UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
---------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
Commission file number 1-12006
FINANCIAL FEDERAL CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 88-0244792
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Park Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 888-3344
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $.50 par value
Name of exchange on which registered: American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant on October 21, 1996 was
$86,439,053.00. The aggregate market value was computed by reference to the
closing price of the Common Stock on the American Stock Exchange on
the prior day (which was $14.50 per share). For the purposes of this
response, executive officers and directors are deemed to be the
affiliates of the Registrant and the holding by non-affiliates was
computed as 5,961,314 shares.
The number of shares of the Registrant's Common Stock outstanding as
of October 21, 1996 was 9,890,246 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's proxy statement for its Annual Meeting of
Stockholders, to be held December 10, 1996, which will be filed
pursuant to Regulation 14A within 120 days of the close of
Registrant's fiscal year, is incorporated by reference in answer to
Part III of this report. In addition, page 1 and pages 6 through 20 of
Financial Federal Corporation's 1996 Annual Report to Stockholders is
incorporated by reference in answer to Items 6, 7 and 8 of Part II.
Page 1
<PAGE>
PART I
Item 1. BUSINESS
The Company, founded in 1989, 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, manufacturing, trucking, and
waste disposal, the majority of which businesses have annual sales of
up to $20 million. The Company finances a wide range of income-
producing and labor-saving equipment such as cranes, earth-movers,
machine tools, personnel lifts, trailers and trucks. In substantially
all cases, the Company's finance receivables are secured by a first
lien on such equipment collateral. The Company generates profits to
the extent that its finance income exceeds its interest,
administrative and other operating expenses and provision for
possible losses.
Equipment Financed
The Company finances and leases equipment of major
manufacturers. 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.
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, earth-movers,
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.
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 credit 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. All of the Companys offices are located in the
United States. Thirty-eight (38) 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 all fifty 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.
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 74% of the Company's directors, officers and employees
who had been employed by the Company for at least one year as of July
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, 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 Strategy
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.
The Company obtains business 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.
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 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.
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 $1.0
million to $5.0 million. These portfolios have included finance
receivables secured by a broader range of equipment than that
typically financed by the Company.
Originating, Structuring and Underwriting of Finance Receivables
The Company originates financings typically ranging in amount
from $30,000 to $1.0 million per transaction. During 1996, the
average finance receivable originated by the Company was
approximately $140,000. 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
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 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.
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.
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. The 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. The Company
competes with banks, manufacturer-owned and independent finance and
leasing companies, as well as 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 equip-
ment 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.
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 is in excess of $50 billion and
its share of this market is less than 1%.
Employees
At July 31, 1996, the Company had 124 employees. All of the
Company's employees and officers 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 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. 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.
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.
Executive Officers
Clarence Y. Palitz, Jr., 65, has served as Chairman of the Board
of the Company since July 1996 and as Chief Executive Officer and
President of the Company since its inception in 1989. From 1963 to
1988, Mr. Palitz served as President and a Director of Commercial
Alliance Corporation ("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 Westchester County, New York.
Michael C. Palitz, 38, has served as Executive Vice President of
the Company since July 1995, as Senior Vice President of the Company
from February 1992 to July 1995 and as a Vice President of the Company
from its inception in 1989 to February 1992. He has also served as
Chief Financial Officer, Treasurer and Assistant Secretary of the
Company 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.
Paul Sinsheimer, 49, has served as Executive Vice President and a
Director of the Company since its inception in 1989. 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, Executive Vice President.
William M. Gallagher, 47, has served as Senior Vice President of
the Company since 1990 and served as a Vice President of the Company
from its inception in 1989 to 1990. 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, Vice President and Houston Branch
Manager.
Troy H. Geisser, 34, has served as Senior Vice President and
Secretary of the Company since February 1996. From 1990 to 1996, Mr.
Geisser held several positions, including Vice President and Branch
Manager. 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).
Richard W. Radom, 48, has served as Senior Vice President of the
Company since 1990 and served as a Vice President of the Company from
1989 to 1990. From 1973 to 1989, Mr. Radom was employed by CAC, where
he served, from 1986, as Senior Vice President.
Item 2. PROPERTIES
The Company's executive offices are located at 400 Park Avenue,
New York, New York and consist of approximately 6,400 rentable square
feet of space. As of July 31, 1996, the Company has full service
offices (where credit analysis and approval, collection and marketing
functions are performed) 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 the Houston office,
the operating headquarters, which consists of approximately 12,500
square feet) and are occupied pursuant to leases which expire on
various dates through 2004. 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.
Item 3. LEGAL PROCEEDINGS
There are no pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company is a
party or to which any of its property is subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended July 31, 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is listed on the American Stock
Exchange under the symbol "FIF." The table below sets forth the high
and low reported closing sales prices of the Common Stock as reported by
the American Stock Exchange during the periods indicated, adjusted for
the January 1996 stock split.
Price Range
Low High
Fiscal year 1996
First Quarter ended October 31, 1995 $11.75 $14.59
Second Quarter ended January 31, 1996 $13.92 $16.50
Third Quarter ended April 30, 1996 $15.13 $16.88
Fourth Quarter ended July 31, 1996 $12.63 $17.13
Fiscal year 1995
First Quarter ended October 31, 1994 $10.17 $12.08
Second Quarter ended January 31, 1995 $11.59 $12.92
Third Quarter ended April 30, 1995 $11.33 $13.33
Fourth Quarter ended July 31, 1995 $11.00 $12.00
The Company presently has no intention of paying cash dividends
on the Common Stock in the foreseeable future. The payment of cash
dividends, if any, 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 may deem
relevant.
Number of Record Holders
The number of record holders of the Company's Common Stock as of
October 21, 1996 was 69. Included in this number are several nominees
which hold the Company's common stock on behalf of numerous other
persons and institutions; these other persons and institutions are not
included in the above number as their shares are held in "Street Name."
Item 6. SELECTED FINANCIAL DATA
Reference is made to information under the heading "Financial
Highlights" contained in the Company's Annual Report to Stockholders for
the fiscal year ended July 31, 1996, which information is incorporated
herein by reference. The Company has not paid any cash dividends on its
Common Stock.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Reference is made to information under the heading "Management's
Discussion and Analysis of Operations and Financial Condition" contained
in the Company's Annual Report to Stockholders for the fiscal year ended
July 31, 1996, which information is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to information under the headings "Consolidated
Balance Sheet," "Consolidated Statement of Stockholders' Equity,"
"Consolidated Statement of Operations," "Consolidated Statement of Cash
Flows," "Notes to Consolidated Financial Statements" and "Independent
Auditors' Report" contained in the Company's Annual Report to
Stockholders for the fiscal year ended July 31, 1996, which information
is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference
from the information in Registrant's proxy statement (filed or to be
filed pursuant to Regulation 14A) for its Annual Meeting of Stockholders
to be held December 10, 1996, except as to biographical information on
Executive Officers which is contained in Item I of this Annual Report on
Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference
from the information in Registrant's proxy statement (filed or to be
filed pursuant to Regulation 14A) for its Annual Meeting of Stockholders
to be held December 10, 1996.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated by reference
from the information in Registrant's proxy statement (filed or to be
filed pursuant to Regulation 14A) for its Annual Meeting of Stockholders
to be held December 10, 1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference
from the information in Registrant's proxy statement (filed or to be
filed pursuant to Regulation 14A) for its Annual Meeting of Stockholders
to be held December 10, 1996.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements Page
The following financial statements are filed herewith and
incorporated herein by reference from pages 11 through 20 of the
Registrant's Annual Report to Stockholders for the fiscal year
ended July 31, 1996, as provided in Item 8 hereof:
- Consolidated Balance Sheet as at July 31, 1996 and 1995.
- Consolidated Statement of Stockholders' Equity for the fiscal
years ended July 31, 1996, 1995 and 1994.
- Consolidated Statement of Operations for the fiscal years ended
July 31, 1996, 1995 and 1994.
- Consolidated Statement of Cash Flows for the fiscal years ended
July 31, 1996, 1995 and 1994.
- Notes to Consolidated Financial Statements.
- Independent Auditors' Report.
2. Financial Statement Schedules
The following financial statement schedules are filed herewith:
- Independent Auditors' Report on Financial Statement Schedules. 13
- Schedule I - Condensed Financial Information of Registrant 14
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
3. Exhibits 18
Exhibit No. Description of Exhibit
3.1* Articles of Incorporation of the Registrant
3.2* By-laws of the Registrant
3.3* Form of Restated and Amended By-laws of the Registrant
4.1* Form of Variable Rate Subordinated Debentures Due September
1, 2000 (a "Debenture") issued by Registrant
4.6****** Form of Note Agreement dated as of April 15, 1996 issued by
Financial Federal Credit Inc.("Credit") to certain
institutional note holders
10.2* Form of Warrant to purchase Common Stock, as amended,
issued by the Registrant to stockholders in
connection with its initial capitalization
10.3* Form of Warrant to purchase Common Stock issued by the
Registrant to certain of its officers
10.8* Form of Commercial Paper Note issued by the Registrant
10.9* Form of Commercial Paper Note issued by Credit
10.10* Stock Option Plan of the Registrant and forms of related
stock option agreements
10.11** Deferred Compensation Agreement dated June 1, 1992
between Credit and Clarence Y. Palitz, Jr.
