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, 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 format.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 12, 1997, 25,000 shares of Common Stock ($1.00 par value) were
outstanding and were held by an affiliate.
<PAGE>
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, 1997 and
December 31, 1996 1
Condensed Consolidated Income Statement - Three Months
Ended March 31, 1997 and 1996 2
Condensed Consolidated Statement of Cash Flows - Three Months
Ended March 31, 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)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS: 1997 1996
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 67,441 $ 31,285
INVESTMENT IN FINANCING TRANSACTIONS:
Loans and other financing contracts, less unearned income 5,387,518 5,305,678
Factored receivables 634,564 564,430
Operating leases 570,869 517,690
Leveraged leases 496,865 514,573
Direct financing leases 389,557 396,388
----------- -----------
7,479,373 7,298,759
Less reserve for possible credit losses (152,545) (148,693)
----------- -----------
Investment in financing transactions - net 7,326,828 7,150,066
Other assets and deferred charges 397,532 370,575
----------- -----------
$ 7,791,801 $ 7,551,926
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses $ 81,522 $ 97,080
Due to clients 297,397 218,494
Interest payable 30,140 52,677
Senior debt 6,010,987 5,850,223
Deferred income taxes 278,078 264,409
----------- -----------
6,698,124 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 301,287 275,062
Cumulative translation adjustments (583) 1,008
----------- -----------
1,093,677 1,069,043
----------- -----------
$ 7,791,801 $ 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
March 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Interest and income earned from
financing transactions $ 191,112 $ 167,679
Operating lease income 25,965 22,973
Interest expense (97,172) (88,224)
Depreciation (16,449) (17,278)
--------- ---------
Interest margins earned 103,456 85,150
Provision for possible credit losses (8,000) (11,624)
--------- ---------
Net interest margins earned 95,456 73,526
Gains on sale of assets 3,233 6,730
--------- ---------
98,689 80,256
Selling, administrative and other operating expenses (45,878) (37,587)
--------- ---------
Income from continuing operations before income taxes 52,811 42,669
Income taxes (19,998) (15,913)
--------- ---------
Income from continuing operations 32,813 26,756
Income from discontinued operations, net of tax -- 365
--------- ---------
Net Income $ 32,813 $ 27,121
========= =========
</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>
Three Months Ended
March 31,
----------------------
OPERATING ACTIVITIES: 1997 1996
--------- ---------
<S> <C> <C>
Net income $ 32,813 $ 27,121
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible credit losses 8,000 11,624
Depreciation and amortization 20,683 21,083
Gains on sale of assets (3,233) (6,730)
Deferred income taxes 13,669 16,297
Change in assets and liabilities, net of effects from subsidiaries purchased (37,906) (101,529)
Other (1,178) (931)
--------- ---------
Net cash provided by (used in) operating activities 32,848 (33,065)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of assets 43,548 42,293
Proceeds from assets securitized -- 100,000
Principal collections on financing transactions 444,660 375,717
Expenditures for financing transactions (480,785) (541,054)
Net change in short-term financing transactions (206,743) (108,352)
Other 1,342 581
--------- ---------
Net cash used by investing activities (197,978) (130,815)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under commercial paper 447,494 115,530
Long-term borrowings 5,625 190,000
Repayment of long-term borrowings (292,768) (219,000)
Net advances to and contributions from parent (31,380) (5,158)
Dividends (6,588) (6,012)
Net change in due to clients 78,903 19,842
--------- ---------
Net cash provided by financing activities 201,286 95,202
--------- ---------
Increase (decrease) in cash and cash equivalents 36,156 (68,678)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,285 90,329
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67,441 $ 21,651
========= =========
</TABLE>
See notes to interim consolidated financial information.
3
<PAGE>
FINOVA CAPITAL CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 1997, the
results of operations for the three months ended March 31, 1997 and 1996 and
cash flows for the three months ended March 31, 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 three months ended March 31, 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.
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>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
MARCH 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------------------------- ---------------------------------------
Repos-
Market sessed Repos- Leases Total
Interest Assets sessed & Carrying
Rate (1) Impaired (2) Impaired Assets Other Amount
-------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) (4) $1,423,281 $ $ $ $ $ $1,423,281
Resort Finance (4) 1,096,435 3,393 14,021 77 21,970 1,135,896
Commercial Real Estate Finance 713,021 23,694 46,173 13,960 9,777 940 807,565
Corporate Finance (4) 633,519 3,063 16,905 335 653,822
Communications Finance (4) 551,924 8,368 12,825 573,117
Commercial Equipment Finance 559,109 8,489 3,499 571,097
Healthcare Finance 501,609 1,010 389 503,008
Rediscount Finance (4) 434,052 213 434,265
Franchise Finance 356,986 1,031 1,923 838 360,778
Inventory Finance (4) 333,451 5,160 338,611
Factoring Services 255,342 5,658 261,000
Commercial Finance 178,217 9,872 188,089
Government Finance 149,597 149,597
Other (5) 34,832 44,415 79,247
---------- ---------- ---------- ---------- ---------- ---------- -----------
TOTAL (4) $7,221,375 $ 39,549 $ 60,194 $ 76,092 $ 32,082 $ 50,081 $ 7,479,373
========== ========== ========== ========== ========== ========== ===========
</TABLE>
- --------------------
(1) Represents original or renegotiated market interest rate terms, excluding
impaired transactions.
