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 September 30, 1997
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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 form.
As of November 4, 1997, 25,000 shares of Common Stock ($1.00 par value) were
outstanding and held by an affiliate.
<PAGE>
FINOVA CAPITAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I FINANCIAL INFORMATION.
<S> <C> <C>
Item 1. Financial Statements.
Condensed Consolidated Financial Information:
Condensed Consolidated Balance Sheet - September 30, 1997 and
December 31, 1996 1
Condensed Consolidated Income Statement - Three and Nine Months
Ended September 30, 1997 and 1996 2
Condensed Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 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>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 42,565 $ 31,285
INVESTMENT IN FINANCING TRANSACTIONS:
Loans and other financing contracts, less unearned income 5,823,834 5,305,678
Operating leases 697,908 517,690
Factored receivables 659,612 564,430
Leveraged leases 572,344 514,573
Direct financing leases 321,902 396,388
----------- -----------
8,075,600 7,298,759
Less reserve for possible credit losses (167,754) (148,693)
----------- -----------
Investment in financing transactions - net 7,907,846 7,150,066
Other assets and deferred charges 407,711 370,575
----------- -----------
$ 8,358,122 $ 7,551,926
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses $ 103,478 $ 97,080
Due to clients 300,308 218,494
Interest payable 38,100 52,677
Senior debt 6,502,512 5,850,223
Deferred income taxes 263,246 264,409
----------- -----------
7,207,644 6,482,883
----------- -----------
SHAREOWNER'S EQUITY:
Common stock, $1.00 par value, 100,000 shares
authorized, 25,000 shares issued 25 25
Additional capital 792,948 792,948
Retained income 357,726 275,062
Cumulative translation adjustments (221) 1,008
----------- -----------
1,150,478 1,069,043
----------- -----------
$ 8,358,122 $ 7,551,926
=========== ===========
</TABLE>
See notes to interim consolidated financial information.
1
<PAGE>
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENT
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ --------------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Interest and income earned from
financing transactions $ 207,103 $ 181,616 $ 597,756 $ 516,888
Operating lease income 30,253 23,356 85,164 71,371
Interest expense (105,592) (91,629) (304,647) (269,571)
Depreciation (17,727) (15,247) (51,786) (47,150)
--------------- --------------- --------------- --------------
Interest margins earned 114,037 98,096 326,487 271,538
Provision for possible credit losses (22,000) (11,664) (48,300) (31,164)
--------------- --------------- --------------- --------------
Net interest margins earned 92,037 86,432 278,187 240,374
Gains on sale of assets 8,706 397 22,407 8,442
--------------- --------------- --------------- --------------
100,743 86,829 300,594 248,816
Selling, administrative and other
operating expenses (44,773) (38,569) (137,263) (110,644)
--------------- --------------- --------------- --------------
Income from continuing operations
before income taxes 55,970 48,260 163,331 138,172
Income taxes (20,103) (17,771) (59,954) (52,075)
--------------- --------------- --------------- --------------
Income from continuing operations 35,867 30,489 103,377 86,097
Loss from discontinued operations,
net of tax - (726) - (1,092)
--------------- --------------- --------------- --------------
Net Income $ 35,867 $ 29,763 $ 103,377 $ 85,005
=============== =============== =============== ==============
</TABLE>
See notes to interim consolidated financial information.
2
<PAGE>
FINOVA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
OPERATING ACTIVITIES: 1997 1996
----------------- -----------------
<S> <C> <C>
Net income $ 103,377 $ 85,005
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible credit losses 48,300 31,164
Depreciation and amortization 64,620 57,509
Gains on sale of assets (22,407) (8,442)
Deferred income taxes (1,163) 27,048
Change in assets and liabilities, net of effects from companies
purchased (45,065) (108,492)
Other (1,058) 1,363
----------------- -----------------
Net cash provided by operating activities 146,604 85,155
----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from sale of assets 157,281 76,104
Proceeds from assets securitized 16,150 100,000
Principal collections on financing transactions 1,445,225 1,260,788
Expenditures for financing transactions (1,691,539) (1,479,265)
Net change in short-term financing transactions (747,479) (499,802)
Purchase of portfolios - (7,455)
Other 2,229 1,918
----------------- -----------------
Net cash used in investing activities (818,133) (547,712)
----------------- -----------------
FINANCING ACTIVITIES:
Net borrowings under commercial paper 711,621 467,219
Long-term borrowings 688,625 564,988
Repayment of long-term borrowings (748,128) (586,237)
Net advances to parent (30,410) (1,442)
Dividends (20,713) (18,628)
Net change in due to clients 81,814 5,190
----------------- -----------------
Net cash provided by financing activities 682,809 431,090
----------------- -----------------
Increase (decrease) in cash and cash equivalents 11,280 (31,467)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,285 90,329
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,565 $ 58,862
================= =================
</TABLE>
See notes to interim consolidated financial information.