10.12** deferred Compensation Agreement dated June 1, 1992
between Credit and Bernard G. Palitz
10.13*** Deferred Compensation Agreement dated January 1, 1993
between Credit and Clarence Y. Palitz, Jr.
10.14*** Deferred Compensation Agreement dated January 1, 1993
between Credit and Bernard G. Palitz.
10.15**** Deferred Compensation Agreement dated January 1, 1994
between Credit and Clarence Y. Palitz, Jr.
10.16**** Deferred Compensation Agreement dated January 1, 1994
between Credit and Bernard G. Palitz.
10.17***** Deferred Compensation Agreement dated January 1, 1995
between Credit and Bernard G. Palitz.
10.18***** Deferred Compensation Agreement dated January 1, 1995
between Credit and Clarence Y. Palitz, Jr.
10.19***** Deferred Compensation Agreement dated February 1, 1995
between Credit and Paul Sinsheimer
10.20******* Deferred Compensation Agreement dated January 1, 1996
between Credit and Clarence Y. Palitz, Jr.
10.21 Form of Commercial Paper Dealer Agreement of Credit
10.22 Form of Deferred Compensation Agreement with certain
officers as filed under the Top Hat Plan with the
Department of Labor
11.1 Computation of Earnings Per Share
13.1 1996 Annual Report to Stockholders (except for the
pages and information thereof expressly
incorporated by reference in this Form 10-K, the Annual
Report to Stockholders is provided solely for the
information of the Securities and Exchange Commission and is
not deemed "filed" as part of this Form 10-K)
22.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27 Financial Data Schedule (EDGAR version only)
____________
*Previously filed with the Securities and Exchange Commission as an
exhibit to the Company's Registration Statement on Form S-1 (Registration
No. 33-46662).
**Previously filed with the Securities and Exchange Commission as an
exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1992.
***Previously filed with the Securities and Exchange Commission as an
exhibit to one of the Company's Forms 10-Q for the fiscal year ended July
31, 1993.
****Previously filed with the Securities and Exchange Commission as an
exhibit to one of the Company's Forms 10-Q for the fiscal year ended July
31, 1994.
*****Previously filed with the Securities and Exchange Commission as an
exhibit to one of the Company's Forms 10-Q for the fiscal year ended July
31, 1995.
******Previously filed with the Securities and Exchange Commission as an
exhibit to the Company's Registration Statement on Form S-2 (Registration
No. 333-3320).
*******Previously filed with the Securities and Exchange Commission as an
exhibit to one of the Company's Forms 10-Q for the fiscal year ended July
31, 1996.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended July 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FINANCIAL FEDERAL CORPORATION
(Registrant)
By:
Clarence Y. Palitz, Jr.,
Chairman of the Board and President
October 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Clarence Y. Palitz, Jr., Chairman of the Board, President and Chief
Executive Officer October 28, 1996
Lawrence B. Fisher, Director October 28, 1996
William C. MacMillen, Jr., Director October 28, 1996
Bernard G. Palitz, Director October 28, 1996
Paul Sinsheimer, Executive Vice President and Director October 28, 1996
Michael C. Palitz, Executive Vice President, Treasurer, Chief Financial
Officer and Director October 28, 1996
David H. Hamm, Controller, Assistant Treasurer and Principal Accounting
Officer October 25, 1996
<PAGE>
INDEX TO FORM 10-K SCHEDULES
Independent Auditors' Report
Schedule I - Condensed Financial Information of Registrant
Schedules other than the schedule referred to above have been omitted as
the conditions requiring their filing are not present or the information
has been presented elsewhere in the consolidated financial statements.
<PAGE>
Independent Auditors Report
Financial Federal Corporation
In connection with our audits of the consolidated financial
statements included in Financial Federal Corporation's annual report
to stockholders and incorporated by reference in this Form 10-K, we
have also audited the schedule listed in the accompanying index. Our
audits of the consolidated financial statements were made for the
purpose of forming an opinion on those statements taken as a whole.
The schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements
/s/ Eisner & Lubin LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
August 30, 1996
<PAGE>
<TABLE>
Schedule I
FINANCIAL FEDERAL CORPORATION
CONDENSED BALANCE SHEET
<CAPTION>
July 31,
1996 1995
<S> <C> <C>
ASSETS
Cash $ 256,000 $ 361,000
Due from subsidiaries:
Advances 27,626,000 19,325,000
Subordinated notes receivable 45,000,000 25,000,000
Investment in subsidiaries - at equity 34,749,000 26,399,000
Other assets 814,000 692,000
----------- ----------
TOTAL $108,445,000 $71,777,00
============ ==========
LIABILITIES
Senior debt $ 4,966,000 $ 5,106,000
Accrued interest, taxes and other liabilities 2,331,000 1,639,000
Subordinated debt 6,957,000 6,957,000
----------- -----------
Total liabilities 14,254,000 13,702,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 4,980,000 2,790,000
Additional paid-in capital 58,289,000 33,201,000
Warrants 29,000 29,000
Retained earnings 30,893,000 23,495,000
Treasury stock, at cost - 96,000 shares (1,440,000)
---------- ----------
Total stockholders' equity 94,191,000 58,075,000
----------- ----------
TOTAL $108,445,000 $71,777,000
============ ===========
<FN>
The note hereto, the consolidated financial statements and the notes
thereto are made a part hereof.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<CAPTION>
Year Ended July 31,
1996 1995 1994
<S> <C> <C> <C>
Equity in earnings of subsidiaries before income taxes $14,205,000 $10,891,000 $ 9,368,000
Interest charges to subsidiaries 4,007,000 3,266,000 2,779,000
----------- ----------- ------------
Total 18,212,000 14,157,000 12,147,000
----------- ----------- ------------
Expenses:
Interest expense 972,000 1,004,000 1,063,000
Other expenses (net) 1,811,000 1,581,000 1,600,000
----------- ----------- -----------
Total 2,783,000 2,585,000 2,663,000
----------- ----------- -----------
Earnings before income taxes 15,429,000 11,572,000 9,484,000
Provision for income taxes 5,819,000 4,363,000 3,540,000
---------- ---------- -----------
NET EARNINGS 9,610,000 7,209,000 5,944,000
Retirement of treasury stock (840,000)
Three-for-two stock split (1,372,000)
Retained earnings - August 1 23,495,000 16,286,000 10,342,000
------------ ----------- ----------
RETAINED EARNINGS - JULY 31 $30,893,000 $23,495,000 $16,286,000
============ =========== ==========
<FN>
The consolidated financial statements and the notes
thereto are made a part hereof.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
Year Ended July 31,
1996 1995 1994
<S> <C> <C> <C>
Net cash provided by operating activities $ 1,330,000 $ 381,000 $ 128,000
------------ ----------- ----------
Cash flows from investing activities:
Collections from(advances to) subsidiaries-net (8,301,000) 2,853,000 4,026,000
Subordinated notes receivable - subsidiary:
Advanced (20,000,000) (25,000,000) (2,000,000)
Collected 20,000,000
Dividends received from subsidiary 500,000 2,000,000 3,000,000
------------ ----------- ----------
Net cash provided by(used in)investing
activities (27,801,000) (147,000) 5,026,000
------------ ----------- ----------
Cash flows from financing activities:
Commercial paper:
Proceeds 76,869,000 71,393,000 25,357,000
Repayments (76,509,000) (71,770,000) (31,860,000)
Note payable - bank (500,000) 500,000
Repurchase of subordinated debt (595,000)
Proceeds from sale of common stock, net 26,340,000
Proceeds from exercise of stock options and
warrants 166,000 306,000 2,409,000
Acquisition of treasury stock (1,440,000)
Tax benefit relating to stock options 37,000 376,000
------------ ----------- ----------
Net cash provided by(used in)financing
activities 26,366,000 (129,000) (5,158,000)
NET INCREASE (DECREASE) IN CASH (105,000) 105,000 (4,000)
Cash - August 1 361,000 256,000 260,000
------------ ----------- ----------
CASH - JULY 31 $ 256,000 $ 361,000 $ 256,000
============ ============ ===========
<FN>
Non-cash financing activities:
In 1996, the Company retired 96,000 common shares held as treasury
stock resulting in a decrease of common stock, additional paid-in
capital and retained earnings of $48,000, $552,000 and $840,000,
respectively. Additionally, the Company authorized a three-for-two
stock split effected in the form of a stock dividend.
