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 June 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 |_|
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.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 8, 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>
<S> <C>
Page No.
--------
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements.
Condensed Consolidated Financial Information:
Condensed Consolidated Balance Sheet - June 30, 1997 and
December 31, 1996 1
Condensed Consolidated Income Statement - Three and Six Months
Ended June 30, 1997 and 1996 2
Condensed Consolidated Statement of Cash Flows - Six Months
Ended June 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
Item 4. Submission of Matters to a Vote of Security Holders 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)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 49,621 $ 31,285
INVESTMENT IN FINANCING TRANSACTIONS:
Loans and other financing contracts, less unearned income 5,730,898 5,305,678
Operating leases 628,423 517,690
Factored receivables 597,515 564,430
Leveraged leases 517,671 514,573
Direct financing leases 351,689 396,388
----------- -----------
7,826,196 7,298,759
Less reserve for possible credit losses (159,747) (148,693)
----------- -----------
Investment in financing transactions - net 7,666,449 7,150,066
Other assets and deferred charges 400,109 370,575
----------- -----------
$ 8,116,179 $ 7,551,926
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses $ 91,441 $ 97,080
Due to clients 241,953 218,494
Interest payable 46,693 52,677
Senior debt 6,338,122 5,850,223
Deferred income taxes 275,808 264,409
----------- -----------
6,994,017 6,482,883
----------- -----------
STOCKHOLDER'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 329,477 275,062
Cumulative translation adjustments (288) 1,008
----------- -----------
1,122,162 1,069,043
----------- -----------
$ 8,116,179 $ 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 Six Months Ended
June 30, June 30,
---------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest and income earned from
financing transactions $ 199,541 $ 167,593 $ 390,653 $ 335,272
Operating lease income 28,946 25,042 54,911 48,015
Interest expense (101,883) (89,718) (199,055) (177,942)
Depreciation (17,610) (14,625) (34,059) (31,903)
--------- --------- --------- ---------
Interest margins earned 108,994 88,292 212,450 173,442
Provision for possible credit losses (18,300) (7,876) (26,300) (19,500)
--------- --------- --------- ---------
Net interest margins earned 90,694 80,416 186,150 153,942
Gains on sale of assets 10,468 1,315 13,701 8,045
--------- --------- --------- ---------
101,162 81,731 199,851 161,987
Selling, administrative and other
operating expenses (46,612) (34,488) (92,490) (72,075)
--------- --------- --------- ---------
Income from continuing operations
before income taxes 54,550 47,243 107,361 89,912
Income taxes (19,853) (18,391) (39,851) (34,304)
--------- --------- --------- ---------
Income from continuing operations 34,697 28,852 67,510 55,608
Loss from discontinued operations,
net of tax -- (731) -- (366)
--------- --------- --------- ---------
Net Income $ 34,697 $ 28,121 $ 67,510 $ 55,242
========= ========= ========= =========
</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>
Six Months Ended
June 30,
--------------------------
OPERATING ACTIVITIES: 1997 1996
----------- -----------
<S> <C> <C>
Net income $ 67,510 $ 55,242
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible credit losses 26,300 19,500
Depreciation and amortization 42,576 38,629
Gains on sale of assets (13,701) (8,045)
Deferred income taxes 11,399 11,200
Change in assets and liabilities, net of effects from subsidiaries
purchased (31,151) (89,339)
Other (1,412) 528
----------- -----------
Net cash provided by operating activities 101,521 27,715
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of assets 109,250 64,241
Proceeds from assets securitized 16,150 100,000
Principal collections on financing transactions 946,031 797,383
Expenditures for financing transactions (1,146,890) (992,705)
Net change in short-term financing transactions (472,021) (285,861)
Purchase of portfolios -- (795)
Other 1,765 1,482
----------- -----------
Net cash used in investing activities (545,715) (316,255)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings under commercial paper 632,868 215,392
Long-term borrowings 565,625 565,000
Repayment of long-term borrowings (710,479) (523,788)
Net advances to and contributions from parent (35,849) (644)
Dividends (13,094) (12,032)
Net change in due to clients 23,459 (22,467)
----------- -----------
Net cash provided by financing activities 462,530 221,461
----------- -----------
Increase (decrease) in cash and cash equivalents 18,336 (67,079)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,285 90,329
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,621 $ 23,250
=========== ===========
</TABLE>
See notes to interim consolidated financial information.
3
<PAGE>
FINOVA CAPITAL CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE SIX MONTHS ENDED JUNE 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 June 30, 1997, the
results of operations for the quarter and six months ended June 30, 1997 and
1996 and cash flows for the six months ended June 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 six months ended June 30, 1996 have been restated to
reflect discontinued operations.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Effective January 1, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Among
other things, this statement changes the accounting treatment of transactions
occurring subsequent to December 31, 1996 that transfer financial assets but
retain the servicing rights, such as securitizations. The adoption of this
standard did not have a material impact on the Company's consolidated financial
statements.