3
<PAGE>
FINOVA CAPITAL CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE A BASIS OF PREPARATION
- ------ --------------------
The consolidated financial statements present the financial position,
results of operations and cash flows of FINOVA Capital Corporation and its
subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned
subsidiary of The FINOVA Group Inc.
The interim consolidated financial information is unaudited. In the
opinion of management all adjustments, consisting of normal recurring items,
necessary to present fairly the financial position as of September 30, 1997, the
results of operations for the quarter and nine months ended September 30, 1997
and 1996 and cash flows for the nine months ended September 30, 1997 and 1996,
have been included. Interim results of operations are not necessarily indicative
of the results of operations for the full year.
Amounts for the nine months ended September 30, 1996 have been restated
to reflect discontinued operations.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
- ------ -------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 31, 1997.
The statement changes the reporting of certain items currently reported in the
shareowners' equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of general
purpose financial statements. Management does not expect this standard will have
a material effect on the Company's financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 31, 1997. This standard requires segments
of a business enterprise to be reported based on the way management organizes
and evaluates segments within the Company. The standard also requires
disclosures regarding products and services, geographical areas and major
customers. Adoption of this standard will require the Company to include
additional detail in its disclosures, including certain disaggregated operating
information.
The Company plans to adopt both SFAS No. 130 and No. 131 in 1998.
NOTE C PORTFOLIO QUALITY
- ------ -----------------
The following table presents, by line of business, the Company's
investment in financing transactions before the reserve for possible credit
losses at the dates indicated.
4
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
SEPTEMBER 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------ --------------------------------------
Market Repos- Repos- Total
Interest sessed sessed Leases Carrying
Rate (1) Impaired Assets(2) Impaired Assets & Other Amount %
---------- ---------- ---------- ---------- ------------ ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) (4) $1,605,116 $ -- $ -- $ -- $ -- $ -- $1,605,116 19.9
Resort Finance (4) 1,161,194 -- 14,588 3,696 22,818 -- 1,202,296 14.9
Corporate Finance (4) 860,153 1,039 -- 28,398 -- -- 889,590 11.0
Commercial Real Estate Finance 618,136 24,037 41,403 7,733 13,414 196 704,919 8.7
Communications Finance (4) 580,278 8,570 -- 12,875 -- -- 601,723 7.5
Commercial Equipment Finance 564,845 -- -- 11,852 -- 4,607 581,304 7.2
Rediscount Finance (4) 547,040 -- -- 1,059 -- -- 548,099 6.8
Healthcare Finance 492,311 -- -- 2,009 -- 660 494,980 6.1
Inventory Finance (4) 393,509 -- -- 4,851 -- -- 398,360 4.9
Franchise Finance (4) 380,413 855 -- 2,131 -- 425 383,824 4.8
Factoring Services 242,636 -- -- 27,425 -- -- 270,061 3.3
Commercial Finance 186,990 -- -- 9,762 -- -- 196,752 2.4
Public Finance 147,237 -- -- -- -- -- 147,237 1.8
Other 31,860 -- -- -- -- 19,479 51,339 0.7
---------- ---------- ---------- ---------- ------------ ---------- ---------- -----
TOTAL (4) $7,811,718 $ 34,501 $ 55,991 $ 111,791 $ 36,232 $ 25,367 $8,075,600 100.0
========== ========== ========== ========== ============ ========== ========== =====
</TABLE>
(1) Represents original or renegotiated market interest rate terms,
excluding impaired transactions.
(2) The Company earned interest income totaling $3.0 million on repossessed
assets during the nine months ended September 30, 1997, including $2.3
million in Commercial Real Estate Finance and $0.7 million in Resort
Finance.
(3) Includes $275.8 million of new aircraft financing business entered into
through the London office.
