<PAGE>
Pursuant to Rule 424(b)(4)
Registration No. 333-3320
PROSPECTUS
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1,700,000 Shares
LOGO FINANCIAL FEDERAL CORPORATION
Common Stock
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All 1,700,000 shares of common stock, par value $.50 per share (the "Common
Stock"), offered hereby are being sold by Financial Federal Corporation (the
"Company").
The Common Stock is listed on the American Stock Exchange, Inc. (the "AMEX")
under the symbol "FIF." The last reported sales price of the Common Stock on
the AMEX on May 6, 1996 was $16.875 per share. See "Price Range of Common
Stock and Dividend Policy."
See "Investment Considerations" on pages 6 to 8 for a discussion of certain
material factors that should be considered in connection with an investment
in the Common Stock offered hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts an Proceeds to
Public Commissions (1) Company (2)
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Per Share . $16.625 $0.95 $15.675
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Total(3) .. $28,262,500 $1,615,000 $26,647,500
================================================================================
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$400,000.
(3) The Company has granted to the several Underwriters a 30-day
over-allotment option to purchase up to 255,000 additional shares of
Common Stock on the same terms and conditions as set forth above. If
all such additional shares are purchased by the Underwriters, the total
Price to Public will be $32,501,875, the total Underwriting Discounts
and Commissions will be $1,857,250 and the total Proceeds to Company
will be $30,644,625. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made at the
office of Prudential Securities Incorporated, One New York Plaza, New York,
New York on or about May 10, 1996.
PRUDENTIAL SECURITIES INCORPORATED NATWEST SECURITIES LIMITED
May 6, 1996
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMEX, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, such material may be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York
10006.
The Company has filed a registration statement on Form S-2 (together with
all amendments and exhibits thereto, the "Registration Statement") with the
Commission under the Securities Act of 1933 (the "Securities Act"). This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted from this
Prospectus in accordance with the Commission's rules and regulations. For
further information, reference should be made to the Registration Statement.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Prospectus the
following documents previously filed with the Commission pursuant to the
Exchange Act except as superseded or modified herein:
(a) Quarterly Report on Form 10-Q for the quarter ended January 31, 1996,
as filed on March 11, 1996;
(b) Quarterly Report on Form 10-Q for the quarter ended October 31, 1995,
as filed on December 11, 1995; and
(c) Annual Report on Form 10-K for the fiscal year ended July 31, 1995, as
filed on October 27, 1995.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document that also is incorporated
or deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of
any or all of the documents incorporated herein by reference, except for
certain exhibits to such documents unless such exhibits are specifically
incorporated by reference herein. Requests for such copies should be directed
to the Stockholder Relations Department, Financial Federal Corporation, 400
Park Avenue, New York, New York 10022, telephone (212) 888-3344.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated
or the context otherwise requires: (i) the "Company" refers to Financial
Federal Corporation ("FFC") and its wholly-owned subsidiaries, (ii) all
information in this Prospectus has been adjusted to reflect a 2-for-1 stock
split effected in March 1992 and a 3-for-2 stock split effected in January
1996 in the form of a stock dividend, and (iii) all information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
The Company is an independent financial services company engaged in
financing industrial, commercial and professional equipment through
installment sales and leasing programs for manufacturers, dealers and users
of such equipment. The Company also makes capital loans to its customers,
primarily secured by the same types of equipment. The Company provides its
services primarily to middle-market businesses which are located throughout
the nation and engaged in diverse industries, such as general construction,
road and infrastructure construction and repair, trucking, waste disposal and
manufacturing. The equipment financed by the Company includes cranes,
earth-moving equipment, trucks, trailers, machine tools, personnel lifts and
a wide range of other income-producing and labor-saving equipment.
The Company generates profits to the extent that its finance income
exceeds its interest, administrative and other operating expenses and
provision for possible losses. Since its inception in 1989, the Company has
reported increased net earnings in every quarter, and its portfolio of
finance receivables has grown to $382.4 million at January 31, 1996. Since
the fiscal year ended July 31, 1992, the Company's net earnings increased at
a compound annual rate of 24.2% through the fiscal year ended July 31, 1995.
For the fiscal year ended July 31, 1995 and the six months ended January 31,
1996, the Company reported net earnings of $7.2 million and $4.4 million,
respectively, representing a return on average assets of 2.3% and 2.5% and a
return on average equity of 13.3% and 14.7%, respectively.
The Company originates finance receivables through a team of experienced
marketing and managerial professionals in 23 locations throughout the United
States. The Company competes by focusing on providing prompt, responsive and
customized service to its prospects and customers. The Company's senior
management has an average of more than 15 years experience in the field of
equipment finance and leasing, and their knowledge and experience enable the
Company to structure profitably financings that meet the needs of its
customers while maintaining the Company's underwriting standards. The finance
receivables originated by the Company typically range from $30,000 to $1.0
million per transaction with full amortization of principal over the term of
the financing. During the six months ended January 31, 1996, the average
amount and stated maturity of finance receivables originated by the Company
were $141,000 and 41 months, respectively. The average yield on the Company's
portfolio of finance receivables for the six months ended January 31, 1996
was 11.5% per annum and its average cost of borrowed funds was 6.4% per
annum.
In substantially all cases, the Company's finance receivables are secured
by, among other things, a first lien on equipment collateral. The Company
concentrates on financing equipment collateral which is easily movable, has
an economic life longer than the term of the financing provided by the
Company, is not subject to rapid technological obsolescence, has applications
in a variety of different industries and has a relatively broad resale
market. These characteristics of the underlying equipment collateral, coupled
with the expertise of management in underwriting, structuring and collecting
the Company's portfolio of finance receivables, have to date, enabled the
Company to minimize its losses. Historically, net charge-offs incurred by the
Company as a percentage of average finance receivables have never exceeded
0.34% for any fiscal year and averaged 0.17% for the three fiscal years ended
July 31, 1995.
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<PAGE>
The Company's portfolio of receivables is supported by borrowings under
short-term (one year or less) or long-term (two to five years) committed
unsecured bank credit facilities, unsecured loans from institutional lenders,
issuance of commercial paper, and equity. At January 31, 1996, the Company
had total borrowed debt of $300.4 million, consisting of $277.3 million of
borrowings under $387.5 million of committed unsecured credit facilities with
22 banks, $7.0 million of subordinated borrowings from various investors, and
$16.1 million of commercial paper. The Company's major operating subsidiary,
Financial Federal Credit, Inc. ("Credit"), has recently received investment
grade ratings on its commercial paper from both Duff & Phelps Credit Rating
Co. and Fitch Investors Service, Inc.
The Company's business strategy is to increase profitably the size of its
portfolio of finance receivables and its share of the domestic market for
equipment financing and leasing by (i) continuing its commitment to customer
service, (ii) maintaining its underwriting standards, (iii) continuing to
concentrate on specified types of equipment, (iv) penetrating further its
existing markets and expanding into new geographic markets and (v) improving
its borrowing spread and diversifying its funding sources.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered Hereby .......................... 1,700,000 shares
Common Stock to be Outstanding after the Offering ... 9,934,622 shares (1)
To reduce borrowings under bank credit
Use of Proceeds ..................................... facilities. See "Use of Proceeds."
AMEX Symbol ......................................... FIF
</TABLE>
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(1) Excludes 1,071,000 shares issuable upon exercise of outstanding warrants,
389,950 shares issuable upon the exercise of outstanding options and
817,175 shares issuable upon exercise of options available for grant
pursuant to the Company's stock option plan (the "Stock Option Plan"). See
"Shares Eligible For Future Sale."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND PERCENTAGES)
<TABLE>
<CAPTION>
For Six Months
For Fiscal Year Ended Ended
July 31, January 31,
--------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Finance obligations income ........ $ 14,249 $ 14,560 $ 14,357 $ 17,264 $ 24,654 $ 11,511 $ 14,265
Lease obligations income .......... 2,853 7,343 8,554 8,602 10,297 4,564 6,651
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total finance income .......... 17,102 21,903 22,911 25,866 34,951 16,075 20,916
Interest expense .................. 10,620 9,935 8,031 9,886 16,253 7,270 9,691
---------- ---------- ---------- ---------- ---------- ---------- ----------
Finance income before provision for
possible losses on finance
receivables ...................... 6,482 11,968 14,880 15,980 18,698 8,805 11,225
Provision for possible losses on
finance receivables .............. 1,219 1,686 1,800 1,475 1,450 705 820
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net finance income ............ 5,263 10,282 13,080 14,505 17,248 8,100 10,405
---------- ---------- ---------- ---------- ---------- ---------- ----------
Miscellaneous income .............. 54 10 15 0 130 130 0
Salaries and other expenses ....... (2,832) (4,311) (5,170) (5,021) (5,806) (2,696) (3,276)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes ...... 2,485 5,981 7,925 9,484 11,572 5,534 7,129
Provision for income taxes ........ 904 2,221 2,957 3,540 4,363 2,077 2,688
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings(1) ................... $ 1,581 $ 3,760 $ 4,968 $ 5,944 $ 7,209 $ 3,457 $ 4,441
========== ========== ========== ========== ========== ========== ==========
Earnings per common share(2):
Primary ...................... $ 0.33 $ 0.67 $ 0.58 $ 0.69 $ 0.80 $ 0.39 $ 0.49
Fully diluted. ............... $ 0.33 $ 0.67 $ 0.57 $ 0.69 $ 0.80 $ 0.38 $ 0.49
Other Financial Data:
Return on average assets(3) ....... 1.2% 2.3% 2.6% 2.5% 2.3% 2.4% 2.5%
Return on average equity(3) ....... 11.1% 14.6% 12.7% 12.9% 13.3% 13.2% 14.7%
Percentage of net charge-offs to
average finance receivables (3).. 0.26% 0.34% 0.31% 0.13% 0.08% 0.05% (0.05)%
Percentage of allowance for possible
losses to finance receivables
(at end of period) .............. 1.1% 1.6% 1.9% 1.9% 1.9% 1.9% 1.9%
Finance receivables originated or
acquired (during period ended) .. $134,526 $134,972 $166,189 $226,456 $261,135 $121,399 $155,526
Net interest spread ............... 3.8% 6.3% 6.4% 5.4% 4.3% 4.5% 5.1%
Net interest margin(3)(4) ......... 4.9% 7.3% 7.9% 6.7% 6.0% 6.1% 6.2%
</TABLE>
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<TABLE>
<CAPTION>
At January 31, 1996
-----------------------------
Balance Sheet Data: At July 31, 1995 Actual As Adjusted (5)
---------------- ---------- ---------------
<S> <C> <C> <C>
Finance receivables(6) .................................... $345,694 $382,446 $382,446
Allowance for possible losses ............................. (6,395) (7,299) (7,299)
Finance receivables, net .................................. 339,299 375,147 375,147
Total assets .............................................. 342,936 378,493 378,493
Total senior debt(7) ...................................... 249,270 293,425 267,177
Total subordinated debt ................................... 21,957 6,957 6,957
Stockholders' equity ...................................... 58,075 62,554 88,802
Book value per common share (8) ........................... $7.06 $7.60 $8.94
Ratio of total senior and subordinated debt to stockholders'
equity ................................................... 4.7 4.8 3.1
</TABLE>
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(1) For the fiscal years ended July 31, 1991 and 1992, the Company had
convertible preferred stock outstanding (which was converted into shares
of Common Stock during 1992). During such periods, earnings applicable to
common shares were $1,101 and $3,356, respectively.
(2) See Note A(4) to the consolidated financial statements for computation of
earnings per share.
(3) Annualized for the six-month periods.
(4) Calculated as the differential between finance income and interest
expense as a percentage of average finance receivables during the period
presented.
(5) As adjusted to reflect the sale of the Common Stock offered hereby and
the application of the estimated net proceeds therefrom, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company. See "Use of Proceeds."
(6) Presented net of dealer and other reserves and deferred finance charges.
See Note B to the consolidated financial statements.
(7) On April 15, 1996, Credit issued $55 million principal amount of 6.76%
Senior Notes, the proceeds of which were used to repay other senior debt.
(8) Excludes shares subject to outstanding warrants and options granted
pursuant to the Stock Option Plan. If all of such warrants and options
had been exercised as of January 31, 1996, the book value per share of
Common Stock, on an as adjusted basis, would have been $8.56.
5
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully the following investment
considerations, in addition to the other information set forth in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
Effects of Changes In Interest Rates. The Company's profitability depends
in large part upon the extent to which its average yield on finance
receivables exceeds its average cost of borrowed funds. This differential
(the Company's net interest spread) is affected by the extent to which the
Company's receivables mature or the interest rate on such receivables is
reset at different intervals than its borrowed funds. The Company currently
is, and historically has been, liability sensitive in that its borrowed funds
mature or reprice at a faster rate than its finance receivables. Accordingly,
a rapid and sustained rise in market interest rates, increasing the Company's
cost of funds could significantly adversely affect the Company's net interest
spread and, therefore, its profitability. In addition, increases in market
interest rates could adversely affect the volume of originations of new
financings and leases because customers and prospects may refrain from
borrowings as a result of having to pay a higher rate of interest. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources--Interest Rates and Sensitivity."
Funding; Liquidity Needs. The Company is and will continue to be highly
dependent on its credit facilities. At January 31, 1996, the Company had
committed unsecured bank credit facilities aggregating $387.5 million, under
which $277.3 million was outstanding, and had outstanding commercial paper
(which is not committed) aggregating $16.1 million. At January 31, 1996, the
Company had unused availability under its committed unsecured bank credit
facilities totaling $94.1 million (excluding $16.1 million which represents
100% coverage for outstanding commercial paper). The Company's committed
unsecured bank credit facilities expire or mature on various dates through
April 2000. There can be no assurance that these credit facilities will not
be suspended or reduced at maturity or that these credit facilities and
commercial paper will be renewed (as to which there are no obligations to do
so) when they expire or mature in accordance with their respective terms or,
if necessary, replaced on terms acceptable to the Company, if at all. Final
scheduled maturities of most of the Company's finance receivables are longer
than the average terms of these credit facilities and commercial paper. If
the Company cannot renew or replace these credit facilities and commercial
paper, its funds from scheduled payments or dispositions of its finance
receivables may not be sufficient to pay amounts becoming due under these
committed unsecured credit facilities and commercial paper. Moreover, there
can be no assurance that the Company could obtain increases in its existing
sources of funds or obtain additional sources of funds to support the growth
of its portfolio of finance receivables.
Furthermore, the documentation under which certain sources of funds have
been or may be made available to the Company has imposed, and may from time
to time impose, restrictions on the Company's operations and ability to
borrow funds. Such restrictions could limit the Company's ability to expand.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources."
Economic Conditions. An economic downturn in the United States could
result in a decline in the demand for some of the types of equipment which
the Company finances with a corresponding decline in originations of related
finance receivables. In addition, such a downturn could result in an increase
in defaults by obligors and guarantors of the Company's finance receivables
and a decrease in the value of collateral which the Company could realize
upon disposition following such a default. Any of these results could have a
significant adverse effect on the Company. See "Business."
Credit Losses. In addition to general economic and other conditions
affecting the industries and regions of the country in which the Company's
obligors and guarantors operate, major factors affecting the Company's
ability to maintain profitability include risks associated with: the
creditworthiness and integrity of the obligors and guarantors of the
Company's finance receivables; the adequacy of the documentation relating to
such receivables and collateral; disputes and litigation with such obligors
or guarantors or with their other creditors or others; the ability to enforce
the Company's lien position in the event of the bankruptcy of such obligors
or guarantors or otherwise; and various other factors. Furthermore, a
decrease in pledged collateral value could occur due to changes in equipment
resale market conditions, the failure by users of collateral to properly main-
6
<PAGE>
tain and protect such collateral or other events. Any one or more of the
foregoing factors would have an adverse effect on the business of the
Company. Although the Company provides a general allowance for losses on
finance receivables, there can be no assurance that such allowance will be
adequate. See "Business--Finance Receivables Portfolio and Credit Practices."
Geographic Concentrations. The Company has significant concentrations of
obligors in various regions of the country. Of the Company's finance
receivables at January 31, 1996, 26.4% were attributable to obligors located
in Texas. In addition at such date, 17.9%, 16.0% and 11.3% were attributable
to obligors located in the Southeast (Florida, Georgia, North Carolina and
South Carolina), Midwest (Illinois, Michigan, Minnesota, and Oklahoma), and
Northeast (New Jersey and New York), respectively. See Note H to the
consolidated financial statements. Adverse economic conditions affecting any
one or more of these regions could have an adverse effect on the financial
condition of the obligors located there or the value of collateral used in
such locations which, in turn, could result in an increase in defaults by
such obligors. Such an increase in defaults or decrease in collateral value
could have a material adverse effect on the Company. See
"Business--Geographic Markets."
Industry and Obligor Concentrations. The Company's business activities
also reflect some industry and obligor concentrations of risk, which are
primarily related to the financing of construction-related equipment, cranes
and trucks. The Company's finance receivables at January 31, 1996, were
concentrated in the following industries: trucking (19%), construction (17%),
manufacturing (16%), cranes (14%) and waste disposal (13%). The Company's
four largest obligors accounted for 4.2% of finance receivables at January
31, 1996. Adverse economic conditions affecting any one or more of the
industries in which the Company is active could have an adverse effect on the
financial condition of the Company's obligors operating in these industries
or other significant obligors or the value of collateral used by the
Company's obligors in such operations which, in turn, could result in an
increase in defaults by such obligors or a decrease in the value of such
collateral used by the Company's obligors in such industries. Such an
increase in defaults or decrease in collateral value could have a material
adverse effect on the Company. See "Business--Equipment Financed,"
"--Geographic Markets."
Ability to Sustain Growth. In order to sustain the Company's historical
rates of growth while maintaining historical profit levels, the Company will
be required to penetrate further the markets in which it presently operates,
as well as successfully expand into other geographic markets by opening
additional full service offices and/or hiring experienced marketing
personnel. Accomplishing the Company's expansion goals will depend upon a
number of factors, including identification of new markets in which the
Company can successfully compete, the hiring of qualified personnel, the
integration of new offices into existing operations and the availability of
capital. There can be no assurance that the Company will be able to expand
into new geographic markets, hire experienced marketing personnel or compete
effectively in these markets and sustain its current growth rate. See
"Business."
Competition. The Company's business is highly competitive and its major
competitors are, in most cases, significantly larger financial institutions
possessing longer operating histories and/or greater financial and other
resources. In addition to these and other competitive advantages, some of
these competitors have well- established relationships with a larger customer
base and sources of funds available at a lower cost than those available to
the Company, thereby enabling them to provide lower financing rates than the
Company. If the Company is unable to compete effectively and, in particular,
if the finance rates charged by the Company are not competitive, the
operations, growth and profitability of the Company could be negatively
affected. See "Business--Competition."
Possible Liability Claims. Use of some of the equipment which the Company
leases to its customers involves inherent risks from accidents or misuse
which could result in property damage, personal injury or other losses.
Although the Company typically requires obligors and lessees to maintain
insurance against such claims and no such claims have been filed to date, in
the event of an accident or the misuse of such equipment, the aggrieved party
could attempt to hold the Company liable for damages based on various
theories of liability. If such damages were substantial, the Company could be
materially adversely affected. See "Business-- Originating, Structuring and
Underwriting of Finance Receivables."
Dependence Upon Management. The Company's growth and profitability are
dependent upon, among other things, the abilities and experience of the
Company's management team. Although all of these officers have equity interests
7
<PAGE>
in the Company, none of them have employment agreements with the Company and
there can be no assurance that the Company will be able to retain their
services. If the services of a number of these officers were no longer available
to the Company, its growth and profitability could be adversely affected.
Bernard G. Palitz, 71, the Chairman of the Board, has announced his retirement
as Chairman effective July 31, 1996; however, he will continue as a director of
the Company. Mr. Palitz relinquished his operating responsibilities in November
1995. See "Management."
Management's Significant Security Ownership. After this offering, the
Company's executive officers and directors will beneficially own
approximately 46.2% of the outstanding Common Stock (45.2% if the
Underwriters' over-allotment option is exercised in full). Accordingly, the
Company's executive officers and directors will be able to substantially
control the election of the directors of the Company and the outcome of all
other matters submitted to a vote of the stockholders. See "Principal
Stockholders" and "Description of Capital Stock."
