINOVA typically has the legal right to cease
funding. In these circumstances, decisions to continue or cease funding are
made on a case-by-case basis following an evaluation as to what management
believes is in the Company's best interest. Commitments generally have a fixed
expiration and at the Company's discretion, may be extended. The Company may
seek appropriate fees, equity and other consideration if circumstances warrant
doing so in exchange for extensions, modifications and waivers.
Other Financial Assets
Assets held for sale are carried at the lower of cost or market with the
adjustment, if any, recorded in operations. During 2000, the Company designated
loans generated by its realty capital portfolio as being held for sale and
recorded a loss of $43.2 million to write down the assets to their net
estimated sales price. An additional loss of $5.1 million was recorded during
the first quarter of 2001. In July 2001, substantially all of the realty
capital assets were sold with no additional gain or loss.
During the second quarter of 2001, the Company designated leveraged leases in
its transportation portfolio as being held for sale and recorded a loss of
$198.1 million to write down the assets to their estimated net sales price. In
August 2001, prior to Fresh-Start Reporting, an additional charge of $74.0
million was recorded due to continued weakening in the airline industry. The
negative impact of the events of September 11 resulted in an additional $67.6
million charge. In December 2001, the Company completed a sale of certain of
these leveraged leases for approximately $125.2 million, which approximated the
carrying amount at the time of sale. The sale resulted in a tax gain of $319
million which was fully offset by the current year's tax loss. Leveraged leases
with a net carrying amount of $98.7 million continue to be classified as held
for sale.
A-39
THE FINOVA GROUP INC.
In connection with the reorganization of the Company, the remaining assets of
the corporate finance portfolio were designated as held for sale. The assets
were previously recorded as discontinued operations and were therefore recorded
at estimated net realizable value.
During the fourth quarter of 2001, the Company designated its investment
alliance portfolio as being held for sale. A loss of $51.4 million was recorded
to write down the assets to their fair value in conjunction with Fresh-Start
Reporting. In a series of transactions during late 2001 and the first quarter
of 2002, the Company sold substantially all of its investment alliance assets
for $89.7 million, resulting in a $6.7 million gain.
The following table presents the balances and changes in FINOVA's assets held
for sale:
As of December 31, 1999 (Predecessor Company) $
Assets reclassified to held for sale.................. 465,165
Markdown to estimated sales price..................... (43,209)
---------
As of December 31, 2000 (Predecessor Company)......... 421,956
Assets reclassified to held for sale.................. 912,225
Markdown to estimated sales price..................... (277,213)
Runoff (amortization and prepayments), net of fundings (87,460)
Sale of assets........................................ (303,299)
---------
As of August 31, 2001 (Reorganized Company)........... 666,209
Assets reclassified to held for sale.................. 113,851
Markdown to estimated sales price..................... (90,045)
Runoff (amortization and prepayments), net of fundings (137,320)
Sale of assets........................................ (132,670)
---------
As of December 31, 2001 (Reorganized Company)......... $ 420,025
=========
Operating leases at December 31, consisted of the following:
2001 2000
--------- ---------
Cost of assets.......... $ 319,480 $ 711,835
Accumulated depreciation (128,555) (150,137)
--------- ---------
Total operating leases.. $ 190,925 $ 561,698
========= =========
Future minimum rentals on noncancellable operating leases are $126.0 million in
the aggregate and for each of the next five years are $42.2 million, $32.6
million, $18.5 million, $11.9 million and $5.9 million.
Assets held for the production of income at December 31, consisted of the
following types of assets:
2001 2000
-------- --------
Aircraft...................................... $124,336 $231,249
Real estate................................... 20,250
Equipment..................................... 7,286 3,921
-------- --------
Total assets held for the production of income $151,872 $235,170
======== ========
Assets held for the production of income include off-lease and returned assets
previously the subject of financing transactions that are currently being made
available for new financing transactions. Assets held for the production of
income are carried at amortized cost, with adjustments for impairment, if any,
recorded in operations. These assets are generally depreciated over their
remaining useful lives.
A-40
THE FINOVA GROUP INC.
Investments at December 31, consisted of the following:
2001 2000
-------- --------
Available for sale:
Partnership interests........ $ 12,931 $135,284
Equity securities............ 37,463 94,418
Debt securities.............. 4,093
-------- --------
Total available for sale........ 54,487 229,702
-------- --------
Held to maturity debt securities 3,413
Trading debt securities......... 58,845 56,232
-------- --------
Total investments............... $116,745 $285,934
======== ========
Debt and equity securities that are being held for an indefinite period of
time, including those securities which may be sold in response to needs for
liquidity, are classified as securities available for sale and are carried at
fair value using the specific identification method with unrealized gains and
losses, net of deferred taxes, reported as a component of accumulated other
comprehensive income in the equity section of the balance sheet.
Net unrealized holding gains were $7.0 million and $15.2 million at December
31, 2001 and 2000, respectively. The net unrealized holding gains at December
31, 2000 were net of a deferred tax liability of $8.1 million, while no
liability was established in 2001 due to the Company's current tax situation.
The decline in the unrealized holding gains during 2001 was primarily due to
the realization of gains through the sale of certain investment securities and
the implementation of Fresh-Start Reporting, which resulted in the adjustment
of assets to fair value through current operations. Net gains of $6.1 million,
$43.3 million and $57.4 million were recognized on sales of marketable
investments for the four months ended December 31, 2001, the eight months ended
August 31, 2001 and the year ended December 31, 2000, respectively.
Held to maturity investments are comprised of certificates of deposit with
maturities of less than one year.
Investments classified as trading are comprised exclusively of assets held in
trust for nonqualified compensation plans. The Company's investments in trading
securities are marked to market on a quarterly basis through current
operations. In the first quarter of 2002, the Company liquidated substantially
all assets of the trust. See Note I "Pension and Other Benefits" for a further
discussion.
E. Reserve For Credit Losses
The following table presents the balances and changes to the reserve for credit
losses:
Reorganized Predecessor Company
Company -------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended -----------------------
Dec. 31, 2001 Aug. 31, 2001 2000 1999
------------- ------------- --------- --------
Balance, beginning of period $ 256,324 $ 578,750 $ 178,266 $141,579
Provision for credit losses. 777,500 230,772 643,000 22,390
Write-offs.................. (35,877) (558,052) (240,655) (24,422)
Recoveries.................. 21,729 4,964 1,018 1,830
Acquisitions and other...... 202 (110) (2,879) 36,889
---------- --------- --------- --------
Balance, end of period...... $1,019,878 $ 256,324 $ 578,750 $178,266
========== ========= ========= ========
A-41
THE FINOVA GROUP INC.
An analysis of nonaccruing assets included in total financial assets at
December 31 is as follows:
2001 2000
---------- ----------
Contracts..................................................................... $1,817,369 $1,374,681
Repossessed assets............................................................ 25,236 32,858
---------- ----------
Total nonaccruing assets...................................................... $1,842,605 $1,407,539
---------- ----------
Nonaccruing assets as a percentage of total financial assets (before reserves) 28.6% 11.9%
========== ==========
In addition to the repossessed assets included in the table above, FINOVA had
accruing repossessed assets with a total carrying amount of $40.9 million at
December 31, 2000. FINOVA had no accruing repossessed assets at December 31,
2001. The Company earned income of $1.8 million and $5.2 million during 2001
and 2000, respectively on accruing repossessed assets.
Had all nonaccruing assets outstanding at December 31, 2001, 2000 and 1999
remained accruing, pre-tax income earned would have increased by approximately
$168.0 million, $59.9 million and $25.7 million, respectively.
A summary of the reserve for credit losses by impaired and other is as follows:
2001 2000
---------- --------
Reserves on impaired assets $ 636,661 $248,234
Other reserves............. 383,217 330,516
---------- --------
Reserve for credit losses.. $1,019,878 $578,750
========== ========
At December 31, 2001, the total carrying amount of impaired loans was $2.3
billion, of which $576.7 million were revenue accruing. The Company has
established impairment reserves of $636.7 million related to $1.7 billion of
impaired loans. At December 31, 2000, the total amount of impaired loans was
$1.6 billion, of which $239.4 million were revenue accruing. The impairment
reserve at December 31, 2000 totaled $248.2 million related to $731.7 million
of impaired loans.
As the U.S. economy has continued to weaken, the level of impaired and
nonaccruing assets has increased. The Company's reserve for credit losses
represents FINOVA's estimate of losses inherent in its portfolio. On a periodic
basis, the Company performs detailed portfolio reviews to identify impaired
assets, measure the amount of such impairment and estimate inherent losses on
assets that are not impaired, SFAS No. 114 defines impaired assets as those not
expected to perform in accordance with contractual terms and specifies the
measurement of impairment on the basis of present value of expected future cash
flows discounted at the loan's effective interest rate or on a loan's
observable market price.
In connection with Fresh-Start Reporting, the Company adjusted the carrying
value of its portfolio to fair value based on expected cash flows using current
risk adjusted interest rates and impaired assets were written down by the
amount of impaired reserves. The remaining $256.3 million reserve for credit
losses represented management's estimate of losses inherent in the portfolio.
The terrorist attacks of September 11 had a significant impact on FINOVA's
asset portfolios. During the third quarter of 2001, FINOVA developed estimates
of the impact these attacks could have on its portfolios, resulting in charges
to provide for additional loss reserves of $634.1 million. These charges
related primarily to FINOVA's transportation, resort and hotel portfolio and
included additional reserves related to all other portfolios. At September 30,
2001, FINOVA's reserve for credit losses was $863.5 million.
A-42
THE FINOVA GROUP INC.
Prior to September 11, the general economic downturn had caused airlines and
cargo carriers to ground or restrict the use of older, less efficient aircraft.
The events of September 11 accelerated this trend and increased the glut of
used aircraft, resulting in significantly reduced values. The Company's
transportation portfolio consists predominantly of used aircraft, and its
ability to place returned aircraft with new carriers or liquidate aircraft
returned in lieu of payment has diminished significantly. An increasing number
of FINOVA's customers are experiencing difficulties in making payments and are
either pursuing reductions in payment obligations or returning aircraft. As a
result, FINOVA's inventory of returned aircraft continues to grow. During the
third quarter of 2001, the Company recorded charges of $367.8 million to
increase reserves for inherent losses expected to be realized in its
transportation portfolio as a result of these events.
