UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q/A-1
(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, 1998
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 1-11011
THE FINOVA GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0695381
(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:
As of July 31, 1998, 56,491,446 shares of Common Stock ($0.01 par value) were
outstanding.
<PAGE>
THE FINOVA GROUP INC.
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements.
Condensed Consolidated Financial Information:
Condensed Consolidated Balance Sheet - June 30, 1998 and
December 31, 1997 1
Condensed Consolidated Income Statement - Three and Six
Months Ended June 30, 1998 and 1997 2
Condensed Consolidated Statement of Cash Flows - Six
Months Ended June 30, 1998 and 1997 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 9
PART II OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
THE FINOVA GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1998 1997
----------- ------------
ASSETS:
Cash and cash equivalents $ 32,777 $ 33,190
Investment in financing transactions:
Loans and other financing contracts 6,367,375 5,955,984
Operating leases 646,675 712,927
Leveraged leases 643,114 619,557
Factored receivables 611,170 750,399
Direct financing leases 356,050 360,589
Financing contracts held for sale 304,260 --
----------- -----------
8,928,644 8,399,456
Less reserve for credit losses (178,070) (177,088)
----------- -----------
Investment in financing transactions - net 8,750,574 8,222,368
Goodwill and other assets 505,513 464,282
----------- -----------
$ 9,288,864 $ 8,719,840
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses $ 132,898 $ 147,280
Due to clients 195,245 278,571
Interest payable 55,139 52,643
Senior debt 7,345,194 6,764,581
Deferred income taxes 296,741 274,761
----------- -----------
8,025,217 7,517,836
----------- -----------
Company-obligated mandatory redeemable convertible
preferred securities of subsidiary trust solely
holding convertible debentures of FINOVA, net of
expenses (TOPrS) 111,550 111,550
SHAREOWNERS' EQUITY:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 58,555,000 shares issued 585 585
Additional capital 765,980 764,525
Retained income 450,962 386,665
Cumulative translation adjustments 330 (10)
Common stock in treasury, 2,123,000 and 2,273,000
shares, respectively (65,760) (61,311)
----------- -----------
1,152,097 1,090,454
----------- -----------
$ 9,288,864 $ 8,719,840
=========== ===========
See notes to interim condensed consolidated financial information.
1
<PAGE>
THE FINOVA GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENT
(Dollars in Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest and income earned
from financing transactions $ 218,199 $ 190,958 $ 421,935 $ 374,286
Operating lease income 31,425 28,946 64,088 54,911
Interest expense (114,987) (101,883) (225,559) (199,055)
Depreciation (20,495) (17,610) (37,665) (34,059)
------------ ------------ ------------ ------------
Interest margins earned 114,142 100,411 222,799 196,083
Volume-based fee income 19,103 8,583 41,259 16,367
------------ ------------ ------------ ------------
Operating margin 133,245 108,994 264,058 212,450
Provision for credit losses (16,000) (18,300) (25,500) (26,300)
------------ ------------ ------------ ------------
Net interest margins earned 117,245 90,694 238,558 186,150
Gains on disposal of assets 9,582 10,468 10,805 13,701
------------ ------------ ------------ ------------
126,827 101,162 249,363 199,851
Selling, administrative and other
operating expenses (57,779) (46,612) (114,737) (92,490)
------------ ------------ ------------ ------------
Income before income taxes and
preferred dividends 69,048 54,550 134,626 107,361
Income taxes (27,068) (19,853) (52,623) (39,851)
------------ ------------ ------------ ------------
Income before preferred dividends 41,980 34,697 82,003 67,510
Dividends on preferred securities of
subsidiary trust, net of tax (945) (946) (1,891) (2,101)
------------ ------------ ------------ ------------
NET INCOME $ 41,035 $ 33,751 $ 80,112 $ 65,409
============ ============ ============ ============
Basic earnings per share $ 0.73 $ 0.62 $ 1.43 $ 1.21
============ ============ ============ ============
Basic average shares outstanding 56,230,000 54,006,000 56,189,000 53,965,000
============ ============ ============ ============
Diluted earnings per share $ 0.69 $ 0.59 $ 1.34 $ 1.15
============ ============ ============ ============
Average shares outstanding
assuming dilution 61,138,000 58,561,000 61,092,000 58,598,000
============ ============ ============ ============
Dividends declared per common
share $ 0.14 $ 0.12 $ 0.28 $ 0.24
============ ============ ============ ============
</TABLE>
See notes to interim condensed consolidated financial information.