Shares Eligible For Future Sale. Upon completion of the offering, the
Company will have a total of 9,934,622 shares of Common Stock outstanding
(10,189,622 shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, 5,927,672 shares (6,182,672 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or registration under the Securities Act by
persons other than "affiliates" of the Company, as defined under the
Securities Act. The remaining 4,006,950 shares of Common Stock outstanding
upon completion of the offering will be "restricted shares" as that term is
defined by Rule 144 as promulgated under the Securities Act. Under Rule 144
(and subject to the conditions thereof), all the restricted shares will be
eligible for sale upon completion of the offering. The Company and its
executive officers and directors, who in the aggregate will hold 3,975,932
shares of the Common Stock upon completion of the offering, have agreed that
they will not directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any options to purchase or other sale or disposition) of any shares of Common
Stock or other capital stock of the Company, or any securities convertible
into, or exercisable or exchangeable for, any shares of Common Stock or other
capital stock of the Company without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, for a period of 90
days (120 days in the case of the Company) from the date of the Prospectus.
As of January 31, 1996, options to purchase a total of 389,950 shares of
Common Stock pursuant to the Stock Option Plan were outstanding, of which
options to purchase 51,938 shares of Common Stock were exercisable as of
January 31, 1996. An additional 817,175 shares of Common Stock were available
for future option grants under the Stock Option Plan. Any future sales of
shares of Common Stock may have an adverse effect on the market price of the
Common Stock. See "Shares Eligible for Future Sale," "Principal Stockholders,"
"Management--Stock Option Plan," "Underwriting" and Note J to the consolidated
financial statements.
8
<PAGE>
THE COMPANY
The Company is an independent financial services company engaged in
financing industrial, commercial and professional equipment through
installment sales and leasing programs for manufacturers, dealers and users
of such equipment. The Company also makes capital loans to its customers,
primarily secured by the same types of equipment. The Company provides its
services primarily to middle-market businesses which are located throughout
the nation and engaged in diverse industries, such as general construction,
road and infrastructure construction and repair, trucking, waste disposal and
manufacturing, the majority of which businesses have annual sales of up to
$20 million. The equipment financed by the Company includes cranes,
earth-moving equipment, trucks, trailers, machine tools, personnel lifts and
a wide range of other income-producing and labor-saving equipment. The
Company generates profits to the extent that its finance income exceeds its
interest, administrative and other operating expenses and provision for
possible losses. Since its inception in 1989, the Company has reported
increased net earnings in every quarter, and its portfolio of finance
receivables has grown to $382.4 million at January 31, 1996.
The Company's operations are principally conducted through its major
operating subsidiary, Credit. FFC is a corporation formed under the laws of
the State of Nevada on February 6, 1989. The mailing address of its principal
executive office is 400 Park Avenue, New York, New York 10022. The telephone
number of such office is (212) 888-3344.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are estimated to be $26,247,500 ($30,244,625 if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The net proceeds will be used by the Company to reduce borrowings under
bank credit facilities, which totaled $277.3 million at January 31, 1996,
substantially all of which was incurred by Credit. Additionally, based upon
market and other conditions, the Company may also elect to repay FFC's
subordinated debt (which can be reduced or retired without penalty or
premium) totaling $7.0 million at January 31, 1996 (46% of which debt was
held by related parties). Subsequent to this offering and the aforementioned
use of proceeds, the Company expects to continue to utilize bank credit
facilities to fund its operations. The Company's borrowings under its bank
credit facilities bear interest at variable rates averaging below the prime
rate, and the subordinated debt bears interest at the prime rate (as defined
in the agreement) with a minimum rate of 8% and a maximum rate of 13%. See
"Capitalization" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources."
9
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the AMEX since June 3, 1993. The
following table sets forth the high and low reported closing sales prices per
share of Common Stock on the AMEX for the periods indicated.
High Low
-------- --------
Fiscal Year Ended July 31, 1994
First Quarter ...................... $13.00$ $11.25
Second Quarter ..................... 12.42 10.92
Third Quarter ...................... 11.75 9.33
Fourth Quarter ..................... 11.33 8.50
Fiscal Year Ended July 31, 1995
First Quarter ...................... $12.08$ 10.17
Second Quarter ..................... 12.92 11.59
Third Quarter ...................... 13.33 11.33
Fourth Quarter ..................... 12.00 11.00
Fiscal Year Ending July 31, 1996
First Quarter ...................... $14.59$ 11.75
Second Quarter ..................... 16.50 13.92
Third Quarter ...................... 16.88 15.13
Fourth Quarter (through May 6, 1996) 16.88 16.50
On May 6, 1996, the last reported sales price of the Common Stock on the
AMEX was $16.875 per share, and there were approximately 60 holders of record
of the Common Stock. As of January 31, 1996, the Company believes (based upon
requests for proxy solicitation materials) that there were over 600
beneficial holders of its Common Stock.
DIVIDEND POLICY
The Company presently intends to employ all available funds for the
expansion of its business and, therefore, does not anticipate declaring or
paying cash dividends on the Common Stock in the foreseeable future. The
payment of cash dividends, if any, in the future will depend upon the
Company's earnings, financial condition, capital requirements, cash flow and
long range plans and such other factors as the Board of Directors of the
Company (the "Board") may deem relevant. In December 1995, the Company
declared a 3-for-2 stock split effected in the form of a stock dividend paid
to its holders of record of Common Stock on January 8, 1996.
The payment of cash dividends and the making of other distributions to FFC
by Credit is restricted under the terms of various instruments and agreements
relating to Credit's unsecured committed credit facilities and other
indebtedness which could, in turn, limit the amount of cash dividends, if
any, paid by FFC on the Common Stock. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition-- Liquidity and
Capital Resources" and notes to the consolidated financial statements. Under
Credit's 6.76% Senior Notes, which contain the most restrictive dividend
payment provisions, $3.0 million would have been available for the payment of
dividends from Credit to FFC as of January 31, 1996. Therefore, on such date,
approximately $10.8 million would have been available for the payment of
dividends to stockholders of FFC.
10
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term and long-term
debt and capitalization of the Company at January 31, 1996, and on a pro
forma basis, as adjusted to reflect (i) the issuance of the 6.76% Senior
Notes on April 15, 1996 and the application of the gross proceeds therefrom,
and (ii) the sale of the Common Stock offered hereby and the application of
the estimated net proceeds therefrom, after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. See
"Use of Proceeds." The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At January 31, 1996
---------------------------
Pro Forma,
Actual As Adjusted
---------- -------------
(In thousands)
<S> <C> <C>
Short-Term Debt:
Commercial paper(1) ...................................... $ 11,620 $ 11,620
Short-term bank debt(2)(3) ............................... 71,805 0
--------- ----------
Total short-term debt ............................... 83,425 11,620
--------- ----------
Long-Term Debt:
Long-term bank debt ...................................... 210,000 200,557
6.76% Senior Notes ....................................... 55,000
Variable Rate Subordinated Debentures(4) ................. 6,957 6,957
--------- ----------
Total long-term debt ................................ 216,957 262,514
--------- ----------
Total debt .......................................... 300,382 274,134
--------- ----------
Stockholders' equity:
Preferred Stock--$1.00 par value; 500,000 shares authorized;
no shares issued .......................................
Common Stock--$.50 par value; 25,000,000 shares authorized;
8,234,622 shares issued and outstanding; 9,934,622 shares
issued and outstanding as adjusted (5) ................. 4,117 4,967
Additional paid-in capital ............................... 32,684 58,082
Warrants--1,071,000 issued ............................... 29 29
Retained earnings ........................................ 25,724 25,724
--------- ----------
Total stockholders' equity .......................... 62,554 88,802
--------- ----------
Total capitalization ................................ $362,936 $362,936
========= ==========
</TABLE>
- ------
(1) Issued by FFC or Credit. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources."
(2) Assumes all of the net proceeds from the sale of shares of Common Stock
by the Company will be used to repay short-term bank debt. See "Use of
Proceeds."
(3) Borrowings under short-term and long-term revolving credit facilities
aggregating $242.3 million at January 31, 1996 have maturities of 90 days
or less. At such date, $170.5 million of these borrowings and $4.5
million of commercial paper, which are supported by revolving credit
facilities extending beyond one year, are reported as long-term debt.
(4) Issued by FFC. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources."
(5) Excludes 1,071,000 shares issuable upon exercise of outstanding warrants,
389,950 shares issuable upon the exercise of outstanding options and
817,175 shares issuable upon exercise of options available for grant
pursuant to the Stock Option Plan.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND PERCENTAGES)
The following statement of operations and balance sheet data of the
Company for fiscal 1993, 1994 and 1995 have been derived from the
consolidated financial statements of the Company, which have been audited by
Eisner & Lubin, Certified Public Accountants, as indicated in their report
included elsewhere herein. The statement of operations and balance sheet data
of the Company for the fiscal years ended July 31, 1991 and 1992 have been
derived from consolidated financial statements of the Company audited by
Eisner & Lubin, which are not included herein. The statement of operations
and balance sheet data for the six month periods ended January 31, 1995 and
January 31, 1996 are derived from unaudited financial statements. Selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and the financial statements and the related notes included elsewhere in this
Prospectus. Unaudited data for the six month periods ended January 31, 1995
and 1996 include, in the opinion of management, all adjustments (consisting
only of normal, recurring adjustments) necessary to state fairly the
information set forth therein. Operating results for the six month period
ended January 31, 1996 are not necessarily indicative of the results that may
be expected for the entire year ending July 31, 1996.
<TABLE>
<CAPTION>
For Six Months
For Fiscal Year Ended Ended
July 31, January 31,
------------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Finance obligations income ................. $ 14,249 $ 14,560 $ 14,357 $ 17,264 $ 24,654 $ 11,511 $ 14,265
Lease obligations income ................... 2,853 7,343 8,554 8,602 10,297 4,564 6,651
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total finance income ................ 17,102 21,903 22,911 25,866 34,951 16,075 20,916
Interest expense ........................... 10,620 9,935 8,031 9,886 16,253 7,270 9,691
----------- ----------- ----------- ----------- ----------- ----------- ----------
Finance income before provision for possible.
losses on finance receivables ............ 6,482 11,968 14,880 15,980 18,698 8,805 11,225
Provision for possible losses on finance
receivables .............................. 1,219 1,686 1,800 1,475 1,450 705 820
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net finance income .................. 5,263 10,282 13,080 14,505 17,248 8,100 10,405
----------- ----------- ----------- ----------- ----------- ----------- ----------
Miscellaneous income ....................... 54 10 15 0 130 130 0
Salaries and other expenses ................ (2,832) (4,311) (5,170) (5,021) (5,806) (2,696) (3,276)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Earnings before income taxes ............... 2,485 5,981 7,925 9,484 11,572 5,534 7,129
Provision for income taxes ................. 904 2,221 2,957 3,540 4,363 2,077 2,688
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net earnings(1) ............................ $ 1,581 $ 3,760 $ 4,968 $ 5,944 $ 7,209 $ 3,457 $ 4,441
=========== =========== =========== =========== =========== =========== ==========
Earnings per common share(2):
Primary .................................. $ 0.33 $ 0.67 $ 0.58 $ 0.69 $ 0.80 $ 0.39 $ 0.49
Fully diluted ............................ $ 0.33 $ 0.67 $ 0.57 $ 0.69 $ 0.80 $ 0.38 $ 0.49
Average number of shares used:
Primary .................................. 5,863,433 6,210,611 8,578,260 8,648,984 8,956,122 8,933,062 9,067,752
Fully diluted ............................ 5,863,433 6,210,611 8,684,547 8,649,339 8,970,057 8,999,457 9,153,294
Other Financial Data:
Return on average assets(3) ................ 1.2% 2.3% 2.6% 2.5% 2.3% 2.4% 2.5%
Return on average equity(3) ................ 11.1% 14.6% 12.7% 12.9% 13.3% 13.2% 14.7%
Percentage of net charge-offs to average
finance receivables(3) ................... 0.26% 0.34% 0.31% 0.13% 0.08% 0.05% (0.05)%
Percentage of allowance for possible losses
to finance receivables (at end of period). 1.1% 1.6% 1.9% 1.9% 1.9% 1.9% 1.9%
Finance receivables originated or acquired
(during period ended) .................... $ 134,526 $ 134,972 $ 166,189 $ 226,456 $ 261,135 $ 121,399 $ 155,526
Net interest spread ........................ 3.8% 6.3% 6.4% 5.4% 4.3% 4.5% 5.1%
Net interest margin(3)(4) .................. 4.9% 7.3% 7.9% 6.7% 6.0% 6.1% 6.2%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At July 31, At January 31, 1996
----------------------------------------------------------- -------------------------
Balance Sheet Data: 1991 1992 1993 1994 1995 Actual As Adjusted (5)
---------- ---------- ---------- ---------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Finance receivables(6) .................... $156,955 $174,646 $210,169 $273,833 $345,694 $382,446 $382,446
Allowance for possible losses ............. (1,700) (2,829) (4,024) (5,191) (6,395) (7,299) (7,299)
Finance receivables, net .................. 155,255 171,817 206,145 268,642 339,299 375,147 375,147
Total assets .............................. 158,506 175,112 209,609 271,987 342,936 378,493 378,493
Total senior debt (7) ..................... 115,488 107,884 134,628 184,848 249,270 293,425 267,177
Total subordinated debt ................... 24,500 24,500 24,189 22,682 21,957 6,957 6,957
Stockholders' equity ...................... 15,038 36,426 41,727 50,523 58,075 62,554 88,802
Book value per common share (8) ........... $3.57 $5.04 $5.73 $6.20 $7.06 $7.60 $8.94
Ratio of total senior and subordinated debt
to stockholders' equity .................. 9.3 3.6 3.8 4.1 4.7 4.8 3.1
</TABLE>
- ------
(1) For the fiscal years ended July 31, 1991 and 1992, the Company had
convertible preferred stock outstanding (which was converted into shares
of Common Stock during 1992). During such periods, earnings applicable to
common shares were $1,101 and $3,356, respectively.
(2) See Note A(4) to the consolidated financial statements for computation of
earnings per share.
(3) Annualized for the six-month periods.
(4) Calculated as the differential between finance income and interest
expense as a percentage of average finance receivables during the period
presented.
(5) As adjusted to reflect the sale of the Common Stock offered hereby and
the application of the estimated net proceeds therefrom, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company. See "Use of Proceeds."
(6) Presented net of dealer and other reserves and deferred finance charges.
See Note B to the consolidated financial statements.
(7) On April 15, 1996, Credit issued $55 million principal amount of 6.76%
Senior Notes, the proceeds of which were used to repay other senior debt.
(8) Excludes shares subject to outstanding warrants and options granted
pursuant to the Stock Option Plan. If all of such warrants and options
had been exercised as of January 31, 1996, the book value per share of
Common Stock, on an as adjusted basis, would have been $8.56.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company derives profits to the extent that the finance and leasing
income it earns exceeds the Company's cost of borrowed funds, operating and
administrative expenses, and the provision for possible credit losses. The
Company borrows funds in the wholesale markets and lends such funds primarily
to middle-market businesses located throughout the United States. State
usury, lending and lien perfection rules and laws can regulate the Company's
activities. In addition, certain states require the Company to obtain
licenses in order to engage in certain types of lending activities.
The Company's finance and leasing operations are substantially identical
in business terms, differing only in legal and tax treatment. As such, for
financial reporting purposes, leasing is treated as a financing arrangement
as more fully described in Note A(2)(b) to the consolidated financial
statements. Whether a transaction is characterized and documented as a
financing or lease depends, among other things, on management's evaluation of
the customer's credit and the collateral, as well as the customer's desire to
either finance or lease. The equipment financed and leased, and the Company's
ongoing operational treatment of a transaction, is generally the same,
regardless of the documentation used.
RESULTS OF OPERATIONS
Comparison of Six Months Ended January 31, 1996 to Six Months Ended
January 31, 1995. Finance income increased 30% to $20.9 million in the first
half of fiscal 1996 from $16.1 million in the first half of fiscal 1995. The
increase was primarily the result of an increase of approximately $76.0
million in the amount of average net finance receivables (before allowance
for loan loss) outstanding from the first half of fiscal 1995 ($287.0
million) to the first half of fiscal 1996 ($363.0 million). Additionally,
average market interest rates increased from the first half of fiscal 1995 to
the first half of fiscal 1996 which led to new business being booked at
higher rates and to increases in rates on variable rate transactions.
Total expenses, which consist of interest expense, provision for possible
losses on finance receivables, salaries and other expenses, increased 29% to
$13.8 million in the first half of fiscal 1996 from $10.7 million in the
first half of fiscal 1995. This increase was mostly due to an increase in the
Company's interest expense of $2.4 million from the first half of fiscal 1995
($7.3 million) to the first half of fiscal 1996 ($9.7 million). The increase
in interest expense was due to an increase in average borrowed funds from
$215.1 million in the first half of fiscal 1995 to $290.0 million in the
first half of fiscal 1996. Additionally, average market interest rates
increased from the first half of fiscal 1995 to the first half of fiscal
1996. Of the increase in total interest expense, approximately 53% is
attributable to the increase in average borrowings and 47% to the increase in
market interest rates. During September of 1995 the Company repaid its $15.0
million Senior Subordinated Note. Interest was payable monthly, in arrears,
at a rate of 12.27%. The Company replaced this source of funding with
short-term and long-term bank credit facilities, commercial paper and cash
flows from operations. Salaries and other expenses increased by approximately
$580,000 from the first half of fiscal 1995 to the first half of fiscal 1996.
The increase was primarily the result of additional personnel added from the
prior period, as well as salary increases.
The provision for possible losses on finance receivables increased by 16%
to $820,000 for the first half of fiscal 1996 from $705,000 for the first
half of fiscal 1995. The allowance for possible losses was $7.3 million, or
1.9% of net finance receivables before such allowance, at January 31, 1996,
substantially equal to the allowance as a percentage of net finance
receivables before such allowance at January 31, 1995. Management continually
evaluates the allowance for possible losses in light of past and current
economic, industry, and geographic business conditions and loss experience.
During the first quarter of fiscal 1995 the Company purchased from a
holder of its subordinated debentures, debentures in the face amount of
$725,000 for $595,000, resulting in miscellaneous income of $130,000.
As a result of the above, earnings before income taxes increased $1.6
million (29%) during the first half of fiscal 1996 ($7.1 million) from the
first half of fiscal 1995 ($5.5 million).
13
<PAGE>
Net earnings increased $984,000 (28%) from the first half of fiscal 1995
to the first half of fiscal 1996.
Comparison of Fiscal 1995 to Fiscal 1994. Finance income increased by 35%
to $35.0 million in fiscal 1995 from $25.9 million in fiscal 1994. Such
increase was attributable primarily to a 32% increase in the average amount
of finance receivables outstanding to $312.3 million during fiscal 1995 from
$237.4 million during fiscal 1994. Additionally, average market interest
rates increased from fiscal 1994 to fiscal 1995 which led to new business
being booked at higher rates and to increases in rates on variable rate
transactions. Additional marketing personnel have been hired which has led to
increases in new business generated. To the extent new business is generated
at a greater rate than collections are made, the outstanding finance
receivables balance increases.
Interest expense increased by 64% to $16.3 million in fiscal 1995 from
$9.9 million in fiscal 1994. Such increase was attributable mainly to an
increase in average borrowed funds outstanding during fiscal 1995 of 28%.
Additionally, average market interest rates increased from fiscal 1994 to
fiscal 1995. Of the increase in total interest expense, approximately 60% is
attributable to the increase in average borrowings and 40% to the increase in
market interest rates.
Since the dollar amount of finance income increased greater than the
dollar amount of interest expense increased during fiscal 1995, finance
income before provision for possible losses on finance receivables increased
by 17% to $18.7 million in fiscal 1995 from $16.0 million in fiscal 1994.
The provision for possible losses on finance receivables remained constant
at $1.5 million for fiscal 1995 and 1994. This was attributable to
management's determination that the allowance for possible losses on finance
receivables as a percentage of finance receivables outstanding was adequate.
Management continually evaluates the allowance for possible losses in light
of past and current economic, industry, and geographic conditions. Such
allowance equaled 1.85% of the finance receivables outstanding at July 31,
1995 and equaled 1.90% of the finance receivables outstanding at July 31,
1994.
Since finance income before such provision increased more in fiscal 1995
than such provision, net finance income increased by 19% to $17.2 million in
fiscal 1995 from $14.5 million in fiscal 1994.