In 1994, $1,507,000 of subordinated debentures were exchanged in
connection with the exercise of 274,000 stock warrants.
The consolidated financial statements and the notes
thereto are made a part hereof.
</TABLE>
<PAGE>
FINANCIAL FEDERAL CORPORATION
NOTE TO CONDENSED BALANCE SHEET
Due from Subsidiaries:
Advances to subsidiaries generally bore interest at 5.66% and 6.25% at July 31,
1996 and 1995, respectively.
Subordinated notes receivable are due $25,000,000 on July 31, 2002,
$10,000,000 on September 1, 2002 and $10,000,000 on July 31, 2004 and
provide for interest, receivable quarterly, at the annual rates of
8.35%, 7.85% and 7.50%, respectively. The notes and interest thereon
are subordinated to the subsidiary's borrowings from banks,
institutional investors, commercial paper investors and other debt
designated by the subsidiary's Board of Directors.
Other assets include $744,000 and $592,000 of accrued interest
receivable from subsidiaries at July 31, 1996 and 1995, respectively.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
3.1 Articles of Incorporation of the Registrant *
3.2 By-laws of the Registrant *
3.3 Form of Restated and Amended By-laws of the Registrant *
4.1 Form of Variable Rate Subordinated Debentures Due
September 1, 2000 (a "Debenture") issued by Registrant *
4.6 Form of Note Agreement, dated as of April 15, 1996,
issued by Financial Federal Credit Inc.
(Credit) to certain institutional note holders *
10.2 Form of Warrant to purchase Common Stock, as amended,
issued by the Registrant to stockholders in
connection with its initial capitalization *
10.3 Form of Warrant to purchase Common Stock issued by the
Registrant to certain of its officers *
10.8 Form of Commercial Paper Note issued by the Registrant *
10.9 Form of Commercial Paper Note issued by Credit *
10.10 Stock Option Plan of the Registrant and forms of related
stock option agreements *
10.11 Deferred Compensation Agreement dated June 1, 1992
between Credit and Clarence Y. Palitz, Jr. *
10.12 Deferred Compensation Agreement dated June 1, 1992
between Credit and Bernard G. Palitz *
10.13 Deferred Compensation Agreement dated January 1, 1993
between Credit and Clarence Y. Palitz, Jr. *
10.14 Deferred Compensation Agreement dated January 1, 1993
between Credit and Bernard G. Palitz. *
10.15 Deferred Compensation Agreement dated January 1, 1994
between Credit and Clarence Y. Palitz, Jr. *
10.16 Deferred Compensation Agreement dated January 1, 1994
between Credit and Bernard G. Palitz. *
10.17 Deferred Compensation Agreement dated January 1, 1995
between Credit and Bernard G. Palitz. *
10.18 Deferred Compensation Agreement dated January 1, 1995
between Credit and Clarence Y. Palitz, Jr. *
10.19 Deferred Compensation Agreement dated February 1, 1995
between Credit and Paul Sinsheimer *
10.20 Deferred Compensation Agreement dated January 1, 1996
between Credit and Clarence Y. Palitz, Jr. *
10.21 Commercial Paper Dealer Agreement, dated April 23, 1996,
between Credit and BA Securities, Inc. 19
10.22 Form of Deferred Compensation Agreement with certain
officers as filed under the Top Hat Plan with the
Department of Labor 24
11.1 Computation of Earnings Per Share 27
13.1 1996 Annual Report to Stockholders (except for the pages
and information thereof expressly incorporated
by reference in this Form 10-K, the Annual Report to
Stockholders is provided solely for the information of
the Securities and Exchange Commission and is not deemed
"filed" as part of this Form 10K)
22.1 Subsidiaries of the Registrant 28
23.1 Consent of Independent Auditors 29
27 Financial Data Schedule (EDGAR version only)
____________
*Previously filed with the Securities and Exchange Commission as an exhibit.
<PAGE>
Exhibit 10.21
COMMERCIAL PAPER DEALER AGREEMENT
THIS COMMERCIAL PAPER DEALER AGREEMENT, dated as of [insert date], between
[insert dealer name] (the "Dealer"), and FINANCIAL FEDERAL CREDIT INC. (the
"Company").
WHEREAS, the Company desires to issue its short-term promissory notes in the
United States commercial paper market,
WHEREAS, the Company has requested the Dealer to act as dealer therefor and
the Dealer has indicated its willingness to do so on the terms and
conditions contained herein,
NOW THEREFORE, the Dealer and the Company hereby agree as follow:
1. The Notes. The term "Notes" means short-term promissory notes of the
Company, each such note (a) having a maturity at the time of issuance
of not more than 270 days (exclusive of days of grace) and (b) not
containing any provision for automatic "rollover". The proceeds from
the sale of the Notes will be used by the Company for "current
transactions" within the meaning of Section 3(a)(3) of the Securities
Act of 1933, as amended (the "1933 Act"). The Notes will be issued in
such face or principal amounts (but not less than $100,000 each) and
will bear such interest rates (if interest-bearing) or be sold at such
discounts, if any, from their face amounts, as shall be approved in
writing in advance by the Company in its sole discretion.
2. Appointment of Dealer. The Company hereby appoints the Dealer to be a
dealer in respect of the Notes and the Dealer accepts such appointment
subject to the terms and conditions set forth herein. Although (a)
the Company has and shall have no obligation to permit the Dealer to
purchase any Notes or arrange any sale of Notes for the account of the
Company, and (b) the Dealer has and shall have no obligation to
purchase any Notes or arrange any sale of Notes for the account of the
Company, the parties hereto agree that any purchase of Notes by the
Dealer and any sale of Notes arranged by the Dealer will be effected
in reliance on, among other things, the representations, warranties,
covenants and agreements of the Company contained herein or made
pursuant hereto and on the terms and conditions and in the manner
herein set forth.
3. Issuance of Notes. (a) Prior to or on the date of a proposed issuance
of Notes, the Dealer and the Company shall confer as to the face or
principal amounts, maturities and denominations thereof, the
applicable interest rates or the discounts from the face amounts, at
which the Notes are to be issued. When the Company has approved such
issuance in writing, the Dealer will instruct the Issuing and Paying
Agent to deliver executed and countersigned Notes to the persons
specified by the Dealer on the date of issuance.
(b) The authentication and delivery of Notes pursuant hereto by The
First National Bank of Chicago, as issuing and paying agent (the
"Issuing and Paying Agent") shall constitute the issuance of such
Notes by the Company. The Company agrees that (i) signed Notes in
bearer form shall be delivered to the Issuing and Paying Agent and
(ii) instructions to the Issuing and Paying Agent to complete,
authenticate and deliver such Notes shall be made in the manner
prescribed in the agreement between the Company and the Issuing and
Paying Agent (as amended from time to time, the "Issuing and Paying
Agency Agreement"). The Company shall promptly give the Dealer prior
written notice of any change in the entity serving as the Issuing and
Paying Agent.
4. Representations and Warranties. The Company represents and warrants:
(a) the Company is a duly organized and validly existing corporation
in good standing under the laws of the state of its incorporation and
has the corporate power and authority to own its property and to carry
on its business as presently being conducted, to execute and deliver
this Agreement, the Issuing and Paying Agency Agreement and the Notes,
and to perform and observe the conditions hereof and thereof;
(b) the execution and delivery and performance of this Agreement and
the Issuing and Paying Agency Agreement and the issuance and sale of
the Notes have been duly authorized by the Company, and this Agreement
and the Issuing and Paying Agency Agreement constitute, and when the
Notes have been duly executed by the Company and countersigned and
delivered by the Issuing and Paying Agent against payment therefor,
such Notes will constitute, legal, valid and binding obligations of
the Company, enforceable in accordance with their terms, except as
enforcement thereof may be limited by bankruptcy, insolvency or other
similar laws relating to or affecting generally the enforcement of
creditors' rights or by general equitable principles, or by applicable
federal or state securities laws;
(c) no consent or action of, or filing or registration with, any
governmental or public regulatory body or authority (other than as may
be required under state securities laws) is required to authorize, or
is otherwise required in connection with, the execution, delivery or
performance of this Agreement, the Issuing and Paying Agency Agreement
or the Notes, except such as have already been obtained;
(d) neither the execution and delivery by the Company of this
Agreement, the Issuing and Paying Agency Agreement or the Notes, nor
the fulfillment of or compliance with the terms and provisions hereof
or thereof by the Company, will (i) result in the creation or
imposition of any mortgage, lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company; (ii)
violate any of the terms of the Company's charter documents or By-
laws, any contract or instrument to which the Company is a party or to
which it or its property is bound, or any law or regulation or any
order, writ, injunction or decree of any court or governmental
instrumentality, to which the Company is subject or by which it or its
property is bound;
(e) each Note issued by the Company pursuant to the terms hereof and
of the Issuing and Paying Agency Agreement is exempt from the
registration requirements of the 1933 Act by reason of Section 3(a)(3)
thereof, and neither registration of the Notes under the 1933 Act nor
qualification of an indenture under the Trust Indenture Act of 1939,
as amended, with respect to the Notes will be required in connection
with the offer, issuance, sale or delivery of the Notes in accordance
with the terms hereof and of the Issuing and Paying Agency Agreement;
(f) the Company is neither an "investment company" nor a "company
controlled by an investment company" within the meaning of the
Investment Company Act of 1940, as amended; and
(g) there are no actions, suits, proceedings, or investigations
pending or, to the Company's knowledge, threatened against the Company
or any of its officers, directors or persons who controls the Company
(within the meaning of Section 15 of the 1933 Act or Section 20 of the
Securities Exchange Act of 1934, as amended) or to which any property
of the Company is subject, which could reasonably be expected to
materially prevent or interfere with or materially and adversely
affect the Company's execution, delivery or performance of this
Agreement, the Issuing and Paying Agency Agreement or the Notes.