The charges to FINOVA's transportation portfolio were based on a detailed
analysis of each aircraft. The critical factors considered included the type of
carrier, age of the aircraft, number of aircraft by type in FINOVA's portfolio,
operating efficiency of each type and the Company's view of the overall
industry capacity to absorb these aircraft. The Company considered current
trends and the financial stability of its customer base to assess the
likelihood of aircraft being returned to FINOVA and the necessity to provide
concessions in the form of reduced payments to keep the aircraft operating.
Based on the Company's assessment of its portfolio, customer base and the
industry, anticipated future cash flows were estimated on each aircraft. These
estimates took into account the likelihood of aircraft being returned,
anticipated reductions in cash flows from customers, timing of returning
off-lease aircraft back into service, costs to place parked aircraft back into
service and the potential necessity to scrap certain classes of aircraft.
Aircraft values were estimated on the basis of current market information, the
glut of aircraft currently in the marketplace and the continuing negative
effect resulting from the events of September 11.
The estimated cash flows were discounted at risk adjusted interest rates to
measure impairment for loans in accordance with SFAS No. 114.
The predictability of aircraft values and cash flows has been made more
difficult by the events of September 11 and the current state of the aircraft
industry. The estimated cash flows are subject to many external factors beyond
the Company's control and as a result, there is an increased likelihood that
the actual results could materially differ from those included within the
financial statements.
The charge relating to FINOVA's resort and hotel portfolios was estimated using
current market information and assumed risk factors specific to those
portfolios. These factors included the financial ability of individual
borrowers/developers to withstand a prolonged reduction in revenues, the
geographic location of each resort/hotel and the development status of each
project. The portfolios were stratified by risk factors and assumed loss ratios
were determined based upon management's evaluation of all relevant conditions.
As a result, the Company recorded third quarter charges related to these events
of $121 million.
In all other FINOVA portfolios, the Company anticipates an increase in the
level of problem accounts as a result of the events of September 11 and the
weakening of the general economy. Additional third quarter charges of $145.3
million were recorded to reserve for inherent losses expected in these
portfolios.
FINOVA increased its reserve for credit losses to $1.0 billion at December 31,
2001. The determination of these reserves resulted from an updated detailed
evaluation of its portfolios to determine current levels of impaired assets,
the amount of such impairment and an updated estimate of losses inherent in
assets that currently are not deemed impaired. This evaluation resulted in
refinements to previously calculated reserves, reallocation of reserves between
asset portfolios and the creation of additional reserves through provision for
credit losses.
A-43
THE FINOVA GROUP INC.
F. Receivable Sales
Commercial Equipment. In the second quarter of 2000, the Company completed the
sale of $322.1 million of commercial equipment loans and direct financing lease
receivables for cash proceeds of $302.8 million. The structure of the
transaction included a 364-day commitment to sell at FINOVA's option up to $375
million of receivables on a revolving basis. The Company also receives annual
servicing fees approximating 50 basis points on the outstanding balance of the
receivables and the right to future cash flows after investors have received
the return for which they have contracted. There is no recourse to the
Company's other assets for failure of debtors to pay when due. The Company's
retained interests are subordinate to investors' interests. The value of the
retained interests is subject to credit, prepayment and interest rate risks on
the transferred financial assets.
At sale dates, the Company recognized a total pre-tax gain of $0.2 million. In
the determination of the gain, the Company assumed an annual prepayment rate of
6.0%, weighted average life of approximately 3.5 years, an annual net credit
loss rate of 1.5%, delinquencies of 5.0% and a discount rate of 15%.
On February 27, 2001, FINOVA Capital announced a moratorium on repayment of
principal on its then-existing outstanding bank and bond debt, which
constituted an event of default and a cross default under substantially all of
FINOVA Capital's then-existing bank and bond indebtedness. The debt default
triggered a cross default under this sale and servicing agreement. As a result,
the revolving feature was terminated, the structure went into rapid
amortization and FINOVA was required to obtain a backup servicer in the event
that FINOVA would not be able to perform its servicing duties. The backup
servicer was retained in the first quarter of 2001. Rapid amortization results
in all cash received from the collection of receivables being applied first to
investors' interests before any cash is remitted to the Company to apply
against its retained interests.
During 2001, retained interests in this structure were adjusted to their
estimated fair value, resulting in a $16.9 million markdown to the retained
interest.
At December 31, 2001 and 2000, the outstanding balance of the sold receivables
totaled $143.7 million and $267.7 million, respectively. A revaluation of the
retained interest resulted in a $0.9 million unrealized holding gain based on
the following revised assumptions: an annual prepayment rate of 7.6%, weighted
average life of approximately 2.3 years, an annual net credit loss rate of
3.2%, delinquencies of 33.0%, and a discount rate of 17.0%. The unrealized
holding gain is included in other comprehensive income. The retained interests
had an estimated fair value, net of the valuation adjustment, totaling $4.1
million and $25.6 million at December 31, 2001 and 2000, respectively, and are
included in investments.
In connection with the retained interests, a hypothetical analysis was
performed to determine the impact of a 10% and 20% adverse change in any
individual assumption from the expected levels. Based on this analysis, a 10%
and 20% adverse change in the level of prepayments would result in a $0.2
million and $0.5 million reduction in its value, respectively. A 10% and 20%
adverse change in the level of net credit losses would result in a $0.1 million
and $0.2 million reduction in its value, respectively. A 10% and 20% adverse
change in the level of delinquencies would result in a $0.07 million and $0.2
million reduction in its value, respectively. A 10% and 20% adverse change in
the discount rate would result in a $0.2 million and $0.4 million reduction in
its value, respectively. These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes in fair value based on a
percentage variation in assumptions generally cannot be extrapolated because
the relationship of the change in assumption to the change in fair value may
not be linear. Also, the effect of a variation in a particular assumption on
the fair value of the retained interest is calculated without changing any
other assumption; in reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or counteract the
sensitivities.
A-44
THE FINOVA GROUP INC.
Corporate Finance (included in discontinued operations). In the third quarter
of 2000, FINOVA's corporate finance division sold $827 million of loans, on a
revolving basis. Cash proceeds to FINOVA aggregated approximately $475 million.
The Company also received annual servicing fees approximating 200 basis points
on the outstanding balance of the receivables and the right to future cash
flows after investors have received the return for which they have contracted.
There is no recourse to the Company's other assets for failure of debtors to
pay when due. The Company's retained interests are subordinate to the
investors' interests. The value of the retained interests is subject to credit,
prepayment and interest rate risks on the transferred financial assets.
During 2000, the Company recognized a pre-tax loss of $13.1 million, including
transaction fees. At December 31, 2000, the outstanding balance of the sold
loans totaled $708.8 million. At December 31, 2000, the Company's retained
interests had an estimated value totaling $419.3 million. The Company used the
following assumptions in determining the value of its retained interests: an
annual prepayment rate of 28.6%, annual net credit loss rate of 2.1% and a
discount rate of 12%. On February 1, 2001, FINOVA negotiated an agreement and
purchased the outstanding beneficial interests.
In February 2000, FINOVA repurchased the $300 million outstanding undivided
proportionate interests in a revolving loan portfolio originated in 1996 and
1995. The revolving loan portfolio totaled $717.9 million as of December 31,
1999.
Franchise. Previously in 1998 and 1997, the Company sold receivables totaling
$140.0 million with limited recourse. As of December 31, 2001 and 2000, the
outstanding balance of the sold loans totaled $104.8 million and $116.8
million, respectively. In these securitizations, the Company retained servicing
responsibilities and subordinated interests. As of December 31, 2001 and 2000,
the Company continued to service these assets and held subordinated interests
totaling $0.04 million and $8.2 million, respectively. During 2001, the
retained interest was marked down to its fair value, resulting in a charge of
$7.5 million. The value of the retained interests is subject to credit,
prepayment, and interest rate risks on the transferred financial assets.
G. Debt
As of December 31, the Company's total debt outstanding was as follows:
2001 2000
---------- -----------
Berkadia Loan......................... $4,900,000 $
Senior debt--Reorganized Company:.....
Principal amount due at maturity... $3,250,478
Discount for Fresh-Start Reporting. (761,396) 2,489,082
---------- ---------- -----------
Senior debt--Predecessor Company:.....
Commercial paper................... 4,690,990
Senior notes....................... 4,172,112
Medium term notes.................. 2,128,772
Nonrecourse installment notes...... 5,813
---------- -----------
Total debt............................ $7,389,082 $10,997,687
========== ===========
Upon emergence from bankruptcy, all of FINOVA's outstanding indebtedness was
restructured. Pursuant to the Plan, Berkadia loaned $5.6 billion to FINOVA
Capital on a senior secured basis, which was used together with cash on hand
and the issuance of $3.25 billion aggregate principal amount of New Senior
Notes to restructure the Company's pre-emergence indebtedness (including
TOPrS), and repay all accrued and unpaid pre-petition and post-petition
interest. The Berkadia Loan has a first priority lien on substantially all of
FINOVA's assets, including all of its subsidiaries, and the holders of New
Senior Notes have a second priority lien on those assets.
A-45
THE FINOVA GROUP INC.
The terms of the Berkadia Credit Agreement permit the Company to retain a
reserve of cash and cash equivalents in an amount not to exceed the sum of (a)
125% of the projected operating expenses for the next fiscal quarter, (b)
unfunded customer commitments expected to be funded over the next two fiscal
quarters, (c) taxes payable during the next fiscal quarter, (d) interest, loan
fees and other amounts due on the Berkadia Loan during the next fiscal quarter,
(e) an amount equal to all payments of principal, interest or fees relating to
other permitted indebtedness that will, by their terms, become due and payable
in cash during the next fiscal quarter and (f) such other reserves as are
necessary in the Company's good faith judgment and as approved in advance by
Berkadia for the operations of the Company. Any amount in excess of the cash
reserve is required to be paid to Berkadia to reduce the principal amount of
the loan on a quarterly basis. As a result, the Company paid Berkadia
$700 million on October 9, 2001 and an additional $500 million on January 7,
2002. On February 7, 2002, with Berkadia's consent, the Company made a
voluntary prepayment of $500 million, reducing the loan balance to $3.9
billion. Loan repayments are unlikely to continue at this pace.