During the first quarter of fiscal 1995, the Company purchased from a
holder of its subordinated debentures, debentures with a face amount of
$725,000 for $595,000, resulting in a gain of $130,000.
Salaries and other expenses increased by 16% to $5.8 million in fiscal
1995 from $5.0 million in fiscal 1994. The increase was due to the hiring of
additional personnel during fiscal 1995 and, to a lesser extent, to the
opening of a new full service office in Charlotte, North Carolina during the
second quarter of fiscal 1995, as well as salary increases.
Earnings before income taxes increased by 22% to $11.6 million in fiscal
1995 from $9.5 million in fiscal 1994. The provision for income taxes
increased to $4.4 million in fiscal 1995 from $3.5 million in fiscal 1994 due
to the increase in such earnings. Net earnings increased by 21% to $7.2
million in fiscal 1995 from $5.9 million in fiscal 1994. Primary and fully
diluted earnings per share increased by 17% to $0.80 per share in fiscal 1995
from $0.69 per share in fiscal 1994.
Comparison of Fiscal 1994 to Fiscal 1993. Finance income increased by 13%
to $25.9 million in fiscal 1994 from $22.9 million in fiscal 1993. Such
increase was attributable primarily to a 26% increase in the average amount
of finance receivables outstanding to $237.4 million during fiscal 1994 from
$189.0 million during fiscal 1993, and was partially offset by a decrease in
finance rates charged by the Company in response to a decline in market
interest rates. Additional marketing personnel have been hired which has led
to increases in new business generated. As new business is generated at a
greater rate than collections are made, the outstanding finance receivables
balance increases.
Interest expense increased by 23% to $9.9 million in fiscal 1994 from $8.0
million in fiscal 1993. Such increase was attributable mainly to an increase
in average borrowed funds outstanding during fiscal 1994 of 28%. Offsetting
this increase was a slight decrease in average market interest rates from
fiscal 1993 to fiscal 1994.
14
<PAGE>
Since the dollar amount of finance income increased greater than the
dollar amount of interest expense increased during fiscal 1994, finance
income before provision for possible losses on finance receivables increased
by 7% to $16.0 million in fiscal 1994 from $14.9 million in fiscal 1993.
The provision for possible losses on finance receivables decreased by 18%
to $1.5 million for fiscal 1994 from $1.8 million for fiscal 1993. The
decrease was attributable to management's determination that the allowance
for possible losses on finance receivables as a percentage of finance
receivables outstanding was adequate. Management continually evaluates the
allowance for possible losses in light of past and current economic,
industry, and geographic conditions. Such allowance equaled 1.90% of the
finance receivables outstanding at July 31, 1994 and equaled 1.91% of the
finance receivables outstanding at July 31, 1993.
Since finance income before such provision increased more in fiscal 1994
than such provision, net finance income increased by 11% to $14.5 million in
fiscal 1994 from $13.1 million in fiscal 1993.
Salaries and other expenses decreased by 3% to $5.0 million in fiscal 1994
from $5.2 million in fiscal 1993. Such decrease was attributable to cost
savings relating to the conversion of the Company's full service office in
Denver to a sales office during fiscal 1994, reduced collection costs and
other cost reduction measures. Slightly offsetting these savings were
increases in salaries and other expenses at the Company's other offices.
Since net finance income increased and salaries and other expenses
decreased, earnings before income taxes increased by 20% to $9.5 million in
fiscal 1994 from $7.9 million in fiscal 1993. The provision for income taxes
increased to $3.5 million in fiscal 1994 from $3.0 million in fiscal 1993 due
to the increase in such earnings. Net earnings increased by 20% to $5.9
million in fiscal 1994 from $5.0 million in fiscal 1993. Primary earnings per
share increased by 18% to $0.69 per share in fiscal 1994 from $0.58 per share
in fiscal 1993; fully diluted earnings per share increased by 20% to $0.69 in
fiscal 1994 from $0.57 per share in fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of the Company's liquidity and capital resources
should be read in conjunction with the more detailed discussion in
"Business."
The Company endeavors to maximize its liquidity by diversifying its
sources of funds, which include: (i) cash flows from operations; (ii) the
issuance of commercial paper; (iii) the issuance of unsecured debt; (iv)
borrowings from short-term and long-term credit facilities with banks; and
(v) the issuance of additional equity.
Recent Developments. On April 15, 1996, Credit completed a private
offering of $55 million principal amount of unsecured 6.76% Senior Notes. The
6.76% Senior Notes will mature on September 1, 2001 and provide for optional
and mandatory redemption under certain circumstances. The 6.76% Senior Notes
contain certain restrictive and financial covenants, including, but not
limited to, the maintenance of net worth and limitations on the incurrence of
indebtedness, the incurrence of liens, the payment of dividends, mergers,
consolidations and sales of assets, and investments. The proceeds from the
6.76% Senior Notes have been used to repay outstanding indebtedness under
bank credit facilities. Credit has received an investment grade rating of
"BBB" from Fitch Investors Service, Inc. on its ability to meet senior
obligations.
In addition to its direct issuance of commercial paper, the Company has
entered into an agreement with a commercial paper dealer to establish a
commercial paper program through that dealer.
For the Six Months Ended January 31, 1996. At January 31, 1996, the
Company had committed unsecured short-term lines of credit aggregating $172.5
million available through financial institutions under which $137.8 million
was outstanding; commercial paper outstanding at this date totaled $16.1
million. At January 31, 1996, the Company had committed unsecured long-term
revolving credit facilities available in the amount of $180.0 million under
which $104.5 million was outstanding at such date. The Company is utilizing
short-term facilities and commercial paper in lieu of borrowing additional
amounts under these arrangements; therefore, in addition to the $104.5
million outstanding under such long-term commitments, $66.0 million in
short-term bank borrowings, and $4.5 million in commercial paper have been
included in long-term senior debt, and senior short-term debt has been
reduced by the same amounts. At January 31, 1996, the Company also had
long-term loans outstanding from financial institutions in the aggregate
amount of $35.0 million. The Company issues commercial paper with maturities
of up to 270 days. During February 1996, Credit received an investment grade
15
<PAGE>
rating of "D-2" on its commercial paper from Duff & Phelps Credit Rating Co.
Credit also received an investment grade rating of "F-2" from Fitch Investors
Service, Inc. during the quarter ended January 31, 1996. Additionally, the
commercial paper of FFC is rated "D-2" by Duff & Phelps Credit Rating Co.
Increases in commercial paper are generally offset by decreases in bank
borrowings, and vice versa; there is generally no seasonal influence.
On September 1, 1995, the Company repaid the $15 million Senior
Subordinated Note using bank borrowings. Interest was payable monthly, in
arrears, at a rate of 12.27%.
The Company's operations are dependent, among other things, upon its
ability to continue to obtain funds on satisfactory terms including costs
thereof. The Company uses such funds principally to finance the acquisition
or origination of finance receivables and for the purchase of portfolios of
finance receivables. The Company may obtain required funds from a variety of
sources, including internal generation of funds, borrowings under bank credit
facilities, sales of common and preferred equity, placement of term debt and
issuance of commercial paper.
The Company has no present plans for significant capital expenditures. The
Company may increase the number of full service offices or marketing
locations in the future; any such increase would not be expected to require
any significant capital expenditures. The Company is not aware of any pending
legislation that would have a material effect on its capital requirements or
business prospects.
For the Year Ended July 31, 1995. In fiscal 1993, 1994 and 1995, net cash
provided by operating activities was $11.5 million, $14.8 million, and $11.4
million, respectively, which amounts were comprised primarily of net
earnings, loss provisions, deferred taxes, amortization of deferred
acquisition costs and changes in accrued expenses. In fiscal 1993, 1994 and
1995, net cash provided by financing activities was $26.8 million, $51.6
million, and $64.2 million, respectively, which were comprised primarily of
increased bank borrowings. Net cash used in investing activities in fiscal
1993, 1994 and 1995 was $38.2 million, $66.4 million, and $75.2 million,
respectively, substantially all of which was initially used for the
origination of finance receivables.
The Company has obtained most of its borrowings through Credit and has
obtained the balance of its borrowings through its own borrowing capability.
At July 31, 1995, Credit had net finance receivables outstanding amounting to
$336.6 million and Commercial had net finance receivables outstanding
amounting to $2.7 million. In the future, the Company may borrow through its
own sources, Credit or Commercial depending upon the terms, availability and
intended use of such borrowing.
Borrowed funds may be obtained on a senior or subordinated basis. The
following table sets forth the maturities (dollars in millions) of the
Company's borrowed debt based on the expiration dates of its credit
facilities as at July 31, 1995.
Year Ending Senior Subordinated Total
July 31, Debt Debt Debt
------------- -------- -------------- --------
1996 ............... $ 99.2 $15.0* $114.2
1997 ............... 95.0 -- 95.0
1998 ............... 50.0 -- 50.0
1999 ............... -- -- --
2000 ............... 5.0 -- 5.0
2001 ............... -- 7.0 7.0
-------- -------------- --------
Total .............. $249.2 $22.0 $271.2
======== ============== ========
- ------
* Paid at maturity on September 1995.
The sources of funds (other than internal generation of funds and sale of
equity) which are presently available to, or being utilized by, the Company
are described below.
Revolving Credit Facilities. At July 31, 1995, Credit had unsecured committed
short-term revolving credit facilities aggregating $155.0 million available
through fourteen banks, under which $95.1 million was outstanding; these
short-term facilities have an original expiration of one year or less. At July
31, 1995, Credit had unsecured committed long-term revolving credit facilities
aggregating $90.0 million available through seven banks under which $62.0
16
<PAGE>
million was outstanding, and the Company had an unsecured committed long-term
revolving credit facility of $5 million through a bank under which $0.5 million
was outstanding; long-term revolving credit facilities have original expirations
of over one year. At July 31, 1995, none of the long-term revolving credit
facilities expire within one year. Amounts outstanding under all of the above
facilities bear interest at variable rates averaging below the prime rate. Fees
are paid to these banks in connection with these facilities. No bank is
contractually obligated to renew any such facility. During fiscal 1993, 1994 and
1995, the maximum aggregate amount outstanding under these facilities at any
time was $71.6 million, $92.9 million, and $157.6 million, respectively. The
weighted average interest rate at the end of each period was 4.3%, 5.3%, and
6.7%, respectively. The average aggregate amount outstanding during each of
those periods was $61.6 million, $74.0 million and $94.6 million, respectively.
The weighted average interest rate during each of those periods was 4.5%, 4.6%,
and 6.5%, respectively.
As of July 31, 1995, the Company was utilizing borrowings under its
short-term bank facilities and commercial paper in lieu of borrowings under
the unused portion of its long-term bank credit facilities and had, in the
financial statements, included $28.0 million of short-term bank borrowings
and $4.5 million of commercial paper in senior long-term debt, and had
reduced senior short-term debt and commercial paper by the same amounts.
Term Debt. As of July 31, 1995, Credit had outstanding unsecured senior
term loans aggregating $80.0 million from eight commercial banks. The
principal amounts outstanding under these loans bear interest at variable
rates averaging below the prime rate. Of the $80.0 million outstanding on
July 31, 1995, $25.0 million matures during the next year. Credit had
privately placed with a major insurance company a Senior Subordinated Note in
the principal amount of $15.0 million which became due and was paid in full
on September 1, 1995. The principal amount outstanding under this note bore
interest at an annual rate of 12.27%. All term debt may be prepaid at
Credit's option, subject in some cases to a penalty, and provides for payment
of the respective principal amounts at maturity. The documentation with
respect to these borrowings contains certain restrictive covenants, including
limitations on encumbrances, investments, dividends and other distributions
to FFC, sales of assets, mergers and other business combinations. In
addition, Credit is required to maintain a minimum net worth (as defined in
the agreement) and has agreed not to permit its debt-to-borrowing base ratios
to exceed specified levels.
At July 31, 1995, FFC had privately placed with various investors variable
rate subordinated debentures due on September 1, 2000 in an aggregate
principal amount outstanding of $7.0 million. The principal amounts
outstanding under these debentures bear interest at the prime rate (as
defined in these debentures) with a minimum rate of 8% and a maximum rate of
13%. These debentures may be prepaid at FFC's option, without penalty, and
provide for payment of the entire principal amount at maturity. Concurrently
with the placement of these debentures, the Company sold warrants to purchase
up to 465,000 shares of common stock; such warrants were exercised as of July
31, 1994.
At July 31, 1995, Credit had $9.1 million of retained earnings and paid-in
capital which was not restricted as to use for dividends or other
distributions to its sole stockholder, the Company, and, at such date,
neither the Company nor Commercial were subject to any such restrictions on
dividends or other distributions to stockholders.
Commercial Paper. FFC and Credit each are direct issuers of commercial paper
with maturities of up to 270 days, which is unsecured. Commercial paper
outstanding at July 31, 1995 bore interest at fixed annual rates ranging from
5.7% to 7.0%. During fiscal 1993, 1994, and 1995, the maximum combined amount of
the outstanding commercial paper issued by FFC and Credit at any time was $23.1
million, $25.6 million, and $25.1 million, respectively. The weighted average
interest rate at the end of each period was 4.5%, 4.8%, and 6.2%, respectively.
The average combined amounts outstanding during each of those periods was $14.1
million, $19.9 million, and $18.7 million, respectively. The weighted average
interest rate on the combined amounts outstanding during each of those periods
was 4.6%, 4.4%, and 5.8%, respectively. Such commercial paper is generally sold
to investors, customers of the Company, officers of the Company and their
affiliates, and others. The Company has not obtained commitments from any
purchaser of its commercial paper regarding additional or future purchases. It
is the Company's policy to maintain aggregate unused revolving credit facilities
in an amount at least equal to the amount of commercial paper outstanding. The
interest rate on the Company's commercial paper has been and will continue to be
determined by reference to prevailing interest rates in the commercial paper
17
<PAGE>
market and other factors. The Company is utilizing commercial paper in lieu of
unused borrowings under its long-term bank facilities and at July 31, 1995 had
included $4.5 million of commercial paper in long-term senior debt and had
reduced commercial paper by the same amount.
Interest Rates and Sensitivity. Most of the Company's debt reprices at
regular intervals. Of the $237.6 million of bank debt outstanding as of July
31, 1995, $127.1 million, or 53%, was scheduled to reprice or mature within
two weeks, $95.0 million, or 40%, within the next following two weeks, and
the remainder scheduled to reprice or mature within two months. Of the $11.7
million of commercial paper outstanding as of July 31, 1995, $3.7 million, or
32%, was scheduled to mature within one month, $3.1 million, or 26%, within
the next following two months and the remainder of $4.9 million, or 42%, in
the following six months. The total debt scheduled to reprice or mature
within nine months was $249.3 million.
Of the Company's finance receivables, $118.9 million of these receivables
before allowance for possible losses, or 34%, reprice with changes in the
prime rate, as defined. Of the remaining 66% of net finance receivables which
bear fixed rates of interest, the contractual stream of payments are as
follows:
Contractual
Payments
Year Ending July 31, ($ Millions)
-------------------- -------------
1996 ............... $97.5
1997 ............... 79.4
1998 ............... 58.2
Thereafter ......... 48.0
The Company does not seek to match maturities of its debt to its
receivables. The Company presently has no liability under and is not a party
to any interest rate hedging or derivative products.
The table below provides information regarding the Company's cost of
borrowed funds, computed on a daily average, the net yield of its finance
receivables, computed on a monthly average, and the resulting net interest
spread.
Fiscal Year Ended July 31,
---------------------------------
1993 1994 1995
------- ------- -------
Average yield of finance receivables ... 12.1% 10.8% 11.2%
Weighted average cost of borrowed funds . 5.7% 5.4% 6.9%
Net interest spread. ................... 6.4% 5.4% 4.3%
Effects of Inflation; Seasonality; Concentration of Credit Risk. Inflation
affects the Company's operating expenses, such as salaries, rent and
communications charges, and increases in operating expenses may not be
readily recoverable by increases in the finance rates charged by the Company.
Inflation also affects market interest rates and movements in market interest
rates may adversely affect the Company's profitability.
To a limited extent, the Company's business is seasonal since the volume
of financings provided by the Company may be affected by weather conditions.
The Company has some asset class concentrations of risk which are
primarily related to the financing of trucks and trailers (18% of total
finance receivables outstanding at July 31, 1995), construction related
equipment (17%), and cranes (16%). There are also some regional
concentrations of risk, with 27% of total finance receivables at July 31,
1995 from obligors located in the Southwest United States, 17% from obligors
located in the Midwest United States, and 16% from obligors located in the
Southeast United States.
Other. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures" in the first quarter of fiscal 1996. These standards require
that impaired loans be measured based on the present value of expected cash
flows, discounted at the loan's effective interest rate or, the loan's
observable market price or, the fair value of the collateral if the loan is
collateral dependent, as well as certain related disclosures. The adoption of
these standards did not have a material effect on the consolidated financial
statements of the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation." This standard encourages, but
does not require, recognition of compensation expense based on the fair value
of equity instruments granted to employees. The Company does not plan to
adopt the recognition provisions of this standard. The disclosures required
by this standard will be included in a note to the 1997 financial statements.
18
<PAGE>
BUSINESS
GENERAL
The Company is an independent financial services company engaged in
financing industrial, commercial and professional equipment through
installment sales and leasing programs for manufacturers, dealers and users
of such equipment. The Company also makes capital loans to its customers,
primarily secured by the same types of equipment. The Company provides its
services primarily to middle-market businesses located throughout the nation
and engaged in diverse industries, such as general construction, road and
infrastructure construction and repair, trucking, waste disposal and
manufacturing, the majority of which businesses have annual sales of up to
$20 million. The equipment financed by the Company includes cranes,
earth-moving equipment, trucks, trailers, machine tools, personnel lifts and
a wide range of other income-producing and labor-saving equipment.
The Company generates profits to the extent that its finance income
exceeds its interest, administrative and other operating expenses and
provision for possible losses. Since its inception in 1989, the Company has
reported increased net earnings in every quarter, and its portfolio of
finance receivables has grown to $382.4 million at January 31, 1996. Since
the fiscal year ended July 31, 1992, the Company's net earnings increased at
a compound annual rate of 24.2% through the fiscal year ended July 31, 1995.
For the fiscal year ended July 31, 1995 and the six months ended January 31,
1996, the Company reported net earnings of $7.2 million and $4.4 million,
respectively, representing a return on average assets of 2.3% and 2.5% and a
return on average equity of 13.3% and 14.7%, respectively.
The Company originates finance receivables through a team of experienced
marketing and managerial professionals in 23 locations throughout the United
States. The Company competes by focusing on providing prompt, responsive and
customized service to its prospects and customers. The Company's senior
management has an average of more than 15 years experience in the field of
equipment finance and leasing, and their knowledge and experience enable the
Company to structure profitably financings that meet the needs of its
customers while maintaining the Company's underwriting standards. The finance
receivables originated by the Company typically range from $30,000 to $1.0
million per transaction with full amortization of principal over the term of
the financing. During the six months ended January 31, 1996, the average
amount and stated maturity of finance receivables originated by the Company
were $141,000 and 41 months, respectively. The average yield on the Company's
portfolio of finance receivables for the six months ended January 31, 1996
was 11.5% per annum and its average cost of borrowed funds was 6.4% per
annum.
In substantially all cases, the Company's finance receivables are secured
by, among other things, a first lien on equipment collateral. The Company
concentrates on financing equipment collateral which is easily movable, has
an economic life longer than the term of the financing provided by the
Company, is not subject to rapid technological obsolescence, has applications
in a variety of different industries and has a relatively broad resale
market. These characteristics of the underlying equipment collateral, coupled
with the expertise of management in underwriting, structuring and collecting
the Company's portfolio of finance receivables, have to date, enabled the
Company to minimize its losses. Historically, net charge-offs incurred by the
Company as a percentage of average finance receivables have never exceeded
0.34% for any fiscal year and averaged 0.17% for the three fiscal years ended
July 31, 1995.
The Company's portfolio of receivables is supported by borrowings under
short-term (one year or less) or long-term (two to five years) committed
unsecured bank credit facilities, unsecured loans from institutional lenders,
issuance of commercial paper, and equity. At January 31, 1996, the Company
had total borrowed debt of $300.4 million, consisting of $277.3 million of
borrowings under $387.5 million of committed unsecured credit facilities with
22 banks, $7.0 million of subordinated borrowings from various investors, and
$16.1 million of commercial paper. On April 15, 1996, the Company's major
operating subsidiary, Credit, issued $55 million principal amount of 6.76%
Senior Notes, the proceeds of which were used to repay other senior debt.
