-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JQXQYMI2I3969AfQlcZP8uhF8EjIiji6ERUEs4mNenb0QPIagAZomXbqnNLpOwR5 H7J5EkWED65eChxEacma+g== 0000950147-99-001268.txt : 19991117 0000950147-99-001268.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950147-99-001268 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINOVA CAPITAL CORP CENTRAL INDEX KEY: 0000043960 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 941278569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07543 FILM NUMBER: 99752732 BUSINESS ADDRESS: STREET 1: 1850 N CENTRAL AVE STREET 2: PO BOX 2209 CITY: PHOENIX STATE: AZ ZIP: 85004-2209 BUSINESS PHONE: 6022076900 MAIL ADDRESS: STREET 1: 1850 N. CENTRAL AVENUE STREET 2: P.O. BOX 2209 CITY: PHOENIX STATE: AZ ZIP: 85002-2209 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND FINANCIAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND LEASING & FINANCIAL CORP DATE OF NAME CHANGE: 19870330 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 9/30/99 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, 1999 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 (until December 10, 1999) 85002-2209 4800 North Scottsdale Road, Scottsdale, AZ (after December 10, 1999) 85251 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (until December 10, 1999) 602/207-6900 (after December 10, 1999) 480/636-4800
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 November 12,1999 25,000 shares of Common Stock ($1.00 par value) were outstanding. FINOVA CAPITAL CORPORATION TABLE OF CONTENTS Page No. -------- Part I FINANCIAL INFORMATION......................................... 1 Item 1. Financial Statements.......................................... 1 Condensed Consolidated Balance Sheets.............................. 1 Condensed Statements of Consolidated Income........................ 2 Condensed Statements of Consolidated Cash Flows.................... 3 Notes to Interim Condensed Consolidated Financial Information...... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 14 Part II OTHER INFORMATION............................................. 15 Item 6. Exhibits and Reports on Form 8-K.............................. 15 Signatures.............................................................. 16 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FINOVA CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) December 31, September 30, 1998 1999 restated ------------ ------------ ASSETS: Cash and cash equivalents $ 76,871 $ 49,519 Investment in financing transactions: Loans and other financing contracts 9,170,823 7,354,736 Leveraged leases 816,849 773,942 Operating leases 681,815 648,185 Fee-based receivables 614,668 626,499 Direct financing leases 375,807 396,759 Financing contracts held for sale 313,805 220,100 ------------ ------------ 11,973,767 10,020,221 Less reserve for credit loss (248,290) (207,618) ------------ ------------ Net investment in financing transactions 11,725,477 9,812,603 Investments 298,066 124,792 Goodwill and other assets 607,708 507,589 ------------ ------------ $ 12,708,122 $ 10,494,503 ============ ============ LIABILITIES: Accounts payable and accrued expenses $ 125,559 $ 141,782 Due to clients 118,566 205,655 Interest payable 74,125 65,817 Senior debt 10,289,419 8,394,578 Deferred income taxes 403,035 355,028 ------------ ------------ 11,010,704 9,162,860 ------------ ------------ SHAREOWNER'S EQUITY: Common stock, $1.00 par value, 100,000 shares authorized, 25,000 shares issued 25 25 Additional capital 1,173,995 870,485 Retained income 592,160 460,447 Accumulated other comprehensive income 7,017 686 Net advances to parent (75,779) ------------ ------------ 1,697,418 1,331,643 ------------ ------------ $ 12,708,122 $ 10,494,503 ============ ============ See notes to interim consolidated condensed financial statements. 1 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Dollars in Thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1998 1998 1999 restated 1999 restated --------- --------- --------- --------- Interest and income earned from financing transactions $ 289,160 $ 229,290 $ 801,360 $ 644,104 Operating lease income 29,528 24,019 86,249 88,107 Interest expense (150,142) (121,937) (420,478) (346,909) Operating lease depreciation (19,435) (13,875) (53,381) (51,540) --------- --------- --------- --------- Interest margins earned 149,111 117,497 413,750 333,762 Volume-based fees 14,317 16,687 38,316 57,946 --------- --------- --------- --------- Operating margin 163,428 134,184 452,066 391,708 Provision for credit losses (25,550) (19,000) (52,050) (44,500) --------- --------- --------- --------- Net interest margins earned 137,878 115,184 400,016 347,208 Gains on disposal of assets 14,880 6,471 46,010 15,429 --------- --------- --------- --------- 152,758 121,655 446,026 362,637 Operating expenses (62,500) (53,047) (183,338) (159,132) --------- --------- --------- --------- Income before income taxes 90,258 68,608 262,688 203,505 Income taxes (34,407) (25,824) (101,226) (78,554) --------- --------- --------- --------- NET INCOME $ 55,851 $ 42,784 $ 161,462 $ 124,951 ========= ========= ========= ========= See notes to interim consolidated condensed financial statements. 