5. Offering Materials. (a) The Company understands that, in connection
with the sale of the Notes, certain materials relating to the Company
and its affiliates may be prepared (collectively referred to herein as
the "Offering Materials"). To provide a basis for the preparation of
the Offering Materials and to assist the Dealer's normal credit review
procedures, the Company shall provide the Dealer with copies of (i) if
the Company becomes a reporting company under the Securities Exchange
Act of 1934, as amended, its most recent reports of the Company on
Forms 10-Q and 10-K filed with the Securities and Exchange Commission
("SEC") and each report on Form 8-K filed by the Company with the SEC
during the current fiscal year, and (ii) its most recent annual
audited financial statements and each interim financial statements or
report prepared subsequent thereto. In addition, the Company will
provide the Dealer with such other information generally supplied in
writing to security analysts. In addition, the Company will provide
the Dealer with such other information as the Dealer may reasonably
request for the purpose of its on-going credit review of the Company,
which information, to the extent not required to be included in the
Offering Materials, may be subject to a confidentiality agreement
between the Company and the Dealer. The Company authorizes the Dealer
to distribute the Offering Materials as the Dealer sees fit.
(b) The Dealer agrees to furnish all Offering Materials to the
Company for its written approval prior to the use thereof in offering
the Notes. The Dealer shall not use any Offering Materials until it
has received written approval from the Company of such Offering
Materials. No materials other than the Offering Materials submitted to
the Company for approval will be used to offer the Notes. The
Company's approval shall not apply to information provided by the
Dealer for inclusion in the Offering Materials, and the Dealer's use
of Offering Materials containing information not approved by the
Company shall constitute the Dealer's approval of such information. A
written approval by the Company shall constitute a representation that
the Offering Materials, as to that portion specifically approved, do
not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
If, at any time during the term of this Agreement, any event occurs
or circumstances exist as a result of which any then current Offering
Materials would include such untrue statement of a material fact or
omission to state a material fact related to those portions of the
Offering Materials previously approved by the Company, then the
Company will promptly notify the Dealer and provide the Dealer with
revised information that corrects such untrue statement or omission.
6. Repetition of Representations and Warranties. Each sale of Notes by
the Company hereunder shall be deemed to be a representation and
warranty by it that, as of the date of such sale, (a) the
representations, warranties and covenants of the Company contained in
Sections 4 are true and correct, and (b) the Issuing and Paying Agent
has not resigned, or been terminated or replaced.
7. Conditions Precedent to Dealer's Obligations. As conditions precedent
to any obligations of the Dealer hereunder, the Company shall furnish
to the Dealer the following documents, in form and substance
reasonably satisfactory to the Dealer: (a) a true and complete copy of
the Issuing and Paying Agency Agreement; (b)(i) a certified copy of
resolutions, duly adopted by the Board of Directors of the Company
authorizing the issuance and sale of the Notes and (ii) a certificate
as to the incumbency and signatures of certain officers authorized to
act on behalf of the Company; and the acceptance by the Company of
proceeds from each sale of Notes hereunder shall be deemed to
constitute a representation and warranty by the Company that such
certificates are accurate and complete and that such resolutions are
in full force and effect, in each case, as of the date of such
acceptance of proceeds; and (c) an opinion of counsel to the Company,
with respect to the matters set forth in Section 4(a) through 4(g) and
in form and substance acceptable to the Dealer.
8. Covenants of the Company. The Company covenants and agrees that: (a)
for the benefit of the Dealer and the holders from time to time of the
Notes, the Company will not permit to become effective any amendment,
supplement, rider, waiver or consent to or under any Note, the Issuing
and Paying Agency Agreement or any document prepared in connection
with any thereof which might adversely affect the interests of the
holder of any Note then outstanding. The Company will give the Dealer
written notice of any such proposed amendment, supplement, rider,
waiver or consent at least ten days prior to the effective date
thereof; (b) the Company agrees to furnish prior notice to the Dealer
of any proposed resignation, termination or replacement of the Issuing
and Paying Agent.
9. Indemnification. (a) The Company will indemnify and hold harmless the
Dealer and any affiliate, director, officer, employee or agent of the
Dealer and any party who "controls" the Dealer within the meaning of
Section 15 of the 1933 Act (each, an "indemnified party") against any
and all liabilities, losses, damages, claims, costs and expenses
(including, without limitation, reasonable fees and disbursements of
counsel) (i) arising out of or based upon any allegation that any
portions of any Offering Material approved in writing by the Company
or any information provided to the Dealer in writing hereunder by the
Company specifically for inclusion in the Offering Materials includes
an untrue statement of a material fact or omits to state any material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (ii)
arising out of the material breach by the Company of any agreement or
representation or warranty made or deemed made pursuant to this
Agreement.
The above indemnification shall not apply to the extent that the
liability, loss, damages, claims, costs and expenses arise from the
inclusion by any indemnified party in any Offering Material of
statements that have not been approved by the other party pursuant to
Section 5 of this Agreement, of an untrue statement of a material fact
or an omission to state any material fact necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
(b) The Dealer shall promptly notify the Company in writing of any
action or claim asserted against any indemnified party as to which
indemnification may be required. The Company shall thereupon assume
the defense thereof, including the employment of counsel and the
payment of all expenses. The Company shall have no obligation to
indemnify against any settlement, costs or expenses incurred prior to
the delivery of written notice of a claim to the Company. The Dealer
(but not other indemnified parties) shall have the right to employ
separate counsel and to participate in the defense thereof, but such
participation shall be at the Dealer's expense, unless (i) the Company
has specifically authorized in writing the retention of such counsel,
(ii) the Company has failed to assume the defense and employ counsel
after the delivery by the Dealer of written notice as provided above,
or (iii) the named parties include the Dealer and the Company, and
counsel shall have advised that representation of both parties by the
same counsel would be prohibited under applicable standards of
professional conduct due to actual or potential differing interests
between them (in which case the Company shall not assume the defense,
provided that Company shall not be responsible for the fees of more
than one separate firm of attorneys for all actions arising out of the
same general allegations or circumstances in any one jurisdiction).
The Company shall not be liable for any settlement of any such action
or claim effected without its prior written consent, but if settled
with written consent or if there is a final judgment, the Company
agrees to indemnify and hold harmless the Dealer against any loss or
liability by reason of such approved settlement or judgment.
(c) If the indemnification provided for in this section is
unavailable, or insufficient, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company
on one hand and the Dealer on the other from the offering of the
Notes, or (ii) if the allocation provided in (i) above is not
permitted pursuant to applicable law (or to the extent that the
contribution allocated is unobtainable from one or more contributing
parties), in such proportion as is appropriate to reflect not only the
relative benefits referred to in (i) above, but also the relative
fault of the Company on the one hand and the Dealer on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as other
relevant equitable considerations. The relative benefits received by
the Dealer on the one hand and the Company on the other shall be
deemed to be in the same proportion as the total net proceeds from the
Note offering (before deducting expenses) received by the Company bear
to the total fees received by the Dealer. The relative fault of the
Company on the one hand and of the Dealer on the other shall be
determined by reference to, among other things, whether the claim
relates to information in the Offering Materials approved by the
Dealer or the Company and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the
statement or action that is the basis for the claim.
10. Compensation. The Dealer shall be entitled to compensation in the
amounts mutually agreed upon in writing between the Company and the
Dealer from time to time.
11. Notices. All notices required or permitted under the terms and
provisions hereof shall be in writing (which shall include facsimile
transmission with receipt confirmed) and shall, unless otherwise
provided herein, be effective when received at the address specified
below or at such other address as shall be specified in a notice
furnished hereunder.
If to the Company:
Financial Federal Credit Inc.
400 Park Avenue
New York, NY 10022
Attention: Michael C. Palitz, CFO and Treasurer
Tel. No.: (212) 888-3344
Facsimile No.: (212) 888-0695
If to the Dealer:
12. Miscellaneous. This Agreement is to be delivered and performed, and
shall be construed and enforced in accordance with, and the rights of
the parties shall be governed by, the internal laws of the State of
[insert state].