Credit has recently received investment grade ratings on its commercial paper
from both Duff & Phelps Credit Rating Co. and Fitch Investors Service, Inc.
In addition, Credit has received a "BBB" investment grade rating from Fitch
Investors Service, Inc. on its ability to meet senior obligations.
19
<PAGE>
INDUSTRY BACKGROUND
The equipment finance/leasing portion of the commercial finance industry
is very broad, highly fragmented and is served by national and regional
banking institutions, independent finance/leasing companies, insurance
companies, bank and manufacturer-owned finance companies, as well as smaller
finance/leasing companies, many of which sell or pledge their receivables to
larger financial institutions.
Although there is no comprehensive data that quantifies the size of the
domestic market for equipment financing and leasing, the Company believes
that annual sales of the principal types of new and used equipment it
finances or leases are in excess of $50 billion and its share of this market
is less than one percent (1%). The Company typically does not compete
primarily on the basis of rate. The Company competes by emphasizing a high
level of equipment and financial expertise, customer service, flexibility in
structuring financing transactions and significant management involvement in
customer relationships.
BUSINESS STRATEGY
The Company's business strategy is to increase profitably the size of its
portfolio of finance receivables and its share of the equipment finance and
leasing market in the United States. The principal aspects of the Company's
business strategy are summarized below.
Commitment to Customer Service. The Company focuses on providing prompt,
responsive and customized service to its customers and business prospects.
The Company's senior management has, on average, in excess of 15 years of
specialized expertise in the industries they serve, which generally enables
them to understand and thus be responsive to customers. The Company's
customer services include making prompt credit decisions, arranging financing
structures which meet customers' needs and the Company's underwriting
criteria, providing direct contact between customers and Company executives
with decision making authority, and providing timely and knowledgeable
responses to customer inquiries.
Maintenance of Underwriting Standards. The Company has developed and
implemented underwriting policies and guidelines that are designed to achieve
attractive yields while minimizing delinquencies and losses. Unlike many of
its competitors, the Company does not use credit scoring models but instead
relies upon the experience of its credit officers to analyze the
creditworthiness of the obligors and collateral values and accordingly
structure transactions which provide an appropriate risk adjusted return to
the Company. Each credit submission, regardless of size, requires the
approval of at least two credit officers.
Focus on Specific Collateral. Virtually all finance receivables originated
or acquired are secured by a first lien on the pledged collateral. The
Company focuses on financing income producing equipment that is movable, has
an economic life which is longer than the term of the financing, is not
subject to rapid technological obsolescence, has applications in a number of
different industries and has a relatively broad resale market. A majority of
the collateral pledged to the Company by obligors and lessees is used late
model equipment. Management believes this type of collateral is less subject
to rapid depreciation as compared to new equipment, and, therefore, is more
stable for the purposes of determining resale values.
Expansion. The Company currently has five full service offices located in
Houston, Texas; Chicago/Westmont, Illinois; Teaneck, New Jersey; Charlotte,
North Carolina; and Hilton Head, South Carolina. Thirty-five (35) full-time
new business marketing representatives directly report to such offices. The
obligors represented in the Company's portfolio of finance receivables are
located in forty-nine (49) states. The Company believes that its share of the
U.S. market for equipment finance and leasing receivables is less than one
percent (1%); therefore, management believes there is substantial opportunity
for growth. The Company intends to achieve such growth by employing
additional marketing personnel and opening new full service offices from time
to time.
20
<PAGE>
Personnel Policy. The Company recognizes that, in order to continue to
compete profitably, it must offer to its business prospects and customers a
high level of service, which the Company believes it can accomplish by
attracting and retaining the services of a team of dedicated and talented
managerial, marketing and administrative personnel. The present strategy used
by the Company to attract and retain such personnel is to offer competitive
salary arrangements, an equity interest in the Company through participation
in the Stock Option Plan, and enhanced career opportunities. Approximately
70% of the Company's directors, officers and employees who had been employed
by the Company for at least one year as of January 31, 1996, are presently
participants in the Stock Option Plan and/or own stock in the Company. The
Company attempts, whenever possible, to promote personnel from within.
Improved Borrowing Spread and Diversified Funding Sources. The Company
continually seeks to improve its borrowing spread (which is the spread the
Company pays to its funding sources over the applicable borrowing indices)
and diversify its funding sources. The Company seeks to further lengthen the
maturities of its committed unsecured credit facilities to more closely match
the average maturity of its finance receivables portfolio. As the Company's
capital base increases with, among other things, the proceeds of this
offering, the Company should be better positioned to arrange for improved
terms under its present and future committed unsecured credit facilities.
Such reduction in the Company's funding costs, if achieved, should permit the
Company to increase its receivables portfolio by enabling the Company to
offer more competitive rates, develop additional vendor relationships and
expand its customer base. Moreover, diversification in funding sources should
provide the Company with greater flexibility to address possible future
adverse market conditions.
MARKETING ACTIVITIES
The Company markets its services through marketing personnel based in 23
domestic locations, and originates finance receivables through its
relationships with dealers and, to a lesser extent, manufacturers (sometimes
collectively called "vendors"). The Company also directly markets its finance
and leasing services to users for the acquisition or use of equipment and for
capital loans. The Company emphasizes credit/collateral quality in all of its
originations. All of the Company's marketing personnel are salaried rather
than commission-based and the majority of such personnel participate in the
Stock Option Plan. Thus, the Company expects that its marketing personnel
should have a close community of interest with the Company and its
stockholders.
The Company's marketing activities are relationship and service oriented.
The Company has a team of dedicated and seasoned marketing and managerial
personnel, with average industry experience of more than 15 years, who
solicit new business from the vendors and users of equipment. Management
believes that the experience, knowledge and relationships of its executives
and managers and marketing personnel, related to its customer and prospect
base, equipment values, resale markets, and local economic and industry
conditions, enable the Company to effectively compete on the basis of prompt,
responsive and customized service. The Company's customer services include
making prompt credit decisions, arranging financing structures responsive to
customer needs, providing direct contact between customers and Company
executives and managers with decision-making authority and providing prompt
and knowledgeable responses to inquiries and to temporary business problems
which customers may encounter in the ordinary course of their business.
In order to expand its customer base and broaden its marketing coverage to
other geographic areas, the Company from time to time has purchased
portfolios of finance receivables from financial institutions, vendors and
others generally in the range of $1 million to $5 million. These portfolios
have included finance receivables secured by a broader range of equipment
than that typically financed by the Company.
EQUIPMENT FINANCED
The Company finances and leases equipment manufactured by such major
manufacturers as Caterpillar, Kotmatsu-Dresser, Grove, Link-Belt, Manitowoc,
Peterbilt, Mack, Kenworth, JLG Industries, Simon Aerials, Mori Seiki, Mazak
and McNeilus. Generally, the equipment financed by the Company is movable,
has an economic life which is longer than the term of the financing provided
by the Company, is not subject to rapid technological obsolescence, has
applications in a number of different industries and has a relatively broad
resale market.
21
<PAGE>
A majority of the equipment and machinery pledged as collateral to the
Company by its obligors is used late model equipment, which is generally, at
the time financed, less than five years old, except for cranes and certain
other items of equipment which have economic lives in excess of 15 years.
Management believes this type of collateral is less subject to rapid
depreciation as compared to new equipment, and, therefore, is more stable for
the purposes of determining resale values.
Sample types of equipment that the Company finances include air
compressors, bulldozers, compactors, crawler cranes, earthmovers, excavators,
generators, hydraulic truck cranes, loaders, machine tools, motor graders,
pavers, personnel and material lifts, recycling equipment, resurfacers, rough
terrain cranes, sanitation trucks, scrapers, trucks, truck tractors and
trailers. Most of the equipment the Company finances is used in more than one
industry. For example, bulldozers can be used in the construction, waste
disposal or surface mining industries and personnel and material lifts can be
used in the manufacturing and utility construction industries.
The following table sets forth information concerning the industry
classification of the Company's customers and the amount and the percentage
of finance receivables in each classification for the periods presented.
<TABLE>
<CAPTION>
At July 31,
----------------------------------------------------------------------------------------- At January 31,
1991 1992 1993 1994 1995 1996
------------------ ---------------- ---------------- ---------------- -------------- --------------
Industry
------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Trucking ............... $ 23.7 15.1% $ 26.4 15.1% $ 37.9 18.0% $ 48.1 17.6% $ 62.9 18.2% $ 71.1 18.6%
Construction equipment . 25.3 16.1 36.2 20.7 48.6 23.1 61.4 22.4 61.2 17.7 63.8 16.7
Cranes (erect. & rigging) 40.2 25.6 42.6 24.4 40.1 19.1 46.7 17.1 49.9 14.5 53.2 13.9
Manufacturing .......... 1.6 1.0 5.1 2.9 17.1 8.1 29.8 10.9 52.3 15.1 61.4 16.0
Waste disposal ......... 9.2 5.9 11.9 6.8 13.2 6.3 31.3 11.4 51.1 14.8 51.4 13.4
Highway construction ... 21.0 13.4 20.5 11.8 21.2 10.1 21.3 7.8 22.5 6.5 24.8 6.5
Excavating and mining .. 10.5 6.7 9.2 5.2 5.3 2.5 5.9 2.1 10.1 2.9 17.1 4.5
Utility construction ... 8.1 5.2 7.1 4.1 7.3 3.5 9.1 3.3 7.0 2.0 9.1 2.4
Concrete pumping ....... 5.5 3.5 3.4 2.0 2.4 1.1 2.6 1.0 4.0 1.2 5.0 1.3
Other (1) .............. 11.8 7.5 12.2 7.0 17.1 8.2 17.6 6.4 24.7 7.1 25.5 6.7
-------- -------- -------- -------- -------- -------- ------ -------- -------- ------- ------ -----
Total .................. $156.9 100.0% $174.6 100.0% $210.2 100.0% $273.8 100.0% $345.7 100.0% $382.4 100.0%
======== ======== ======== ======== ======== ======== ====== ======== ======== ======= ====== =====
</TABLE>
- ------
(1) Includes pre-stress concrete contractor, food supply, foundation,
recycling, chemical, film, production equipment, concrete manufacturing,
logging, oil related, rental company, food processing, and other
industries.
22
<PAGE>
GEOGRAPHIC MARKETS
The Company presently provides its services to an estimated 2,500
middle-market customers who are located throughout the nation. The following
table sets forth information concerning the states in which obligors of
equipment financed by the Company were located as a percentage (by dollar
amount) of the Company's finance receivables at January 31, 1996.
Percentage of
Finance
State Receivables
---- ---------------
Texas ................................................ 26.4%
New Jersey ........................................... 7.0
Florida .............................................. 6.3
Michigan ............................................. 5.4
Georgia .............................................. 4.4
New York ............................................. 4.3
North Carolina ....................................... 4.1
Oklahoma ............................................. 4.1
Illinois ............................................. 3.8
California ........................................... 3.7
South Carolina ....................................... 3.1
Minnesota ............................................ 2.7
Arizona .............................................. 2.5
Ohio ................................................. 2.1
Virginia ............................................. 2.1
Maryland ............................................. 1.6
Other (33 states) ..................................... 16.4
----------
Total ............................................ 100.0%
==========
Since the Company's inception in 1989, the percentage of finance
receivables from obligors who are located in Texas has decreased from 100% to
26.4% at January 31, 1996, and the number of states in which obligors are
located has increased from one to 49 states. This is primarily the result of
the Company opening additional full service branch offices in areas of the
country outside Texas. Management believes opportunities exist to expand its
current business by opening additional full service offices in new markets
where management believes there is a strong demand for the Company's services
and where the Company is able to hire marketing and managerial executives
with specialized expertise in the industries served by the Company. In each
new market, the Company intends to focus on equipment and machinery that is
easily transportable, has relatively low real depreciation, low obsolescence
and broad resale markets.
ORIGINATING, STRUCTURING AND UNDERWRITING OF FINANCE RECEIVABLES
The Company originates finance receivables in several ways. Dealers and,
to a lesser extent, manufacturers of equipment may refer their customers
(users of equipment) to the Company, or such customers may directly approach
the Company to finance equipment purchases. The Company also purchases
installment sales contracts, leases and personal property security agreements
from vendors who extend credit to purchasers of their equipment. The Company
also makes direct loans to equipment users collateralized by equipment
pursuant to personal property security agreements. In addition, the Company
purchases equipment from vendors and, simultaneously, leases it to users,
generally under non-cancelable leases. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--General." All of
the receivables created by these transactions are collectively called
"finance receivables." Unless otherwise indicated, the amounts of finance
receivables set forth in this Prospectus are reflected net of dealer and
other reserves and deferred finance charges (net of deferred acquisition
costs), but before allowance for possible losses on finance receivables.
The vendors with whom the Company seeks to establish these relationships tend
to be mid-sized, since the larger vendors typically generate a volume of
business which is greater than the Company can presently service with its
23
<PAGE>
existing financial resources. The Company is not obligated to purchase any
finance receivables from vendors nor are vendors obligated to sell any finance
receivables to the Company. Most of the vendors with whom the Company has
relationships also sell finance receivables to other financial institutions. The
Company presently does business with more than 100 vendors and is not dependent
on any single vendor. In all vendor generated business, the Company
independently approves the credit of the prospective obligor or lessee.
The Company originates financings typically ranging in amount from $30,000
to $1.0 million per transaction. During the six months ended January 31,
1996, the average finance receivable originated by the Company was
approximately $141,000. The Company typically does not provide financings of
less than $30,000, except in limited circumstances.
The Company attempts to structure financings to meet the financial needs
of its customers. Structuring includes determination of: whether the
financing will be an installment sale, lease or secured loan; term and
payment schedule; whether the financing provided will be funded immediately
or held available (possibly subject to conditions) for future use; finance or
interest rate and other fees and charges; the primary collateral, and
additional equipment collateral, if any, to be pledged, and the necessity of
additional credit support which may include, among other things, accounts
receivable, inventory, real property, certificates of deposit and/or
commercial paper, payment guarantees and full or partial recourse to the
selling vendor, if any.
A portion of the Company's business is the making of capital loans secured
by equipment. Customers seek such capital loans for numerous reasons,
including consolidation of obligations, working capital, reduction of monthly
debt service costs, enhancement of bonding capacity (generally in the case of
road contractors), and acquisition of additional equipment or other assets.
The Company may obtain, as additional collateral, a lien on the customer's
accounts receivable, inventory and real property. Such capital loans are
generally four to five years in term, and the documentation in connection
therewith generally contains prepayment premium provisions.
When a vendor seeks to sell a finance receivable to the Company or a user
seeks to obtain financing from the Company, an application for credit
(including cash flow and background information) is submitted to the Company
with respect to the obligor and any guarantors thereof along with a
description of collateral to be pledged or leased and its present or proposed
use. The Company's personnel analyze the credit application, investigate the
credit of the obligor and any guarantors thereof, and evaluate the primary
collateral to be pledged. The extent of such analysis depends upon, among
other things, the dollar amount of the proposed transaction, the obligor's
and any guarantors' financial strength, financial, trade and industry
references, and the obligor's payment history. The Company may also obtain
reports from independent credit reporting agencies and conduct lien,
litigation and tax searches. Unlike many of its competitors, the Company does
not use credit scoring models. The creditworthiness of obligors and
guarantors is evaluated on a case-by-case basis by the Company's credit
personnel and management. The primary pledged collateral and any additional
collateral are evaluated as to present and possible future resale value. If
the Company approves the credit application on terms acceptable to the vendor
and/or the obligor, and provided the intended purchaser/lessee acquires the
equipment, then the Company either purchases an installment sales contract or
lease from the vendor or enters into a direct finance or lease transaction
with the obligor, the proceeds of which are remitted when applicable to the
vendor. Funding occurs upon the receipt by the Company of all required
documentation in form and substance satisfactory to the Company and its legal
department. Under the Company's documentation, the obligor/lessee is
responsible for all sales, use and property taxes.
The Company maintains an operating environment which permits significant
flexibility to its managers in structuring financing transactions subject to the
Company's credit policies and procedures manual. The Company has established
credit policies and procedures which are periodically reviewed and updated,
which set forth detailed guidelines for credit review and approval, including
maximum credit concentrations with any one obligor which are based on the
Company's capital resources and other considerations. Each credit submission,
regardless of size, requires the approval of at least two credit officers. The
Company's credit policy provides three designations of credit officer authority
levels. A credit officer's authority level is based, among other things, on
his/her credit experience, managerial position and tenure with the Company. The
dollar amount that a credit officer can approve for a particular transaction, is
based upon the credit officer's authority level, collateral coverage relative to
the Company's potential lending exposure, and the extent of recourse, if any,
the Company may have to financially responsible vendors. Credit officers only
24
<PAGE>
have authority to approve credits up to their prescribed maximum level, and only
then if certain criteria have been met. Notwithstanding the foregoing, any
single obligor concentration in excess of $1.5 million requires the approval of
two senior credit officers, and in excess of $3.0 million, three senior credit
officers.
In addition to the obligor's/lessee's obligation to pay, on occasion
vendors provide the Company with full or partial recourse which, among other
things, obligates the vendor to pay the Company upon an obligor's default or
a breach of warranty with respect to the assignment of the finance receivable
to the Company by the vendor. In a small percent of cases when the Company
originates or acquires a finance receivable, it may withhold an agreed upon
amount from the vendor, obligor or lessee as security or obtain cash
collateral from an obligated party as security (sometimes called a "dealer
reserve"). The Company retains most of these dealer reserves until the
Company is required (pursuant to the applicable agreement), or deems it
appropriate, to release same. In most cases, the Company has the right to
charge the applicable dealer reserve for any delinquent payments due on any
finance receivable acquired from or originated through that vendor or
obligor. See "Business--Finance Receivables Portfolio and Credit Practices."
In purchasing a portfolio of finance receivables, the Company reviews and
analyzes the terms of the finance receivables to be purchased, the credit of
the related obligors, the documentation relating to such finance receivables
and the value of the related pledged collateral, the payment history of the
obligors/lessees and the implicit yield to be earned by the Company.
FINANCE RECEIVABLES PORTFOLIO AND CREDIT PRACTICES
The following table sets forth information concerning the Company's
finance receivables, before allowance for possible losses, at the dates or
for the periods indicated.
<TABLE>
<CAPTION>
At July 31, At January 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Finance receivables at beginning of period ..... $174,646 $210,169 $273,833 $273,833 $345,694
Finance receivables originated or acquired
(during period ended) ........................ 166,189 226,456 261,135 121,399 155,526
Finance receivables collected (during
period ended) ................................ 128,259 160,155 186,132 92,082 117,229
Finance receivables at end of period .......... 210,169 273,833 345,694 301,659 382,446
Average receivable outstanding (during
period ended) ................................ 189,000 237,400 312,300 287,000 363,000
Amount of finance receivables from single
largest obligor .............................. $ 3,424 $ 4,204 $ 4,674 $ 4,263 $ 4,483
As percentage of finance receivables ........ 1.6% 1.5% 1.4% 1.4% 1.2%
Aggregate amount of finance receivables
from ten largest obligors ................... $ 28,728 $ 30,118 $ 34,858 $ 31,921 $ 34,582
As percentage of finance receivables......... 13.7% 11.0% 10.1% 10.6% 9.0%
Average yield of average finance
receivables(1) .............................. 12.1% 10.8% 11.2% 11.2% 11.5%
Weighted average cost of borrowed funds(1) 5.7% 5.4% 6.9% 6.7% 6.4%
--------- ---------- ---------- ---------- ----------
Net interest spread(1) ........................ 6.4% 5.4% 4.3% 4.5% 5.1%
========= ========== ========== ========== ==========
Net interest margin(1) ........................ 7.9% 6.7% 6.0% 6.1% 6.2%
</TABLE>
- ------
(1) Annualized for the six-month periods.
Historically, a portion of the Company's receivables have been repaid
prior to their contractually scheduled maturities. The Company attributes
such prepayments to, among other things, its customers' selling of older or
unneeded equipment, acquisitions (particularly in the waste industry) and
customers' refinancing for rate or cash flow purposes.
25
<PAGE>
The Company's equipment leases generally grant an option to the lessee,
exercisable under certain conditions at maturity, to renew the lease or to
purchase the leased equipment. An option is typically exercised if a lease is
paid to maturity.