2 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in Thousands) (Unaudited) Nine Months Ended September 30, -------------------------- 1998 1999 restated ----------- ----------- OPERATING ACTIVITIES: Net income $ 161,462 $ 124,951 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 52,050 44,500 Depreciation and amortization 76,986 68,726 Gains on disposal of assets (46,010) (15,429) Deferred income taxes 86,220 49,757 Change in assets and liabilities, net of effects from acquisitions: Increase in other assets (54,033) (76,615) Decrease in accounts payable and accrued expenses (66,890) (10,320) Increase (decrease) in interest payable 6,655 (11,418) Other 1,462 1,006 ----------- ----------- Net cash provided by operating activities 217,902 175,158 ----------- ----------- INVESTING ACTIVITIES: Proceeds from sale of assets 226,047 173,114 Proceeds from sale of securitized assets 77,478 Proceeds from sales of commercial mortgage backed securities ("CMBS") assets 243,762 Principal collections on financing transactions 1,619,549 1,453,757 Expenditures for financing transactions (2,720,924) (2,215,432) Expenditures for CMBS transactions (421,329) Net change in short-term financing transactions (757,307) (561,278) Cash received in acquisitions 20,942 Other 2,598 1,742 ----------- ----------- Net cash used in investing activities (1,786,662) (1,070,619) ----------- ----------- FINANCING ACTIVITIES: Net borrowings under commercial paper and short-term loans 591,928 874,741 Long-term borrowings 1,788,592 915,000 Repayment of long-term borrowings (591,791) (663,572) Net contributions from (advances to) Parent (75,779) (49,288) Dividends (29,749) (58,837) Net change in due to clients (87,089) (77,747) ----------- ----------- Net cash provided by financing activities 1,596,112 940,297 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 27,352 44,836 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 49,519 33,193 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 76,871 $ 78,029 =========== =========== See notes to interim consolidated condensed financial statements. 3 FINOVA CAPITAL CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 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. ("FINOVA Group"). 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 September 30, 1999, the results of operations for the quarter and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998, have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year. The enclosed financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A Amendment No. 1 for the year ended December 31, 1998. NOTE B SIGNIFICANT ACCOUNTING POLICIES The Company reports other comprehensive income in accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Total comprehensive income was $57.6 million and $43.6 million for the three months ended September 30, 1999 and 1998, respectively and $167.8 million and $125.4 million for the nine months ended September 30 1999 and 1998, respectively. The primary component of comprehensive income other than net income was unrealized holding gains. NEW ACCOUNTING STANDARDS In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," ("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by recognition of those items as assets or liabilities in the statement of financial position and measurement at fair value. The impact of SFAS No. 133 on the Company's financial position and results of operations has not yet been determined. NOTE C SEGMENT REPORTING MANAGEMENT'S POLICY FOR IDENTIFYING REPORTABLE SEGMENTS FINOVA's reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS Management evaluates the business performance of each group based on total net revenue, income before allocations and managed assets. Total net revenue is operating margin plus gains on disposal of assets. Income before allocations is income before income taxes and preferred dividends, excluding allocation of corporate overhead expenses and the unallocated portion of provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations and participations sold. 4 Information for FINOVA's reportable segments reconciles to FINOVA's consolidated totals as follows: Nine Months Ended September 30, ---------------------------- Dollars in Thousands 1999 1998 ------------ ------------ Total net revenue (loss): Commercial Finance $ 159,977 $ 138,215 Specialty Finance 278,298 254,637 Capital Markets 67,084 9,924 Corporate and other (7,283) 4,361 ------------ ------------ Consolidated total $ 498,076 $ 407,137 ============ ============ Income (loss) before allocations: Commercial Finance $ 70,145 $ 54,564 Specialty Finance 223,602 204,624 Capital Markets 19,827 (10,236) Corporate and other, overhead and unallocated provision for credit losses (50,886) (45,447) ------------ ------------ Income from continuing operations before income taxes $ 262,688 $ 203,505 ============ ============ September 30, ---------------------------- 1999 1998 ------------ ------------ Managed assets: Commercial Finance $ 3,529,133 $ 2,928,326 Specialty Finance 7,841,607 6,626,414 Capital Markets 1,044,259 293,933 Corporate and other 89,306 87,890 ------------ ------------ Consolidated total 12,504,305 9,936,563 Less securitizations and participations sold (530,538) (516,019) ------------ ------------ Investment in financing transactions $ 11,973,767 $ 9,420,544 ============ ============ NOTE D ACQUISITION OF SIRROM CAPITAL CORPORATION In March 1999, FINOVA acquired Sirrom Capital Corporation ("Sirrom"), a specialty finance company headquartered in Nashville, Tennessee. The acquisition was accounted for using the purchase method of accounting. The purchase price was approximately $343 million in FINOVA Group common stock, excluding converted stock options. Total assets acquired were $619 million, including $65 million in goodwill and $278 million in assumed liabilities and transaction costs. Goodwill is subject to change due to a preliminary estimate of fair values of various private equities and loan balances at the date of acquisition. Goodwill is being amortized over 25 years and covenants not to compete, which are included in goodwill, are being amortized over 3 years. The accompanying unaudited pro forma information gives effect to the merger as if it had occurred on January 1, 1999 and 1998 and combines the historical consolidated information of FINOVA and Sirrom for the nine months ended September 30, 1999 and 1998. 5 The unaudited comparative pro forma information is not necessarily indicative of the results that actually would have occurred had the merger been consummated on the dates indicated or that may be obtained in the future. The unaudited pro forma financial information does not give effect to the potential cost savings and other synergies that may result from the merger or the possible cash-out of existing stock options held by employees of Sirrom that became fully vested by reason of the adoption of the merger agreement by Sirrom stockholders. There can be no assurance that FINOVA will realize cost savings or synergies from this or any other acquisition. Included in the historical operations of Sirrom for the first nine months of 1999 are approximately $27 million of nonrecurring charges, a significant portion of which related to the acquisition. Comparative Pro Forma Information Nine Months Ended September 30, (Dollars in thousands) ------------------------------- 1999 1998 -------- -------- Total revenue $902,936 $786,821 Net income $108,872 $ 97,779 The acquisition resulted in an excess purchase price over the historical net assets acquired. The excess is allocated to the net assets acquired and liabilities assumed, as follows: Allocation of purchase price: Purchase price $ 342,730 Elimination of historical stockholders' equity of Sirrom (264,056) --------- Estimated excess purchase price $ 78,674 ========= Allocation of excess: Elimination of unamortized debt costs $ (3,227) Deferred income taxes 44,152 Assumed liabilities (26,802) Goodwill 64,551 --------- $ 78,674 ========= NOTE E RESTATEMENT Subsequent to the issuance of the Company's financial statements for the year ended December 31, 1998, the Company's management determined that it should revalue its retained interest in a mini-commercial mortgage-backed securities ("mini-CMBS") transaction. The revaluation resulted in a reduction of the value of the retained portion of the loans and reduced the Company's previously reported gross gains on the transaction. The Company's management also determined that expenses incurred in connection with the origination of new loans under SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (SFAS No. 91), should have been deferred and amortized over the estimated loan life. Previously, the Company was deferring loan origination fees received and amortizing them over the lives of the loans in accordance with SFAS No. 91, but electing to expense loan origination costs as incurred. Accordingly, the Company restated its condensed consolidated financial statements for the nine months ended September 30, 1998 for the revaluation of the retained interest in the mini-CMBS transaction and to defer and amortize loan costs over the estimated loan life in accordance with SFAS No. 91, as well as to make several other less material adjustments. 6 A summary of the significant effects of the restatements for the three and nine months ended September 30, 1998 is as follows:
Three Months Ended Nine Months Ended September 30, 1998 September 30, 1998 -------------------------- -------------------------- As previously As previously (Dollars in thousands) Reported As restated Reported As restated ------------- ----------- ------------- ----------- Interest margins earned $ 120,744 $ 117,497 $ 343,543 $ 333,762 Gains on disposal of assets 13,438 6,471 24,243 15,429 Operating expenses (61,097) (53,047) (175,834) (159,132) Net income 44,078 42,784 126,081 124,951
NOTE F 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. 7 INVESTMENT IN FINANCING TRANSACTIONS BY LINE OF BUSINESS September 30, 1999 (Dollars in Thousands)
Revenue Accruing Nonaccruing --------------------------------- -------------------------------- Total Market Repossessed Repossessed Leases & Carrying Rate (1) Impaired Assets (2) Impaired Assets Other Amount % --------- -------- ----------- -------- ----------- -------- -------- ---- Transportation Finance (3) 2,264,741 $ 56,141 $ $ $ $ $ 2,320,882 19.3 Resort Finance 1,457,035 16,467 2,770 21,083 1,497,355 12.5 Rediscount Finance 967,389 16,722 756 172 985,039 8.2 Corporate Finance 875,910 36,810 46,342 901 959,963 8.0 Commercial Equipment Finance 768,743 1,379 5,138 11,754 19,677 3,032 809,723 6.8 Specialty Real Estate Finance 726,340 35,910 14,987 290 194 777,721 6.5 Franchise Finance 707,544 1,406 1,882 6,891 2,837 263 720,823 6.0 Healthcare Finance 640,759 5,789 37,462 708 684,718 5.7 Communications Finance 676,051 9,399 17,714 703,164 5.9 Distribution & Channel Finance 429,869 69,689 11,732 511,290 4.3 Mezzanine Capital 416,247 23,399 28,800 468,446 3.9 Realty Capital 551,286 551,286 4.6 Business Credit 339,770 5,752 19,467 364,989 3.1 Public Finance 164,215 164,215 1.4 Commercial Services 271,515 7,779 805 280,099 2.3 Other (4) 63,013 940 25,353 89,306 0.8 Growth Finance 56,536 3,685 60,221 0.5 Investment Alliance 24,527 24,527 0.2 ----------- --------- -------- -------- -------- -------- ----------- ----- TOTAL (5) $11,401,490 $ 204,915 $ 81,908 $210,139 $ 45,765 $ 29,550 $11,973,767 100.0 =========== ========= ======== ======== ======== ======== =========== =====
NOTES: (1) Represents original or renegotiated market rate terms, excluding impaired transactions. (2) The Company earned income totaling $4.3 million on repossessed assets year to date during 1999, including $1.7 million in Specialty Real Estate Finance, $0.8 million in Resort Finance, $0.4 million in Healthcare Finance, $1.1 million in Rediscount Finance, $0.2 million in Commercial Equipment Finance and $0.1 million in Franchise Finance. (3) Transportation Finance includes $427.8 million of aircraft financing business booked through the London office. (4) Primarily includes other assets retained from disposed or discontinued operations. (5) Excludes $530.5 million of assets securitized and participations sold which the Company manages, including securitizations of $300.0 million in Corporate Finance and $123.7 million in Franchise Finance and participations of $47.6 million in Corporate Finance, $27.2 million in Franchise Finance, $11.9 million in Rediscount Finance, $5.9 in Transportation Finance, $8.0 million in Business Credit and $6.2 million in Resort Finance. 8 RESERVE FOR CREDIT LOSSES: The reserve for credit losses at September 30, 1999 represents 2.1% of the Company's investment in financing transactions and securitized assets. Changes in the reserve for credit losses were as follows: Nine Months Ended September 30, -------------------------- 1999 1998 --------- --------- (Dollars in Thousands) Balance, beginning of period $ 207,618 $ 177,088 Provision for credit losses 52,050 44,500 Write-offs (42,183) (38,672) Recoveries 2,598 1,742 Reserves related to acquisitions 23,763 2,460 Other 4,444 43 --------- --------- Balance, end of period $ 248,290 $ 187,161 ========= ========= At September 30, 1999 the total carrying amount of impaired loans was $415.1 million, of which $204.9 million were revenue accruing. A reserve for credit losses of $74.2 million has been established for $110.4 million of nonaccruing impaired loans and $79.9 million has been established for $138.8 million of accruing impaired loans. The remaining $94.2 million of the reserve for credit losses is designated for general purposes and represents management's best estimate of inherent 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998 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"). Net