(a) The Company agrees that any suit, action or proceeding brought
by the company against the Dealer in connection with or arising
out of this Agreement or the offer and sale of Notes shall be
brought solely in federal or state court, located in [insert
jurisdiction].
(b) With the prior written consent of the Company, the Dealer may
share with any affiliate of the Dealer, including but not
limited to [insert name of specific affiliates] (the Dealer and
such affiliates, each an "Affiliated party" and collectively,
the "Affiliated parties") any and all financial information in
the possession of any of the Affiliated parties (including,
without limitation, documents in possession of any of the
Affiliated parties and any credit or other analyses prepared by
a Affiliated party) concerning the Company, except to the
extent that the Affiliated party is prohibited from sharing such
information pursuant to a written confidentiality agreement or
by law.
(c) This Agreement may be terminated, at any time, by the Company,
upon notice to such effect to the Dealer, or by the Dealer, upon
notice to such effect to the Company. Any such termination,
however, shall not affect the obligations of the Company and the
Dealer under Sections 9 and 10 hereof or the rights or
responsibilities of the parties arising prior to the termination
of this Agreement.
(d) This Agreement may not be assigned by the Company without the
prior consent of the Dealer and any such assignment without such
consent shall be null and void. This Agreement may be assigned
or transferred by the Dealer to any affiliate of the Dealer upon
at least 30 days prior written notice to the Company.
(e) This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same
instrument and any party hereto may execute this Agreement by
signing one or more counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
[DEALER]
By: _____________________
Title:
FINANCIAL FEDERAL CREDIT INC.
By: ____________________
Title:
By: ____________________
Title:
<PAGE>
Exhibit 10.22
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, made as of the _______ day of _________,
19_____, by and between Financial Federal Credit Inc. (the "Company") and
____________________ (the "Employee");
W I T N E S S E T H :
WHEREAS, Employee is an employee of the Company; and
WHEREAS, the Employee and the Company desire to set forth in
writing herein the terms and conditions of their agreement with respect to
the payment to Employee, on a deferred basis, of some of the Employee's
salary for his services to the Company for the months of ____________, 19___
through December, 19_____.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain amounts of salary earned by the Employee for each
of the months of ____________ 19_____ through December 19_____, shall be
deferred and, in lieu of current payment thereof, the Company shall pay to
the Employee the sum of $___________on ________________,______[DATE]. The
amounts so deferred are shown on Exhibit 1 to this Agreement. In the event
the Employee's employment is terminated for any reason whatsoever during
this period, the amount payable to the Employee pursuant to this paragraph
shall be proportionately reduced (in the same proportion as the number of
days or portions thereof from the date of such termination of employment to
the end of this period bears to the entire period), and any payment provided
for in paragraphs "2", "3", "5" or "7" of this Agreement shall be further
discounted as described in paragraph "4" of this Agreement.
2. In the event of i). Employee's death, ii). Employee's
retirement from the Company and its affiliates (and employment is not
obtained with another company in substantially the same types of business as
the Company is engaged) or iii). Employee's leave of absence owing to a bona
fide disability (which shall be defined as the incapacity to perform any
employment which would be appropriate given the prior physical status,
intellectual ability and experience of the Employee, due to a mental or
physical disability which shall have been certified by an independent
physician and which has lasted or can be expected to last for a continuous
period of not less than twelve months), then, in the Company's sole
discretion, either a). the Company shall pay the amount specified in
paragraph "1" on the date there specified or b). all amounts payable
pursuant to paragraph "1" of this Agreement shall be re-computed as
described in paragraph "4" of this Agreement and shall be paid in total on
the first day of the first month 30 days after the date of the death,
retirement or disability. Payments of amounts due pursuant to the terms of
this paragraph shall be made first to the Employee, if living, then to the
Employee's Beneficiary, _____________________, the Employee's ________, or
if he/she is not then alive, to the Employee's Estate.
3. Except for the events specified in paragraph "2" of this
Agreement, in the event of termination of Employee's employment by the
Company for any other reason whatsoever (other than a transfer to employment
with an affiliate of the Company), or in the event the Employee terminates
his employment with the Company and its affiliates, then, in either such
event, the amount payable pursuant to paragraph "1" of this Agreement shall
be paid to Employee on the first day of the first month following such
termination of employment in an amount calculated as set forth in paragraph
"4" of this Agreement.
4. If, pursuant to paragraphs "2", "3", "5" or "7" of this
Agreement, payment of any amount provided for in paragraph "1" of this
Agreement is to be made earlier than the due date set forth in such
paragraph "1", the amount to be paid is the amount as provided in paragraph
"1" of this Agreement, discounted at the rate of [Applicable Federal MidTerm
Rate, monthly compounding, for prior month] per annum, compounded monthly,
from the date any such payments would have been due (as set forth in
paragraph "1" of the Agreement) to the actual date of payment. For purposes
of illustration, a payment of $500.00 would be due with respect to a
$[xxx.xx] payment which would have been due and payable forty-eight (48)
months later.
5. If any federal, state or other tax law or regulation or
any determination by any taxing authority with respect to the Employee would
cause any amounts due pursuant to this Agreement to become taxable to the
Employee before payment thereof, except for taxes owing due to FICA, FUTA,
or other employment taxes, then the Employee, irrespective and
notwithstanding any other provisions of this Agreement, shall have the
right, upon written notice to the Company, to require payment of any of the
installments or portions thereof specified in paragraph "1" of this
Agreement. The notice shall specify a date within ninety (90) days of such
notice when payment is to be made. The payment shall be made in an amount
calculated as set forth in paragraph "4" of this Agreement.
6. Employee shall have no right to pledge, hypothecate,
assign or otherwise dispose of any amounts due or to become due hereunder.
Employee's right to receive payments under this Agreement shall be no
greater than those of any other unsecured creditor of the Company.
7. Should, at any time, more than 50 percent of the combined
voting power of the Company's then outstanding voting securities be held by
any person, entity or group of persons, directly or indirectly, within the
meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended ("Act"), other than those persons, entities or groups of persons
owning over 14 percent of the combined voting power as of the date hereof,
or a liquidation or dissolution of the Company or of the sale of all or
substantially all of the Company's assets, then a). the Company may, upon 30
days notice, pay to Employee the amount payable pursuant to paragraph "1" of
this Agreement on the first day of the first month following such notice in
an amount calculated as set forth in paragraph "4" of this Agreement, OR b).
Employee may, upon 30 days notice, require that the Company pay to Employee
the amount payable pursuant to paragraph "1" of this Agreement on the first
day of the first month following such notice in an amount calculated as set
forth in paragraph "4" of this Agreement.
8. During the term of this Agreement, the Company shall
furnish to Employee, no later than the 30th day of each fiscal year, a
schedule setting forth in reasonable detail the changes occurring during the
preceding year and the balance as at the end of the preceding year with
respect to the amount accrued by the Company on account of all sums payable
hereunder to Employee.
9. Employee shall have the right at any time, by written
notice to the Company, to change the Beneficiary named in paragraph "2"
hereof, with such notice acknowledged in writing by the Company.
10. This Agreement contains the entire understanding of the
parties hereto relating to the payments described herein; however, this
Agreement shall not affect any other salary nor any other benefit that
Employee may be or may become entitled to, except as required by law. This
written agreement represents the entire final agreement between the parties
relating to the payments described herein and may not be contradicted by
evidence of prior, contemporaneous or subsequent oral agreements of the
parties. There are no unwritten oral agreements between the parties. This
agreement cannot be amended, modified or changed except by a writing signed
by both parties. Only an officer of the Company with the title of Senior
Vice President or a more senior officer may accept this agreement or agree
to any amendments, modifications or changes.
11. This Agreement shall be governed and construed in
accordance with the laws of the State of New York. If any provision of this
Agreement is rendered or declared invalid, illegal or ineffective by any
existing or subsequently enacted legislation or decision of a court of
competent jurisdiction, such legislation or decision shall only invalidate
such provision to the extent so rendered or declared invalid, illegal or
ineffective in such jurisdiction only and shall not impair, invalidate or
nullify the remainder of this Agreement which shall remain in full force and
effect.
12. Any controversy or claim arising out of or relating to
this Agreement or any alleged breach thereof shall be settled by
arbitration in New York City in accordance with the rules of the American
Arbitration Association governing contract disputes and judgment upon the
award rendered by any arbitrator(s) may be entered in any court of
appropriate jurisdiction.
IN WITNESS WHEREOF, Company has caused this Agreement to be
executed by its duly authorized officers and Employee has hereunto set his
hand on the day and year first above written.
FINANCIAL FEDERAL CREDIT INC.