Delinquencies and Repossessions. Finance receivables are considered
delinquent whenever any payment or portion thereof is past due according to
the applicable contract terms. Delinquencies are cured when all delinquent
payments are brought current. The Company repossesses collateral typically
after the failure by an obligor to make payments and a determination by
management that it is probable that an obligor or the obligor's guarantor, if
any, cannot or will not honor their respective obligations to the Company.
Equipment which has been repossessed by the Company is generally disposed of
by private sale or at public auction in order to comply with the requirements
of the applicable Uniform Commercial Code. The obligor and any guarantors
thereof generally remain liable for any deficiency. Collection efforts are
continued against the obligor and any guarantors thereof when deemed
appropriate. The Company will generally seek to sell or lease such
repossessed equipment acquired by it at such public auctions and in
conjunction therewith, may provide financing for the purchaser or lessee. If,
in management's opinion, the finance receivable generated by such selling or
leasing is likely to be fully paid in accordance with its terms, such
receivable will accrue income. At January 31, 1996, finance receivables
generated by such selling or leasing of repossessed equipment represented
less than one percent of finance receivables at such date. Legal,
maintenance, repair, storage and other costs incurred in connection with a
repossession are expensed (and not capitalized) as incurred. Any recoupment
of such costs is applied as a reduction of expense. For the purpose of
determining delinquencies, the applicable contract terms are those in effect
after the grant of payment extensions, if any. See "--Finance Receivables and
Credit Practices--Extensions."
The following table sets forth information concerning the Company's
delinquencies, which may include repossessions, at the dates indicated.
<TABLE>
<CAPTION>
At July 31, At January 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of finance receivables as to
which any payments are past due:
61-90 days .................... $ 897 $1,422 $1,300 $1,531 $2,439
91-120 days ................... 782 190 527 405 1,181
Over 120 days ................. 2,346 1,244 192 488 423
------ ------ ------ ------ ------
Total .................... $4,025 $2,856 $2,019 $2,424 $4,043
====== ====== ====== ====== ======
Percentage of past due finance
receivables to finance receivables:
61-90 days .................... 0.4% 0.5% 0.4% 0.5% 0.7%
91-120 days ................... 0.4 0.1 0.1 0.1 0.3
Over 120 days ................. 1.1 0.4 0.1 0.2 0.1
------ ------ ------ ------ ------
Total .................... 1.9% 1.0% 0.6% 0.8% 1.1%
====== ====== ====== ====== ======
</TABLE>
Extensions. The Company from time to time may grant contractual extensions
to provide for deferrals of all or a portion of monthly payments. Customers
requesting an extension generally do so because of adverse weather
conditions, strikes or difficulty in collecting receivables from their
customers, among other reasons. Substantially all extensions involve
postponements of one to three monthly payments. The Company, prior to
granting an extension, will re-examine the customer's credit standing in
order to ascertain that the customer's cash flow problem is temporary in
nature. If the Company has recourse to a vendor on a contract to be extended,
the vendor is asked to approve such extension prior to grant even though the
Company may not be obligated to request such approval. Upon the granting of
extensions, the finance or interest rates charged by the Company to its
customers are rarely reduced and, in some cases, are increased. The Company
may also charge an extension and documentation fee and may obtain additional
collateral and/or third party guarantees. The Company does not grant
concessions to customers that the Company would not otherwise consider in the
ordinary course of its business with such customer.
26
<PAGE>
Non-Accrual Receivables. The Company's practice is to suspend accrual of
income on finance receivables (i) when a payment is more than 120 days past
due in accordance with the applicable contract terms, (ii) when the obligor
becomes the subject of a bankruptcy proceeding, (iii) when the collateral
securing the finance receivable is being liquidated, or (iv) sooner, when in
management's opinion full collection is doubtful. At that time, the finance
receivable is written down to its estimated net liquidation value (if less
than the carrying value), which estimate is periodically reviewed, at least
quarterly, and may, if appropriate in management's opinion, be further
written down. The Company may resume accrual of income on a finance
receivable if, in management's opinion, full collection is probable. Accrual
of income is not automatically suspended when the contractual terms of a
finance receivable are extended.
Obligors of some of the finance receivables as to which the Company has
suspended accruing income, may nevertheless be remitting payments (or others
may be remitting payments on their behalf) on a current basis and may not be
delinquent as to prior payments. Such payments are applied as follows: first,
to reduce the outstanding principal balance of the receivable; second, to
recoup any write-downs; third, to recoup expenses and costs; and, lastly, to
finance income. This situation arises generally when the finance receivable
is in default, even though payments are not past due, because the obligor is
the subject of a bankruptcy proceeding or the collateral securing the finance
receivable is being liquidated or a third party obligor has acquired from the
Company an item of equipment that the Company has repossessed. The following
table sets forth information concerning the Company's outstanding finance
receivables as to which it had suspended accruing income at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
For Six Months Ended
For Fiscal Year Ended July 31, January 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Finance receivables ..................... $210,169 $273,833 $345,694 $301,659 $382,446
Aggregate amount of finance
receivables as to which accrual of
income was suspended ................... $ 6,480 $ 4,239 $ 3,453 $ 2,259 $ 3,467
Percentage of finance receivables so
suspended to finance receivables ....... 3.1% 1.5% 1.0% 0.7% 0.9%
Percentage of finance receivables so
suspended which are not more than
60 days past due ....................... 44.9% 44.1% 80.0% 55.2% 50.8%
Income not accrued for the period ........ $ 937 $ 649 $ 483 $ 270 $ 255
</TABLE>
Provision for Possible Losses and Loss Experience. The Company charges
against income a general provision for possible losses on finance receivables
in such amounts as management deems appropriate. Case-by-case direct
write-downs of finance receivables are charged to the Company's allowance for
possible losses. The amount of such allowance is reviewed periodically (at
least quarterly) and consideration is given to present and anticipated
national and regional economic conditions, the status of the outstanding
finance receivables, the financial standing of obligors and vendors, and
other factors. The following table sets forth information concerning the
Company's allowance for possible losses on finance receivables and its loss
experience for the periods indicated. The Company does not use any standard
formula or percent in determining the amount of such allowance.
27
<PAGE>
<TABLE>
<CAPTION>
For Six Months Ended
For Fiscal Year Ended July 31, January 31,
-------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for possible losses at
beginning of period ................ $ 2,829 $4,024 $5,191 $5,191 $6,395
Provision for possible losses ....... 1,800 1,475 1,450 705 820
Charge-offs during period ........... (1,169) (792) (914) (379) (380)
Amounts recovered during period ...... 564 484 668 308 464
------- ------- -------- -------- --------
Net charge-offs ..................... (605) (308) (246) (71) 84
------- ------- -------- -------- --------
Allowance for possible losses at end
of period .......................... $ 4,024 $5,191 $6,395 $5,825 $7,299
======== ======= ======== ======== ========
Percentage of allowance for possible
losses to finance receivables at
end of period ...................... 1.9% 1.9% 1.9% 1.9% 1.9%
Percentage of net charge-offs to
average finance receivables
(annualized for the six-month
periods) ........................... 0.31% 0.13% 0.08% 0.05% (0.05%)
</TABLE>
COLLECTION AND SERVICING
The Company collects and services all of its finance receivables. Customer
payments are remitted to, and processed in, the Houston office. Collection
efforts in connection with delinquent accounts, however, are handled by the
collection personnel and managers in the various branch offices in
conjunction with senior management and, if necessary, the Company's legal
department. All past due accounts are reviewed by senior management at least
monthly, and all accounts which are past due more than 60 days are
continually reviewed by the Company's in-house legal staff. The decision to
repossess collateral is made by the Company's senior management in
conjunction with its legal staff. The Company determines, on a case-by-case
basis, whether or not to use an outside source to repossess an item of
collateral. Sale or other disposition of repossessed collateral is determined
by the Company's senior management and legal staff in accordance with
applicable law.
COMPETITION
The Company's business is highly competitive, and the Company competes
with banks, manufacturer-owned finance and leasing companies, independent
finance and leasing companies and other financial institutions. Some of those
competitors may be better positioned than the Company to market their
services and financing programs to vendors and users of equipment because of
their ability to offer additional services and products, and more favorable
rates and terms. Many of these competitors have longer operating histories
and possess greater financial and other resources than the Company. In
addition, some of these competitors have sources of funds available at a
lower cost than those available to the Company, thereby enabling them to
provide financing at rates lower than the Company may be willing to provide.
The Company typically does not compete primarily on the basis of rate. The
Company competes by emphasizing a high level of equipment and financial
expertise, customer service, flexibility in structuring financing
transactions and significant management involvement in customer
relationships.
EMPLOYEES
At March 15, 1996, the Company had 116 employees, of whom 35 were engaged
primarily in marketing, including the development of new business, 25 were
engaged primarily in credit investigation and collection, 30 were engaged in
accounting, financial and legal areas and the remainder were engaged in
executive, administrative and clerical functions. All of the Company's employees
and officers, except Bernard G. Palitz, are salaried. The Company provides its
employees with group health and life insurance benefits and a qualified 401(k)
plan. The Company does not match employee contributions to the 401(k) plan. The
Company does not have any collective bargaining, employment, pension, incentive
28
<PAGE>
compensation arrangements or non-solicitation agreements with any of its
employees other than its stock option plan (which contains a non-solicitation
provision) and deferred compensation agreements. See "Management-Stock Option
Plan." Employees who have participated in the Company's stock option plan have,
among other things, agreed not to solicit customers of the Company for 90 days
following termination of their employment. The Company considers its relations
with its employees to be satisfactory.
LITIGATION
In the ordinary course of business, the Company becomes involved, as
plaintiff or defendant, in various bankruptcy and legal proceedings relating
to the collection of finance receivables, repossession of collateral and
foreclosure on liens or arising out of its activities as an employer, an
owner or lessor of property, a purchaser of goods and services or other
matters, none of which, individually or in the aggregate, to date has had or
is presently expected to have a material adverse effect on the Company.
REGULATION
The Company's commercial finance activities are generally not subject to
regulation, except that certain states may regulate motor vehicle
transactions, impose licensing requirements, and/or restrict the amount of
interest or finance rates and other amounts that the Company may charge its
customers. Failure to comply with such regulations can result in loss of
principal and interest or finance charges, penalties and imposition of
restrictions on future business activities. Even though the Company does not
originate consumer finance transactions, which are subject to extensive state
and federal regulation, the Company could, if it purchased a portfolio which
contained such consumer transactions, be deemed to be subject to some or all
of such consumer finance regulations.
PROPERTIES
The Company's executive offices are located at 400 Park Avenue, New York, New
York and consist of approximately 6,500 square feet of space. As of March 31,
1996, the Company has full service offices (which perform credit analysis and
approval, collection and marketing functions) in Houston, Texas; Westmont,
Illinois; Teaneck, New Jersey; Hilton Head, South Carolina; and Charlotte, North
Carolina, which generally consist of between approximately 2,000 and 4,500
square feet of space (except for Houston, which consists of approximately 12,500
square feet) and are occupied pursuant to leases which expire on various dates
through 2003. The Houston office is the operating headquarters of Credit. Future
minimum rental commitments under such leases are set forth in Note F to the
consolidated financial statements included in this Prospectus. Management
believes that the Company's existing facilities are suitable and adequate for
their present and proposed uses and that suitable and adequate facilities will
be available on reasonable terms for any additional offices which the Company
may open.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of
FFC, their ages and the positions held by them with FFC.
<TABLE>
<CAPTION>
Name Age Positions Held
----- --- --------------
<S> <C> <C>
Bernard G. Palitz ....... 71 Chairman of the Board and Director
Clarence Y. Palitz, Jr. . 65 Chief Executive Officer, President and Director
Paul Sinsheimer ......... 48 Executive Vice President and Director
Michael C. Palitz ....... 37 Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
William M. Gallagher .... 46 Senior Vice President
Troy H. Geisser ......... 34 Senior Vice President and Secretary
Fred K. Hochman ......... 49 Senior Vice President
Richard W. Radom ........ 47 Senior Vice President
Lawrence B. Fisher ...... 57 Director
William C. MacMillen, Jr. . 82 Director
</TABLE>
The business experience of each of FFC's directors and executive officers
during at least the past five years is set forth below.
Bernard G. Palitz has served as Chairman of the Board and a director of
FFC since its inception in 1989. From 1963 to 1988, Mr. Palitz served as
Chairman of the Board and Chief Executive Officer of Commercial Alliance
Corporation ("CAC"), which he founded with his brother, Clarence Y. Palitz,
Jr., in 1963. Mr. Palitz has announced his retirement as Chairman effective
July 31, 1996; however, he will continue as a director of the Company.
Clarence Y. Palitz, Jr. has served as Chief Executive Officer, President
and a director of FFC since its inception in 1989. From 1963 to 1988, Mr.
Palitz served as President and a director of CAC, which he founded with his
brother, Bernard G. Palitz, in 1963. Since October 1988, he has been a
director of City and Suburban Financial Corp., a privately owned savings and
loan holding company located in New York, New York.
Paul Sinsheimer has served as Executive Vice President and a director of
FFC since its inception in 1989. Mr. Sinsheimer has also served as Chief
Operating Officer of Credit and Commercial since 1992. From 1970 to 1989, Mr.
Sinsheimer was employed by CAC, where he served successively as Credit
Manager, Collections Manager, Operations Manager, Houston Branch Manager,
Division Manager and, from 1988, as Executive Vice President.
Michael C. Palitz has served as Executive Vice President of FFC since July
1995. Mr. Palitz served as Senior Vice President of FFC since February 1992
and served as a Vice President of FFC from its inception in 1989 to February
1992. He has also served as Chief Financial Officer, Treasurer and Assistant
Secretary of FFC since its inception in 1989. From 1985 to 1989, Mr. Palitz
was an Assistant Vice President of Bankers Trust Company and, from 1980 to
1983, he was an Assistant Secretary of Chemical Bank.
William M. Gallagher has served as Senior Vice President of FFC since 1990
and served as a Vice President of FFC from its inception in 1989. From 1973
to 1989, Mr. Gallagher was employed by CAC, where he served successively as
Collections Manager, Accounting Manager, Operations Manager of the Chicago
and Houston regions and, from 1988, as a Vice President and Houston Branch
Manager.
Troy H. Geisser has served as Senior Vice President and Secretary of FFC
since February 15, 1996. From 1990 to 1996, Mr. Geisser held several
positions, including Vice President and Branch Manager of the Teaneck, New
Jersey office of Credit. From 1986 to 1990, Mr. Geisser held several
positions including Division Counsel for the Northern Division of Orix Credit
Alliance, Inc. (the successor to CAC).
30
<PAGE>
Fred K. Hochman has served as Senior Vice President of FFC and President
of the Machine Tool Division, a division of Credit, since 1992. Mr. Hochman
was the founder and chairman of National Machine Tool Finance, a wholly-owned
subsidiary of U.S. Bancorp, from 1981 to 1991.
Richard W. Radom has served as Senior Vice President of FFC since 1990 and
served as a Vice President of FFC from 1989. From 1973 to 1989, Mr. Radom was
employed by CAC, where he served, from 1986, as Senior Vice President.
Lawrence B. Fisher has served as a director of FFC since February 1992.
Mr. Fisher has been a partner in the law firm of Orrick, Herrington &
Sutcliffe since December 1995 and was a partner of Kelley Drye & Warren, a
law firm, for more than five years prior to December 1995. Mr. Fisher is a
director of National Bank of New York City, a privately owned commercial
bank.
William C. MacMillen, Jr. has served as a director of FFC since 1989. Mr.
MacMillen served as a director of CAC from 1963 to 1984, and he is presently
a director of Republic New York Corporation and Republic National Bank of New
York.
The term of office of each director ends when his successor has been
elected at the annual meeting of stockholders and qualified or upon his
removal or resignation. The term in office of each executive officer ends
when his successor has been elected by the Board at any time in its
discretion and qualified or upon his removal or resignation.
FFC has a policy of paying directors who are not employees or officers of
FFC $300 for each meeting of the Board attended and of reimbursing directors
for all expenses incurred in connection with travelling to and from meetings.
Directors who are officers of FFC are not entitled to any additional
compensation as such.
Bernard G. Palitz and Clarence Y. Palitz, Jr. are brothers. Michael C.
Palitz is the son of Clarence Y. Palitz, Jr.
COMMITTEES OF THE BOARD
The Board has an Executive Committee. The Executive Committee can exercise
all of the powers of the Board between meetings of the Board. The present
members of the Executive Committee are Messrs. B.G. Palitz, C.Y. Palitz, Jr.
and MacMillen.
In addition, the Board has an Audit Committee which consists of three
directors, at least two of whom cannot be officers or employees of the
Company. The Audit Committee is responsible for the engagement of the
Company's independent auditors and will review with them the scope and timing
of their audit services and any other services they are asked to perform,
their report on the Company's financial statements following completion of
their audit and the Company's policies and procedures with respect to
internal accounting and financial controls. The present members of the Audit
Committee are Messrs. Fisher, MacMillen and C.Y. Palitz, Jr.
The Board also has an Executive Compensation Committee which consists of
three directors. The Executive Compensation Committee is responsible for
approving appointments, promotions and fixing salaries of executives of the
Company between meetings of the full Board. All actions of the Executive
Compensation Committee must be ratified by the Board within six months in
order to remain effective. The present members of the Executive Compensation
Committee are Messrs. Fisher, Sinsheimer and C.Y. Palitz, Jr.
Additionally, the Board has a Stock Option Committee, which consists of
two directors. The Stock Option Committee is responsible for administering
the Stock Option Plan, including the granting, modification and cancellation
of options to purchase the Common Stock granted thereunder. The present
members of the Stock Option Committee are Messrs. MacMillen and C.Y. Palitz,
Jr.
31
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities paid to the Chief
Executive Officer and to the Company's officers who were, at July 31, 1995,
executive officers of the Company.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
-------------- --------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Options (#) Compensation(1)
------------------------------------- -------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Bernard G. Palitz
Chairman of the Board and Director 1995 $178,416 0
1994 164,754 0
1993 139,756 12,000
Clarence Y. Palitz, Jr.
Chief Executive Officer, President
and Director ................. 1995 178,416 0
1994 164,754 0
1993 139,585 0
Paul Sinsheimer
Executive Vice President and
Director ..................... 1995 269,651 0
1994 247,249 21,750(2)
1993 226,052 8,250 $839,952
Michael C. Palitz
Executive Vice President, Chief
Financial Officer and Treasurer 1995 143,750 0
1994 140,179 27,750(2)
1993 367,835(3) 17,250
William M. Gallagher
Senior Vice President .......... 1995 160,966 0 15,562
1994 142,467 15,750(2) 125,527
1993 127,441 5,250
Troy H. Geisser
Senior Vice President and Secretary 1995 109,500 0
1994 98,400 7,500(2)
1993 87,400 3,000
Fred K. Hochman
Senior Vice President .......... 1995 177,417 0
1994 176,583 15,750(2)
1993 138,111 7,500
Richard W. Radom
Senior Vice President ............. 1995 193,084 0 10,000
1994 180,800 15,750(2)
1993 163,552 5,250
</TABLE>
- ------
(1) Represents non-cash compensation recognized pursuant to the Internal
Revenue Code of 1986, as amended, from the sale of stock, acquired
through exercise of incentive stock options, within one year of such
exercise.
(2) The amounts shown for these individuals include the grant, in fiscal
1994, of replacement options which modified the price and term of the
options issued in fiscal 1993.
(3) Includes deferred compensation from prior years paid during fiscal 1993
to Mr. M.C. Palitz.
32
<PAGE>
STOCK OPTION PLAN
In September 1989, the Company adopted the Stock Option Plan. The purpose
of the Stock Option Plan is to enable the Company to provide additional
incentives to the Company's officers, directors and employees to advance the
interests of the Company by giving them an opportunity to participate in an
increase in the market value of the Common Stock. The Stock Option Plan
provides for the grant of stock options that are either "incentive" or
"non-qualified" for federal income tax purposes. "Incentive" stock options
are expected to satisfy the requirements of Section 422A of the Internal
Revenue Code of 1986, as amended, and, accordingly, no "incentive" stock
options may be granted to directors of the Company who are not also employees
of the Company.