income for 1998 has been restated to reflect adjustments described in the Company's report on Form 10-K/A Amendment No. 1 for the year ended December 31, 1998. The effects of the restatements for the nine months ended September 30, 1998 are presented in Note E of the Notes to Interim Consolidated Financial Statements, and have been reflected herein. RESULTS OF OPERATIONS Net income for the nine months ended September 30, 1999 was $161.5 million compared to $125.0 million for the nine months ended September 30, 1998. INTEREST MARGINS EARNED. Interest margins earned represents the difference between (a) interest and income earned from financing transactions and operating lease income and (b) interest expense and depreciation on operating leases. Interest margins earned were $413.8 million for the nine months ended September 30, 1999, an increase of 24% over interest margins earned of $333.8 million for the same period in 1998. The increase was principally due to annualized portfolio growth of 25% for the nine months ended September 30, 1999. Interest margins earned as a percentage of average earning assets were 5.3% for the nine months ended September 30, 1999, down from 5.4% for the same period in 1998. 9 VOLUME-BASED FEES. Volume-based fees are generated by FINOVA's Distribution & Channel Finance, Commercial 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 nine months ended September 30, 1999, volume-based fees were $38.3 million compared to $57.9 million for the nine months ended September 30, 1998. The decrease was due to lower fee-based volume for the nine months ended September 30, 1999 than for the same period in the prior year ($4.8 billion vs. $5.4 billion) and lower commission rates earned on that volume (0.79% vs. 1.07%). The decrease in commission rates was primarily due to an increased percentage of structured finance (brokered) deals in Realty Capital which earn a lower average commission rate than other fee-based products (0.37%), and to the movement by Commercial Services to improved credits with lower commission rates. PROVISION FOR CREDIT LOSSES. The provision for credit losses was $52.1 million for the nine months ended September 30, 1999 compared to $44.5 million for the same period last year. Net write-offs during the first nine months of 1999 were $39.6 million compared to $36.9 million for the same period in 1998. Corporate Finance incurred $17.1 million in net write-offs in the first nine months of 1999 compared to $4.4 million in the first nine months of 1998. Net write-offs in Commercial Services were $4.4 million in the first nine months of 1999 compared to $21.0 million in the same period in 1998. Net write-offs in other lines of business for the first nine months of 1999 were comparable to net write-offs in the first nine months of 1998. GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $46.0 million for the nine months ended September 30, 1999 compared to $15.4 million for the first nine months of 1998. Gains were earned on sales of investments ($16.1 million), sales of CMBS loans ($11.8 million), and on the sales of other assets ($18.1 million) including assets coming off lease in 1999. While in the aggregate FINOVA has historically recognized gains on such disposals, the timing and amount of these gains are sporadic in nature. There can be no assurance FINOVA will recognize gains in the future, depending, in part, on market conditions at the time of sale. OPERATING EXPENSES. Operating expenses increased $24.2 million to $183.3 million for the first nine months of 1999 compared to $159.1 million for the first nine months of 1998. This increase was attributable to Company growth including the addition of 154 employees (primarily through acquisitions) during the twelve months ended September 30, 1999. Operating expenses improved as a percentage of operating margins plus gains on disposal of assets to 36.8% for the nine months ended September 30, 1999 from 39.1% in the comparable period in 1998. INCOME TAXES. Income taxes were higher for the first nine months of 1999 compared to the corresponding period in 1998 primarily due to the increase in pre-tax income. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Managed assets were $12.50 billion at September 30, 1999 compared to $10.56 billion at December 31, 1998. Included in managed assets at September 30, 1999 were $11.97 billion in funds employed (including $313.8 million of financing contracts held for sale generated by FRC), $423.7 million of securitized assets managed by FINOVA and $106.9 million of participations sold to third parties. The increase in managed assets was due to funded new business of $3.43 billion for the nine months ended September 30, 1999, compared to $2.74 billion for the nine months ended September 30, 1998, plus $486 million of assets acquired in the first quarter of 1999, partially offset by prepayments and asset sales accompanied by normal portfolio amortization. The reserve for credit losses increased to $248.3 million at September 30, 1999 from $207.6 million at December 31, 1998. At September 30, 1999, the reserve for credit losses represented 2.1% of ending managed assets (excluding participations and financing contracts held for sale) compared to 2.0% at year-end. Nonaccruing assets increased to $285.5 million or 2.3% of ending 10 managed assets (excluding participations) at September 30, 1999 from $249.6 million or 2.1% at June 30, 1999 and from $205.2 million or 2.0% at the end of 1998. Nonaccruing assets increased due to the acquisition of Sirrom Capital Corporation in the first quarter of 1999, and due to the transition of FINOVA's $33 million share of a large syndicated credit facility held by the Healthcare Finance line of business to nonaccruing status in the third quarter of 1999. At September 30, 1999, FINOVA had $10.29 billion of debt outstanding, representing 6.06 times the Company's equity base of $1.70 billion. Included in debt at September 30, 1999 was approximately $4.34 billion of commercial paper and short-term borrowings supported by unused long-term revolving-credit agreements. At year-end 1998, FINOVA's debt was 6.30 times the equity base of $1.33 billion. The reduction in the Company's leverage was primarily the result of adding $343 million of equity in conjunction with the Sirrom acquisition. Growth in funds employed is financed by FINOVA's internally generated funds and new borrowings. During the nine months ended September 30, 1999, FINOVA issued $1.79 billion of new long-term borrowings and recognized a net increase in commercial paper outstanding of $592.2 million. During the same period, FINOVA repaid $591.8 million of long-term borrowings. SEGMENT REPORTING FINOVA's business is organized into three market groups, which are also its reportable segments: Commercial Finance, Specialty Finance and Capital Markets. Management principally relies on total revenue, income before allocations and managed assets in evaluating the business performance of each reportable segment. Total revenue is the sum of operating margin and gains on disposal of assets. Income before allocations is income before income taxes, preferred dividends, corporate overhead expenses and the unallocated portion of the provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations and participations sold. COMMERCIAL FINANCE. Commercial Finance includes traditional asset-based businesses that provide financing through revolving credit facilities and term loans secured by assets such as receivables and inventories, as well as providing factoring and management services. Total net revenue was $160.0 million in 1999 compared to $138.2 for the first nine months of 1998, an increase of 15.7%. The increase was primarily due to a 20.5% increase in managed assets over the first nine months of 1998, partially offset by the effects of competitive pressures on pricing in the asset-based lending businesses, a decrease in fee-based volume and a 21 basis point reduction in the average rate earned on that volume. Fee-based volume decreased for the segment to $3.15 billion in 1999 from $3.30 billion in the first nine months of 1998. Income before allocations increased 28.6% to $70.1 million in 1999 compared to $54.6 million in the first nine months of 1998. In addition to portfolio growth, the increase resulted from lower net write-offs in 1999 in the Commercial Services line of business ($4.4 million in 1999 vs. $21.0 million in the first nine months of 1998), partially offset by higher net write-offs in Corporate Finance ($17.1 million in 1999 vs. $4.4 million in the first nine months of 1998). Managed assets grew to $3.53 billion in the first nine months of 1999 from $2.93 billion in the same period in 1998, primarily due to increases in Rediscount Finance and Corporate Finance. The addition of Growth Finance, which 11 is composed of two small acquisitions, also added to the growth in managed assets at September 30, 1999. New business in Commercial Finance for the first nine months of 1999 was $874.5 million compared to $592.5 million for the first nine months of 1998. SPECIALTY FINANCE. Specialty Finance provides a wide variety of lending products such as leases, loans, accounts receivable and cash flow based financing, as well as servicing and collection services to a number of highly focused industry specific niches. Total net revenue increased to $278.3 million in the first nine months of 1999, compared to $254.6 million in the same period of 1998. The increase in revenue was attributable to 18.3% growth