BY:
(Title)
EMPLOYEE:
_____________________
<PAGE>
Exhibit 11.1
<TABLE>
FINANCIAL FEDERAL CORPORATION & SUBSIDIARIES
CHEDULE OF COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Year Ended July 31,
1996 1995 1994
<S> <C> <C> <C>
Primary
- -------------------------
Net earnings for primary per share amounts $9,610,000 $7,209,000 $5,944,000
========== ========== ==========
Weighted average number of common
shares outstanding 8,617,558 8,199,686 7,366,763
Add - common equivalent shares
(determined using the
"treasury stock" method) 865,770 756,436 1,282,221
------- ------- ---------
Weighted average number of shares
used in calculation of primary net
earnings per common share 9,483,328 8,956,122 8,648,984
========= ========= =========
Primary net earnings per common share $1.01 $0.80 $0.69
========= ===== =====
Fully Diluted
- --------------------------
Net earnings for fully diluted per share
amounts $9,610,000 $7,209,000 $5,944,000
========= ========= =========
Weighted average number of shares
used in calculation of fully diluted
net earnings per common share 9,508,538 8,970,057 8,649,339
========= ========= =========
Fully diluted net earnings per common
share $1.01 $0.80 $0.69
========= ========= =========
</TABLE>
<PAGE>
Exhibit 22.1
SUBSIDIARIES OF REGISTRANT
Name State of incorporation
Financial Federal Credit Inc. Texas
Names of particular subsidiaries have been omitted since in the
aggregate they do not constitute a significant subsidiary as of July 31,
1996 as defined by Rule 1-02(w) of Regulation S-X.
<PAGE>
Exhibit 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement on Form S-8 (No. 33-73320) of
Financial Federal Corporation of our report dated August 30, 1996, included
in this Annual Report on Form 10-K. We also consent to the incorporation by
reference in such Registration Statement of our report on the Financial
Statement Schedules, which appears on Page 13 of this Form 10-K.
/s/ Eisner & Lubin LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
October 23, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FINANCIAL FEDERAL
CORPORATION
(Registrant)
By: /s/ Clarence Y. Palitz, Jr.
Chairman of the Board and President
October 28, 1996
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Clarence Y. Palitz, Jr. October 28, 1996
Chairman of the Board, President and Chief Executive Officer
/s/ Lawrence B. Fisher October 28, 1996
Director
/s/ William C. MacMillen, Jr. October 28, 1996
Director
/s/ Bernard G. Palitz October 28, 1996
Director
/s/ Paul Sinsheimer October 28, 1996
Executive Vice President and Director
/s/ Michael C. Palitz October 28, 1996
Executive Vice President, Treasurer, Chief Financial Officer and Director
/s/ David H. Hamm October 25, 1996
Controller, Assistant Treasurer and Principal Accounting Officer
EXHIBIT 13.1
[LOGO]
FINANCIAL
FEDERAL
CORPORATION
[GRAPHIC] VARIOUS PHOTOS
1996 ANNUAL REPORT
<PAGE>
CORPORATE PROFILE
FINANCIAL FEDERAL CORPORATION IS A MAJOR, INDEPENDENT
FINANCIAL SERVICES COMPANY ENGAGED IN FINANCING
INDUSTRIAL, COMMERCIAL AND PROFESSIONAL EQUIPMENT
THROUGH INSTALLMENT SALES, CAPITAL LOANS AND LEASING
PROGRAMS FOR MANUFACTURERS, DEALERS AND USERS OF
SUCH EQUIPMENT ON A NATIONWIDE BASIS.
<PAGE>
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
<TABLE>
<CAPTION>
for years ended July 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finance Receivables, net ............... $429,698 $339,299 $268,642 $206,145 $171,817
Total Assets ........................... 433,087 342,936 271,987 209,609 175,112
Total Senior Debt ...................... 310,830 249,270 184,848 134,628 107,884
Total Subordinated Debt ................ 6,957 21,957 22,682 24,189 24,500
Stockholders' Equity ................... 94,191 58,075 50,523 41,727 36,426
Revenues ............................... 43,523 34,951 25,866 22,911 21,903
Net Earnings ........................... 9,610 7,209 5,944 4,968 3,760
Earnings per common share, primary ..... 1.01 0.80 0.69 0.58 0.67
Earnings per common share, fully diluted 1.01 0.80 0.69 0.57 0.67
</TABLE>
[THE FOLOWING 3 TABLES WERE REPRESENTED BY BAR GRAPHS IN THE PRINTED MATERIAL]
FINANCE RECEIVABLES REVENUES NET EARNINGS
(in millions) (in millions) (in millions)
<PAGE>
DEAR SHAREHOLDER:
[GRAPHIC] PHOTO OF CRANE
Fiscal 1996 was the Company's best year ever. Net earnings increased by
over 33% to $9.6 million, net finance receivables increased by 27% to $430
million, net credit losses remained at minimal levels and tangible net worth
increased from $58 million to $94 million. The Company replaced, upon maturity
in September 1995, its institutional subordinated debt with senior borrowings
bearing lower rates of interest which resulted in a reduction of interest
expense for the year in excess of $750,000. Overall, funding costs were further
reduced as the Company's credit status continued to improve and the financial
community recognized Financial Federal's investment grade status. In order to
accommodate portfolio and geographic growth, the Company increased its
management, marketing, administrative and managerial staffing. The national
economy remained strong and, during the second half of our fiscal year, market
interest rates trended down. The combination of the Company's continued growth
of its receivables portfolio, favorable loss experience, strong general economic
conditions, the reduction of the Company's borrowing costs and the significant
increase in the Company's net worth, contributed to the enhancement of the
Company's earnings results for fiscal 1996.
Fiscal 1996 was a dynamic and exciting year for Financial Federal. Many
strategic objectives were successfully completed that have positioned the
Company for significant growth.
The capitalization and financial standing of the Company was substantially
strengthened during the year.
o In December 1995 and January 1996, Financial Federal Credit Inc.
("Credit"), the Company's major operating subsidiary, received
commercial paper investment grade ratings from both Fitch Investors
Services ("F-2") and Duff & Phelps Credit Rating Company ("D-2"). In
addition, Fitch Investors Services assigned an investment grade rating
of "BBB" to Credit's ability to meet senior obligations. Obtaining
such ratings was a major achievement for our Company and was
predicated on the Company's exceptional operating history and
financial position. To our knowledge, in recent years, there is no
other independent financial service company of our size which has
obtained such investment grade ratings.
o In April, Credit privately placed $55 million of 5 1/2 year senior
unsecured debt at an annual interest rate of 6.76% with a group of
insurance companies led by Principal Mutual Life Insurance Company.
o In May, Financial Federal raised over $26 million of additional common
equity through the successful completion of a 1.7 million share public
offering of common stock which was managed by Prudential Securities
and NatWest Markets.
o The Company's investment grade status enabled the Company, in May, to
commence a $100 million dealer-placed commercial paper program. The
program was well-received by the investment community and quickly
oversubscribed and, therefore, increased to $200 million in June and
$250 million in early September. BA Securities Inc. and The Chicago
Corporation have been engaged as dealers of the Company's commercial
paper. As of July 31, 1996, the Company had $190 million in commercial
paper outstanding, which represented 70% of its then money market
borrowing requirements.
o In support of its commercial paper and bank borrowings, the Company
had $377.5 million of committed bank credit facilities at year end, of
which over $60 million contractually expires during fiscal 1998 and
$190 million expires during the ensuing two fiscal years. The Company
had, as of July 31, over $120 million of unused committed bank
facilities in excess of its bank borrowings and commercial paper
support needs.
o In December, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend, which was paid in January.
The Company's financial strength and earnings potential have never been
stronger. As of the end of the Company's fiscal year, its tangible net worth was
in excess of $94 million and is expected to exceed the $100 million mark during
fiscal 1997. Based on the Company's current capital structure and its maximum
contractual permitted debt-to-equity ratios with its lenders, it can incur over
$700 million of unsecured senior debt. Therefore, the Company, over time, is in
a position to substantially increase the size of its receivables portfolio
without the necessity of raising additional common or preferred equity, selling
or securitizing its receivables and/or placing costly subordinated debt.
2 FINANCIAL FEDERAL CORPORATION
<PAGE>
In July 1996, the Company called its $7.0 million variable rate
subordinated debt due September 1, 2000, subject to the holders of same having
an option to accept replacement, fixed rate 8% subordinated debentures due March
2003. As of September 1, 1996, $4.7 million of such subordinated debt was
retired at par.
Over 90% of the Company's receivables are concentrated in four core
business equipment categories, namely, (1) construction and material handling
and processing, (2) over-the-road vehicles including trucks, trailers, vans and
buses, (3) machine tool and manufacturing equipment, and (4) environmental waste
equipment. The Company estimates that its market share of the domestic capital
loan, financing and leasing market for such new and used equipment categories is
less than one percent. Therefore, the potential for the Company to expand its
lending, financing and leasing activities in such core categories is
substantial.