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
stockholders' 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 to 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. The Company is currently evaluating the impact of this standard on
its disclosures.
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
JUNE 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) $1,532,966 $ -- $ -- $ -- $ -- $ -- $1,532,966 19.6
Resort Finance (4) 1,142,389 3,223 14,333 99 21,186 -- 1,181,230 15.1
Corporate Finance (4) 755,307 1,096 -- 19,981 335 -- 776,719 9.9
Commercial Real Estate Finance 630,839 23,859 41,824 7,859 13,681 196 718,258 9.2
Communications Finance (4) 614,361 8,384 -- 12,825 -- -- 635,570 8.1
Commercial Equipment Finance 596,364 -- -- 8,482 -- 4,460 609,306 7.8
Healthcare Finance 503,493 -- -- 2,742 -- 1,267 507,502 6.5
Rediscount Finance (4) 501,164 -- -- 198 -- -- 501,362 6.4
Franchise Finance (4) 353,593 952 -- 1,671 -- 456 356,672 4.6
Inventory Finance (4) 347,229 -- -- 4,391 -- -- 351,620 4.5
Factoring Services 222,174 -- -- 24,221 -- -- 246,395 3.1
Commercial Finance 178,046 -- -- 9,754 -- -- 187,800 2.4
Public Finance 150,540 -- -- -- -- -- 150,540 1.9
Other 38,175 -- -- -- -- 32,081 70,256 0.9
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----
TOTAL (4) $7,566,640 $ 37,514 $ 56,157 $ 92,223 $ 35,202 $ 38,460 $7,826,196 100.0
========== ========== ========== ========== ========== ========== ========== =====
</TABLE>
(1) Represents original or renegotiated market interest rate terms,
excluding impaired transactions.
(2) The Company earned interest income totaling $2.1 million on repossessed
assets during the six months ended June 30, 1997, including $1.6
million in Commercial Real Estate Finance and $0.5 million in Resort
Finance.
(3) Includes $237.3 million of new aircraft financing business entered into
through the London office.
(4) Excludes $394.0 million of assets securitized and participations sold
which the Company manages, including $319.7 million in Corporate
Finance, $38.9 million in Communications Finance, $15.9 million in
Franchise Finance, $9.1 million in Transportation Finance, $4.7 million
in Rediscount Finance, $3.7 million in Resort Finance and $2.0 million
in Inventory Finance.
----------------------------
5
<PAGE>
Reserve for Possible Credit Losses:
The reserve for possible credit losses of $159.7 million at June 30,
1997 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:
Six Months Ended
June 30,
-----------------------------
1997 1996
------------ -----------
(Dollars in Thousands)
Balance, beginning of period $ 148,693 $ 129,077
Provision for possible credit losses 26,300 19,500
Write-offs (16,858) (15,240)
Recoveries 1,634 1,482
Other (22) 2,098
------------ ------------
Balance, end of period $ 159,747 $ 136,917
============ ============
The specific impairment reserve of $7.5 million at June 30, 1997
applies to $29.7 million of the $129.7 million of impaired loans. The remaining
$152.2 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 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 SIX MONTHS ENDED JUNE 30, 1997
TO THE SIX MONTHS ENDED JUNE 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 six months
ended June 30, 1996 have been restated to reflect discontinued operations.
Results of Operations
Net income and income from continuing operations for the six months
ended June 30, 1997 was $67.5 million compared to net income of $55.2 and income
from continuing operations of $55.6 million for the first six 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, were
$212.5 million for the six months ended June 30, 1997 compared with $173.4
million during the same period in 1996, an increase of 22%. The increase was
primarily due to a 16% growth in average managed assets (investment in financing
transactions plus securitizations and participations sold) in 1997 as compared
to June 30, 1996. In addition, interest margins earned as a percentage of
average earning assets increased to 6.0% from
6
<PAGE>
5.7%. The higher interest margins earned are attributable to increases in the
rate earned on the company's investment in financing transactions combined with
a lower aggregate cost of funds.
Provision for Possible Credit Losses. The provision for possible credit
losses increased to $26.3 million for the first six months of 1997, compared to
$19.5 million during the same period in 1996. The increase is attributable to
the increase in financing transactions for the first six months of 1997 as
compared to the same period in 1996 and slightly higher write-offs during the
six months ended June 30, 1997 ($16.9 million compared to $15.2 million in the
first six months of 1996). At June 30, 1997, the reserve for possible credit
losses was 96.3% of nonaccruing assets compared to 87.9% a year earlier.
