<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
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 1-7543
FINOVA CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1278569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 North Central Ave., P. O. Box 2209, Phoenix, AZ 85002-2209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602/207-6900
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 such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The Registrant meets the conditions set forth in General Instructions H(i)(a)
and (b) of Form 10-Q and is therefore filing this form in the reduced disclosure
format.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 26, 1996, 25,000 shares of Common Stock ($1.00 par value) were
outstanding and were held by an affiliate.
<PAGE> 2
FINOVA CAPITAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements.
Condensed Consolidated Financial Information:
Condensed Consolidated Balance Sheet - March 31, 1996 and
December 31, 1995 1
Condensed Consolidated Income Statement - Three Months Ended
March 31, 1996 and 1995 2
Condensed Consolidated Statement of Cash Flows - Three Months
Ended March 31, 1996 and 1995 3
Notes to Interim Condensed Consolidated Financial Information 4 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 8
PART II OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS: 1996 1995
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 21,651 $ 90,329
INVESTMENT IN FINANCING TRANSACTIONS:
Loans and other financing contracts, less unearned
income of $399,839 and $354,961, respectively 5,109,105 4,973,864
Direct financing leases 747,792 828,713
Operating leases 449,955 460,798
Leveraged leases 417,933 366,196
Factored receivables 220,129 189,486
----------- -----------
6,944,914 6,819,057
Less reserve for possible credit losses (144,754) (140,333)
----------- -----------
Investment in financing transactions - net 6,800,160 6,678,724
OTHER ASSETS AND DEFERRED CHARGES 334,221 294,782
----------- -----------
$ 7,156,032 $ 7,063,835
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses $ 66,001 $ 103,990
Due to clients 201,390 181,548
Interest payable 32,895 45,553
Senior Debt 5,736,159 5,649,368
Deferred income taxes 244,094 227,797
----------- -----------
6,280,539 6,208,256
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, 100,000 shares
authorized, 25,000 shares issued and outstanding 25 25
Additional capital 677,948 677,948
Retained income 204,401 183,292
Cumulative translation adjustments (6,881) (5,686)
----------- -----------
875,493 855,579
----------- -----------
$ 7,156,032 $ 7,063,835
=========== ===========
</TABLE>
See notes to interim consolidated financial information.
1
<PAGE> 4
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENT
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Interest and income earned from financing transactions $ 208,556 $ 174,757
Interest expense (97,056) (84,524)
Depreciation (17,278) (12,743)
--------- ---------
Interest margins earned 94,222 77,490
Provision for possible credit losses (14,250) (6,400)
--------- ---------
Net interest margins earned 79,972 71,090
Gains on sale of assets 6,657 2,980
--------- ---------
86,629 74,070
Selling, administrative and other operating expenses (43,350) (36,575)
--------- ---------
Income before income taxes 43,279 37,495
Income taxes (16,158) (15,127)
--------- ---------
NET INCOME $ 27,121 $ 22,368
========= =========
</TABLE>
See notes to interim consolidated financial information.
2
<PAGE> 5
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
OPERATING ACTIVITIES: 1996 1995
--------- ---------
<S> <C> <C>
Net income $ 27,121 $ 22,368
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Provision for possible credit losses 14,250 6,400
Depreciation and amortization 21,727 16,307
Gains on sale of assets (6,657) (2,980)
Deferred income taxes 16,297 13,036
Change in assets and liabilities, net of effects from subsidiaries
purchased (90,311) (9,312)
--------- ---------
Net cash (used) provided by operating activities (17,573) 45,819
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of assets 42,757 11,518
Proceeds from sales of securitized assets 100,000
Principal collections on financing transactions 433,521 247,085
Expenditures for financing transactions (614,835) (410,339)
Net change in short-term financing transactions (108,352) (67,452)
Acquisitions (127,045)
Other 602 425
--------- ---------
Net cash used by investing activities (146,307) (345,808)
--------- ---------
FINANCING ACTIVITIES:
Long-term borrowings 190,000 375,000
Net borrowings under commercial paper 115,530 139,870
Repayment of long-term borrowings (219,000) (240,951)
Net advances and contributions from Parent (5,158) (3,354)
Dividends (6,012) (5,511)
Net change in due to clients 19,842 19,529
--------- ---------
Net cash provided by financing activities 95,202 284,583
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (68,678) (15,406)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 90,329 52,753
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,651 $ 37,347
========= =========
</TABLE>
See notes to interim consolidated financial information.