The terms of the Credit Agreement require the Company to maintain at all times,
a ratio of Collateral Value (as defined in the Credit Agreement) to the loan
balance of not less than 1.25 to 1. As of December 31, 2001, the Company's
Collateral Value totaled $6.5 billion, resulting in a ratio of 1.33 to 1.
The Berkadia Loan matures on August 20, 2006 and bears interest, payable
monthly at the Eurodollar Rate, as defined in the Credit Agreement, plus 2.25%.
The weighted average rate under the agreement for the four- month period ended
December 31, 2001 was 5.0%. Principal is payable from available cash. All
outstanding principal and accrued and unpaid interest is payable at maturity.
FINOVA and substantially all of its direct and indirect subsidiaries (except
those that are contractually prohibited from acting as a guarantor) have
guaranteed FINOVA Capital's repayment of the Berkadia Loan.
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, at a fixed interest rate of 7.5% per annum.
Principal payments are due prior to maturity only after the Berkadia Loan has
been paid in full, and is payable out of available cash after establishment of
cash reserves as defined in the Indenture. The Indenture has no financial
covenants, except for the requirement to use available cash as described above.
Because virtually all of the Company's assets are pledged to secure the
obligations under the Berkadia Loan and 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 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 aggregated 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 shareowners. It should be noted that these
distributions cannot be made to shareowners so long as FINOVA has an
accumulated deficit. Instead, these payments will be held until legally
permitted for that purpose under corporate law or used to satisfy the Company's
debts, if necessary. These restrictions also apply to the shareowner payments
noted below.
If payment in full is made of the outstanding principal of the New Senior Notes
and payments are made to FINOVA common shareowners in an aggregate amount equal
to 5.263% (5%/95% as noted above) of the
A-46
aggregate principal amount of the New Senior Notes, ninety-five percent (95%)
of any available cash will be used to pay contingent interest to holders of New
Senior Notes in an aggregate amount of up to $100 million (as that amount may
be reduced to reflect a decrease in the principal amount of New Senior Notes
outstanding as a result of repurchases by FINOVA) and five percent (5%) of such
remaining available cash will be used for distributions to and/or repurchases
of stock from common shareowners, if those payments can be made to shareowners,
as noted above. Contingent interest payments will terminate in 2016. FINOVA's
obligation to make the contingent interest payments is not secured.
FINOVA's obligations with respect to the payment of interest and principal
under the New Senior Notes are secured by a second-priority security interest
in (a) all of the 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 Note.
The New Senior Notes are reflected in the Company's Consolidated Balance Sheet
net of a $761.4 million unamortized discount. The book value of the New Senior
Notes is scheduled to increase over time to the principal amount due at
maturity through the amortization of the discount as interest expense. For the
four months ended December 31, 2001, the Company recorded $9.9 million of
amortization related to the discount, resulting in an effective interest rate
of 10.8%. The Company's obligation is to pay the full $3.25 billion principal
amount of the New Senior Notes at maturity in 2009.
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 and the related 5% distribution to common
shareowners or to make any contingent interest payments. The Company has a
negative net worth of $1.1 billion as of December 31, 2001 ($1.9 billion when
the New Senior Notes are considered at their principal amount due), the
financial condition of many of its customers has 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 the
Company's debt and equity securities involves a high level of risk to the
investor.
H. Derivative Financial Instruments
During 2001, substantially all of FINOVA's interest rate swaps were terminated
as a result of the Company's chapter 11 filing. In accordance with the
Company's various swap agreements, the swap counterparties exercised their
right to offset the amounts due to the Company upon the termination of the
swaps against the amounts due by the Company on the debt outstanding. At the
time FINOVA emerged from chapter 11 and the debt was restructured,
approximately $45.6 million was offset against amounts due to the Company.
Historically, FINOVA used derivative instruments to minimize its exposure to
fluctuations in interest rates, reduce debt expense and lock funding costs over
predetermined periods of time. FINOVA attempted to minimize its overall debt
costs while limiting the short-term variability of interest expense and funds
required for debt service. To achieve this objective, FINOVA diversified its
borrowing sources (short- and long-term debt with a fixed or a variable rate)
and sought to maintain a portfolio that was match funded. FINOVA's matched
funding policy generally required that floating-rate assets be financed with
floating-rate liabilities and fixed-rate assets be financed with fixed-rate
liabilities. As a result of the termination of substantially all FINOVA
interest rate swaps, the Company's assets and liabilities are no longer match
funded.
At December 31, 2001, the Company had two outstanding interest rate conversion
agreements with notional principal amounts totaling $204.0 million to
effectively convert certain floating interest rate obligations into
A-47
THE FINOVA GROUP INC.
fixed interest rate obligations. These agreements required interest payments on
the stated principal amount at rates ranging from 7.42% to 7.58% in return for
receipts calculated on the same notional amounts at floating interest rates.
At December 31, 2000, FINOVA Capital had outstanding interest rate conversion
agreements with notional principal amounts totaling approximately $1.7 billion.
Agreements with notional principal amounts of $100 million were arranged to
effectively convert certain floating interest rate obligations into fixed
interest rate obligations. These agreements required interest payments on the
stated principal amount at rates ranging from 6.67% to 6.73% in return for
receipts calculated on the same notional amounts at floating interest rates.
Agreements with notional principal amounts of $1.63 billion were arranged to
effectively convert certain fixed interest rate obligations into floating
interest rate obligations. They required interest payments on the stated
principal amount at the three-month or six-month London interbank offered rates
("LIBOR") in return for receipts calculated on the same notional amounts at
fixed interest rates of 5.70% to 7.40%. FINOVA also entered into a fixed-rate
foreign currency-denominated borrowing (Japanese Yen ("JPY") 5 billion)
maturing in 2002. Two derivatives were associated with this borrowing, a
receive fixed rate swap (JPY 5 billion) versus three-month JPY LIBOR and a
cross-currency basis swap, converting JPY LIBOR to US Dollar ("USD") LIBOR. The
receive side of the basis swap had a notional amount of JPY 5 billion paying
three-month JPY LIBOR and the pay side had a notional amount of USD $43.6
million paying three-month USD LIBOR.
I. Pension and Other Benefits
The Company sponsors a trusteed, noncontributory pension plan that covers
substantially all of its employees. Benefits are based primarily on final
average salary and years of service. Post retirement health benefits are any
benefits other than retirement benefits and are recorded at the time employees
leave active service. The Company's funding policy for the pension plan is to
make at least the minimum annual contribution required by applicable
regulations. Post retirement benefits are funded as benefits are paid.
Change in Benefit Obligations
Post retirement
Pension benefits health benefits
---------------- ---------------
2001 2000 2001 2000
------- ------- ------ -------
Benefit obligation, beginning of year $32,547 $29,865 $3,383 $ 5,352
Service cost......................... 2,346 3,145 293 341
Interest cost........................ 2,421 2,110 218 210
Curtailment gain..................... (2,745) (519)
Actuarial loss/(gain)................ 1,483 1,364 (767) (1,744)
Benefits paid........................ (1,357) (1,192) (517) (257)
------- ------- ------ -------
Benefit obligation, end of year (1).. $37,440 $32,547 $2,610 $ 3,383
======= ======= ====== =======
--------
(1) The Company's benefit obligation excludes $20.0 million and $16.9 million
at December 31, 2001 and 2000, respectively, representing the Company's
obligation related to an unfunded nonqualified supplemental retirement plan
(the "SERP") for certain highly compensated employees. The Company
terminated the SERP plan in December 2001 and paid a lump-sum distribution
to participants during the first quarter of 2002, upon their acceptance of
an amendment and release. As of December 31, 2001, the Company had accrued
for all costs associated with this termination.
Previously, the Company established a Rabbi Trust to hold investments for
nonqualified compensation plans, including SERP. At December 31, 2001, the
trust assets totaled $58.8 million. In conjunction with the termination of
the SERP and all other nonqualified compensation plans, the trust was
liquidated and all excess cash was returned to FINOVA for use in funding
operations.
A-48
THE FINOVA GROUP INC.
Change in Qualified Plan Assets
Post retirement
Pension benefits health benefits
---------------- --------------
2001 2000 2001 2000
------- ------- ----- -----
Fair value of plan assets, beginning of year $29,457 $34,225 $ $
Actual return on plan assets................ (2,552) (3,577)
Employer contributions...................... 517 257
Benefits paid............................... (1,357) (1,191) (517) (257)
------- ------- ----- -----
Fair value of plan assets, end of year (1).. $25,548 $29,457 $ $
======= ======= ===== =====
--------
(1) Plan assets include 90,348 shares of FINOVA stock which had a fair value of
approximately $55 and $90 thousand at December 31, 2001 and 2000,
respectively.
Funded Status of Plan
Post retirement
Pension benefits health benefits
----------------- ----------------
2001 2000 2001 2000
-------- ------- ------- -------
Plan assets less than benefit obligation $(11,892) $(3,090) $(2,610) $(3,383)
Unrecognized net loss (gain)............ 3,861 4,438 324 (2,574)
Unrecognized prior service cost......... (991) 647
Unrecognized net (obligation) asset..... (20) 607
-------- ------- ------- -------
Net amount recognized................... $ (8,031) $ 337 $(2,286) $(4,703)
======== ======= ======= =======
In accordance with the implementation of Fresh-Start Reporting, FINOVA recorded
an additional $10.8 million liability to reflect its benefit obligations,
including the noncontributory pension plan, the SERP and the post retirement
health benefits, at fair value. This adjustment to the liability was charged to
reorganization expense in the statement of consolidated operations.