(4) Excludes $373.7 million of assets securitized and participations sold
which the Company services including $316.6 million in Corporate
Finance, $21.4 million in Communications Finance, $15.8 million in
Franchise Finance, $8.6 million in Transportation Finance, $4.8 million
in Rediscount Finance, $4.8 million in Resort Finance, $1.7 million in
Inventory Finance.
5
<PAGE>
Reserve for Possible Credit Losses:
The reserve for possible credit losses of $167.8 million and $144.3
million at September 30, 1997 and 1996, respectively, represents 2.0% of the
Company's investment in financing transactions and securitized assets. Changes
in the reserve for possible credit losses were as follows:
Nine Months Ended
September 30,
--------------------------------
1997 1996
------------- --------------
(Dollars in Thousands)
Balance, beginning of period $ 148,693 $ 129,077
Provision for possible credit losses 48,300 31,164
Write-offs (31,263) (24,018)
Recoveries 2,098 1,918
Other (74) 6,152
------------- --------------
Balance, end of period $ 167,754 $ 144,293
============= ==============
A specific impairment reserve of $8.3 million at September 30, 1997
applies to $36.5 million of impaired loans totaling approximately $146.3
million. The remaining $159.5 million of the reserve for possible credit losses
is designated for general purposes and represents management's estimate of
potential losses in the portfolio considering delinquencies, loss experience and
collateral. Additions to the general and specific reserves are reflected in
current operations. Management may reclassify 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 NINE MONTHS ENDED SEPTEMBER 30, 1997
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
The following discussion relates to FINOVA Capital Corporation and its
subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned
subsidiary of The FINOVA Group Inc. ("FINOVA Group"). Amounts for the nine
months ended September 30, 1996 have been restated to reflect discontinued
operations.
Results of Operations
Net income and income from continuing operations for the nine months
ended September 30, 1997 were both $103.4 million compared to net income of
$85.0 million and income from continuing operations of $86.1 million for the
first nine months of 1996.
Interest Margins Earned. Interest margins earned, which represent the
difference between (a) interest and income earned from financing transactions
and operating lease income and (b) interest expense and depreciation on
operating leases, were $326.5 million for the first nine months of 1997 compared
with $271.5 million during the same period in 1996, an increase of 20%. The
increase was primarily due to a 16% increase in average managed assets
(investments in financing transactions plus securitizations and participations
sold) during the nine months ended September 30, 1997 compared to the first nine
months of 1996. In addition, interest margins earned as a percentage of average
earning assets for the first nine months of 1997 increased to 6.0% from 5.9% in
1996. The higher margin percentages are primarily the result of a lower cost of
funds and lower debt leverage.
6
<PAGE>
Provision for Possible Credit Losses. The provision for possible credit
losses increased to $48.3 million for the nine months ended September 30, 1997
compared to $31.2 million for the first nine months of 1996. The increase is
primarily attributable to the growth in managed assets during the first nine
months of 1997, coupled with reserve requirements related to increased
write-offs in the Company's Factoring portfolio. Write-offs for the remainder of
the Company were lower on an aggregate basis through the first nine months of
1997 compared to the same period one year ago.
Gains on Sale of Assets. For the nine months ended September 30, 1997,
the Company recorded $22.4 million in gains on sale of assets compared to $8.4
million in the first nine months of 1996. This increase was primarily
attributable to a gain resulting from the sale of the Company's interest in a
real estate leveraged lease transaction. Gains on sale of assets are sporadic in
nature and result primarily from assets coming off lease which are subsequently
sold.
Selling, Administrative and Other Operating Expenses. Selling,
administrative and other operating expenses ("operating expenses") were higher
during the nine months ended September 30, 1997, due primarily to the growth in
managed assets, as well as incentives related to the Company's new business,
profitability and stock performance. As a percentage of interest margins earned,
operating expenses for the first nine months of 1997 were 42.0% compared to
40.7% for the nine months ended September 30, 1996. Operating expenses include
costs related to projects underway to develop accurate date recognition and data
processing with respect to the Year 2000; these costs have been immaterial to
date and are not expected to have a material impact on the Company's earnings in
the future.
Income Taxes. Income taxes were higher for the first nine months of
1997 compared to the corresponding period in 1996 due to the increase in pre-tax
income. The effective tax rate, which decreased to 36.7% during the first nine
months of 1997 from 37.7% during the first nine months of 1996, was partially
due to the Company's ability to utilize capital loss carryforwards.