2
<PAGE>
THE FINOVA GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net income $ 80,112 $ 65,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 25,500 26,300
Depreciation and amortization 49,177 42,576
Gains on disposal of assets (10,805) (13,701)
Deferred income taxes 21,980 11,688
Change in assets and liabilities, net of effects
from subsidiaries purchased (64,629) (33,183)
Other 2,460 (514)
----------- -----------
Net cash provided by operating activities 103,795 98,575
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of assets 167,065 109,250
Proceeds from sale of assets securitized 31,126 16,150
Principal collections on financing transactions 905,996 946,031
Expenditures for financing transactions (1,104,014) (1,146,890)
Net change in short-term financing transactions
& financing contracts held for sale (582,042) (472,021)
Other 1,303 1,765
----------- -----------
Net cash used by investing activities (580,566) (545,715)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings under commercial paper and
short-term loans 623,870 632,868
Long-term borrowings 610,000 565,625
Repayment of long-term borrowings (653,316) (710,479)
Proceeds from exercise of stock options 4,716 4,384
Common stock purchased for treasury (9,771) (37,296)
Dividends (15,815) (13,094)
Net change in due to clients (83,326) 23,459
----------- -----------
Net cash provided by financing activities 476,358 465,467
----------- -----------
(Decrease) increase in cash and cash equivalents (413) 18,327
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,190 31,260
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,777 $ 49,587
=========== ===========
See notes to interim condensed consolidated financial information.
3
<PAGE>
THE FINOVA GROUP INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE A BASIS OF PREPARATION
- -----------------------------
The consolidated financial statements present the financial position,
results of operations and cash flows of The FINOVA Group Inc. and its
subsidiaries (collectively, "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries (collectively, "FINOVA Capital").
The interim condensed 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, 1998,
the results of operations for the quarter and six months ended June 30, 1998 and
1997 and cash flows for the six months ended June 30, 1998 and 1997, have been
included. Interim results of operations are not necessarily indicative of the
results of operations for the full year.
Previously, volume-based fees, which represent fees generated by
Inventory Finance, Commercial Services (formerly "Factoring Services") and
FINOVA Realty Capital lines of business, were classified as a component of
interest and income earned from financing transactions. Commencing in 1998, the
Company has reported these amounts as a separate item and reclassified prior
period amounts accordingly. This change in classification has no effect on
previously reported net income or earnings per share.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 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. The company has adopted
this standard effective January 1, 1998. Total comprehensive income was $41.4
million and $34.0 million for the three months ended June 30, 1998 and 1997,
respectively and $80.5 million and $64.1 million for the six months ended June
30, 1998 and 1997, respectively. The primary component of comprehensive income
other than net income was foreign currency translation.
NOTE C PORTFOLIO QUALITY
- --------------------------
The following table presents a distribution (by line of business) of
the Company's investment in financing transactions before the reserve for credit
losses at the dates indicated.
4
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
JUNE 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------- -----------------------------
Repos-
sessed Repos- Leases Total
Original Assets sessed & Carrying
Rate (1) Impaired (2) Impaired Assets Other Amount %
------------------------------- ----------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3 & 4) $1,683,700 $ $ $ $ $ 4,009 $1,687,709 18.9
Resort Finance (4) 1,133,435 15,497 31,439 1,180,371 13.2
Corporate Finance (4) 795,487 858 26,828 823,173 9.2
Communications Finance (4) 738,594 9,028 26,857 774,479 8.7
Specialty Real Estate Finance 599,261 21,089 36,066 6,719 7,687 194 671,016 7.5
Rediscount Finance (4) 654,573 4,757 659,330 7.4
Commercial Equipment Finance 600,396 1,676 4,786 9,685 846 3,802 621,191 7.0
Inventory Finance (4) 537,020 7,998 545,018 6.1
Healthcare Finance 501,093 8,792 873 510,758 5.7
Franchise Finance (4) 492,647 755 5,118 293 498,813 5.6
Realty Capital (5) 307,530 307,530 3.4
Business Credit (4) 234,602 7,236 241,838 2.7
Commercial Services 169,468 18,516 1,060 189,044 2.1
Public Finance 160,113 160,113 1.8
Other (6) 34,146 24,115 58,261 0.7
---------- ------- -------- -------- ------- ------- ---------- -----
TOTAL (4) $8,642,065 $33,406 $ 56,349 $122,506 $41,032 $33,286 $8,928,644 100.0
========== ======= ======== ======== ======= ======= ========= =====
</TABLE>
- ----------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $1.7 million on repossessed assets year
to date during 1998, including $1.2 million in Specialty Real Estate
Finance, $0.4 million in Resort Finance and $0.1 million in Commercial
Equipment Finance.
(3) Transportation Finance includes $381.8 million of aircraft financing
business originated through the London office.