(2) The Company earned interest income totaling $1.1 million on repossessed
assets during the three months ended March 31, 1997, including $0.9 million
in Commercial Real Estate Finance and $0.2 million in Resort Finance.
(3) Includes $171.9 million of new aircraft financing business entered into
through the London office.
(4) Excludes $381.0 million of assets securitized and participations sold which
the Company manages, including $329.4 million in Corporate Finance, $35.8
million in Communications Finance, $5.0 million in Rediscount Finance, $3.7
million in Resort Finance, $3.6 million in Inventory Finance and $3.5
million in Transportation Finance.
(5) Includes assets retained by the Company subsequent to the sale of the
Manufacturer and Dealer Services' line of business.
--------------------
<PAGE>
Reserve for Possible Credit Losses:
The reserve for possible credit losses of $152.5 million at March 31,
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:
Three Months Ended
March 31,
------------------------------
1997 1996
------------ -------------
(Dollars in Thousands)
Balance, beginning of period $ 148,693 $ 129,077
Provision for possible credit losses 8,000 11,624
Write-offs (5,300) (7,858)
Recoveries 1,211 581
Other (59) (21)
------------ ------------
Balance, end of period $ 152,545 $ 133,403
============ ============
The specific impairment reserve of $8.2 million at March 31, 1997
applies to $26.8 million of the $115.6 million of impaired loans. The remaining
$144.3 million of the reserve for possible credit losses is designated for
general purposes and represents management's best estimate of 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, 1997
TO THE THREE MONTHS ENDED MARCH 31, 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 three
months ended March 31, 1996 have been restated to reflect discontinued
operations.
Results of Operations
Income from continuing operations and net income for the first quarter
of 1997 was $32.8 million compared to $26.8 million for the first quarter of
1996, an increase of 23%. Net income for the first quarter of 1996 was $27.1
million.
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, was $103.5
million in the first quarter of 1997, compared to $85.2 million in the same
period a year ago. This 21% increase was primarily the result of a 16% increase
in managed assets and an increase in interest margins earned as a percentage of
average earning assets (from 5.7% to 5.9%).
6
<PAGE>
In the first quarter of 1997, managed assets increased at a 10%
annualized growth rate as a result of new business recorded, partially offset by
normal portfolio amortization and $160 million of prepayments. New business and
fee-based volume totaled $1.43 billion in the first quarter of 1997, compared to
$1.34 billion in the first quarter of 1996. In accordance with the Company's
strategy to diversify into non-asset related businesses, fee-based volume
represented a larger percentage of new activity in the first quarter of 1997
than in the first quarter of 1996.
Interest margins earned as a percentage of average earning assets
increased primarily because of lower interest costs. Interest costs as a
percentage of average earning assets were lower during the first quarter of 1997
compared to 1996 primarily due to improved credit ratings, the maturity of
certain interest rate hedges and lower debt to equity leverage during the
period. Lower interest costs were partially offset by a decrease in income
earned from financing transactions as a percentage of average earning assets in
the first quarter of 1997 compared to 1996.
Provision for credit losses. The provision for credit losses for the
first quarter of 1997 was lower than the first quarter of 1996, as were
write-offs. As an annualized percentage of average managed assets (excluding
participations sold in which the Company has transferred credit risk),
write-offs were 0.28% for the first quarter of 1997 compared to 0.47% in the
first quarter of 1996. Management believes that 0.28% is unusually low and will
not likely be sustained over the long-term.
Gains on sale of assets. Gains on sale of assets were down in the first
quarter of 1997 compared to an unusually high level in 1996. Gains are sporadic
in nature and can vary significantly from period to period.
Selling, administrative and other operating expenses. Selling,
administrative and other operating expenses ("operating expenses") were higher
in the first quarter of 1997 than in 1996, primarily due to the increased costs
associated with the increase in the Company's portfolio. For the quarter,
operating expenses as a percentage of interest margins earned were 44.3%,
compared to 44.1% in the first quarter of 1996. Included in operating expenses
for the first quarter of 1997 were higher incentive compensation accruals,
including a $6.3 million pre-tax expense for the Chairman, President and Chief
Executive Officer's value sharing plan, under an employment agreement, which
reached one of its share price objectives in the first quarter of 1997. This
plan is more fully described in The FINOVA Group's Annual Proxy Statement.