Weighted Average Assumptions Used
Pension benefits Post retirement health benefits
---------------- ------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ----- ---- ----
Discount rate................................... 6.75% 7.25% 7.50% 6.75% 7.50% 7.50%
Expected long term rate of return on plan assets 9.00% 9.50% 9.50% n/a n/a n/a
Rate of increase in future compensation levels.. 3.25% 3.75% 4.00% n/a n/a n/a
Current year's rate--pre-65..................... n/a n/a n/a 10.00% 5.00% 5.00%
Current year's rate--post-65.................... n/a n/a n/a 12.00% 5.00% 5.00%
Ultimate year's rate............................ n/a n/a n/a 5.00% 5.00% 5.00%
Ultimate year................................... n/a n/a n/a 2007 2000 2000
---- ---- ---- ----- ---- ----
As a result of the significant increase in medical costs, FINOVA increased the
medical trend rate from its historical rate of 5% to 10% for retirees under 65
and 12% for retirees over 65. It is not anticipated that this increase in
medical costs will continue; therefore, the trend rate was gradually decreased
to 5% (the ultimate year's rate) by the year 2007 (the ultimate year).
A-49
THE FINOVA GROUP INC.
Components of Net Periodic Benefit Cost
Reorganized Predecessor Company
Company -------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended -----------------------
Pension benefits: Dec. 31, 2001 Aug. 31, 2001 2000 1999
----------------- ------------- ------------- ------- -------
Service cost...................... $ 580 $ 1,766 $ 3,145 $ 2,815
Interest cost..................... 800 1,621 2,110 1,829
Expected return on plan assets.... (810) (1,876) (2,813) (2,471)
Recognized net actuarial loss..... 47
Amortization of prior service cost (85) (128) (128)
Amortization of transition asset.. (14) (62) (62)
----- ------- ------- -------
Net periodic benefit cost......... 570 1,412 2,252 2,030
SFAS 88 credits................... (3,162)
----- ------- ------- -------
Total benefit cost................ $ 570 $ 1,412 $ (910) $ 2,030
===== ======= ======= =======
Reorganized Predecessor Company
Company -------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended -----------------------
Post retirement health benefits: Dec. 31, 2001 Aug. 31, 2001 2000 1999
-------------------------------- ------------- ------------- ----- ----
Service cost......................... $40 $253 $ 341 $459
Interest cost........................ 50 168 210 293
Recognized net actuarial gain........ (97) (152) (39)
Amortization of prior service cost... 46 66 66
Amortization of transition obligation 51 72 72
--- ---- ----- ----
Net periodic benefit cost............ 90 421 537 851
SFAS 88 charges...................... 10
--- ---- ----- ----
Total benefit cost................... $90 $421 $ 547 $851
=== ==== ===== ====
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components $ 13 $ (12)
Effect on post retirement benefit obligation........... 121 (115)
A-50
THE FINOVA GROUP INC.
J. Income Taxes
The consolidated income tax expense (benefit) consisted of the following for
the periods ended:
Reorganized Predecessor Company
Company -------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended -----------------------
Dec. 31, 2001 Aug. 31, 2001 2000 1999
------------- ------------- --------- --------
Current:
United States:
Federal.................. $ $ $ (19,696) $ 7,493
State.................... (1,580) (815) 784 (612)
Foreign..................... 11,043 4,637
------- ------- --------- --------
(1,580) (815) (7,869) 11,518
------- ------- --------- --------
Deferred:
United States:
Federal.................. (189,634) 101,550
State.................... 1,580 815 (14,237) 20,781
Foreign..................... 792 (2,765) (1,433) 4,467
------- ------- --------- --------
2,372 (1,950) (205,304) 126,798
------- ------- --------- --------
Income tax expense (benefit) $ 792 $(2,765) $(213,173) $138,316
======= ======= ========= ========
During the four months ended December 31, 2001, the Company received net income
tax refunds of approximately $1.6 million. Net income taxes paid for the eight
months ended August 31, 2001 were approximately $5.7 million and net income
taxes paid were $0 and $6 million for the years ended December 31, 2000 and
1999, respectively.
The federal statutory income tax rate applied to (loss) income before taxes is
reconciled to the effective income tax rate as follows:
Reorganized Predecessor Company
Company -------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended -----------------------
Dec. 31, 2001 Aug. 31, 2001 2000 1999
------------- ------------- ----- ----
Federal statutory income tax rate. (35.0)% (35.0)% (35.0)% 35.0%
State income taxes................ (2.8) (2.4) (2.7) 3.6
Foreign tax effects............... 0.7 1.3
Valuation allowance............... 37.2 35.0 7.5
Municipal and ESOP income......... (0.1) (0.3) (0.6) (1.3)
Non-deductible goodwill........... 0.8 2.3
Other............................. 0.1 0.2 0.3 1.1
----- ----- ----- ----
Expense (benefit) for income taxes 0.1% (0.4)% (28.2)% 38.4%
===== ===== ===== ====
A-51
THE FINOVA GROUP INC.
The significant components of deferred tax liabilities and deferred tax assets
at December 31 consisted of the following:
2001 2000
---------- --------
Deferred tax liabilities:
Deferred income from leveraged leases. $ 309,090 $558,400
Deferred income from lease financing.. 3,526 146,645
Other comprehensive income............ 7,942
Deferred acquisition costs............ 15,099
Foreign taxes......................... 14,495
Other................................. 15,384 11,329
---------- --------
Gross deferred tax liability............. 328,000 753,910
---------- --------
Deferred tax assets:
Reserve for credit losses............. 557,224 263,107
Goodwill.............................. 29,558 55,381
Alternative minimum tax............... 55,516
Net operating loss carryforward....... 21,781 185,079
Basis difference in loans/investments. 283,478 66,090
Basis difference in debt.............. 60,938
Basis difference in owned assets...... 81,997
Foreign taxes......................... 11,057
Accrued expenses...................... 16,375 6,568
Discontinued operations............... 145,303
Other................................. 13,019 25,445
---------- --------
Gross deferred tax asset................. 1,075,427 802,489
Valuation allowance...................... (759,784) (97,781)
---------- --------
Net deferred tax asset................... 315,643 704,708
---------- --------
Net deferred tax liability............... $ 12,357 $ 49,202
========== ========
The effective income tax rates for the four months ended December 31, 2001 and
the eight months ended August 31, 2001 were 0.1% expense and 0.4% benefit,
respectively, compared to 28.2% benefit and 38.4% expense in 2000 and 1999,
respectively for continuing operations. The effective income tax rate for
discontinued operations for the eight months ended August 31, 2001 was 9.95%
expense compared to 30% benefit in 2000 and 40% benefit in 1999. The lower
rates in 2001 were due to the possibility that the Company would not be able to
utilize all of the deferred tax assets created during the year to reduce
federal or state tax liabilities in future years. The reasons the Company may
not be able to utilize all the deferred tax assets created during the year
include: a variety of loss or other tax attribute carryover limitations in the
various jurisdictions in which the Company files tax returns; uncertainty about
the amount of future earnings; and uncertainty about the timing of the reversal
of deferred tax liabilities.
Management has concluded based on available data that a change in ownership, as
defined in Internal Revenue Code Section 382, occurred on the effective date of
the Plan. Ordinarily, an ownership change under Section 382 would result in a
significant limitation on the Company's ability to utilize net operating loss
("NOL") carryforwards and built in losses following the ownership change.
However, pursuant to the "Section 382(I)(5) bankruptcy exception," provided the
Company's reorganization resulted in the ownership of 50% or more of the
Company's stock by "qualifying creditors" and pre-change shareowners, the
general limitations imposed by Section 382 will not apply. If the Section
382(I)(5) bankruptcy exception applies and the Company undergoes another
ownership change within two years after the ownership change resulting from its
chapter 11
A-52
THE FINOVA GROUP INC.
reorganization, the Company would not be entitled to utilize any NOL
carryforward or built in losses that accrued prior to such subsequent ownership
change, to offset taxable income earned following such ownership change.
The Company estimates for its tax year ended December 31, 2001 it will be able
to utilize a significant amount of its NOL carryforwards and alternative
minimum tax credits to offset the recognition of taxable income from
cancellation of debt ("COD") under Section 108 of the Internal Revenue Code of
1986 (the "Tax Code"). Under this Section, the Company will recognize
approximately $800 million of COD income. Should the amount of COD exceed the
sum of NOL carryforwards, current year NOLs and other tax credits, then the Tax
Code provides that such excess be applied to reduce the tax basis of the
Company's assets. Based on current estimates, the Company does not expect that
it will have to reduce the tax basis of its assets. As of December 31, 2001,
the Company generated approximately $68.5 million of NOLs related to foreign
operations with expiration periods beginning in 2008 including some NOLs with
an indefinite expiration period.
K. Convertible Preferred Securities
FINOVA Finance Trust, a subsidiary trust sponsored and wholly owned by FINOVA,
was one of the entities that filed a voluntary petition for protection from
creditors pursuant to chapter 11 on March 7, 2001. On August 10, 2001, the
Bankruptcy Court entered an order confirming FINOVA's Plan, pursuant to which
the Debtors restructured their debt, effective August 21, 2001. Holders of the
51/2% Convertible Trust Originated Preferred Securities (the "Preferred
Securities" or the "TOPrS") issued by FINOVA Finance Trust received (a) a cash
payment equal to 52.5% of the liquidation preference attributable to the TOPrS
(not including pre-petition and post-petition dividends), (b) a cash payment
equal to 75% of accrued and unpaid pre-petition and post-petition dividends
attributable to the TOPrS and (c) New Senior Notes having an aggregate
principal amount equal to 22.5% of the liquidation preference attributable to
the TOPrS (not including pre-petition and post-petition dividends). As a
result, FINOVA recorded an extraordinary gain of $28.8 million. The Convertible
Subordinated debentures (the "Debentures") related to the TOPrS have been
cancelled and FINOVA Finance Trust has been dissolved.
In December 1996, FINOVA Finance Trust issued (a) 2,300,000 shares of Preferred
Securities to the public for gross proceeds of $115 million (before
transactions costs of $3.5 million) and (b) 71,135 shares of common securities
to FINOVA. The gross proceeds for these transactions were invested by the trust
in $118.6 million aggregate principal amount of 51/2% Debentures due 2016 newly
issued by FINOVA. The Debentures represented all of the assets of the trust.