Financial Condition, Liquidity and Capital Resources
At September 30, 1997, managed assets totaled $8.45 billion compared to
$7.66 billion at December 31, 1996. The increase in managed assets was due to
new business of $2.31 billion booked during the first nine months of 1997
(compared to $1.87 billion during the nine months ended September 30, 1996),
partially offset by normal portfolio amortization and prepayments. In addition,
the Company recorded $2.67 billion in fee-based volume for the nine months ended
September 30, 1997, compared to $2.12 billion for the nine months ended
September 30, 1996.
The reserve for possible credit losses increased to $167.8 million at
September 30, 1997, compared to $148.7 million at December 31, 1996. This
increase is primarily the result of the increase in the Company's financing
portfolio; the reserve as a percentage of managed assets (excluding
participations) remains at 2.0% at September 30, 1997, the same level as
year-end. The reserve for possible credit losses increased to 96.7% of
non-accruing assets at September 30, 1997, compared to 95.6% at December 31,
1996; non-accruing assets at September 30, 1997, were $173.4 million compared to
$155.5 million at the end of 1996.
At September 30, 1997, the Company had $6.50 billion of senior debt
outstanding, representing 5.65 times the Company's $1.15 billion equity base
compared to $5.85 billion at December 31, 1996, representing 5.47 times the
Company's equity base.
Growth in funds employed is financed by the Company's internally
generated funds and new borrowings. During the nine months ended September 30,
1997, the Company issued $688.6 million in new long-term borrowings and
recognized a net increase in borrowings under commercial paper of $711.6
million. During the same period, the Company repaid $748.1 million in long-term
borrowings.
7
<PAGE>
Recent Developments and Business Outlook
Subsequent to September 30, 1997, the Company consummated the
acquisition of Belgravia Capital Corporation, a national commercial mortgage
banking organization based in Irvine, California. The terms of the transaction
included an initial payment to Belgravia's shareholders of approximately $87.5
million in FINOVA stock and cash and up to approximately $30 million in
additional annual payments contingent upon the satisfaction of certain net
income requirements over the next three years. The Company also announced a
reorganization into three operating groups.
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 October 15, 1997, was filed by
Registrant which reported under Items 5 and 7 the revenues, net
income and selected financial data and ratios for the third quarter
ended September 30, 1997 (unaudited).
8
<PAGE>
FINOVA CAPITAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINOVA CAPITAL CORPORATION
(Registrant)
Dated: November 5, 1997 By: /s/ Bruno A. Marszowski
--------------------------------------------
Bruno A. Marszowski, Senior Vice President,
Chief Financial Officer and Controller
Principal Financial and Accounting Officer
9
<PAGE>
FINOVA CAPITAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
SEPTEMBER 30, 1997 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
EXHIBIT 12
FINOVA CAPITAL CORPORATION
Computation of Ratio of Income to Combined Fixed Charges
and Preferred Stock Dividends
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
-------------- -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before income
taxes $ 163,331 $ 138,172 $ 185,822 $ 150,834 $ 122,847
Add fixed charges:
Interest expense 304,647 269,571 366,543 337,814 210,730
One-third rentals 2,052 1,722 2,368 2,084 2,053
------------ ------------- ------------ ------------- -------------
Total fixed charges 306,699 271,293 368,911 339,898 212,783
------------ ------------- ------------ ------------- -------------
Income as adjusted $ 470,030 $ 409,465 $ 554,733 $ 490,732 $ 335,630
------------ ------------- ------------ ------------- -------------
Ratio of income to fixed
charges 1.53 1.51 1.50 1.44 1.58
============ ============= ============ ============= =============
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 42,565
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,075,600
<ALLOWANCE> 167,754
<TOTAL-ASSETS> 8,358,122
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 705,132
<LONG-TERM> 6,502,512
0
0
<COMMON> 25
<OTHER-SE> 1,150,453
<TOTAL-LIABILITIES-AND-EQUITY> 8,358,122
<INTEREST-LOAN> 682,920
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 304,647
<INTEREST-INCOME-NET> 326,487
<LOAN-LOSSES> 48,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 137,263
<INCOME-PRETAX> 163,331
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,377
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> .06
<LOANS-NON> 173,390
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148,693
<CHARGE-OFFS> 31,263
<RECOVERIES> 2,098
<ALLOWANCE-CLOSE> 167,754
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