Financial Condition, Liquidity and Capital Resources
Managed assets increased by $197.1 million during the first quarter of
1997 to $7,860 million at March 31, 1997. This increase is primarily
attributable to the new business funded during the quarter, partially offset by
portfolio amortization and prepayments.
The reserve for possible credit losses increased to $152.5 million from
$148.7 million at December 31, 1996 as a result of an $8.0 million provision for
credit losses which was partially offset by $5.3 million of write-offs. The
Company continues to experience improving portfolio performance as measured by
nonaccruing assets, write-offs and reserve coverage. Nonaccruing assets are 2.0%
of managed assets at March 31, 1997 and December 31, 1996, and the reserve for
possible credit losses is 96.4% of nonaccruing assets at March 31, 1997,
compared to 95.6% at the end of 1996.
Growth in funds employed is generally financed by the Company's
internally generated cash flow and new borrowings. As a result of the sale of
the Company's Manufacturer & Dealer Services unit and the issuance of
company-obligated mandatory redeemable convertible preferred securities
("TOPrS") by
7
<PAGE>
FINOVA Group (the proceeds from which were contributed to the Company) during
the fourth quarter of 1996, the Company had significantly paid down its
commercial paper borrowings. As a result of the new business booked in the first
quarter of 1997, outstanding commercial paper increased to $2.9 billion at March
31, 1997. Consequently, long-term borrowings only increased by $5.6 million
during the first quarter of 1997. Senior debt outstanding totaled $6.0 billion
at March 31, 1997 compared to $5.9 billion at December 31, 1996. The debt to
equity ratio for the Company was 5.50x at March 31, 1997, up slightly from 5.47x
at December 31, 1996.
Deferred taxes, which are generally used to reduce debt, were $278.1
million at March 31, 1997 compared to $264.4 million at the end of 1996.
Recent Developments and Business Outlook
On March 25, 1997, the Federal Reserve Board's Open Market Committee
voted to increase the federal funds rate by 25 basis points to 5.50%. The
resulting increase in general interest rates in the first quarter did not
significantly impact interest margins earned for the period. As a result of the
Company's matched funding policy, whereby floating rate assets are matched with
floating rate debt, the impact of changes in interest rates on net interest
margins earned is significantly mitigated. The Company's policy generally is to
limit the difference between floating rate assets and floating rate debt to 3%
of total assets.
During the first quarter of 1997, the Company initiated the FINOVA
Investment Alliance to provide equity and mezzanine debt financing to mid-side
businesses in conjunction with institutional investors and selected fund
sponsors.
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 (interim period).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
A Report on Form 8-K, dated April 17, 1997, 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, 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: May 12, 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
MARCH 31, 1997 FORM 10-Q
Exhibit No. Document
-------------- ----------------------------------------------------------
12 Computation of Ratio of Income to Combined Fixed Charges
(interim period).
27 Financial Data Schedule.
10
EXHIBIT 12
FINOVA CAPITAL CORPORATION
Computation of Ratio of Income to Combined Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
----------------------------- ----------------------------------------------
1997 1996 1996 1995 1994
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before income
taxes $ 52,811 $ 42,669 $ 185,822 $ 150,834 $ 122,847
Add fixed charges:
Interest expense 97,172 88,224 366,543 337,814 210,730
One-third rentals 694 535 2,368 2,084 2,053
------------ ------------- ------------ ------------- -------------
Total fixed charges 97,866 88,759 368,911 339,898 212,783
------------ ------------- ------------ ------------- -------------
Income as adjusted $ 150,677 $ 131,428 $ 554,733 $ 490,732 $ 335,630
------------ ------------- ------------ ------------- -------------
Ratio of income to fixed
charges 1.54 1.48 1.50 1.44 1.58
============ ============= ============ ============= =============
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 67,441
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 7,479,373
<ALLOWANCE> 152,545
<TOTAL-ASSETS> 7,791,801
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 687,137
<LONG-TERM> 6,010,987
0
0
<COMMON> 25
<OTHER-SE> 1,093,652
<TOTAL-LIABILITIES-AND-EQUITY> 7,791,801
<INTEREST-LOAN> 217,077
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 97,172
<INTEREST-INCOME-NET> 103,456
<LOAN-LOSSES> 8,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 45,878
<INCOME-PRETAX> 52,811
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,813
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.9
<LOANS-NON> 158,255
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148,693
<CHARGE-OFFS> 5,300
<RECOVERIES> 1,211
<ALLOWANCE-CLOSE> 152,545
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