The Preferred Securities accrued and paid cash distributions quarterly, when
declared by FINOVA, at a rate of 51/2% per annum of the stated liquidation
amount of $50 per preferred security. FINOVA had the option to defer making
distributions on the Debentures for up to 20 consecutive quarters, and did so
early in 2001, at which time dividends on the TOPrS were also suspended.
L. Shareowners' Equity
Upon emergence from chapter 11, FINOVA's existing shares of common stock
continued to remain outstanding. Pursuant to the Plan, FINOVA issued 61,020,581
shares of common stock to Berkadia, representing 50% of FINOVA's shares
outstanding after giving effect to implementation of the Plan. Accordingly,
there were approximately 122,041,000 shares outstanding on the Effective Date.
At December 31, 2001, 2000 and 1999, FINOVA had approximately 125,873,000,
64,849,000 and 64,849,000 shares of common stock issued with approximately
122,041,000, 61,295,000 and 61,252,000 shares of common stock outstanding,
respectively. All rights under existing options, warrants and rights of
conversion were deemed cancelled on August 21, 2001, the effective date of the
Plan. As a result, 132,296 shares of FINOVA common stock were reacquired by
FINOVA. The Company has 400,000,000 shares of common stock authorized.
A-53
THE FINOVA GROUP INC.
FINOVA has 200,000,000 shares of one cent ($0.01) per share par value preferred
stock authorized, none of which was issued at December 31, 2001. The Board of
Directors is authorized to provide for the issuance of shares of preferred
stock in series, to establish the number of shares to be included in each
series and to fix the designation, powers, preferences and rights of the shares
of each series.
The Plan contemplates and authorizes the issuance of shares of (a) FINOVA's
common stock to satisfy any final judgment against FINOVA not covered by
insurance arising from certain existing class action litigation and (b) 6%
Perpetual Non-Cumulative Redeemable Preferred Stock of FINOVA to satisfy any
final judgment against FINOVA Capital not covered by insurance arising from
certain existing class action litigation against FINOVA Capital. If any FINOVA
common stock is issued in satisfaction of any such judgment, the Plan provides
that Berkadia would receive additional shares in the amount equal to the number
it would have received on the Effective Date, as if such additional FINOVA
stock had been issued on the Effective Date.
Historically, FINOVA would periodically repurchase its securities on the open
market to fund its obligations pursuant to employee stock options, benefit
plans and similar obligations. No shares were purchased in 2001 or 2000 and
during the year ended December 31, 1999, FINOVA repurchased 1,833,200 shares.
Pursuant to the terms of the Credit Agreement, the Company is generally
prohibited from additional repurchases of securities.
In conjunction with implementing Fresh-Start Reporting, the Company adjusted
its assets and liabilities to fair value, which resulted in a shareowners'
value of $17.6 million. This value was based on the consideration of many
factors and various valuation methods, including the fair values of assets and
liabilities, discounted cash flows, selected publicly traded company market
multiples and other applicable ratios and valuation techniques believed by the
Company and its financial advisors to be representative of the Company's
business and industry.
M. Other Comprehensive Income
Accumulated other comprehensive income activity for the four months ended
December 31, 2001, the eight months ended August 31, 2001 and the years ended
December 31, 2000 and 1999:
Net Unrealized
Holding Gains Accumulated Other
Foreign Currency (Losses) on Comprehensive
Translation Securities Income
---------------- -------------- -----------------
Balance, January 1, 1999............................. $ (218) $ 904 $ 686
Change during 1999................................... (3,928) 37,054 33,126
------- -------- --------
Balance, December 31, 1999........................... (4,146) 37,958 33,812
Change during 2000................................... 4,051 (22,709) (18,658)
------- -------- --------
Balance, December 31, 2000........................... (95) 15,249 15,154
Change during the eight months ended August 31, 2001. 95 (15,249) (15,154)
------- -------- --------
Balance August 31, 2001..............................
Change during the four months ended December 31, 2001 (2,919) 6,999 4,080
------- -------- --------
Balance, December 31, 2001........................... $(2,919) $ 6,999 $ 4,080
======= ======== ========
For 2000 and 1999, the changes in foreign currency translation were net of
income tax benefits of $0.1 million and $2.1 million, respectively. Net
unrealized holding gains were net of income tax expenses of $8.1 million and
$25.6 million in 2000 and 1999, respectively. No liability was established in
2001 due to the Company's current tax situation. See Note J "Income Taxes" for
the Company's current tax situation.
A-54
THE FINOVA GROUP INC.
N. (Loss) Earnings Per Share
Basic loss or earnings per share exclude the effects of dilution and are
computed by dividing (loss) income available to common shareowners by the
weighted average amount of common stock outstanding for the period. Diluted
(loss) earnings per share reflect the potential dilution that could occur if
options, convertible preferred stock or other contracts to issue stock were
exercised or converted into common stock. These per share calculations are
presented for the four months ended December 31, 2001, the eight months ended
August 31, 2001, and the years ended December 31, 2000 and 1999.
As a result of the Plan, all stock incentive plans, all outstanding stock
options, stock appreciation rights and restricted stock were cancelled.
Additionally, TOPrS were restructured in the reorganization and ceased to
exist. As a result, basic and diluted (loss) earnings per share are equal for
the Reorganized Company. For the periods ended August 31, 2001 and December 31,
2000, basic (loss) earnings per share equaled diluted (loss) earnings per share
as a result of the options and preferred stock being antidilutive.
Basic and diluted (loss) earnings per share calculations are presented in the
Statements of Consolidated Operations and are detailed below:
Reorganized Predecessor Company
Company --------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended ------------------------
Dec. 31, 2001 Aug. 31, 2001 2000 1999
------------- ------------- ----------- -----------
Basic (Loss) Earnings Per Share Computation:
(Loss) income from continuing operations........ $ (1,142,300) $ (654,583) $ (546,709) $ 218,241
============ =========== =========== ===========
Weighted average shares outstanding............. 122,041,000 63,677,000 61,272,000 60,173,000
Contingently issued shares...................... (278,000) (293,000)
------------ ----------- ----------- -----------
Adjusted weighted average shares outstanding.... 122,041,000 63,677,000 60,994,000 59,880,000
============ =========== =========== ===========
Basic (loss) earnings from continuing operations
per share..................................... $ (9.36) $ (10.28) $ (8.96) $ 3.64
============ =========== =========== ===========
Diluted (Loss) Earnings Per Share Computation:
(Loss) income from continuing operations........ $ (1,142,300) $ (654,583) $ (546,709) $ 218,241
Preferred dividends, net of tax................. 3,782
------------ ----------- ----------- -----------
(Loss) income from continuing operations before
preferred dividends available to common
shareowner.................................... $ (1,142,300) $ (654,583) $ (546,709) $ 222,023
============ =========== =========== ===========
Weighted average shares outstanding............. 122,041,000 63,677,000 61,272,000 60,173,000
Contingently issued shares...................... (278,000) (293,000)
Incremental shares from assumed conversions:....
Stock options.................................. 1,482,000
Convertible preferred securities............... 2,938,000
------------ ----------- ----------- -----------
Total potential dilutive common shares.......... 4,420,000
------------ ----------- ----------- -----------
Adjusted weighted average shares outstanding.... 122,041,000 63,677,000 60,994,000 64,300,000
============ =========== =========== ===========
Diluted (loss) earnings from continuing
operations per share.......................... $ (9.36) $ (10.28) $ (8.96) $ 3.45
============ =========== =========== ===========
A-55
THE FINOVA GROUP INC.
O. Stock Options
Pursuant to the Plan, all rights under existing options, restricted stock,
warrants and rights of conversion were deemed cancelled on August 21, 2001. No
additional shares of FINOVA common stock may be issued after the Effective Date
of the Plan pursuant to any restricted stock plans, arrangements or awards.
Prior to the Effective Date, The FINOVA Group Inc. 1992 Stock Incentive Plan
allowed for the grant of options, restricted stock and stock appreciation
rights to officers, directors and employees. The Stock Incentive Plan provided
for the following types of awards: (a) stock options (both incentive and
nonqualified stock options), (b) stock appreciation rights and (c) restricted
stock. The 1992 Stock Incentive Plan generally authorized the issuance of
awards for up to 21/2% of the total number of shares of common stock
outstanding as of the first day of each year, with some modifications. In
addition, 250,000 shares of preferred stock were reserved for awards under the
Stock Incentive Plan.
The stock options were granted for terms of 10 years and generally became
exercisable between one month to five years from the date of grant. Stock
options were issued at market value at the date of grant, unless a higher
exercise price was established. Since 1993, the Board issued multi-year,
multi-priced stock options to senior executives. The exercise price of those
option grants ranged in price from the fair market value on the grant date to
prices up to 58.7% in excess of the grant date value. Those option grants were
intended to cover anticipated grants during the years the grants were scheduled
to vest, although the Board had authority to issue additional grants at its
discretion. In 1999, premium-priced options were granted with exercise prices
ranging from $41.56 to $50.29; none of these options were granted in 2001 or
2000.
Information with respect to options granted and exercised under the Stock
Incentive Plan for the three years ended December 31, 2001 is as follows:
Average Option
Shares Price Per Share
---------- ---------------
Options outstanding at January 1, 1999.. 3,957,642 $34.79
Granted.............................. 1,125,443 42.81
Exercised............................ (258,004) 21.35
Cancelled............................ (248,335) 51.86
---------- ------
Options outstanding at December 31, 1999 4,576,746 36.56
Granted.............................. 149,941 21.69
Exercised............................ (117,098) 9.67
Cancelled............................ (754,048) 43.32
---------- ------
Options outstanding at December 31, 2000 3,855,541 35.50
Granted..............................
Exercised............................
Cancelled............................ (3,855,541) 35.50
---------- ------
Options outstanding at December 31, 2001 $
========== ======
A-56
THE FINOVA GROUP INC.
From April 1992, the Board of Directors only granted performance-based
restricted stock to employees. Performance-based restricted stock awards (no
shares in 2001 and 2000, 113,500 shares in 1999), vested generally over five
years from the date of grant. The holder of the performance-based restricted
stock, like the holder of restricted stock, had the right to receive dividends
and vote the target number of shares, but was not permitted to sell, assign,
transfer, pledge or otherwise encumber the performance-based restricted stock.