The Stock Option Plan, as amended, which provides for the issuance of up
to a maximum of 1,500,000 shares of Common Stock (subject to adjustment
pursuant to customary anti-dilution provisions), is administered by the Stock
Option Committee of the Board (the "Committee"). The number of shares of
Common Stock as to which stock options will be granted to any officer,
director or employee will be determined by the Committee based upon such
factors as it may deem to be relevant, such as previous and anticipated
contributions to, and duration of employment with, the Company.
The exercise price per share of a stock option is established by the
Committee in its discretion, but may not be less than the fair market value
(or not less than 110% of such value if the individual to whom an "incentive
stock option is granted owns, as of the date of grant, shares of the
Company's capital stock possessing 10% or more of the total voting power of
all outstanding shares of the Company's capital stock) of a share of Common
Stock as of the date of grant. The aggregate fair market value (determined as
of the date of grant) of shares of Common Stock with respect to which
"incentive" stock options are exercisable for the first time by an individual
to whom an "incentive" stock option is granted during any calendar year
(under "incentive" stock option plans of the Company) may not exceed
$100,000. Payment for shares of Common Stock purchased upon the exercise of
stock options may be made only in cash or by check.
Stock options may be exercisable (subject to such restrictions and vesting
provisions as the Committee may determine on the date of grant in its
discretion) in part from time to time or in whole at any time after full
vesting for a period not to exceed five years, in the case of both
"non-qualified" stock options and "incentive" stock options, from the date of
grant and terminate upon the date of termination of employment or, in the
case of a director who is not also an employee, association with the Company
for a reason other than death (in which event such stock options terminate
six months thereafter). Such period is established by the Board in its
discretion on the date of grant. Stock options are not transferable except
upon death (in which case they may be exercised by the decedent's executor or
other legal representative). The Stock Option Plan (but not stock options
then outstanding under the Plan) terminates in September 1999 or on such
earlier date as the Committee may determine in its discretion.
33
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION VALUES
The following table sets forth information with respect to previously
granted options which were exercised in fiscal 1995 or which remain
outstanding at the end of fiscal 1995 for the executive officers listed in
the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of
Shares Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options Held In-the-Money Options
Exercise (#) Realized at July 31, 1995 (#) At July 31, 1995 (1)
------------- ------------- -------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Bernard G. Palitz ..... 0 0 6,000 6,000 $5,000 $ 5,000
Clarence Y. Palitz, Jr.. 0 0 0 0 0 0
Paul Sinsheimer ....... 0 0 0 21,750 0 54,375
Michael C. Palitz ..... 0 0 0 27,750 0 69,375
William M. Gallagher .. 0 0 0 15,750 0 39,375
Troy H. Geisser ....... 15,000 $113,700(2) 0 7,500 0 18,750
Fred K. Hochman ....... 0 0 0 15,750 0 39,375
Richard W. Radom ...... 0 0 0 15,750 0 39,375
</TABLE>
- ------
(1) Only the value of unexercised, in-the-money options are reported. Value
is calculated by (i) subtracting the total exercise price per share from
the fiscal year-end value of $11.83 per share and (ii) multiplying by the
number of shares subject to the option. Options that have an exercise
price greater than the fiscal year-end value are not included in the
value calculation.
(2) Represents the difference between the closing price of the Common Stock
on the date exercised and the exercise price of the options, multiplied
by the number of shares subject to the exercised option.
34
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock, the only class of capital stock of the Company
of which shares will be outstanding after the offering, on a comparative
basis, as of March 15, 1996 and as adjusted to reflect the sale of Common
Stock offered hereby (in each case) by (i) all persons who beneficially own,
to the knowledge of the Company, 5% or more of the Common Stock, (ii) each
director of the Company individually, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Percentage of
or Number of Persons in Group (1) Ownership
------------------------------------- Number of Shares ------------------------
Beneficially Before After
Owned (2) Offering Offering
---------------- ---------- ----------
<S> <C> <C> <C>
Clarence Y. Palitz, Jr.(3) .......... 2,757,750 31.5% 26.4%
Bernard G. Palitz(4) ................ 1,449,982 17.0% 14.2%
Putnam Investments, Inc.(5) ......... 1,010,016 12.3% 12.5%
1 Post Office Square ...............
Boston, MA 02109 ...................
Michael C. Palitz(6) ................ 374,388 4.5% 3.7%
Paul Sinsheimer(7) .................. 328,937 3.9% 3.3%
William M. Gallagher(8) ............. 76,439 * *
Richard W. Radom(9) ................. 75,188 * *
William C. MacMillen, Jr.(10) ....... 37,500 * *
Troy H. Geisser(11) ................. 10,875 * *
Fred K. Hochman(12) ................. 3,938 * *
Lawrence B. Fisher(13) .............. 7,500 * *
All directors and officers as a group
(10 persons) ........................ 5,122,497 54.6% 46.2%
</TABLE>
- ------
* Represents beneficial ownership of less than 1%.
(1) The address of each person listed, unless otherwise indicated, is 400
Park Avenue, New York, New York 10022.
(2) As used in this table "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the
disposition of any security. A person is deemed as of any date to have
"beneficial ownership" of any security that such person has a right to
acquire within 60 days after such date. Any security that any person
named above has the right to acquire within 60 days is deemed to be
outstanding for purposes of calculating the ownership percentage of such
person but is not deemed to be outstanding for purposes of calculating
the ownership percentage of any other person. Unless otherwise noted,
each person listed has the sole power to vote, or direct the voting of,
and power to dispose, or direct the disposition of, all of such shares.
(3) Consists of (i) warrants to purchase 135,000 shares of Common Stock held
by Mr. C. Y. Palitz, Jr. (ii) 2,210,250 shares of Common Stock and
warrants to purchase 375,000 shares of Common Stock held by a limited
partnership, the general partner of which is a corporation owned and
controlled by Mr. C.Y. Palitz, Jr., (iii) 18,750 shares of Common Stock
held by such corporation, and (iv) 18,750 shares of Common Stock held by
Mr. C. Y. Palitz, Jr.'s wife, as to which shares Mr. C.Y. Palitz, Jr.
disclaims beneficial ownership.
(4) Consists of (i) 1,062,982 shares of Common Stock owned by Mr. B.G.
Palitz, (ii) warrants to purchase 150,000 shares of Common Stock and
incentive stock options to purchase 12,000 shares of Common Stock, held
by Mr. B.G. Palitz, (iii) warrants to purchase 135,000 shares of Common
Stock held by a corporation owned by Mr. B.G. Palitz's children and over
which Mr. B.G. Palitz has control, as to which shares Mr. B.G. Palitz
disclaims beneficial ownership, (iv) 33,750 shares of Common Stock held
by Mr. B.G. Palitz's wife, as to which shares Mr. B.G. Palitz disclaims
beneficial ownership, (v) 18,750 shares of Common Stock held by a Keogh
plan established for Mr. B.G. Palitz's benefit and of which he is the
trustee and (vi) 37,500 shares owned by a charitable foundation over
which Mr. B.G. Palitz has control.
35
<PAGE>
(5) The percentage ownership after the Offering includes approximately
230,000 shares of Common Stock expected to be purchased by Putnam
Investments, Inc. in the Offering, resulting in a total of 1,240,016
shares to be beneficially owned by Putnam Investments, Inc. after the
Offering. The information which has been provided to the Company with
respect to the address of and beneficial ownership by such person has
been provided as of December 31, 1995.
(6) Consists of (i) 224,600 shares of Common Stock and warrants to purchase
75,000 shares of Common Stock held by a corporation owned and controlled
by Mr. M.C. Palitz, (ii) options and warrants to purchase 74,438 shares
of Common Stock held by Mr. M.C. Palitz, (iii) 150 shares of Common
Stock held by Mr. M.C. Palitz's wife, as to which shares Mr. M.C. Palitz
disclaims beneficial ownership and (iv) 100 shares held by each of Mr.
M.C. Palitz's two children.
(7) Consists of (i) 187,500 shares of Common Stock owned by Mr. Sinsheimer
and (ii) options and warrants to purchase 141,437 shares of Common
Stock.
(8) Consists of (i) 60,000 shares of Common Stock owned by Mr. Gallagher and
(ii) options and warrants to purchase 16,439 shares of Common Stock.
(9) Consists of (i) 71,250 shares of Common Stock owned by Mr. Radom and
(ii) options to purchase 3,938 shares of Common Stock.
(10) Consists of (i) 22,500 shares of Common Stock owned by Mr. MacMillen and
(ii) options to purchase 15,000 shares of Common Stock held by Mr.
MacMillen.
(11) Consists of (i) 9,000 shares of Common Stock owned by Mr. Geisser and
(ii) options to purchase 1,875 shares of Common Stock.
(12) Consists of options to purchase 3,938 shares of Common Stock.
(13) Consists of options to purchase 7,500 shares of Common Stock.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $.50 per share, and 500,000 shares of Preferred
Stock, par value $1.00 per share. As of April 15, 1996, 8,234,622 shares of
Common Stock were outstanding. After giving effect to the sale of the shares
of Common Stock offered hereby, there will be 9,934,622 shares of Common
Stock outstanding (10,189,622 shares if the Underwriters' over-allotment
option is exercised in full).
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share
on all matters submitted to a vote at a meeting of stockholders. Each
stockholder may exercise such vote either in person or by proxy. Stockholders
are not entitled to cumulate their votes for the election of directors, which
means that the holders of more than 50% of the Common Stock voting for the
election of directors can elect all of the directors to be elected by holders
of Common Stock, in which event the holders of the remaining Common Stock
voting will not be able to elect any director. Subject to preferences to
which holders of Preferred Stock issued after the sale of the Common Stock
offered hereby may be entitled, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by the Board out of funds legally available therefor. The Company does not
presently anticipate paying cash dividends in the foreseeable future. See
"Price Range of Common Stock and Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company which are
legally available for distribution to stockholders, subject to the prior
rights on liquidation of creditors and to preferences to which holders of
Preferred Stock issued after the sale of the Common Stock offered hereby may
be entitled. The holders of Common Stock have no preemptive, subscription,
redemption or sinking fund rights. The Common Stock currently outstanding,
and the Common Stock offered hereby, is and will be validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Board has the authority to issue the Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
prices and liquidation preferences, and the number of shares constituting and
the designation of any such series, without further vote or action by the
stockholders. At present, the Company has no plans to issue any of the
Preferred Stock and is not aware of any pending or proposed transaction that
would be affected by such an issuance.
CERTAIN EFFECTS OF AUTHORIZED AND UNISSUED STOCK
There will be, at the time of the sale of the Common Stock offered hereby,
12,787,253 unissued and unreserved shares of Common Stock (12,532,253 shares
if the Underwriters' over-allotment option is exercised in full) and 500,000
unissued and unreserved shares of Preferred Stock. These additional shares
may be issued for a variety of proper corporate purposes, including future
public or private offerings to raise additional capital or facilitate
acquisitions. The Company does not presently intend to issue additional
shares of Common Stock or Preferred Stock (other than in connection with the
Stock Option Plan or upon the exercise of outstanding warrants).
One of the effects of the existence of unissued and unreserved shares of
Common Stock and Preferred Stock may be to enable the Board to discourage an
attempt to change control of the Company (by means of a tender offer, proxy
contest or otherwise) and thereby to protect the continuity of the Company's
management. If, in the due exercise of its fiduciary duties, the Board
determined that an attempt to change control of the Company was not in the
Company's best interest, the Board could authorize, without having to obtain
approval of the stockholders, the issuance of such shares in one or more
transactions that might prevent or render more difficult the completion of such
attempt. In this regard, the Board has the authority to establish the rights and
preferences of the authorized and unissued shares of Preferred Stock, one or
more series of which could be issued entitling the holders thereof to vote
37
<PAGE>
separately as a class or to cast a proportionately larger vote than the holders
of shares of Common Stock on any proposed action, to elect directors having
terms of office or voting rights greater than the terms of office or voting
rights of other directors, to convert shares of Preferred Stock into a
proportionately larger number of shares of Common Stock or other securities of
the Company, to demand redemption at a specified price under prescribed
circumstances related to such a change or to exercise other rights designed to
impede such a change. The issuance of shares of Preferred Stock, whether or not
related to any attempt to effect such a change, may adversely affect the rights
of the holders of shares of Common Stock.
CERTAIN CHARTER PROVISIONS
Under Nevada law, directors of a Nevada corporation can generally be held
liable for certain types of negligence and other acts and omissions in
connection with the performance of their duties to the corporation and its
stockholders. As permitted by Nevada law, however, the Company's Articles of
Incorporation contain a provision eliminating the liability of the Company's
directors for monetary damages for breaches of their duty of care to the
Company and the stockholders, except as described below.
Such provision does not eliminate liability for (i) breaches of the duty
of loyalty to the Company and the stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) transactions from which improper personal benefit is derived and
(iv) unlawful declaration of dividends or repurchases or redemptions of
shares of the Company's capital stock. Such provision applies to officers
only if they are directors and are acting in their capacity as directors.
Although the issue has not been determined by any court, such provision would
probably have no effect on claims arising under federal securities laws. Such
provision does not eliminate the duty of care, but only eliminates liability
for monetary damages for breaches of such duty under various circumstances.
Accordingly, such provision has no effect on the availability of equitable
remedies, such as an injunction or rescission, based upon a breach of the
duty of care. Equitable remedies may not, however, be wholly effective to
remedy the injury caused by any such breach.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
38
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of
9,934,622 shares of Common Stock outstanding (10,189,622 if the Underwriters'
over-allotment option is exercised in full). Of these shares, 5,927,672
shares (6,182,672 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or
registration under the Securities Act by persons other than "affiliates" of
the Company, as defined under the Securities Act. The remaining 4,006,950
shares of Common Stock outstanding upon completion of the offering will be
"restricted shares" as that term is defined by Rule 144 as promulgated under
the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of
the Company, would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of one percent of the number of
shares of Common Stock then outstanding or the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements, and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least three years, would be entitled to
sell such shares under Rule 144(k) without regard to the requirements
described above.
Under Rule 144 (and subject to the conditions thereof), all the restricted
shares will be eligible for sale upon completion of this offering. The
Company and its executive officers and directors, who in the aggregate will
hold 3,975,932 shares of Common Stock upon completion of the offering, have
agreed that they will not directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any options to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company, or any
securities convertible into, or exercisable or exchangeable for, any shares
of Common Stock or other capital stock of the Company without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, for a period of 90 days (120 days in the case of the Company)
after the date of the Prospectus.
No prediction can be made as to the effect, if any, that the sales of the
Common Stock or the availability of such shares for sale in the public market
will have on the market price for the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock in the
public market after the restrictions described above lapse, could adversely
affect prevailing market prices for the Common Stock and impair the ability
of the Company to raise capital through an offering of its equity securities
in the future.
39
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and NatWest Securities Limited are acting as
representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth below
opposite their respective names.
Number
Underwriter of Shares
-----------
Prudential Securities Incorporated ............................ 739,500
NatWest Securities Limited .................................... 739,500
Credit Lyonnais Securities (USA) Inc. .......................... 34,000
Dresdner Securities Inc. ...................................... 34,000
A.G. Edwards & Sons, Inc. ..................................... 34,000
Montgomery Securities ......................................... 34,000
PaineWebber Incorporated ...................................... 34,000
Societe Generale Securities Corp. ............................. 34,000
Ladenburg, Thalmann & Co. Inc. ................................ 17,000
-----------
Total ....................................................... 1,700,000
===========
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are
purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $0.55 per share;
and that such dealers may reallow a concession of $0.10 per share to certain
other dealers. After the public offering, the offering price and the
concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase, up to 255,000 additional
shares of Common Stock at the public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The option granted to the Underwriters may only be exercised for the purpose
of covering over-allotments incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option to purchase is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the preceding table bears
to 1,700,000.
The Company has agreed to indemnify the several Underwriters or contribute
to losses arising out of certain liabilities, including liabilities under the
Securities Act.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United
States, its territories or possessions, or to person who are citizens thereof
or residents therein. The Underwriting Agreement does not limit sale of the
Common Stock offered hereby outside of the United States.
NatWest Securities Limited has represented and agreed that (i) it has not
offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986 (the "Act"),
(ii) it has complied and will comply with all applicable provisions of the
Act with respect to anything done by it in relation to the shares of Common
Stock in, from or otherwise involving the United Kingdom, and (iii) it has
only issued or passed on, and will only issue or pass on, in the United
Kingdom any document received by it in connection with the issue of the
shares of Common Stock, other than any document which consists of or any part
of listing particulars, supplementary listing particulars, or any other
document required or permitted to be published by listing rules under Part IV
of the Act, to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom the document may otherwise lawfully be issued or
passed on.
40
<PAGE>
The Company and its executive officers and directors, who in the aggregate
will hold 3,975,932 shares of Common Stock upon the completion of the
offering, have agreed that, they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase
or otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the
Company, or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock or other capital stock of the Company without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, for a period of 90 days (120 days in the case of the
Company) from the date of this Prospectus, except (i) the granting of options
pursuant to the Stock Option Plan or the issuance of Common Stock pursuant to
options granted under such plan, (ii) shares of Common Stock transferred
pursuant to bona fide gifts, provided that the transferee agrees to be bound
by the terms of such lock-up agreement and (iii) by operation of law by will
or in accordance with the laws of descent and distribution.
NatWest Bank, N.A. is a lender to the Company under two separate $15
million revolving credit facilities and has received customary fees in
connection with such facilities. Prior to May 1, 1996, NatWest Bank, N.A. was
an affiliate of NatWest Securities Limited.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Orrick,
Herrington & Sutcliffe, located at 666 Fifth Avenue, New York, New York
10103. Lawrence B. Fisher, Esq., a partner of Orrick, Herrington & Sutcliffe,
is a director of the Company and holds options to purchase 7,500 shares of
Common Stock. Certain legal matters will be passed upon for the Underwriters
by Stroock & Stroock & Lavan, located at Seven Hanover Square, New York, New
York 10004.
EXPERTS
The consolidated financial statements of the Company at July 31, 1995 and
1994, and for each of the three years in the period ended July 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Eisner & Lubin, Certified Public Accountants, independent auditors, as set
forth in their reports thereon appearing herein and in the Registration
Statement and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
41
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT ....................................................... F-2
CONSOLIDATED BALANCE SHEET AS AT JULY 31, 1995 AND 1994 (AUDITED) AND JANUARY 31,
1996 (UNAUDITED) .................................................................. F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31, 1995,
1994 AND 1993 (AUDITED) AND THE SIX MONTHS ENDED JANUARY 31, 1996 AND 1995
(UNAUDITED)........................................................................ F-4
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED JULY 31, 1995, 1994 AND
1993 (AUDITED) AND THE SIX MONTHS ENDED JANUARY 31, 1996 AND 1995 (UNAUDITED) ..... F-5
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED JULY 31, 1995, 1994 AND
1993 (AUDITED) AND THE SIX MONTHS ENDED JANUARY 31, 1996 AND 1995 (UNAUDITED)...... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Financial Federal Corporation
We have audited the accompanying consolidated balance sheets of Financial
Federal Corporation and Subsidiaries as at July 31, 1995 and 1994, and the
related consolidated statements of stockholders' equity, operations and cash
flows for each of the three years in the period ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Financial Federal Corporation and Subsidiaries at July 31, 1995 and 1994,
and the consolidated operating results and cash flows for each of the three
years in the period ended July 31, 1995, in conformity with generally
accepted accounting principles.
EISNER & LUBIN
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
September 1, 1995
(Except for Note A(6)
which date is December 20, 1995)
F-2
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At July 31, At January 31, 1996
-------------------------------- -------------------
1994 1995 (Unaudited)
-------------- --------------
<S> <C> <C> <C>
A S S E T S
Cash ............................................... $ 2,805,000 $ 3,090,000 $ 2,761,000
-------------- -------------- -------------------
Finance receivables ................................ 273,833,000 345,694,000 382,446,000
Less allowance for possible losses ............... (5,191,000) (6,395,000) (7,299,000)
-------------- -------------- -------------------
Finance receivables -- net ......................... 268,642,000 339,299,000 375,147,000
-------------- -------------- -------------------
Other assets ....................................... 540,000 547,000 585,000
-------------- -------------- -------------------
TOTAL .......................................... $271,987,000 $342,936,000 $378,493,000
============== ============== ===================
L I A B I L I T I E S
Senior debt:
Short-term (includes commercial paper due to
related parties of $17,142,000 in 1994 and
$6,816,000 in 1995 and $8,540,000 at
January 31, 1996) .............................. $139,848,000 $ 99,270,000 $ 83,425,000
Long-term ........................................ 45,000,000 150,000,000 210,000,000
Accrued interest, taxes and other liabilities ...... 8,885,000 7,347,000 8,640,000
Senior subordinated note ........................... 15,000,000 15,000,000
Subordinated debentures ............................ 7,682,000 6,957,000 6,957,000
Deferred income taxes .............................. 5,049,000 6,287,000 6,917,000
-------------- -------------- -------------------
Total liabilities .............................. 221,464,000 284,861,000 315,939,000
-------------- -------------- -------------------
S T O C K H O L D E R S' E Q U I T Y
Preferred stock -- $1 par value, authorized 500,000
shares, none issued ...............................