Gains on Sale of Assets. During the first six months of 1997, the
company recorded gains on sale of assets totaling $13.7 million compared to $8.0
million during the same period one year ago. Included in the 1997 amount was 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 expense. Selling,
administrative and other operating expenses ("operating expenses") were higher
during the six months ended June 30, 1997, due principally to the growth in
managed assets and incentives related to the company's new business,
profitability and stock performance. As a percentage of interest margins earned,
operating expenses were 43.5% for the first six months of 1997 compared to 41.6%
for the first six months of 1996.
Income taxes. Income taxes were higher for the first six 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 37.1% in 1997 from 38.2% in
1996, was partially due to the company's ability to utilize capital loss
carryforwards.
Financial Condition, Liquidity and Capital Resources
Managed assets grew by $556.9 million during the first six months of
1997 and totaled $8.22 billion at June 30, 1997. The increase was due to new
business of $1.56 billion booked during the 1997 period (compared to $1.23
billion for the 1996 period), partially offset by normal portfolio amortization
and prepayments.
The reserve for possible credit losses increased to $159.7 million from
$148.7 million at December 31, 1996 while non-accruing assets increased to
$165.9 million at June 30, 1997 from $155.5 million at the end of 1996. However,
non-accruing assets remained at 2.0% of ending managed assets (exclusive of
participations sold) and reserve coverage (reserves/non-accruing assets)
increased to 96.3% at June 30, 1997 from 95.6% at December 31, 1996.
The company had total debt outstanding of $6.34 billion at June 30,
1997 or 5.65 times its equity base of $1.12 billion at June 30, 1997.
Growth in funds employed is financed by the company's internally
generated funds and new borrowings. During the six months ended June 30, 1997,
the company issued $566 million in new long-term borrowings and recognized a net
increase in commercial paper borrowings of approximately $633 million.
Repayments of long-term debt totaled $710 million during the first six months of
1997.
7
<PAGE>
Recent Developments and Business Outlook
At the close of trading on July 7, 1997, Standard & Poor's Financial
Information Services began to include FINOVA Group in its calculation of the
"S&P MidCap 400", a composite stock price index.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
Omitted
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------
(a) The following exhibits are filed herewith:
Exhibit No. Document
-------------- ----------------------------------------------
10 Second Amendment to Employment Agreement of
Samuel L. Eichenfield dated July 16, 1997
(providing for the deferral of bonus payments
until his retirement at or after age 65)
(incorporated by reference from the Report on
Form 10-Q of The FINOVA Group, Inc. for the
period ended June 30, 1997, Exhibit 10).
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 July 21, 1997, was filed by
Registrant which reported under Items 5 and 7 the revenues, net
income and selected financial data and ratios for the second
quarter ended June 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: August 11, 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
JUNE 30, 1997 FORM 10-Q
Exhibit No. Document
- -------------- -------------------------------------------------------------
10 Second Amendment to Employment Agreement of Samuel L.
Eichenfield dated July 16, 1997 (providing for the deferral
of bonus payments until his retirement at or after age 65)
(incorporated by reference from the Report on Form 10-Q of
The FINOVA Group, Inc. for the period ended June 30, 1997,
Exhibit 10).
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>
Six Months Ended Year Ended
June 30, December 31,
----------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
-------------- -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before income
taxes and preferred
dividends $ 107,361 $ 89,912 $ 185,822 $ 150,834 $ 122,847
Add fixed charges:
Interest expense 199,055 177,942 366,543 337,814 210,730
One-third rentals 1,341 1,141 2,368 2,084 2,053
------------ ------------- ------------ ------------- -------------
Total fixed charges 200,396 179,083 368,911 339,898 212,783
------------ ------------- ------------ ------------- -------------
Income as adjusted $ 307,757 $ 268,995 $ 554,733 $ 490,732 $ 335,630
------------ ------------- ------------ ------------- -------------
Ratio of income to fixed
charges 1.54 1.50 1.50 1.44 1.58
============ ============= ============ ============= =============
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 49621
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 7826196
<ALLOWANCE> 159747
<TOTAL-ASSETS> 8116179
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 655895
<LONG-TERM> 6338122
0
0
<COMMON> 25
<OTHER-SE> 1122137
<TOTAL-LIABILITIES-AND-EQUITY> 8116179
<INTEREST-LOAN> 445564
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 199055
<INTEREST-INCOME-NET> 212450
<LOAN-LOSSES> 26300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 92490
<INCOME-PRETAX> 107361
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67510
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> .06
<LOANS-NON> 165885
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148693
<CHARGE-OFFS> 16858
<RECOVERIES> 1634
<ALLOWANCE-CLOSE> 159747
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