All performance-based restricted stock grants since 1992 were based on FINOVA
share performance and could have resulted in greater or lesser numbers of
shares ultimately being delivered to the holder, depending on that performance.
The target number of shares was deemed received on the grant date. Additional
vesting over the target was reported as new grants as of the vesting dates.
Vestings below target were reported as a forfeiture of amounts below the target
number of shares.
The Company applied APB Opinion 25 and related interpretations in accounting
for its plans. No compensation cost was recognized for its fixed stock option
plans because FINOVA options were granted at or above market price on the date
of grant. Vesting criteria for restricted stock were not met in 2001, 2000 and
1999.
With the acquisition of Sirrom Capital Corporation in March 1999, the Board of
Directors of FINOVA adopted Sirrom's three existing stock option plans (the
"Sirrom Plans"). Each option outstanding under the Sirrom Plans at the time of
the acquisition was converted into an option exercisable for 0.1634 shares of
FINOVA common stock. No new options were issued under these plans. Options from
the Sirrom Plans were not included in the table above. During the year ended
December 31, 2000, 13,253 and 85,502 options with a weighted average price of
$21.80 were exercised and cancelled, respectively. All the outstanding options
under the Sirrom Plans were cancelled on the Effective Date.
P. Related Party
On February 26, 2001, FINOVA and FINOVA Capital entered into a commitment with
Berkadia LLC, an entity jointly owned by Berkshire Hathaway Inc. ("Berkshire")
and Leucadia National Corporation ("Leucadia"), pursuant to which Berkadia
committed to lend the Company $6 billion to facilitate a chapter 11
restructuring of the outstanding debt of FINOVA and its principal subsidiaries.
As contemplated in the loan commitment with Berkadia, 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").
Berkadia 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 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's shares outstanding after giving effect to the
implementation of the Plan.
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 repayment of the Berkadia Loan. The guarantees
are secured by substantially all of the Guarantors' assets.
A-57
THE FINOVA GROUP INC.
Upon entering into the commitment with Berkadia, FINOVA paid Berkadia a
nonrefundable commitment fee of $60.0 million. An additional $60.0 million
funding fee was paid to Berkadia when the Berkadia Loan was made.
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 the payment of interest and principal under the New Senior Notes are secured
by a second-priority security interest in (a) all of the 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 paid.
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 aggregated 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. If repayment is made 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 shareowners. It should be noted that these
distributions cannot be made to shareowners so long as FINOVA has an
accumulated deficit. Instead these payments will be held until legally
permitted for that purpose under corporate law or used to satisfy the Company's
debt if necessary.
FINOVA's Board of Directors was reconstituted and is comprised of four
directors designated by Berkadia, two prior directors of FINOVA and one
director designated by the Official Committee of Creditors. The Berkadia
designated directors are Ian M. Cumming, Joseph S. Steinberg, Lawrence S.
Hershfield and R. Gregory Morgan; the continuing FINOVA directors are G. Robert
Durham and Kenneth R. Smith; and Thomas F. Boland was designated by the
Committee of Creditors. All directors are subject to reelection annually by the
shareowners, without regard to their original designation.
FINOVA's business is being operated under a 10-year Management Services
Agreement with Leucadia. Leucadia has designated its employees to act as
Chairman of the Board (Ian M. Cumming), President (Joseph S. Steinberg) and
Chief Executive Officer (Lawrence S. Hershfield). In accordance with the
agreement, FINOVA pays an annual management fee of $8 million. Additionally,
FINOVA reimburses Leucadia personnel for all reasonable out-of-pocket expenses.
A-58
Certain members of the Board of Directors have a relationship with Leucadia,
Berkshire or the Company's creditors. The table below summarizes the background
of the directors that have some form of related party relationship:
Name Position and Background
---- -----------------------
Ian M. Cumming Chairman of the Board of FINOVA. Director and Chairman of the Board of
Leucadia National Corporation since June 1978.
Joseph S. Steinberg Director and President of FINOVA. Director of Leucadia National Corporation
since December 1978 and President of Leucadia National Corporation since 1979.
Lawrence S. Hershfield Director and Chief Executive Officer of FINOVA. Vice President of Berkadia
LLC. Executive Officer of Leucadia National Corporation since November 1995.
R. Gregory Morgan Director of FINOVA. Partner in the law firm of Munger, Tolles & Olson LLP,
counsel to Berkshire, where he has practiced since 1981.
Thomas F. Boland Director of FINOVA originally designated by the Official Committee of
Creditors. Managing Director of Seneca Financial Group, Inc. since 2001.
Q. Operating Expenses
The following represents a summary of the major components of operating
expenses for periods ended:
Reorganized Predecessor Company
Company ------------------------------------------------------
Four Months Eight Months Years Ended December 31,
Ended Ended ---------------------------------
Dec. 31, 2001 % Aug. 31, 2001 % 2000 % 1999 %
------------- ----- ------------- ----- -------- ----- -------- -----
Salaries and employee
benefits............... $35,431 49.3% $ 60,603 45.2% $112,519 54.6% $112,388 66.6%
Professional services.... 15,218 21.2% 34,657 25.8% 32,048 15.5% 7,646 4.5%
Problem account costs.... 7,586 10.6% 6,542 4.9% 11,865 5.8% 8,317 4.9%
Occupancy expenses....... 5,933 8.3% 8,645 6.4% 12,374 6.0% 8,986 5.3%
Other operating expenses. 5,157 7.2% 15,620 11.7% 22,159 10.8% 24,206 14.3%
Depreciation and
amortization........... 1,615 2.2% 4,601 3.5% 7,425 3.6% 5,957 3.5%
Travel and entertainment. 855 1.2% 1,785 1.3% 10,837 5.3% 13,372 7.9%
Deferred acquisition cost (19,415) (9.5%) (28,237) (16.5%)
Goodwill amortization (1) 1,621 1.2% 16,300 7.9% 16,062 9.5%
------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses. $71,795 100.0% $134,074 100.0% $206,112 100.0% $168,697 100.0%
======= ===== ======== ===== ======== ===== ======== =====
--------
(1) Excludes the write down of impaired goodwill of $193.3 million in 2000.
R. Operating Leases
As part of the Reorganization Proceedings, the Company rejected a number of its
leases for office properties. The Company continues to evaluate the possibility
of rejecting additional leases. Potential damages for the rejected leases have
been accrued based on the Company's estimate of expected payments. Actual
damages could differ from those estimated. Damages are currently being
negotiated with the Company's landlords and the amount paid will be impacted by
the amount of space, if any, retained by the Company at each of the facilities
being rejected and the amounts that could be obtained from releasing the
property in the current economic environment.
A-59
THE FINOVA GROUP INC.
The table below details minimum future rental payments under operating leases
still in place as of December 31, 2001. The table does not include payments on
rejected leases, which are currently being paid on a month-to-month basis as
the Company continues to determine its course of action. Actual future rentals
will differ from those detailed below, based on future lease negotiations.
2002................................ $ 4,775
2003................................ 4,277
2004................................ 3,167
2005................................ 2,305
2006................................ 1,540
Thereafter.......................... 5,542
-------
Total minimum future rental payments $21,606
=======
Total minimum future rental payments have not been reduced by $4.5 million of
sublease rentals to be received in the future under non-cancelable subleases.
Rent expense net of sublease rentals of $0.4 million, $1.7 million, $1.8
million and $2.4 million was $5.9 million, $8.6 million, $12.4 million and $9.0
million for the four months ended December 31, 2001, the eight months ended
August 31, 2001 and the years ended December 31, 2000 and 1999, respectively.
S. Discontinued Operations
Upon emergence from bankruptcy, net assets of discontinued operations of $322.6
million were reclassified to assets held for sale. This decision reflects
management's intention to manage the net assets previously classified as
discontinued operations in the same manner as other assets of the Company.
Additionally, all former segments of the Company have been dissolved and the
Company is now managed as one operating unit, with an emphasis on orderly
collection of its portfolio.
During the third quarter of 2000, FINOVA's Board of Directors approved a plan
to discontinue and offer for sale its corporate finance, distribution & channel
and commercial services portfolios. As a result, the Company had reported these
divisions as discontinued operations in accordance with Accounting Principles
Board Opinion ("APB") No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions."
The consolidated financial statements of the Company were reclassified to
reflect these businesses as discontinued operations. Accordingly, the revenues,
costs and expenses, assets and liabilities expected to be assumed by an
acquiring entity and cash flows of these discontinued operations were excluded
from the respective captions in the Consolidated Balance Sheets and Statements
of Consolidated Operations and Statements of Consolidated Cash Flows.
Management believed that net assets of discontinued operations represented a
reasonable estimate of the net realizable values of those businesses.
A-60
THE FINOVA GROUP INC.
At December 31, 2000, FINOVA had total net assets of discontinued operations of
$1.2 billion, which included the following:
2000
----------
Financial assets......................... $1,234,761
Accounts payable and accrued expenses (1) (39,776)
Due to clients (2)....................... (32,762)
----------
Net assets of discontinued operations.... $1,162,223
==========
--------
(1) FINOVA assumed that all liabilities directly related to the remaining
assets of the discontinued businesses would be assumed by an acquiring
entity. The amounts included accruals for future operating losses. A
substantial portion of the balance at December 31, 2000 related to the
various cash incentive, retention and severance plans developed for the
employees of the discontinued lines of business.
(2) Due to clients represented the amount due to the third party vendors on
behalf of FINOVA's customers.