Common stock -- $.50 par value, authorized 10,000,000
shares in 1994 and 1995 and 25,000,000 shares at
January 31, 1996, issued 5,532,000 shares in 1994,
5,580,000 in 1995 and 8,235,000 at January 31,
1996 ............................................. 2,766,000 2,790,000 4,117,000
Additional paid-in capital ......................... 32,882,000 33,201,000 32,684,000
Warrants -- 1,071,000 issued and outstanding ....... 29,000 29,000 29,000
Retained earnings .................................. 16,286,000 23,495,000 25,724,000
Treasury stock, at cost -- 96,000 shares ........... (1,440,000) (1,440,000)
-------------- -------------- -------------------
Total stockholders' equity ............... 50,523,000 58,075,000 62,554,000
-------------- -------------- -------------------
TOTAL .................................... $271,987,000 $342,936,000 $378,493,000
============== ============== ===================
</TABLE>
The notes to financial statements are made a part hereof.
F-3
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock - $.50 Par Value
------------------------------------------
Additional
Number of Paid-in Retained Treasury
Shares Par Value Capital Warrants Earnings Stock
----------- ------------ ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1992 .......... 4,818,000 $2,409,000 $28,556,000 $ 87,000 $ 5,374,000
Exercise of stock options .......... 3,000 2,000 20,000
Stock issued and exercise of stock
warrants in exchange for
subordinated debentures ........... 33,000 16,000 297,000 (2,000)
Net earnings ....................... 4,968,000
----------- ------------ ------------- ---------- -------------
Balance at July 31, 1993 ........... 4,854,000 2,427,000 28,873,000 85,000 10,342,000
Exercise of stock options .......... 234,000 117,000 1,357,000
Tax benefit relating to stock options 376,000
Exercise of stock warrants in exchange
for:
Cash .......................... 170,000 85,000 871,000 (21,000)
Subordinated debentures ....... 274,000 137,000 1,405,000 (35,000)
Purchase of common stock for treasury $(1,440,000)
Net earnings ....................... 5,944,000
----------- ------------ ------------- ---------- ------------- ------------
Balance at July 31, 1994 ........... 5,532,000 2,766,000 32,882,000 29,000 16,286,000 (1,440,000)
Exercise of stock options ........ 48,000 24,000 282,000
Tax benefit relating to stock options 37,000
Net earnings ....................... 7,209,000
----------- ------------ ------------- ---------- ------------- ------------
Balance at July 31, 1995 ........... 5,580,000 2,790,000 33,201,000 29,000 23,495,000 (1,440,000)
Retirement of treasury stock ....... (96,000) (48,000) (552,000) (840,000) 1,440,000
Exercise of stock options .......... 6,000 3,000 35,000
Three-for-two stock split .......... 2,745,000 1,372,000 (1,372,000)
Net earnings ....................... 4,441,000
----------- ------------ ------------- ---------- ------------- ------------
BALANCE AT JANUARY 31, 1996
(UNAUDITED)........................ 8,235,000 $4,117,000 $32,684,000 $ 29,000 $25,724,000 $ --
=========== ============ ============= ========== ============= ============
</TABLE>
The notes to financial statements are made a part hereof.
F-4
<PAGE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Year Ended July 31, Ended January 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Finance income:
Finance obligations ....... $14,357,000 $17,264,000 $24,654,000 $11,511,000 $14,265,000
Lease obligations ......... 8,554,000 8,602,000 10,297,000 4,564,000 6,651,000
------------- ------------- ------------- ------------- -------------
Total finance income . 22,911,000 25,866,000 34,951,000 16,075,000 20,916,000
Interest expense .......... 8,031,000 9,886,000 16,253,000 7,270,000 9,691,000
------------- ------------- ------------- ------------- -------------
Finance income before provision
for possible losses on
finance receivables .......... 14,880,000 15,980,000 18,698,000 8,805,000 11,225,000
Provision for possible losses on
finance receivables .......... 1,800,000 1,475,000 1,450,000 705,000 820,000
------------- ------------- ------------- ------------- -------------
Net finance income ... 13,080,000 14,505,000 17,248,000 8,100,000 10,405,000
Miscellaneous income ........... 15,000 130,000 130,000
Salaries and other expenses .... (5,170,000) (5,021,000) (5,806,000) (2,696,000) (3,276,000)
------------- ------------- ------------- ------------- -------------
Earnings before income taxes ... 7,925,000 9,484,000 11,572,000 5,534,000 7,129,000
Provision for income taxes ..... 2,957,000 3,540,000 4,363,000 2,077,000 2,688,000
------------- ------------- ------------- ------------- -------------
Net Earnings ................... $ 4,968,000 $ 5,944,000 $ 7,209,000 $ 3,457,000 $ 4,441,000
============= ============= ============= ============= =============
Earnings per common share:
Primary ................... $ 0.58 $ 0.69 $ 0.80 $ 0.39 $ 0.49
============= ============= ============= ============= =============
Fully diluted ............. $ 0.57 $ 0.69 $ 0.80 $ 0.38 $ 0.49
============= ============= ============= ============= =============
Average number of shares used:
Primary ................... 8,578,260 8,648,984 8,956,122 8,933,062 9,067,752
============= ============= ============= ============= =============
Fully diluted ............. 8,684,547 8,649,339 8,970,057 8,999,457 9,153,294
============= ============= ============= ============= =============
</TABLE>
The notes to financial statements are made a part hereof.
F-5
<PAGE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Year Ended July 31, Ended January 31,
---------------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings ......................... $ 4,968,000 $ 5,944,000 $ 7,209,000 $ 3,457,000 $ 4,441,000
Adjustments to reconcile net earnings to
net cash provided by operating
activities: .......................
Depreciation and amortization ..... 88,000 103,000 156,000 68,000 88,000
Provision for possible losses on finance
receivables ..................... 1,800,000 1,475,000 1,450,000 705,000 820,000
Amortization of deferred acquisition
costs ........................... 1,802,000 2,329,000 2,896,000 1,420,000 1,629,000
Deferred income taxes ............. 1,596,000 1,839,000 1,238,000 225,000 630,000
Gain on repurchase of subordinated
debenture ....................... (130,000) (130,000)
Decrease (increase) in other assets . 48,000 121,000 79,000 (97,000) (51,000)
Increase (decrease) in accrued
interest, taxes and other liabilities 1,167,000 3,030,000 (1,538,000) 23,000 1,293,000
--------------- --------------- --------------- --------------- --------------
Net cash provided by operating
activities ................. 11,469,000 14,841,000 11,360,000 5,671,000 8,850,000
--------------- --------------- --------------- --------------- --------------
Cash flows from investing activities:
Finance receivables:
Originated ........................ (166,189,000) (226,456,000) (261,135,000) (121,399,000) (155,526,000)
Collected ......................... 128,259,000 160,155,000 186,132,000 92,082,000 117,229,000
Payments for office furniture and
equipment ......................... (223,000) (127,000) (242,000) (178,000) (75,000)
--------------- --------------- --------------- --------------- --------------
Net cash (used in) investing
activities ................. (38,153,000) (66,428,000) (75,245,000) (29,495,000) (38,372,000)
--------------- --------------- --------------- --------------- --------------
Cash flows from financing activities:
Commercial paper:
Proceeds .......................... 71,650,000 89,847,000 127,245,000 70,503,000 58,583,000
Repayments ........................ (64,141,000) (82,592,000) (137,268,000) (72,473,000) (54,148,000)
Notes payable -- banks (net) ......... (765,000) 17,965,000 74,445,000 (3,990,000) 84,720,000
Term loans -- banks: .................
Proceeds .......................... 25,000,000 25,000,000 35,000,000 30,000,000
Repayments ........................ (5,000,000) (35,000,000) (45,000,000)
Repayment of senior subordinated note . (15,000,000)
Repurchase of subordinated debenture . (595,000) (595,000)
Proceeds from exercise of:
Stock options ..................... 22,000 1,474,000 306,000 204,000 38,000
Stock warrants .................... 935,000
Acquisition of treasury stock ........ (1,440,000)
Tax benefit relating to stock options . 376,000 37,000 37,000
--------------- --------------- --------------- --------------- --------------
Net cash provided by financing
activities ................. 26,766,000 51,565,000 64,170,000 23,686,000 29,193,000
--------------- --------------- --------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH ........ 82,000 (22,000) 285,000 (138,000) (329,000)
Cash -- beginning of period ............ 2,745,000 2,827,000 2,805,000 2,805,000 3,090,000
--------------- --------------- --------------- --------------- --------------
CASH -- END OF PERIOD .................. $ 2,827,000 $ 2,805,000 $ 3,090,000 $ 2,667,000 $ 2,761,000
=============== =============== =============== =============== ==============
Supplemental disclosures of cash flow
information: .........................
Interest paid ........................ $ 7,919,000 $ 9,787,000 $ 16,037,000 $ 7,135,000 $ 9,272,000
=============== =============== =============== =============== ==============
Income taxes paid .................... $ 1,796,000 $ 367,000 $ 3,807,000 $ 1,844,000 $ 1,745,000
=============== =============== =============== =============== ==============
</TABLE>
The notes to financial statements are made a part hereof.
F-6
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) Principles of Consolidation -- The consolidated financial statements
include the accounts of Financial Federal Corporation ("Financial") and its
subsidiaries, Financial Federal Credit Inc. ("Credit"), First Federal
Commercial Inc. ("Commercial") and Financial Federal Commercial Inc.
(collectively, the "Company"). Intercompany investments and advances have
been eliminated.
(2) Recognition of Income:
(a) Purchases are made of installment obligations receivable (conditional
sales contracts, chattel paper and other lien instruments) principally
arising out of the sale by others of income-producing and labor-saving
equipment. The Company also makes direct loans secured by equipment,
machinery and other assets.
For financial accounting purposes, the finance charges and costs related
to the acquisition of such installment obligations are deferred and amortized
over the terms of the receivables utilizing the "interest method" in
accordance with Statement of Financial Accounting Standards (SFAS) No. 91.
For income tax purposes, acquisition costs are charged to operations as
incurred.
(b) Purchases are also made of various types of income-producing and
labor-saving equipment which are leased to others under noncancelable
installment leases, generally subject to purchase options.
For financial accounting purposes, the leasing of equipment is treated as
a financing arrangement. The Company records as installment obligations
receivable the total rentals receivable during the initial term of the lease,
plus residual values equal to the smallest of (i) the amount to be received
if the lessee exercises its option, if any, to purchase the equipment, (ii)
the present value at the expiration of the initial lease term of rentals to
be received under renewal options, if any, or (iii) the estimated fair value
of the equipment at the expiration of the lease. The difference between such
recorded receivables and the cost of the equipment represents finance
charges. The finance charges and acquisition costs incurred are deferred and
amortized utilizing the "interest method" in accordance with SFAS No. 91.
For income tax purposes, certain leases are classified as operating leases
where amounts due are credited to rental income and depreciation is computed
on the related equipment at rates and lives in accordance with the Internal
Revenue Code.
(c) The Company suspends accrual of income on finance receivables if, in
management's opinion, full collection is doubtful. This typically occurs when
(i) a payment is more than 90 days past due in accordance with the applicable
contract terms, (ii) the obligor becomes the subject of a bankruptcy
proceeding or (iii) the finance receivable is being liquidated. At that time,
if appropriate in management's opinion, the finance receivable is written
down to its estimated net liquidation value, which estimate is periodically
reviewed, at least quarterly, and may, if appropriate in management's
opinion, be further written down. The Company may resume accrual of income on
a finance receivable if, in management's opinion, full collection is
probable.
The Company charges against income a general provision for possible losses
on finance receivables in such amounts as management deems appropriate.
Case-by-case direct write-downs and write-offs of finance receivables, net of
recoveries, are charged to the Company's allowance for possible losses. The
amount of such allowance is reviewed periodically in light of national and
regional economic conditions, the status of the outstanding finance
receivables, the financial standing of obligors and vendors and other
factors.
(3) Income Taxes -- Effective August 1, 1993, the Company adopted SFAS 109,
"Accounting for Income Taxes." SFAS 109 requires the recognition of deferred tax
assets and liabilities for the estimated future tax effects attributable to
temporary differences between the financial statement and tax bases of assets
and liabili ties and carryforwards utilizing enacted tax rates. Deferred tax
F-7
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Note A) -- Summary of Significant Accounting Policies: - (Continued)
expense or benefit represents the change during the year in the deferred tax
asset and liability balances. Previously, the Company accounted for income taxes
using Accounting Principles Board (APB) Opinion No. 11.
(4) Primary earnings per common share is computed based on the weighted
average number of common shares and common share equivalents assumed
outstanding during each period. Proceeds from exercise of warrants and
options have been assumed to be used to purchase treasury stock. Fully
diluted earnings per share includes, in addition to the above, the additional
dilutive effect, if any, of stock options and warrants from the utilization
of the end of year market price in determining the assumed purchase of
treasury stock.
(5) The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures," in the first
quarter of fiscal 1996. These standards require that impaired loans be
measured based on the present value of expected cash flows, discounted at the
loan's effective interest rate or, the loan's observable market price or, the
fair value of the collateral if the loan is collateral dependent. The
adoption of these statements did not have a material effect on the Company's
unaudited interim consolidated financial statements.
(6) On December 20, 1995, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a stock dividend, payable
to shareholders on January 30, 1996. Average shares outstanding and all per
share amounts included in the consolidated financial statements and
accompanying notes are based on the increased numbers of shares giving
retroactive effect to the three-for-two stock split.
(7) On December 12, 1995, the shareholders approved an increase in the
number of authorized shares of common stock from 10,000,000 to 25,000,000 and
an amendment to the Company's stock option plan to increase the number of
shares of common stock available in the plan from 750,000 to 1,500,000 (as
adjusted to reflect the three-for-two stock split).
(8) Unaudited Interim Consolidated Financial Statements:
The consolidated balance sheet as at January 31, 1996, the consolidated
statement of stockholders' equity for the six months ended January 31, 1996
and the statements of consolidated operations and cash flows for the six
months ended January 31, 1995 and 1996 are unaudited and in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's consolidated
financial position, consolidated results of operations and cash flows.
(NOTE B) -- FINANCE RECEIVABLES:
(1) Receivables reflected on the consolidated balance sheet comprise the
following:
<TABLE>
<CAPTION>
July 31, 1994
-------------------------------------------------
Finance Leasing
Total Operations Operations
-------------- -------------- --------------
<S> <C> <C> <C>
Installment obligations ................................. $336,755,000 $244,508,000 $92,247,000
Less amounts withheld from obligors ..................... 12,911,000 9,487,000 3,424,000
-------------- -------------- ------------
Balance ............................................ 323,844,000 235,021,000 88,823,000
Less deferred finance charges (net of deferred acquisition
costs of $3,415,000) .................................. 50,011,000 34,858,000 15,153,000
-------------- -------------- ------------
Balance ............................................... 273,833,000 200,163,000 73,670,000
Less allowance for possible losses ...................... 5,191,000 3,818,000 1,373,000
-------------- -------------- ------------
Net ................................................... $268,642,000 $196,345,000 $72,297,000
============== ============== ============
</TABLE>
F-8
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Note B) -- Finance Receivables: - (Continued)
<TABLE>
<CAPTION>
July 31, 1995
-------------------------------------------------
Finance Leasing
Total Operations Operations
-------------- -------------- ------------
<S> <C> <C> <C>
Installment obligations ................................. $432,613,000 $290,989,000 $141,624,000
Less amounts withheld from obligors ..................... 14,995,000 10,570,000 4,425,000
-------------- -------------- ------------
Balance ............................................... 417,618,000 280,419,000 137,199,000
Less deferred finance charges (net of deferred acquisition
costs of $4,038,000) ................................... 71,924,000 46,584,000 25,340,000
-------------- -------------- ------------
Balance ............................................... 345,694,000 233,835,000 111,859,000
Less allowance for possible losses ...................... 6,395,000 4,393,000 2,002,000
-------------- -------------- ------------
Net ................................................... $339,299,000 $229,442,000 $109,857,000
============== ============== ============
</TABLE>
<TABLE>
<CAPTION>
January 31, 1996 (Unaudited)
------------------------------------------------
Finance Leasing
Total Operations Operations
-------------- -------------- ------------
<S> <C> <C> <C>
Installment obligations ................................. $476,416,000 $319,545,000 $156,871,000
Less amounts withheld from obligors ..................... 17,737,000 12,827,000 4,910,000
-------------- -------------- ------------
Balance ............................................... 458,679,000 306,718,000 151,961,000
Less deferred finance charges (net of deferred acquisition
costs of $4,400,000) ................................... 76,233,000 49,503,000 26,730,000
-------------- -------------- ------------
Balance ............................................... 382,446,000 257,215,000 125,231,000
Less allowance for possible losses ...................... 7,299,000 4,993,000 2,306,000
-------------- -------------- ------------
Net ................................................... $375,147,000 $252,222,000 $122,925,000
============== ============== ============
</TABLE>
For financial accounting purposes, receivables are written off against the
allowance for possible losses on the basis of an evaluation of the status of
individual accounts. Receivables written off (recovered) aggregated $605,000,
$308,000, $246,000, $71,000 and ($84,000) during the fiscal years 1993, 1994
and 1995 and the six months ended January 31, 1995 and 1996, respectively,
net of recoveries of $564,000, $484,000, $668,000, $308,000 and $464,000
during the fiscal years 1993, 1994 and 1995 and the six months ended January
31, 1995 and 1996, respectively. For income tax purposes, expense is
recognized on a specific write-off basis.
(2) Installment obligations are receivable principally in monthly
installments over periods generally not longer than five years. The balance
at July 31, 1995 is due as follows:
<TABLE>
<CAPTION>
Finance Leasing
Total Operations Operations
-------------- -------------- --------------
<S> <C> <C> <C>
Year ending July 31: .
1996 .......... $151,342,000 $108,577,000 $ 42,765,000
1997 .......... 125,075,000 85,582,000 39,493,000
1998 .......... 85,647,000 55,898,000 29,749,000
1999 .......... 47,380,000 28,600,000 18,780,000
2000 .......... 19,548,000 9,919,000 9,629,000
Thereafter .... 3,621,000 2,413,000 1,208,000
-------------- -------------- --------------
Total .......... $432,613,000 $290,989,000 $141,624,000
============== ============== ==============
</TABLE>
F-9
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Note B) -- Finance Receivables: - (Continued)
(3) The following table lists the components of the net investment in
direct financing leases:
<TABLE>
<CAPTION>
July 31,
---------------------------------- January 31,
1994 1995 1996
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Minimum lease payments receivable .... $ 79,418,000* $120,553,000* $133,513,000*
Less amounts withheld from obligors .. (3,424,000) (4,425,000) (4,910,000)
--------------- --------------- -------------
Balance ............................ 75,994,000 116,128,000 128,603,000
Less allowance for possible losses ... (1,373,000) (2,002,000) (2,306,000)
--------------- --------------- -------------
Net minimum lease payments receivable . 74,621,000 114,126,000 126,297,000
Add unguaranteed residual values ..... 12,829,000* 21,071,000* 23,358,000*
Less unearned income ................. (16,115,000) (26,763,000) (28,252,000)
Add initial direct costs ............. 962,000 1,423,000 1,522,000
--------------- --------------- -------------
Net investment ............. $ 72,297,000 $109,857,000 $122,925,000
=============== =============== =============
</TABLE>
*Comprise installment obligations receivable -- leasing operations in Note
B(1) above.
(4) Residual values included in leasing installment obligations receivable
aggregated $17,633,000, $25,495,000 and $27,039,000 at July 31, 1994 and 1995
and January 31, 1996, respectively, of which $4,804,000, $4,424,000 and
$3,681,000 were guaranteed at July 31, 1994 and 1995 and January 31, 1996,
respectively.