3
<PAGE> 6
FINOVA CAPITAL CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE A BASIS OF PREPARATION
The consolidated financial statements present the financial position,
results of operations and cash flows of FINOVA Capital Corporation and its
subsidiaries (collectively, "FINOVA" or the "Company").
The interim consolidated financial information is unaudited. In the
opinion of management all adjustments, consisting only of normal recurring
accruals, necessary to present fairly the financial position as of March 31,
1996, the results of operations for the three months ended March 31, 1996 and
1995 and cash flows for the three months ended March 31, 1996 and 1995, have
been included. Interim results of operations are not necessarily indicative of
the results of operations for the full year.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company adopted this accounting standard effective January 1, 1996, as required.
The effect on the Company's financial position and the results of operations was
not material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", effective for transactions entered into in fiscal
years that begin after December 15, 1995. As permitted under the provisions of
SFAS 123, the Company continues to account for such compensation under existing
rules and will provide the required pro forma disclosures in the 1996 Annual
Report.
NOTE C PORTFOLIO QUALITY
The following table presents a breakdown (by line of business) of the
Company's investment in financing transactions before the reserve for possible
credit losses at the dates indicated.
4
<PAGE> 7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
March 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------------- --------------------------------------
Repos-
sessed Repos- Total
Original Impaired Assets sessed Leases Carrying
Rate (1) (2) Impaired Assets & Other Amount
-------------------------------------- -------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $1,065,382 $ $ $ $ $ $1,065,382
Resort Finance 972,857 2,869 12,734 2,375 29,850 1,020,685
Commercial Real Estate Finance 691,914 11,583 41,864 7,313 18,630 988 772,292
Communications Finance 632,043 2,500 1,653 10,342 3,670 650,208
Corporate Finance (4) 560,448 3,635 18,666 335 583,084
Manufacturer & Dealer Services (4) 465,646 120 36,202 501,968
Medical Finance 401,830 81 1,015 402,926
Rediscount Finance 372,697 372,697
Franchise Finance 336,212 1,444 6,291 967 344,914
Commercial Equipment Finance 334,880 2,511 5,718 343,109
Commercial Finance 215,750 13,221 228,971
Inventory Finance 223,719 328 224,047
Factoring Services 219,588 541 220,129
Government Finance 125,567 4 125,571
Other 80,645 2,897 5,389 88,931
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL $6,699,178 $ 22,031 $ 56,251 $ 64,686 $ 52,485 $ 50,283 $6,944,914
========== ========== ========== ========== ========== ========== ==========
</TABLE>
- --------------------
NOTES:
(1) Consists of troubled debt restructurings.
(2) The Company earned income totaling $1.0 million on repossessed assets
during the first quarter of 1996, including $0.7 million in Commercial
Real Estate Finance and $0.3 million in Resort Finance.
(3) Transportation Finance includes $128.8 million of aircraft financing
business booked through the London office.
(4) Excludes $374.4 million of assets securitized which the Company manages,
including $300.0 million in Corporate Finance and $74.4 million in
Manufacturer and Dealer Services.
--------------------
5
<PAGE> 8
RESERVE FOR POSSIBLE CREDIT LOSSES:
The reserve for possible credit losses of $144.8 million at March 31,
1996 represents 2.0% of managed assets (investment in financing transactions and
securitized assets) before deducting such reserve. Changes in the reserve for
possible credit losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------
1996 1995
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period $ 140,333 $ 122,233
Provision for possible credit losses 14,250 6,400
Write-offs (10,410) (8,885)
Recoveries 602 426
Other (21) 2,779
------------- -------------
Balance, end of period $ 144,754 $ 122,953
============= =============
</TABLE>
The Company believes that collateral values significantly reduce its
loss exposure and that the reserve for possible credit losses is adequate.