In general, middle market businesses that avail themselves of the Company's
lending, finance and leasing services are privately owned, have a net worth in
the $250,000 to $5 million range and sales in the $2 million to $25 million
range. The average transaction when originally booked is in the range of
$140,000 and is generally scheduled to be repaid in monthly installments of
principal and interest over a 36 to 60 month period. The Company's present
self-imposed maximum lending limit to a single customer is in the $7 million
range and its single largest net receivable exposure is less than $5 million.
The Company generally has a first lien on the primary equipment which is pledged
to it as collateral. The Company focuses its lending, financing and leasing
operations on equipment that is long-lived, not subject to major technological
obsolescence, and, if need be, can be readily marketed by the Company directly
or through public auction.
The Company operates in a very competitive business environment. Most
commercial banks offer equipment finance and/or leasing services to middle
market businesses, especially those in their franchise area. In addition, there
are numerous other finance and leasing companies, including some of the largest
in the country, with which Financial Federal competes. To date, notwithstanding
such intense competition from larger financial institutions that generally have
lower funding costs, the Company has been able to grow successfully and
profitably, which it attributes primarily to its managerial and marketing
personnel's extensive specialized industry experience and their devotion to
excel.
To narrow the Company's funding cost disadvantage, vis-a-vis its larger
competitors, the Company, as indicated above, has taken significant steps during
fiscal 1996 to reduce its borrowing costs, primarily by accessing the commercial
paper market and obtaining an investment grade rating on its ability to meet
senior obligations. The Company continually endeavors to pursue ways to lower
its funding costs.
The Company takes great pride in the 125 men and women who comprise its
management, marketing and operational teams; their dedication and commitment to
the Company since its founding has been most gratifying. In order to align their
interests with those of our shareholders and to focus their efforts on continued
increasing profitability, the Company has granted incentive stock options to the
vast majority of its employees. This gives the Company's employees the
opportunity to benefit from increases in the market value of the Company's
stock, providing them with a strong financial incentive consistent with the
goals of our other shareholders.
My brother, Bernard G. Palitz, who is one of the founding members of the
Financial Federal management group, relinquished his operating duties in
November, 1995 as the senior executive in charge of the Company's Liability
Management Department and stepped down as Chairman of the Board in July.
Bernard, who just reached his 72nd year, has had a long and distinguished career
in the financial service industry. We all thank him for his untiring devotion to
the Company, its employees and shareholders.
I wish to thank all our employees, customers, funding sources and investors
who, from the time the Company commenced business in March 1989, have
continually demonstrated great confidence in us and our management team.
We have, in just a few short years, built an exceptionally fine Company
with a solid reputation of responsiveness, service and integrity. I am very
proud of our achievements and the loyal support we have received from our
stockholders. Financial Federal is a small but growing Company. We strive not to
be the largest in our field of expertise, but to always be the best.
/S/ CLARENCE Y. PALITZ, JR.
- ----------------------------
CLARENCE Y. PALITZ, JR.
President and Chief Executive Officer
September 26, 1996
3 FINANCIAL FEDERAL CORPORATION
<PAGE>
BUSINESS APPROACH
[GRAPHIC] PHOTO OF TRUCK
In the dynamic and changing world of equipment financing, Financial Federal
differentiates itself by providing the two most important ingredients--SERVICE
and RELATIONSHIP.
Our goal is not to be the largest finance and leasing company, nor to
strain our financial and managerial resources to exponentially increase our
market share, but to provide our customers with the best and most responsive
financial services available. The Company's management group strives to
establish and nurture long-standing and mutually rewarding relationships with
its customers. While the Company's marketing representatives continually work
toward introducing Financial Federal's services to new customers, the Company is
also able to generate a large percentage of its new business volume from repeat
business with its existing customer base. We listen to our customers and then
custom-tailor a financial program that best meets the needs of all concerned.
[GRAPHIC] PHOTO OF CRANE
Our experienced and industry-knowledgeable specialists in credit analysis
and collateral evaluation understand the intricacies and nuances of our
customers' businesses and the uses and valuations of the equipment being
pledged, in many fields including the construction, transportation, production
and environmental service industries. We recognize that within these different
industries, customers have individual and varied needs. Our management group
must understand such complexities in order to achieve our goal of delivering
outstanding SERVICE and retaining customer RELATIONSHIPS.
Financial Federal started in business less than eight years ago, and in
that short period of time, through a commitment to excellence in service to its
customer base, it has been able to grow steadily and profitably and become
recognized as one of the finest financial SERVICE companies in the country.
4 FINANCIAL FEDERAL CORPORATION
<PAGE>
[GRAPHIC] Photos
"FISCAL 1996 WAS
A DYNAMIC AND EXCITING
YEAR FOR FINANCIAL
FEDERAL . . . THE COMPANY'S
FINANCIAL STRENGTH AND
EARNINGS POTENTIAL HAVE
NEVER BEEN GREATER."
5 FINANCIAL FEDERAL CORPORATION
<PAGE>
Financial Federal Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
General
The Company derives profits to the extent that its income exceeds its cost of
borrowed funds, operating and administrative expenses, and provision for
possible losses. The Company borrows funds in the wholesale markets to lend
primarily to middle market businesses 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 business activities.
The Company's leasing activities are substantially identical in business terms
to its lending and financing activities, differing only in legal and tax
treatment.For financial reporting purposes, leases are treated as a financing
arrangement. Whether a transaction is characterized and documented as a lease
depends on management's evaluation of the customer's credit and the collateral,
as well as the customer's desire to lease, and other factors. The types of
equipment that the Company lends against, finances and leases, and the ongoing
operational treatment of a transaction, is generally the same, regardless of the
documentation used.
Comparison of Fiscal 1996 to Fiscal 1995
Finance income increased 25% to $43.5 million in fiscal 1996 from $35.0 million
in fiscal 1995. The increase was primarily attributable to the 24% increase in
average finance receivables outstanding to $388.0 million in1996 from $312.3
million in 1995. The growth in finance receivables was due to new financings
which totaled $334.2 million in 1996, an increase of 28% over 1995. New
financings increased as a result of the hiring of additional marketing personnel
in 1996 and favorable economic conditions.
Interest expense, which is incurred on borrowings primarily used to fund finance
receivables, increased 19% to $19.3 million in 1996 from $16.3 million in 1995.
The overall increase was mainly due to the 27% increase in average borrowings
during 1996 from 1995, offset by decreases in costs of funds and, to a lesser
extent, average market interest rates.
Since the increase in finance income exceeded the increase in interest expense,
finance income before provision for possible losses on finance receivables
increased by 30% to $24.3 million in 1996 from $18.7 million in 1995. As a
percentage of average finance receivables outstanding, finance income before
provision for possible losses increased to 6.3% in 1996 from 6.0% in 1995. The
increase was primarily due to the interest savings of approximately $750,000
from the replacement of the $15.0 million senior subordinated note, bearing a
12.27% interest rate, on September 1, 1995 with borrowings bearing lower
interest rates and the interest savings of approximately $350,000 on the debt
repaid from the net proceeds of the Company's 1.7 million share public offering
of its common stock in May 1996.
The provision for possible losses on finance receivables increased 18% to $1.7
million in 1996 from $1.5 million in 1995. The increase was primarily due to the
increase in finance receivables. See Note B(5) of Notes to Consolidated
Financial Statements for the summary of activity in the allowance for possible
losses.
Salaries and other expenses increased 23% to $7.1 million in 1996 from $5.8
million in 1995. The increase was primarily due to the hiring of additional
marketing and other personnel and salary increases.
The provision for income taxes increased to $5.8 million in 1996 from $4.4
million in 1995 due to the increase in earnings before income taxes.
Net earnings increased by 33% to $9.6 million in 1996 from $7.2 million in 1995.
Primary and fully diluted earnings per share increased by 26% to $1.01 per share
in 1996 from $0.80 per share in 1995. The increase in earnings per share was
lower than the increase in net earnings primarily due to the effect of the sale
of 1.7 million shares of the Company's common stock in a public offering in May
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.
6 FINANCIAL FEDERAL CORPORATION
<PAGE>
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 in the 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 16% to $0.80 per share in fiscal 1995 from $0.69 per share in
fiscal 1994.
RECEIVABLE PORTFOLIO AND
ASSET QUALITY
Finance receivables outstanding increased $92.0 million to $437.7 million at
July 31, 1996 from $345.7 at July 31, 1995. The increase is primarily due to the
amount of new financings exceeding amounts collected. At July 31, 1996,
Financial Federal Credit Inc. ("Credit," a wholly-owned subsidiary) had $436.0
million, or 99.6%, of total finance receivables and First Federal Commercial
Inc. ("Commercial," a wholly-owned subsidiary) had the balance of finance
receivables.