(5) The accrual of income has been suspended on $4,239,000, $3,453,000 and
$3,467,000 of finance receivables at July 31, 1994 and 1995 and January 31,
1996, respectively.
(6) The Company in the normal course of business is a party to financial
instruments with off-balance sheet risk. These financial instruments are
commitments to extend credit. The Company uses the same credit policies in
making commitments to extend credit as it does for extending credit. The
risks associated with these commitments are substantially the same as with
extensions of credit constituting finance receivables. At July 31, 1994 and
1995 and January 31, 1996, the unused portion of these commitments aggregated
$3,092,000, $2,400,000 and $3,989,000, respectively.
(NOTE C) -- INCOME TAXES:
(1) Income taxes reflected on the consolidated statement of operations
comprises the following:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
July 31, January 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Currently payable: ..........
Federal ................ $1,098,000 $1,325,000 $2,742,000 $1,649,000 $1,737,000
State and local ........ 263,000 346,000 166,000 321,000
------------ ------------ ------------ ------------ ------------
Total .................. 1,361,000 1,325,000 3,088,000 1,815,000 2,058,000
Deferred .................... 1,596,000 1,839,000 1,238,000 225,000 630,000
Tax benefit relating to stock
options (Note J) .......... 376,000 37,000 37,000
------------ ------------ ------------ ------------ ------------
Total .................. $2,957,000 $3,540,000 $4,363,000 $2,077,000 $2,688,000
============ ============ ============ ============ ============
</TABLE>
F-10
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Note C) -- Income Taxes: - (Continued)
(2) Income taxes computed at the statutory federal income tax rates are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
July 31, January 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax at statutory
rates ........................ $2,694,000 $3,225,000 $3,934,000 $1,882,000 $2,424,000
State and local taxes (net of
federal income tax benefit) .. 174,000 313,000 429,000 195,000 264,000
Other ......................... 89,000 2,000
------------ ------------ ------------ ------------ ------------
Total ..................... $2,957,000 $3,540,000 $4,363,000 $2,077,000 $2,688,000
============ ============ ============ ============ ============
</TABLE>
(3) Deferred income taxes is comprised of the tax effect of the following
temporary differences and carryforwards:
July 31,
------------------------------
1994 1995
------------- -------------
Deferred tax liabilities: ..................
Leasing transactions .................. $ 7,610,000 $ 8,243,000
Deferred acquisition costs ............ 1,273,000 1,555,000
------------- -------------
Total ............................ 8,883,000 9,798,000
------------- -------------
Deferred tax assets: .......................
Allowance for loan losses ............. (1,936,000) (2,463,000)
Other liabilities ..................... (513,000) (751,000)
Alternative minimum tax credit
carryforward (1,385,000) (297,000)
Valuation allowance ................... -- --
------------- -------------
Total ............................ (3,834,000) (3,511,000)
------------- -------------
Deferred income taxes ...................... $ 5,049,000 $ 6,287,000
============= =============
(4) Deferred income tax provision as computed under APB Opinion No. 11 for
the year ended July 31, 1993 was comprised of the tax effects of timing
differences as follows:
Leasing operations ........................................ $2,248,000
Finance receivable acquisition costs ........................ 224,000
Provision for possible losses .............................. (406,000)
Other differences .......................................... (41,000)
Alternative minimum tax .................................... (429,000)
------------
Deferred income tax provision .............................. $1,596,000
============
(5) The Company is subject to the alternative minimum tax for federal
income tax purposes. Alternative minimum tax paid of approximately $297,000
at July 31, 1995 is available indefinitely as a credit against future regular
tax expense in excess of the alternative minimum tax expense.
F-11
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(NOTE D) -- DEBT:
Debt is summarized as follows:
<TABLE>
<CAPTION>
July 31,
-------------------------------- January 31,
1994 1995 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Senior debt:
Commercial paper ................. $ 21,708,000 $ 11,685,000 $ 16,120,000
Variable rate notes payable--banks. 83,140,000 157,585,000 242,305,000
Variable rate term loans loans--
banks ........................... 80,000,000 80,000,000 35,000,000
-------------- -------------- ------------
Total senior debt .............. 184,848,000 249,270,000 293,425,000
-------------- -------------- ------------
Subordinated debt:
Senior subordinated note ......... 15,000,000 15,000,000
Variable rate debentures ......... 7,682,000 6,957,000 6,957,000
-------------- -------------- ------------
Total subordinated debt ..... 22,682,000 21,957,000 6,957,000
-------------- -------------- ------------
Total debt .................. $207,530,000 $271,227,000 $300,382,000
============== ============== ============
</TABLE>
(1) The Company issues commercial paper at fixed rates of interest for
periods not exceeding 270 days. At July 31, 1994 and 1995 and January 31,
1996, these rates ranged from 4.2% to 5.4%, 5.7% to 7.0% and 5.1% to 6.1%,
respectively.
(2) At July 31, 1995, the Company had $330,000,000 ($387,500,000 at
January 31, 1996) of bank credit facilities, consisting of $155,000,000
($172,500,000 at January 31, 1996) on a revolving basis expiring within a
year, $95,000,000 ($180,000,000 at January 31, 1996) on a revolving basis
expiring on various dates from January 1997 through April 2000 and
$80,000,000 ($35,000,000 at January 31, 1996) of outstanding term loans.
Borrowings under the revolving credit facilities, aggregating $157,585,000
at July 31, 1995 ($242,305,000 at January 31, 1996) have maturities of 90
days or less. At July 31, 1995, $90,500,000 ($170,500,000 at January 31,
1996) of these borrowings and $4,500,000 ($4,500,000 at January 31, 1996) of
commercial paper, which are supported by revolving credit facilities
extending beyond one year, are reported as long-term senior debt.
Term loans outstanding at July 31, 1995 are due at maturity on various
dates from November 1995 through March 1997.
Borrowings under the Company's credit facilities bear interest at variable
rates which cannot exceed the prime rate. Borrowings may be prepaid at the
Company's option. The facilities contain certain restrictive covenants
including limitations on encumbrances, dividends to Financial, capital
expenditures and minimum net worth. In addition, Credit is required to
maintain certain debt to borrowing base ratios (as defined). At July 31,
1995, $9,129,000 ($11,170,000 at January 31, 1996) of Credit's equity was not
subject to dividend restrictions.
(3) Credit's $15,000,000 senior subordinated note, was due and repaid on
September 1, 1995. Interest was payable monthly, in arrears, at a rate of
12.27%.
(4) The variable rate subordinated debentures, which are the obligation of
Financial, are due September 1, 2000. Interest is payable semi-annually at
the prime rate (as defined) but in no event shall the rate be less than 8% or
more than 13%. Prepayment can be made at Financial's option. The debentures
and interest thereon are subordinated to borrowings from banks, institutional
investors, commercial paper and other debt designated by the Board of
Directors of Financial and to certain other liabilities as provided for in
the debentures.
F-12
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Note D) -- Debt: -- (Continued)
In 1995, Financial repurchased a debenture, with a face amount of
$725,000, from a non-related party for $595,000.
Related parties, including certain stockholders, held $3,178,000 of these
debentures at July 31, 1994 and 1995. In 1993, $2,000,000 of these debentures
were acquired from non-related parties. In 1994, $352,000 of these debentures
were exchanged in connection with the exercise of stock warrants.
(5) Long-term senior debt (based on the expiration dates of credit
facilities) and subordinated debt at July 31, 1995 are due as follows:
Year ending July 31:
1997 ..................... $ 95,000,000
1998 ..................... 50,000,000
2000 ..................... 5,000,000
2001 ..................... 6,957,000
------------
Total .................. $156,957,000
============
Long-term senior debt (based on the expiration dates of credit facilities)
and subordinated debt at January 31, 1996 are due as follows (unaudited):
Year ending January 31:
1998 .................... $ 40,000,000
1999 .................... 150,000,000
2000 .................... 15,000,000
2001 .................... 11,957,000
------------
Total ................. $216,957,000
============
(NOTE E) -- STOCK WARRANTS:
The holders of the original 2,250,000 shares of common stock (adjusted for
the three-for-two stock split) purchased for $.0033, one warrant for each
three shares owned. The warrants (as amended) may be exercised until February
1, 2001 to purchase a share of common stock at $4.25.
Shares of stock which were purchased at $3.67 per share through the
exercise of warrants issued to the holders of the variable rate subordinated
debentures aggregated 21,000 shares (prior to the January 1996 stock split)
in 1993 and 444,000 shares (prior to the January 1996 stock split) in 1994
(of which 76,500 shares (prior to the January 1996 stock split) were
purchased by related parties, including certain stockholders).
In August 1991, Financial issued 321,000 warrants (adjusted for the
three-for-two stock split) to officers of the Company for $.0833 per warrant.
These warrants may be exercised until August 31, 2001 to purchase a share of
common stock at $4.08.
F-13
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(NOTE F) -- LEASES:
The Company occupies office space under various leases expiring through
2000 (2003 at January 31, 1996). Certain leases provide for additional
rentals for increases in real estate taxes and other operating expenses.
The minimum future rentals due under noncancelable leases in effect at
July 31, 1995 are as follows:
Year ending July 31:
1996 ....................... $ 353,000
1997 ....................... 315,000
1998 ....................... 267,000
1999 ....................... 95,000
2000 ....................... 21,000
----------
Total .................... $1,051,000
==========
The minimum future rentals due under noncancelable leases in effect at
January 31, 1996 are as follows (unaudited):
Year ending January 31:
1997 ...................... $ 466,000
1998 ....................... 502,000
1999 ....................... 373,000
2000 ....................... 237,000
2001 ....................... 190,000
Thereafter ................. 447,000
-----------
Total................. $2,215,000
===========
Office rent expense aggregated $350,000, $428,000, $473,000, $233,000 and
$255,000 in the fiscal years ended 1993, 1994 and 1995 and the six months
ended January 31, 1995 and 1996, respectively.
(NOTE G) -- RELATED PARTY TRANSACTIONS:
(1) Commercial paper transactions with officers and other related parties
are summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended July 31, January 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Issued .......... $48,261,000 $67,342,000 $55,270,000 $36,003,000 $14,616,000
Matured ......... 42,783,000 60,339,000 65,596,000 40,850,000 12,892,000
Interest expense . 505,000 683,000 730,000 382,000 254,000
</TABLE>
July 31, January 31,
---------------------------------
1994 1995 1996
------------- ------------- -------------
(Unaudited)
Outstanding ..... $17,142,000 $6,816,000 $8,540,000
Accrued interest . 103,000 130,000 87,000
(2) The Company incurred charges of $310,000 in 1993 for certain
administrative services formerly provided by a company wholly-owned by two
stockholder/officers of Financial.
(NOTE H) -- CONCENTRATION OF CREDIT RISK:
The Company primarily finances the installment sale and leasing of
income-producing and labor-saving equipment and machinery, as well as makes
direct loans secured by the same types of equipment and machinery. The
F-14
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Note H) -- Concentration of Credit Risk: -- (Continued)
installment receivables are generally secured by a first lien on equipment. The
Company's business activities reflect some obligor, industry and geographic
concentrations of risk, which are primarily related to the financing of
construction-related equipment, cranes and trucks. The Company's four largest
obligors accounted for 5.8% and 4.9% of total finance receivables outstanding at
July 31, 1994 and 1995, respectively.
The significant industry and geographic concentrations of total finance
receivables outstanding are summarized as follows:
July 31,
-------------------------
1994 1995
-------- --------
Industry:
Trucking ...................... 17% 18%
Construction .................. 22 17
Cranes ........................ 18 16
Waste disposal ................. 11 14
Geographic:
Southwest ..................... 32 27
Midwest ....................... 16 17
Southeast ..................... 13 16
Northeast ..................... 15 12
(NOTE I) -- FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair values of most financial instruments for
which it is practicable to estimate fair value.
The Company has no financial instruments for which it is practicable to
estimate fair value except for cash and debt, where the carrying amounts
approximate fair value.
Finance receivables comprises a substantial number of transactions with
commercial obligors in numerous industries and are secured by liens on
various types of equipment. Each such transaction would be valued by a
potential buyer in terms of its credit quality, collateral value, payment
history, interest rate, maturity, documentation and other legal matters, and
many other considerations which involve the subjective judgment of the buyer.
A fair market transaction would also be based on the nature of the purchase,
the documentation governing such purchase, the seller's and buyer's view of
general economic conditions, industry dynamics, the seller's and buyer's tax
considerations, and numerous other factors. Accordingly, it is not
practicable to estimate the fair value of such receivables.
The Company's fixed rate finance receivables (excluding lease contracts)
before allowance for possible losses aggregated $111,813,000 and $130,706,000
at July 31, 1994 and 1995, respectively, with interest at the weighted
average rates of approximately 10.6% and 11.6% at July 31, 1994 and 1995,
respectively. The expected cash flows from such receivables at July 31, 1995
are as follows:
Year ending July 31:
1996 .................................... $ 60,275,000
1997 .................................... 46,692,000
1998 .................................... 31,861,000
Thereafter .............................. 21,567,000
------------
Total .................................... $160,395,000
============
Fixed rate finance transactions generally require monthly payments of
equal and/or varying amounts.
F-15
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Note I) -- Fair Values of Financial Instruments: -- (Continued)
The Company's variable rate transactions are based on the prime rate as
defined in the documentation. The weighted average interest rates at July 31,
1994 and 1995 were approximately 2.3% and 2.8% over the prime rate,
respectively.
(NOTE J) -- STOCK OPTIONS:
In September 1989, the Company adopted a stock option plan (as amended on
December 12, 1995) providing for the granting of non-qualified and incentive
options to officers, directors and employees to purchase a maximum of
1,500,000 shares of common stock. The plan expires in September 1999 but may
be terminated at any time at the discretion of the Board of Directors.
The activity of the plan updated to reflect the three-for-two stock split
described in Note A(6), is summarized as follows:
Number of Exercise Price
Options Per Option
--------- ---------------
Outstanding at August 1, 1992 ............. 463,500 $ 4.17 - $ 4.96
Granted .............................. 102,150 10.67 - 11.00
Exercised ............................ (4,500) 4.17 - 4.96
Cancelled ............................ (1,200) 4.17 - 4.96
---------
Outstanding at July 31, 1993 .............. 559,950 4.17 - 11.00
Granted (includes replacement options) . 183,675 9.33
Exercised ............................ (352,200) 4.17 - 4.96
Cancelled (includes replaced options) . (75,750) 10.67 - 11.00
---------
Outstanding at July 31, 1994 .............. 315,675 4.17 - 11.00
Granted .............................. 1,800 10.17
Exercised ............................ (72,300) 4.17 - 4.96
Cancelled ............................ (8,850) 9.33 - 11.00
---------
Outstanding at July 31, 1995 .............. 236,325 4.96 - 11.00
Granted .............................. 163,150 11.83 - 15.00
Exercised ............................ (7,875) 4.96 - 11.00
Cancelled ............................ (1,650) 9.33
---------
Outstanding at January 31, 1996 (unaudited) . 389,950 4.96 - 15.00
=========
All options granted were at exercise prices not less than the fair market
value of the common stock on the date of the grant. Options granted through
July 31, 1993 have a term of five years and become exercisable in two
cumulative installments of 50 percent on each of the second and third
anniversaries of the grant date. Options granted after July 31, 1993 have a
term of six years and become exercisable in four cumulative installments of
25 percent on each of the second, third, fourth and fifth anniversaries of
the grant date except for 75,000 options granted to certain executive
officers of the Company in August 1995, which have a term of eight years and
are exercisable as follows; 20 percent three months from the grant date, 8
percent on each of the first, second, third, fourth and fifth anniversaries
of the grant date and 20 percent on each of the sixth and seventh
anniversaries of the grant date. The number of shares of common stock
available for granting future options at July 31, 1995 and January 31, 1996
was 228,675 and 817,175, respectively. At July 31, 1994 and 1995 and January
31, 1996, options were exercisable to purchase 105,600, 44,625 and 51,938
shares, respectively.
In June 1994, certain holders of options granted in 1993 replaced 71,475
of these options pursuant to the Company's offer to grant replacement options
with an exercise price of $9.33 per option and a longer vesting period.
F-16
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Note J) -- Stock Options: -- (Continued)
Certain dispositions of stock by optionees acquired through the exercise
of incentive stock options resulted in federal and state income tax benefits
to the Company aggregating $376,000 in 1994 and $37,000 in 1995 which was
credited to additional paid-in capital.
In November 1993, the Company acquired 96,000 optioned shares of common
stock (prior to the January 1996 stock split), at a cost of $1,440,000, from
an officer/director. These shares were held in treasury at July 31, 1995 and
were retired in December 1995.
The Company does not plan to adopt the recognition provisions of SFAS No.
123 "Accounting for Stock-Based Compensation."
F-17
<PAGE>
FINANCIAL FEDERAL CORPORATION & SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended
For Year Ended July 31, January 31,
------------------------------------------- -------------------------
Primary 1993 1994 1995 1995 1996
- -------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net earnings for primary per share
amounts............................... $4,968,000 $5,944,000 $7,209,000 $3,457,000 $4,441,000
----------- ------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding .......................... 7,261,365 7,366,763 8,199,686 8,181,704 8,229,293
Add - common equivalent shares
(determined using the "treasury stock"
method) .............................. 1,316,895 1,282,221 756,436 751,358 838,459
----------- ------------ ------------ ------------ ------------
Weighted average number of shares used
in calculation of primary net earnings
per common share ..................... 8,578,260 8,648,984 8,956,122 8,933,062 9,067,752
----------- ------------ ------------ ------------ ------------
Primary net earnings per common share $0.58 $0.69 $0.80 $0.39 $0.49
=========== ============ ============ ============ ============
Fully Diluted
- -------------
Net earnings for fully diluted per share
amounts .............................. $4,968,000 $5,944,000 $7,209,000 $3,457,000 $4,441,000
=========== ============ ============ ============ ============
Weighted average number of shares used
in calculation of fully diluted net
earnings per common share ............ 8,684,547 8,649,339 8,970,057 8,999,457 9,153,294
=========== ============ ============ ============ ============
Fully diluted net earnings per common
share ................................ $0.57 $0.69 $0.80 $0.38 $0.49
=========== ============ ============ ============ ============
</TABLE>
- ------
(1) Average shares outstanding and all per share amounts included above are
based on the increased numbers of shares giving retroactive effect to the
three-for-two stock split discussed in Note A(6) to the Consolidated
Financial Statements for the Year Ended July 31, 1995.
F-18
<PAGE>
<TABLE>
<CAPTION>
======================================================== ========================================================
<S> <C>
No dealer, salesperson or any other person has
been authorized to give any information or to make 1,700,000 SHARES
any representations other than those contained in
this Prospectus in connection with the offer made
by this Prospectus and, if given or made, such
information or representations must not be relied
upon as having been authorized by the Company or LOGO
any of the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of
any offer to buy any security other than the
shares of Common Stock offered by this Prospectus,
nor does it constitute an offer to sell or a
solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in
which such offer or solicitation is not
authorized, or in which the person making such
offer or solicitation is not qualified to do so,
or to any person to whom it is unlawful to make
such offer or solicitation. Neither the delivery FINANCIAL FEDERAL
of this Prospectus nor any sale made hereunder CORPORATION
shall, under any circumstances, create any
implication that information contained herein is
correct as of any time subsequent to the date COMMON STOCK
hereof.
------
TABLE OF CONTENTS -------------------
P R O S P E C T U S
Page -------------------
--------
Available Information ......................... 2
Incorporation of Documents by
Reference ................................... 2
Prospectus Summary ............................ 3
Investment Considerations ..................... 6 PRUDENTIAL SECURITIES INCORPORATED
The Company ................................... 9
Use of Proceeds ............................... 9 NATWEST SECURITIES LIMITED
Price Range of Common Stock and
Dividend Policy ............................. 10
Capitalization ................................ 11
Selected Consolidated Financial Data .......... 12
Management's Discussion and Analysis of Results
of Operations and Financial Condition ....... 13
Business ...................................... 19
Management .................................... 30
Principal Stockholders ........................ 35
Description of Capital Stock .................. 37
Shares Eligible for Future Sale ............... 39
Underwriting .................................. 40
Legal Matters ................................. 41
Experts ....................................... 41 MAY 6, 1996
Index to Consolidated Financial
Statements .................................. F-1
======================================================== ========================================================
</TABLE>