The specific impairment reserve of $14.8 million at March 31, 1996
applies to $33.2 million of the $86.7 million of impaired loans. The remaining
$130.0 million of the reserve for possible credit losses is designated for
general purposes and represents management's estimate of the amount to cover
potential losses in the portfolio considering delinquencies, loss experience and
collateral. Additions to general and specific reserves are reflected in current
operations. Management may transfer reserves between the general and specific
reserves as considered necessary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996
TO THE THREE MONTHS ENDED MARCH 31, 1995
The following discussion relates to FINOVA Capital Corporation and its
subsidiaries (collectively, "FINOVA" or the "Company").
RESULTS OF OPERATIONS
Net income for the first quarter of 1996 was $27.1 million compared to
$22.4 million for the first quarter of 1995, a 21% increase in earnings per
common share.
INTEREST MARGINS EARNED. Interest margins earned, which represent the
difference between (a) interest and income earned from financing transactions
and (b) interest expense and depreciation, increased by 22% in 1996 to $94.2
million from $77.5 million in 1995, primarily due to growth in managed assets
(investment in financing transactions plus securitizations). The growth in
managed assets was driven by new business, which totaled $723 million for the
first quarter of 1996 compared to $478 million for 1995, an increase of 51%.
Also contributing to the increase in interest margins were higher amounts of the
fee based factoring and floor planning business which totaled $694 million in
the first quarter of 1996, an increase of 82% over the $381 million done in the
first quarter of 1995.
6
<PAGE> 9
Interest margins earned as a percentage of average earning assets
increased to 5.8% in 1996 from 5.7% in 1995, primarily due to prepayment fees
received in connection with early terminations in the first quarter of 1996 and
lower interest costs.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserves"), were 1.4x write-offs and exceeded the
comparable loss provision for the first quarter of 1995 by $7.9 million,
primarily due to the growth in managed assets. Reserve coverage improved to
86.4% of nonaccruing assets at March 31, 1996 from 70.9% in 1995.
Selling, administrative and other operating expenses increased by $6.8
million in 1996 due to the continued growth of the Company, the large volume of
new business added and employee incentives related to improved Company
performance. As a percentage of interest margins earned, these costs decreased
to 46.0% in 1996 from 47.2% in the previous year.
GAINS ON SALE OF ASSETS. Gains on sale of assets were $3.7 million
higher in 1996 compared to 1995 primarily due to the amount and type of assets
coming off lease.
INCOME TAXES. Income taxes for the first quarter of 1996 increased to
$16.2 million from $15.1 million in 1995. This increase was caused by the
increase in pre-tax income in 1996. The 1996 overall effective income tax rate
for the Company approximated 37.3% compared to 40.3% in 1995. The decrease in
the effective rate is primarily related to lower state and foreign tax effects,
as well as to increased tax exempt municipal income.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets increased by $196.9 million to $7,319 million at March
31,1996 from $7,122 million at December 31, 1995. This increase is primarily
attributable to the $723 million of new business generated in 1996, offset by
portfolio amortization.
The reserve for possible credit losses increased by $4.4 million in
1996 to $144.8 million. The increase in the reserve consisted primarily of
increases due to loss provisions of $14.3 million which were applicable to
portfolio growth, partially offset by write-offs of $10.4 million.
Nonaccruing assets decreased to $167.5 million at March 31, 1996 from
$167.9 million at December 31, 1995. When measured as a percent of ending
managed assets, nonaccruing assets declined to 2.3% at March 31, 1996 from 2.4%
at December 31, 1995.
The Company had total debt of approximately $5.7 billion or 6.6 times
its equity base of $875 million at March 31, 1996. The Company also had deferred
income taxes of $244 million, generally used to reduce debt and, therefore, help
finance lending activities.