in managed assets, partially offset by the effects of a one-time revenue enhancement recorded in 1998 from the refinancing of non-recourse debt in a real estate leveraged lease. Income before allocations increased to $223.6 million for the nine months ended September 30, 1999 from $204.6 million for the same period in 1998. The increase in income was primarily due to the growth in total net revenue over the nine months ended September 30, 1998. Managed assets grew to $7.84 billion in the first nine months of 1999 from $6.63 billion in the same period of 1998, an increase of 18.3%. The growth in managed assets was driven by new business originations (leases and loans) of $2.36 billion during the 1999 period, compared to $2.09 billion in 1998, and by a $129 million decrease in prepayments and asset sales in 1999 compared to the same period in 1998. CAPITAL MARKETS. Capital Markets, in conjunction with institutional investors, provides commercial mortgage banking services and debt and equity capital funding. Mezzanine Capital (formerly Sirrom Capital Corporation) was added to this segment late in the first quarter of 1999. Total net revenue increased to $67.1 million in the nine months ended September 30, 1999 from $9.9 million in the same period of 1998. The increase was primarily due to the acquisition of Mezzanine Capital and to the recognition of $11.8 million in gains on sales of CMBS loans by Realty Capital in the 1999 period, compared to $13 million in losses in the same period of 1998. The increase was partially offset by lower volume-based fees for Realty Capital in 1999 due to an increased percentage of structured finance (brokered) deals with lower commission rates. Income before allocations was $19.8 million in the first nine months of 1999 compared to a loss of $10.2 million in the first nine months of 1998. The increase in income was primarily due to higher total net revenue in the first nine months of 1999, partially offset by higher operating expenses due to the acquisition of Mezzanine Capital in the first quarter of 1999. Managed assets increased to $1.04 billion at September 30, 1999 from $293.9 million at September 30, 1998. The acquisition of Mezzanine Capital added $469 million of managed assets to the segment. The remaining increase was principally due to additional fundings of Realty Capital's held-to-maturity portfolio and continued origination of CMBS loans. YEAR 2000 COMPLIANCE FINOVA continues to implement changes necessary to help assure accurate date recognition and data processing with respect to the year 2000. To be year 2000 compliant means (1) significant information technology ("IT") systems in use by FINOVA demonstrate performance and functionality that is not materially affected by processing dates on or after January 1, 2000, (2) customers and collateral included in FINOVA's portfolio of business are year 2000 compliant and (3) vendors of services critical to FINOVA's business processes are year 2000 compliant. 12 FINOVA's non-IT systems used to conduct business at its facilities consist primarily of office equipment (other than computer and communications equipment) and other equipment at leased office facilities. FINOVA has inventoried its non-IT systems and has sent year 2000 questionnaires to office equipment vendors and landlords to determine the status of their year 2000 readiness. Primary internal activities related to this issue are modifications to existing computer programs and conversions to new programs. FINOVA has a five-phase plan for assuring year 2000 compliance of its internal systems: 1) Identifying each area, function and application that could be affected by the change in date. 2) Determining the extent to which each area, function or application will be affected by the change in date and identifying the proper course of action to eliminate adverse effects. 3) Making the changes necessary to bring the system into year 2000 compliance. 4) Testing the integrated system. 5) Switching to year 2000 compliant applications. As of September 30, 1999, FINOVA has completed all the necessary changes to make mission critical applications year 2000 compliant. FINOVA intends to promptly address year 2000 issues for any acquisitions consummated after this filing. Where appropriate, new acquisitions will be migrated to existing FINOVA applications that are already year 2000 ready. Costs incurred to bring FINOVA's internal systems into year 2000 compliance are not expected to have a material impact on FINOVA's results of operations. Maintenance and modification costs are expensed as incurred, while the costs of new hardware and software are capitalized and amortized over their estimated useful lives. As of September 30, 1999, FINOVA has incurred expenses of $207,000 and capital costs of $1.7 million related to year 2000 compliance efforts. FINOVA estimates that 90% of anticipated costs have been recognized but will continue to review and revise these figures as necessary on a quarterly basis. FINOVA's aggregate cost estimate does not include time and costs that may be incurred as a result of the failure of any third parties to become year 2000 compliant. FINOVA is communicating with customers, software vendors and others to determine if their applications or services are year 2000 compliant and to assess the potential impact on FINOVA related to this issue. Risks to FINOVA include that third parties may not have accurately assessed their state of readiness. Similarly, FINOVA cannot assure that the systems of other companies and government agencies on which FINOVA relies will be converted in a timely manner. While FINOVA believes all necessary work on internal systems has been completed, there can be no guarantee that all systems will be compliant by the year 2000. FINOVA routinely assesses the year 2000 compliance status of its borrowers and generally requires that they provide representations and warranties regarding their status. FINOVA also attempts to monitor their progress with questionnaires and other means. While FINOVA believes it has been diligent in its efforts to reasonably ensure its customers' and service providers' year 2000 compliance, it is possible under a worst case scenario for a number of its borrowers and service providers to not be capable of fully performing their contractual obligations to FINOVA. The financial impact of this worst case scenario cannot reliably be determined. 13 FINOVA is developing contingency plans for the change in century by reviewing departmental needs and establishing procedures to operate manually in the event of a system failure. Existing Business Resumption Plans are expected to be updated by the end of November to address year 2000 issues as well as various other potential business interruptions. Vacation schedules and holiday schedules are being adjusted to help assure that sufficient staffing is available to address material problems. Critical support relationships will be contacted to help assure that they will be capable of servicing material issues that should arise in a prompt manner. There can be no assurance, however, that trained technical support personnel will be available at that time, as demand for their services could grow considerably. RECENT DEVELOPMENTS 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 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," ("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by recognition of those items as assets or liabilities in the statement of financial position and measurement at fair value. The impact of SFAS No. 133 on the Company's financial position and results of operations has not yet been determined. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes from the information provided in the report on Form 10-K/A, Amendment No. 1 for the year ended December 31, 1998. 14 PART II OTHER INFORMATION 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 Fixed Charges (interim period). 27 Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K, dated October 18, 1999 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, 1999 (unaudited). 15 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 15, 1999 By: /s/ Bruno A. Marszowski ---------------------------------------- Bruno A. Marszowski, Senior Vice President, Chief Financial Officer and Controller Principal Financial and Accounting Officer 16 FINOVA CAPITAL CORPORATION COMMISSION FILE NUMBER 1-7543 EXHIBIT INDEX SEPTEMBER 30, 1999 FORM 10-Q Exhibit No. Document - ----------- -------- 12 Computation of Ratio of Income to Fixed Charges (interim period). 27 Financial Data Schedule EX-12 2 COMP.--RATIO OF INCOME TO FIXED CHGS. EXHIBIT 12 FINOVA CAPITAL CORPORATION COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES (Dollars in Thousands) Nine Months Ended September 30, ------------------------ 1998 1999 restated -------- -------- Income before income taxes $262,688 $203,505 Add fixed charges: Interest expense 420,478 346,909 One-third rentals 3,516 2,786 -------- -------- Total fixed charges 423,994 349,695 -------- -------- Income as adjusted $686,682 $553,200 -------- -------- Ratio of income to fixed charges 1.62 1.58 ======== ======== EX-27 3 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1999 SEP-30-1999 76,871 0 0 0 0 0 0 11,973,767 248,290 12,708,122 0 0 721,285 10,289,419 0 0 25 1,697,393 12,708,122 887,609 0 0 420,478 0 0 413,750 52,050 0 183,338 262,688 0 0 0 161,462 0 0 5.3 285,454 0 0 0 207,618 42,183 2,598 248,290 0 0 0
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