(4) Excludes $502.0 million of assets securitized and participations sold which
the Company manages, including securitizations of $300.0 million in
Corporate Finance and $67.9 million in Franchise Finance and participations
sold of $45.3 million in Corporate Finance, $73.0 million in Communications
Finance, $5.3 million in Resort Finance, $4.4 million in Rediscount
Finance, $3.0 million in Business Credit, $2.9 million in Transportation
Finance and $0.2 million in Inventory Finance.
(5) Includes $304.3 million of financing contracts held for sale.
(6) Primarily includes London-based FINOVA Capital Limited and other.
5
<PAGE>
Reserve for Credit Losses:
The reserve for credit losses at June 30, 1998 represents 2.0% of the
Company's investment in financing transactions and securitized assets. Changes
in the reserve for credit losses were as follows:
Six Months Ended
June 30,
----------------------
1998 1997
--------- --------
(Dollars in Thousands)
Balance, beginning of period $ 177,088 $148,693
Provision for credit losses 25,500 26,300
Write-offs (28,272) (16,858)
Recoveries 1,285 1,634
Other 2,469 (22)
--------- --------
Balance, end of period $ 178,070 $159,747
========= ========
A specific impairment reserve of $28.5 million at June 30, 1998 applies
to $66.1 million of the $155.9 million of impaired loans. The remaining $149.6
million of the reserve for 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, 1998
TO THE SIX MONTHS ENDED JUNE 30, 1997
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively, "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries (collectively, "FINOVA Capital").
Results of Operations
Net income for the six months ended June 30, 1998 was $80.1 million
($1.34 per diluted share) compared to $65.4 million ($1.15 per diluted share)
for the six months ended June 30, 1997.
Interest margins earned. Interest margins earned 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 and other owned assets. Interest margins earned were $222.8
million for the six months ended June 30, 1998 compared to $196.1 million for
the six months ended June 30, 1997, a 14% increase. The increase was primarily
due to a 15% growth in managed assets to $9.43 billion at June 30, 1998 from
$8.22 billion at June 30, 1997. Interest margins earned remained at 5.5% of
average earning assets (average funds employed less nonaccruing assets and
deferred taxes on leveraged leases) for the six months ended June 30, 1998 and
1997.
6
<PAGE>
Volume-based fee income. Volume-based fee income is generated by
FINOVA's Inventory Finance, Commercial Services (formerly "Factoring Services")
and Realty Capital lines of business. These fees are predominately based on
volume originated business rather than the balance of outstanding financing
transactions during the period. For the six months ended June 30, 1998,
volume-based fee income was $41.3 million compared to $16.4 million for the same
period in 1997. Fee-based volume for the first six months of 1998 totaled $3.8
billion compared to $1.7 billion in the same period one year ago. Included in
the first six months of 1998 were fees associated with FINOVA Realty Capital
("FRC") and the Inventory Finance portfolio purchased from AT&T Capital Corp.,
both of which were acquired in the fourth quarter of 1997.
Provision for credit losses. The provision for credit losses was $25.5
million for the six months ended June 30, 1998 compared to $26.3 million for the
same period one year ago. Net write-offs during the six months ended June 30,
1998 were $27.0 million compared to $15.2 million for the same period in 1997.
The 1998 net write-offs included $17.4 million of amounts written off relative
to the Commercial Services line of business, a portion of which a specific
reserve had previously been provided.
Gains on disposal of assets. Gains on disposal of assets were $10.8
million for the six months ended June 30, 1998 compared to $13.7 million for the
first six months of 1997. Included in the 1997 amount was a $5.6 million gain
resulting from the sale of the Company's interest in a real estate leveraged
lease transaction. Gains on disposal primarily relate to the sale of assets
coming off lease and the sale of financing contracts held for sale (primarily
generated by FRC). While, in the aggregate, FINOVA historically recognizes gains
on such disposals, the timing and amount of these gains are sporadic in nature.
There can be no assurance FINOVA will recognize such gains in the future,
depending, in part, on market conditions at the time of sale.
Selling, administrative and other operating expenses. Selling,
administrative and other operating expenses ("operating expenses") were
generally higher in all major categories and increased to $114.7 million for the
first six months of 1998 compared to $92.5 million for the first six months of
1997. This increase was partially attributable to the growth in managed assets
during the year. Also contributing to the increase was the addition of FRC,
which has a higher operating structure than FINOVA, including over 80 business
development officers and associated support staff. Meanwhile, operating expenses
remained at 43.5% of operating margins for the six months ended June 30, 1998
and the comparable period in 1997. Excluding the addition of FRC, FINOVA's
operating expense ratio would have been 41.6% for the six months ended June 30,
1998.