Loss from discontinued operations in the Statements of Consolidated Operations
for the eight months ended August 31, 2001 and the years ended December 31,
2000 and 1999 were as follows:
Eight Months Years Ended December 31,
Ended -----------------------
Aug. 31, 2001 2000 1999
------------- --------- ---------
Total revenues..................... $ 61,635 $ 267,819 $ 262,226
Total expenses..................... (57,296) (341,413) (267,221)
Income tax (expense) benefit....... (1,359) 18,197 1,998
-------- --------- ---------
Discontinued operations, net of tax $ 2,980 $ (55,397) $ (2,997)
======== ========= =========
The net loss on disposal of assets for the eight months ended August 31, 2001
and the year ended December 31, 2000 is comprised of the following:
2001 2000
-------- ---------
Net realizable value markdowns.... $(17,997) $(347,511)
Goodwill written off.............. (107,338)
Proceeds in excess of assets sold. 29,172
Accrued expenses.................. (62,697)
Income tax benefit................ 150,663
-------- ---------
Net loss on disposal of operations $(17,997) $(337,711)
======== =========
T. Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
has been developed by FINOVA using market information obtained by the Company
and the valuation methodologies described below. Fair value is defined as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties in other than a forced sale or liquidation.
These values do not represent the liquidation value of the Company and the fair
value of debt may be less than the principal amount due on the debt (as is the
case with the New Senior Notes). Considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein may not be indicative of the amounts that FINOVA
could realize in a current market exchange. The use of different market
assumptions or valuation methodologies may have a material effect on the
estimated fair value amounts.
A-61
THE FINOVA GROUP INC.
The carrying values of cash and cash equivalents, investments and accounts
payable and accrued expenses approximate fair values due to their short-term
maturity or the on-balance sheet valuation of these items.
Financing Assets. As of December 31, 2001, the Company believes the carrying
amount of financing assets, net of the reserve for credit losses, approximates
its fair value. In conjunction with Fresh-Start Reporting, the entire portfolio
was revalued and adjusted to its estimated fair value. The fair value was
primarily determined based upon the present value of future cash flows,
discounted at appropriate risk adjusted market rates for similar loans and
leases. FINOVA reassessed the carrying amount of assets affected by the events
of September 11, resulting in charges to provide additional loss reserves and
to write down various owned assets. In the fourth quarter of 2001, additional
reserves and asset markdowns were recorded, following a detailed assessment of
the portfolio and remeasurement of asset impairment and inherent losses
expected in the portfolio. As a result, the Company believes the carrying
amount approximates its fair value.
Assets Held for Sale. These assets are recorded at the lower of cost or market
and reflect balances written down to their estimated market value at the date
of designation as held for sale. With the adoption of Fresh-Start Reporting,
the market value of these assets was established as a new "cost" basis against
which further market impairment, if any, is recorded, but against which
improvements in market value are not recorded. As of December 31, 2001, the
Company believes that certain assets held for sale within its corporate finance
portfolio may have fair values that exceed the recorded amounts, however, due
to the nonaccruing nature of many of these assets, such fair value is not
readily determinable. Ultimate realization is dependent upon purchasers'
perceptions of credit quality and expectations of market returns, which can
vary significantly. The Company has the ability to hold these assets for some
time and may do so if it believes that such a strategy will enhance the
ultimate recovery.
Senior Debt. As of December 31, 2001, the fair value of the New Senior Notes
was $1.4 billion compared to its book value of $2.5 billion. The New Senior
Notes are publicly traded securities and the fair value was determined using
quoted market prices obtained as of December 31, 2001.
Berkadia Loan. As of December 31, 2001, the Company believes the fair value of
the Berkadia Loan (private placement) approximated its book value. The Berkadia
Loan has a first priority lien on substantially all of FINOVA's assets,
including substantially all of its subsidiaries.
The fair value estimates presented herein were based on information obtained by
FINOVA as of December 31, 2001. Although management is not aware of any factors
that would significantly affect the estimated fair values, those values have
not been updated since December 31, 2001. Therefore, subsequent estimates of
fair value may differ significantly from the amounts presented herein.
U. Litigation and Claims
Legal Proceedings
FINOVA is a party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts.
Litigation often results from FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions.
Litigation is subject to many uncertainties. It is possible that some of the
legal actions, proceedings or claims could be decided against FINOVA. Other
than the matters described below, FINOVA believes that any resulting liability
for their litigation matters should not materially affect FINOVA's financial
position, results of operations or cash flows. One or more of the following
matters could have a material adverse impact on FINOVA's financial position,
results of operations or cash flow.
A-62
THE FINOVA GROUP INC.
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 obtained orders from the Bankruptcy Court on the first day
permitting them to continue their operations in the ordinary course, including
honoring their obligations to borrowers. The orders also permitted the Debtors
to pay certain pre- and post-petition expenses and claims, such as to employees
(other than executive officers, with exceptions), taxing authorities and
foreign trade vendors.
The Debtors submitted a Joint Plan of Reorganization to the Bankruptcy Court on
June 10, 2001. In July, the Debtors' Third Amended and Restated Joint Plan of
Reorganization was submitted for creditor approval, and eventually was approved
at a confirmation hearing on August 10, 2001. The Bankruptcy Court's order
confirming the Plan became final and non-appealable on August 21, 2001, at
which time it became effective upon consummation of the Berkadia Loan. See
Annex A, Note B "Significant Accounting Policies" 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, as noted above,
and it is possible that some of the claims could be decided against FINOVA.
FINOVA believes that any resulting liability for those claims should not
materially affect FINOVA's financial position.
Securities Litigation
Between March 29, 2000 and May 23, 2000, five shareowner lawsuits were filed
against FINOVA and Samuel Eichenfield, FINOVA's former chairman, president and
chief executive officer. Two of the lawsuits also named FINOVA Capital as a
defendant and one named three other executive officers. All of the lawsuits
purport to be on behalf of the named plaintiffs (William K. Steiner, Uri
Borenstein, Jerry Krim, Mark Kassis and the Louisiana School Employees
Retirement System) and others who purchased FINOVA common stock during the
class period of July 15, 1999, through either March 26, 2000, or May 7, 2000.
The suit brought by the Louisiana School Employees Retirement System also
purported to be on behalf of all those who purchased FINOVA Capital's 7.25%
Notes which, prior to the reorganization, would have been due November 8, 2004,
pursuant to the registration statement and prospectus supplement dated November
1, 1999.
By order of the U.S. District Court for the District of Arizona dated August
30, 2000, these five lawsuits were consolidated and captioned In re: FINOVA
Group Inc. Securities Litigation. The court also selected the Louisiana School
Employees Retirement System ("LSERS") as the lead plaintiff in the consolidated
cases. LSERS filed its Amended Consolidated Complaint on September 29, 2000,
naming FINOVA, FINOVA Capital, Samuel Eichenfield, Matthew Breyne and Bruno
Marszowski as defendants. The consolidated amended complaint generally alleged
that the defendants made materially misleading statements regarding FINOVA's
loss reserves, and otherwise violated the federal securities laws in an effort
to, among other reasons, bolster FINOVA's stock price. Among other things, the
complaint sought unspecified damages for losses incurred by shareowners, plus
interest and other relief and rescission with regard to the notes purchased.
Since consolidation of the original five shareowner lawsuits, other related
lawsuits have been initiated against the Company and current and former
officers and directors. Three shareowner lawsuits were filed in the United
A-63
THE FINOVA GROUP INC.
States District Court for the Middle District of Tennessee, in which the named
plaintiffs (John Cartwright, Sirrom Partners and Sirrom G-1, and Caldwell
Travel) assert claims relating to the Company's acquisition in 1999 of Sirrom
Capital Corporation, and the exchange of shares of Sirrom stock for shares of
FINOVA stock. The Cartwright complaint purports to be a class action lawsuit on
behalf of all Sirrom shareowners that exchanged their Sirrom stock for FINOVA
stock as a result of the acquisition. The defendants named are Sirrom Capital
Corporation, FINOVA, Samuel Eichenfield, John W. Teets, Constance Curran, G.
Robert Durham, James L. Johnson, Kenneth Smith, Shoshana Tancer and Bruno
Marszowski. The complaints allege that the defendants made materially
misleading statements regarding FINOVA's loss reserves, and otherwise violated
the federal securities laws in an effort to reduce the total consideration
provided to Sirrom shareowners at the time of the acquisition. The complaints
seek unspecified damages for losses incurred by shareowners, plus interest and
other relief.
Another lawsuit was filed on September 13, 2000, in the Circuit Court for
Davidson County, Tennessee, by Ronald Benkler against several former officers
of Sirrom Capital Corporation. In various agreements entered into in connection
with the Sirrom acquisition, FINOVA had agreed to indemnify the former officers
of Sirrom named as defendants. The complaint alleges that the Sirrom officers
breached various duties to Sirrom in connection with the acquisition of Sirrom
by the Company in 1999, and with the exchange of Sirrom stock for FINOVA stock
as a result of the acquisition. The plaintiffs agreed to a stay of discovery in
this case, pending the final determination of the motion to dismiss the
consolidated securities litigation.
On January 4, 2001, the United States District Court for the Middle District of
Tennessee granted a motion brought by FINOVA and the other defendants to
transfer the Cartwright and Sirrom Partners cases to the United States District
Court for the District of Arizona. The plaintiff in Caldwell Travel agreed to
dismiss that case without prejudice. Pursuant to a Stipulation and Order
entered in March 2001, the Cartwright case was consolidated for all purposes
with the previous five cases in the FINOVA Group Securities Litigation, and the
Sirrom Partners case was consolidated for all pre-trial purposes.
On May 4, 2001, the lead plaintiffs filed a Second Amended Consolidated
Complaint for all of the consolidated and transferred actions pending in the
United States District Court in Arizona. Among other things, the Second Amended
Consolidated Complaint expanded the original class period for the shareholder
class to all those who had purchased FINOVA Common Stock, and certain debt
securities, between January 14, 1999 and November 13, 2000. It also asserted
claims on behalf of a purported subclass of those who exchanged shares of
Sirrom stock for FINOVA stock in connection with the 1999 Sirrom acquisition.
By agreement of the parties, the time for the defendants to answer or move to
dismiss the Second Amended Consolidated Complaint was extended to August 24,
2001. After extensive negotiations, the parties reached an agreement in
principle to resolve all of the various claims in the Consolidated Securities
Litigation, including the claims in the Tennessee actions that had been
transferred and consolidated in January, and the claims asserted in the
Tennessee state court action brought by Ronald Benkler. The Bankruptcy Court
gave preliminary approval to the agreement in principle on August 10, 2001.