Growth in funds employed is generally financed by internally generated
cash flow and additional borrowings. During the first three months, FINOVA
issued $190 million in new senior debt, which, together with general corporate
funds and net commercial paper borrowings, was used to finance new business and
redeem or retire $219 million of debt.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
The Company continues to execute its strategy of providing financing to
midsize companies operating in the industries served by the Company's 14 lines
of business. Management believes the Company ranks among the largest independent
commercial finance companies, based on assets, in the
7
<PAGE> 10
United States. The Company continues to seek new business by emphasizing
customer service, providing competitive interest rates and focusing on selected
market niches. Additionally, the Company continues to evaluate potential
acquisition opportunities that it believes are consistent with its business
strategies.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of",
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company adopted this accounting standard effective January 1, 1996, as required.
The effect on the Company's financial position and the results of operations was
not material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", effective for transactions entered into in fiscal
years that begin after December 15, 1995. As permitted under the provisions of
SFAS 123, the Company continues to account for such compensation under existing
rules and will provide the required pro forma disclosures in the 1996 Annual
Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
Exhibit No. Document
----------- --------
12 Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends
(interim period).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
A Report on Form 8-K, dated April 17, 1996, was filed by
Registrant which reported under Items 5 and 7 the revenues, net
income and selected financial data and ratios for the first quarter
ended March 31, 1996 (unaudited).
8
<PAGE> 11
FINOVA CAPITAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINOVA CAPITAL CORPORATION
(Registrant)
Dated: April 26, 1996 By: /s/ Bruno A. Marszowski
------------------------------------------
Bruno A. Marszowski, Senior Vice President,
Chief Financial Officer and Controller
Principal Accounting Officer
9
<PAGE> 12
FINOVA CAPITAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
MARCH 31, 1996 FORM 10-Q
Exhibit No. Document
- ----------- ---------------------------------------------------------------
12 Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends (interim period).
27 Financial Data Schedule.
10
<PAGE> 1
EXHIBIT 12
FINOVA CAPITAL CORPORATION
Computation of Ratio of Income to Combined Fixed Charges
and Preferred Stock Dividends
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------------------------- ------------------------------------------------------
1996 1995 1995 1994 1993
------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income before income
taxes $ 43,279 $ 37,495 $ 157,240 $ 123,755 $ 64,123
Add fixed charges:
Interest expense 97,056 84,524 366,822 222,929 126,152
One-third rentals 573 648 2,478 2,041 1,387
--------------- --------------- -------------- --------------- ---------------
Total fixed charges 97,629 85,172 369,300 224,970 127,539
--------------- --------------- -------------- --------------- ---------------
Net income as adjusted $ 140,908 $ 122,667 $ 526,540 $ 348,725 $ 191,662
--------------- --------------- -------------- --------------- ---------------
Ratio of income to fixed
charges 1.44 1.44 1.43 1.55 1.50
=============== =============== ============== =============== ===============
Preferred stock dividends
on a pre-tax basis $ 0 $ 0 $ 0 $ 930 $ 3,682
Total combined fixed
charges and preferred
stock dividends $ 97,629 $ 85,172 $ 369,300 $ 225,900 $ 131,221
--------------- --------------- -------------- --------------- ---------------
Ratio of income to combined
fixed charges and preferred
stock dividends 1.44 1.44 1.43 1.54 1.46
=============== =============== ============== =============== ===============
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 21,651
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,944,914
<ALLOWANCE> (144,754)
<TOTAL-ASSETS> 7,156,032
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 544,380
<LONG-TERM> 5,736,159
<COMMON> 25
0
0
<OTHER-SE> 875,468
<TOTAL-LIABILITIES-AND-EQUITY> 7,156,032
<INTEREST-LOAN> 208,556
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 97,056
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 94,222
<LOAN-LOSSES> 14,250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 43,350
<INCOME-PRETAX> 43,279
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,121
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.8
<LOANS-NON> 167,454
<LOANS-PAST> 0
<LOANS-TROUBLED> 22,031
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 140,333
<CHARGE-OFFS> (10,410)
<RECOVERIES> 602
<ALLOWANCE-CLOSE> 144,754
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