Income taxes. Income taxes were higher for the first six months of 1998
compared to the corresponding period in 1997 due to the increase in pre-tax
income and a higher effective tax rate in 1998 (39.1% vs 37.1%). The 1997 tax
rate was lower due to certain tax credits realized in 1997.
Financial Condition, Liquidity and Capital Resources
Managed assets were $9.43 billion at June 30, 1998 compared to $8.86
billion at December 31, 1997. Included in managed assets at June 30, 1998 are
$8.93 billion in funds employed (including $304.3 million of financing contracts
held for sale generated by FRC), $367.9 million of securitized assets managed by
FINOVA and $134.1 million of participations sold to third parties. The increase
in managed assets was due to funded new business of $1.4 billion for the six
7
<PAGE>
months ended June 30, 1998, coupled with a net increase in volume based
receivables, partially offset by normal portfolio amortization and prepayments.
The reserve for credit losses increased slightly to $178.1 million at
June 30, 1998 from $177.1 million at December 31, 1997, while nonaccruing assets
increased to $196.8 million at June 30, 1998 from $187.4 million at the end of
1997. However, nonaccruing assets remained at 2.1% of ending managed assets
(excluding participations sold).
At June 30, 1998, FINOVA had $7.35 billion of debt outstanding,
representing 5.81 times the Company's equity base of $1.26 billion (including
$111.6 million of convertible preferred securities). At year-end 1997, FINOVA's
debt was 5.63 times the equity base of $1.20 billion.
Growth in funds employed is financed by FINOVA's internally generated
funds and new borrowings. During the six months ended June 30, 1998, FINOVA
issued $610 million of new long-term borrowings and recognized a net increase in
commercial paper outstanding of $624 million. During the same period, FINOVA
repaid $653 million of long-term borrowings.
FINOVA repurchased 196,207 shares of its common stock during the first
six months of 1998. These shares are intended to fund awards under FINOVA's
stock incentive plan.
Year 2000 Date Conversion
FINOVA continues to implement changes necessary to assure accurate date
recognition and data processing with respect to the year 2000. Primary internal
activities related to this issue are modifications to existing computer programs
and conversions to new programs. The Company is also communicating with software
vendors, financial institutions, clients and others with whom it conducts
business to determine the nature of any impact on FINOVA. If needed
modifications and conversions are not accomplished in a timely manner, this
issue could have a material effect on the operations of FINOVA. As of this time,
however, management believes that necessary corrections will be achieved on
time. Costs related to this issue, which have been immaterial to date, are being
expensed as incurred and are not expected to have a material impact on FINOVA's
financial position.
Recent Development and Business Outlook
FINOVA continues to seek new business by emphasizing customer service,
providing competitive interest rates and focusing on selected market niches.
Additionally, FINOVA continues to evaluate potential acquisition opportunities
it believes are consistent with its business strategies.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for transactions entered into in
fiscal quarters of fiscal years that begin after June 15, 1999. This statement
establishes standards for the accounting and reporting for derivative
instruments and for hedging activities. The future effect on the Company's
financial position and the results of operations has not been determined.
8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
The Annual Meeting of Shareowners of the Company was held on May 14,
1998. At that meeting, Shareowners owning 49,032,216 shares of the Company's
common stock ("Shares") were present in person or by proxy. The Shareowners
approved each matter submitted by the following votes:
<TABLE>
<CAPTION>
Item For Against Abstain*
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. a) Election of Mr. Samuel L. Eichenfield as a Director 48,526,516 N/A 505,700
b) Election of Mr. James L. Johnson as a Director 48,552,576 N/A 479,640
c) Election of Mr. John W. Teets as a Director 48,311,471 N/A 720,745
2. Appointment of Deloitte & Touche LLP as Auditors for 1998 48,801,063 47,693 183,460
</TABLE>
* Abstain includes broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
(a) The following exhibits are filed herewith:
Exhibit No. Document
----------- ----------------------------------------------------
11* Computation of Earnings Per Share.
12* Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends (interim
period).
27* Financial Data Schedule.
* Previously filed
(b) Reports on Form 8-K:
A Report on Form 8-K, dated July 28, 1998, 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, 1998 (unaudited).
9
<PAGE>
THE FINOVA GROUP INC.
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.
THE FINOVA GROUP INC.
(Registrant)
Dated: August 7, 1998 By: /s/ Bruno A. Marszowski
-------------------------------------------------
Bruno A. Marszowski, Senior Vice President,
Chief Financial Officer and Controller
Principal Financial and Accounting Officer
10