Between September 2001 and January 2002, the lead plaintiffs conducted
confirmatory discovery in connection with the settlement. The parties executed
a settlement agreement on February 19, 2002, which is pending before the United
States District Court in Arizona for preliminary approval. In addition to that
approval, the agreement remains subject to certain other conditions. In 2000
FINOVA accrued and in 2001 it funded into an escrow its anticipated share of
the settlement.
Finally, two shareowners' derivative lawsuits were filed against current and
former officers and directors of FINOVA Group, one in the United States
District Court for the District of Arizona, and one in the Court of Chancery
for Newcastle County, Delaware. Both complaints were filed on September 11,
2000, and both purported to be brought by the named plaintiffs (William Kass
and Cindy Burkholter) derivatively on behalf of the Company against several
current and former officers and directors, alleging generally breaches of
fiduciary
A-64
THE FINOVA GROUP INC.
and other duties as directors. These actions sought unspecified money damages
and other relief. As with the consolidated securities litigation, the
allegations centered generally on claims that there were materially misleading
statements regarding FINOVA's loss reserves. The Plan, which was confirmed on
August 10, 2001, provided that the Company may enforce any claims or causes of
action arising before or after the petition that the Company has against any
entity or person, that the Company may pursue or abandon such claims or causes
of action as it deems appropriate, and that no creditor or shareowner may
pursue or commence such litigation, whether direct or derivative, in regard to
such claims and causes of action. The shareowners' derivative actions are thus
superceded by the Plan. By stipulation of the parties, the Delaware Chancery
Court therefore dismissed the Kass lawsuit in December 2001, and the Arizona
District Court dismissed the Burkholter lawsuit in January 2002.
A-65
THE FINOVA GROUP INC.
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(Dollars in thousands, except per share data)
The following represents the condensed quarterly results for the periods ended:
Predecessor Company Reorganized Company
------------------------------ --------------------
Two Months One Month
First Second Ended Ended Fourth
2001: Quarter Quarter Aug. 31 Sep. 30 Quarter
----- -------- --------- ---------- --------- ---------
Total revenues.................................. $259,376 $ 197,650 $ 117,334 $ 55,282 $ 136,497
Total expenses.................................. 313,086 631,519 284,029 904,915 428,372
Loss before extraordinary item (1).............. (75,746) (436,464) (157,390) (850,047) (292,253)
Net loss (1).................................... (75,746) (436,464) (128,640) (850,047) (292,253)
Basic loss before extraordinary item per share.. (1.24) (7.15) (2.22) (6.97) (2.39)
Diluted loss before extraordinary item per share (1.24) (7.15) (2.22) (6.97) (2.39)
First Second Third Fourth
2000: Quarter Quarter Quarter Quarter
----- -------- -------- --------- ----------
Total revenues........................................... $294,433 $289,058 $ 292,941 $ 273,227
Total expenses........................................... 214,347 199,960 408,284 1,083,168
Net income (loss) (1).................................... 10,412 42,933 (274,061) (719,101)
Basic income (loss) before extraordinary item per share.. 0.17 0.70 (4.49) (11.78)
Diluted income (loss) before extraordinary item per share 0.17 0.69 (4.49) (11.78)
--------
(1) See Note K "Convertible Preferred Securities" and S "Discontinued
Operations" for the effect of discontinued operations and extraordinary
item, respectively.
A-66
EXHIBIT INDEX
Exhibits.
---------
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the
Company's Current Report on Form 8-K dated July 14, 1993).*
3.2 Amended and Restated By-laws as amended through February 23, 1999
(filed as Exhibit 3.2 to the 1998 10-K).*
4.1 The Company undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with
respect to long-term debt not filed herewith.
10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy Statement).*
10.2 Articles and Agreement of General Partnership, effective as of April
15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20
to the Company's Registration Statement No. 33-00606).*
10.3 Operating Agreement of The Jordan Company LLC, dated as of July 23,
1998 (filed as Exhibit 10.3 to the 1998 10-K).*
10.4 Leucadia National Corporation Senior Executive Warrant Plan (filed as
Annex B to the 1999 Proxy Statement).*
10.5 Amended and Restated Shareholders Agreement dated as of
December 16, 1997 among the Company, Ian M. Cumming and Joseph
S. Steinberg (filed as Exhibit 10.4 to the 1997 10-K).*
10.6 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to
the 1998 10-K).*
10.7 Form of Amended and Restated Revolving Credit Agreement dated
as of June 27, 2000 between the Company, Fleet National Bank
as Administrative Agent, The Chase Manhattan Bank, as
Syndication Agent, and the Banks signatory thereto, with Fleet
Boston Robertson Stephens, Inc., as Arranger (filed as Exhibit
10.9 to the 2000 10-K).*
10.8 Form of First Amendment, dated as of August 10, 2001, to
Amended and Restated Revolving Credit Agreement dated as of
June 27, 2000 between the Company, Fleet National Bank as
Administrative Agent, The Chase Manhattan Bank, as Syndication
Agent, and the Banks signatory thereto, with Fleet Boston
Robertson Stephens, Inc., as Arranger (filed as Exhibit 10.8
to the 2001 10-K).*
10.9 Purchase Agreement among Conseco, Inc., the Company, Charter National
Life Insurance Company, Colonial Penn Group, Inc., Colonial Penn
Holdings, Inc., Leucadia Financial Corporation, Intramerica Life
Insurance Company, Colonial Penn Franklin Insurance Company and
Colonial Penn Insurance Company dated as of April 30, 1997 (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).*
--------
* Incorporated by reference.
10.10 Purchase Agreement among General Electric Capital Corporation, the
Company, Charter National Life Insurance Company, Colonial Penn Group
Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed
as Annex A to the 1997 Proxy Statement).*
10.11 Purchase Agreement by and among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York, Charter National Life
Insurance Company, Intramerica Life Insurance Company and the Company,
dated February 11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).*
10.12 Leucadia National Corporation Senior Executive Annual Incentive Bonus
Plan (filed as Annex D to the 1997 Proxy Statement).*
10.13 Stock Purchase Agreement by and between the Company and
Allstate Life Insurance Company dated as of December 18, 1998
(filed as Exhibit 10.14 to the 1998 10-K).*
10.14 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated as of December 30, 1999 (filed as Exhibit
10.16 to the 1999 10-K).*
10.15 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17
to the 1999 10-K).*
10.16 Deferred Compensation Agreement between the Company and Thomas
E. Mara dated as of January 10, 2000 (filed as Exhibit 10.17
to the 2000 10-K).*
10.17 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000 (filed as Exhibit
10.18 to the 2000 10-K).*
10.18 Employment Agreement made as of December 28, 1993 by and between the
Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993 10-K).*
10.19 Amendment, dated as of May 5, 1999, to the Employment
Agreement made as of December 28, 1993 by and between the
Company and Ian M. Cumming (filed as Exhibit 10.19 to the 2001
10-K).*
10.20 Employment Agreement made as of December 28, 1993 by and
between the Company and Joseph S. Steinberg (filed as Exhibit
10.18 to the 1993 10-K).*
10.21 Amendment, dated as of May 5, 1999, to the Employment
Agreement made as of December 28, 1993 by and between the
Company and Joseph S. Steinberg (filed as Exhibit 10.21 to the
2001 10-K).*
10.22 Commitment Letter dated February 26, 2001 among the Company, Berkshire
Hathaway Inc., Berkadia LLC, The FINOVA Group Inc. and FINOVA Capital
Corporation (filed as Exhibit 10.19 to the 2000 10-K).*
10.23 Management Services Agreement dated as of February 26, 2001
among The FINOVA Group Inc., the Company and Leucadia
International Corporation (filed as Exhibit 10.20 to the 2000
10-K).*
--------
* Incorporated by reference.
2
10.24 Leucadia National Corporation Guaranty to Fleet Securities, Inc., as
administrative agent, and the lenders from time to time party to the
Fleet Facility, dated as of August 21, 2001 (filed as Exhibit 4 to the
Berkshire Schedule 13D).*
10.25 Berkadia Management LLC Operating Agreement, dated August 21,
2001, by and between BH Finance LLC and WMAC Investment
Corporation (filed as Exhibit 8 to the Berkshire Schedule
13D).*
10.26 Voting Agreement, dated August 21, 2001, by and among Berkadia LLC,
Berkshire Hathaway Inc., the Company and The FINOVA Group Inc. (filed
as Exhibit 10.J to the August 27, 2001 8-K).*
10.27 First Amended and Restated Berkadia LLC Operating Agreement,
dated August 21, 2001, by and among BHF Berkadia Member Inc.,
WMAC Investment Corporation and Berkadia Management LLC (filed
as Exhibit 11 to the Berkshire Schedule 13D).*
10.28 Deferred Compensation Agreement between the Company and Thomas
E. Mara dated as of December 20, 2001 (filed as Exhibit 10.28
to the 2001 10-K).*
10.29 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001 (filed as Exhibit
10.29 to the 2001 10-K).*
21 Subsidiaries of the registrant.
23.1 Consent of independent accountants with respect to the incorporation by
reference into the Company's Registration Statement on Form S-8 (File
No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3
(File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8
(File No. 33-61682), Form S-8 (File No. 33-61718) and Form S-8 (File
No. 333-51494)(filed as Exhibit 23.1 to the 2001 10-K).*
23.2 Independent Auditors' Consent from KPMG LLP, with respect to
the inclusion in this Annual Report on Form 10-K the financial
statements of Jefferies Partners Opportunity Fund II, LLC and
with respect to the incorporation by reference in the
Company's Registration Statements on Form S-8 (No. 2-84303),
Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No.
33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No.
33-61682), Form S-8 (No. 33-61718) and Form S-8 (No.
333-51494) (filed as Exhibit 23.2 to the 2001 10-K).*.
23.3 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K of
the consolidated financial statements of The FINOVA Group Inc.
and the financial statements of Berkadia LLC and with respect
to the incorporation by reference in the Company's
Registration Statements on Form S-8 (No. 2-84303), Form S-8
and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form
S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8
(No. 33-61718) and Form S-8 (No. 333-51494).
--------
* Incorporated by reference.
3