The Company's finance receivables reflect certain industry and geographic
concentrations of credit risks. These concentrations arise from counterparties
having similar economic characteristics that would cause their ability to meet
their contractual obligations to the Company to be similarly affected by changes
in economic or other conditions. The major industry concentrations are:
trucking-20%, construction-17%, waste disposal-13% and cranes-11%. The major
geographic concentrations are the: southwest-27%, southeast-25%, northeast-21%
and central-17%.
Finance receivables on which the Company has suspended the recognition of
income, $5.9 million at July 31, 1996, expressed as a percentage of total
finance receivables outstanding, increased to 1.3% at July 31, 1996 from 1.0% at
July 31, 1995.
The allowance for possible losses on finance receivables, $8.0 million at July
31, 1996, expressed as a percentage of total finance receivables outstanding,
was approximately the same at July 31, 1996, 1.83%, as it was at July 31, 1995,
1.85%. The allowance is periodically reviewed by the Company's management and is
based on management's current assessment of the risks inherent in the Company's
finance receivables from national and regional economic conditions, industry
conditions, concentrations, the financial condition of individual counterparties
and other factors. Future increases in the level of the allowance may be
necessary based on future changes in these factors.
7 FINANCIAL FEDERAL CORPORATION
<PAGE>
Management believes that net credit losses on the Company's finance receivables
have been historically low primarily due to favorable economic and industry
conditions. Net credit losses, defined as write-downs of receivables less
subsequent recoveries, expressed as a percentage of average finance receivables
outstanding, was 0.34% in 1992, 0.31% in 1993, 0.13% in 1994, 0.08% in 1995 and
0.03% in 1996. Management does not currently expect that this trend will
continue. Increases in the Company's net credit losses would have a negative
impact on the Company's earnings through increased loss provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations are dependent upon the continued availability of funds
which are used primarily for the origination or acquisition 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, direct issuance of and dealer placed commercial paper,
borrowings under revolving credit facilities, sales of common and preferred
equity and placement of term debt.
The Company's total debt outstanding increased $46.6 million to $317.8 million
at July 31, 1996 from $271.2 million at July 31, 1995. The Company also
increased its stockholders' equity by $36.1 million to $94.2 million at July 31,
1996 from $58.1 million at July 31, 1995 and its net deferred income tax
liability by $2.6 million to $8.9 million at July 31, 1996 from $6.3 million at
July 31, 1995. These increases, together with increases in the Company's accrued
expenses and other liabilities, were used to fund the increase in finance
receivables.
During 1996, the Company improved its liquidity and capital structure. Credit
obtained investment grade commercial paper ratings of "D-2" from Duff & Phelps
Credit Rating Co. and "F-2" from Fitch Investors Services, Inc., which should
reduce the Company's cost of funds (without giving effect to changes in market
interest rates) and improve its access to capital. The Company completed a 1.7
million share public offering of its common stock in May 1996, receiving net
proceeds of $26.3 million which was used to repay debt. In April 1996, Credit
issued $55.0 million of senior institutional term notes maturing in September
2001. During the year, the Company increased its total committed unsecured
revolving credit facilities by $47.5 million to $377.5 million at July 31, 1996
and increased the amount of these facilities that have original terms of two or
more years by $175.0 million to $270.0 million at July 31, 1996. In the fourth
quarter of 1996, Credit established a $200.0 million commercial paper program
with recognized dealers in addition to the Company's existing direct commercial
paper programs. At July 31, 1996, $190.0 million of commercial paper was
outstanding.
In December 1995, the Company declared a three-for-two stock split effected in
the form of a stock dividend which was paid in January 1996. In August 1996, the
Company announced a $2.5 million common stock repurchase program and
subsequently acquired 74,300 shares of its common stock for $941,000.
Repurchases under this program are not expected to have a significant impact on
the Company's earnings per share.
The Company has obtained most of its borrowings through Credit and has obtained
the balance of its borrowings through Financial Federal Corporation
("Financial", the parent company). The Company may also borrow through
Commercial. The sources of the Company's borrowings are described below.
Financial and Credit are each direct issuers of commercial paper. Credit also
issues commercial paper through a $200.0 million program with recognized
dealers. All of the Company's commercial paper is unsecured and matures within
270 days. Commercial paper outstanding at July 31, 1996 bore interest at fixed
annual rates generally ranging from 5.4% to 6.0%. 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 bank
committed revolving credit facilities in an amount at least equal to commercial
paper outstanding.
At July 31, 1996, Credit had committed unsecured revolving credit facilities
with an original term of one year or less aggregating $107.5 million with ten
banks under which $31.0 million was outstanding. At July 31, 1996, Credit also
had committed unsecured revolving credit facilities with original terms ranging
from two to five years aggregating $265.0 million with seventeen banks under
which $34.9 million was outstanding, and Financial had a $5.0 million committed
8 FINANCIAL FEDERAL CORPORATION
<PAGE>
unsecured revolving credit facility with an original term of five years with a
bank under which no borrowings were outstanding. At July 31, 1996, $15.0 million
of long-term revolving credit facilities expire within one year. Amounts
outstanding under all of these facilities bear interest at variable rates
indexed to either domestic money market rates or LIBOR. Fees are paid to these
banks in connection with these facilities. None of the banks is contractually
obligated to renew its facility.
The following table presents information on the amounts outstanding and interest
rates of the Company's commercial paper and bank borrowings under revolving
credit facilities:
(dollars in millions) 1996 1995 1994
- ------------------------------------------------------------
Commercial Paper:
Maximum amount
outstanding during
the year ................ $ 192.5 $ 25.1 $ 25.6
Average amount
outstanding during the year 38.0 18.7 19.9
Weighted average
interest rate:
During the year ........ 5.8% 5.8% 4.4%
End of the year ........ 5.7 6.2 4.8
Bank borrowings:
Maximum amount
outstanding during the year $ 256.1 $ 157.6 $ 92.9
Average amount
outstanding during the year 178.1 94.6 74.0
Weighted average
interest rate:
During the year ........ 6.3% 6.5% 4.6%
End of the year ........ 6.1 6.7 5.3
At July 31, 1996, the Company reported $255.0 million of commercial paper and
bank borrowings as long-term senior debt in its financial statements based on
its long-term revolving credit facilities that expire after one year.
In April 1996, Credit issued $55.0 million of institutional term notes to
insurance companies. The notes are due September 1, 2001 and bear interest,
payable semi-annually, at the annual rate of 6.76%. Prepayments of the notes are
subject to a premium based on a yield maintenance formula.
In July 1996, Financial called its $7.0 million of variable rate subordinated
debentures at face value, offering holders the option to receive amended
debentures. As a result, $4.7 million of these debentures were repaid and $2.3
million of amended debentures were issued subsequent to year-end. The amended
debentures, due on March 1, 2003, bear interest, payable semi-annually, at an
annual rate of 8.0%, and contain a penalty for prepayments made prior to
September 1, 1999. The original debentures bore interest at the prime rate, as
defined, with minimum and maximum rates of 8.0% and 13.0%.
The institutional term notes and the bank revolving credit facilities contain
certain restrictive covenants including limitations on indebtedness,
encumbrances, investments, dividends and other distributions from Credit to
Financial, sales of assets, mergers and other business combinations, capital
expenditures and the minimum adjusted net worth of Credit.
At July 31, 1996, $43.6 million of the Company's retained earnings and
paid-in-capital was free of restrictions on dividends or other distributions to
its stockholders.
INTEREST RATES AND SENSITIVITY
The table below provides information regarding the net yield of the Company's
finance receivables, its cost of borrowed funds and the resulting net interest
spread.
Year ended July 31,
1996 1995 1994
- --------------------------------------------------------
Average yield of finance
receivables .......... 11.2% 11.2% 10.8%
Weighted average cost of
borrowed funds ....... 6.6% 6.9% 5.4%
-------------------------
Net interest spread .... 4.6% 4.3% 5.4%
=========================
The Company's finance receivables consist of fixed rate and variable rate
transactions. At July 31, 1996, $319.2 million, or 73%, of finance receivables
provide for interest at fixed rates and $118.5 million, or 27%, of finance
receivables provide for interest at variable rates which reprice with changes in
the prime rate, as defined. Finance receivables generally have original
maturities ranging from two to five years and provide for monthly installments.
The Company experiences some prepayments of its finance receivables.
9 FINANCIAL FEDERAL CORPORATION
<PAGE>
At July 31, 1996, fixed rate long-term debt of $55.0 million, stockholders'
equity of $94.2 million and net deferred income tax liability of $8.9 million
totaled $158.1 million and variable rate debt totaled $262.8 million. Most of
the Company's variable rate debt reprices at regular intervals. At July 31,
1996, total commercial paper and bank borrowings outstanding of $255.8 million
was scheduled to reprice or mature as follows: $219.0 million, or 86%, within
one month, $26.8 million, or 10%, within the following two months and the
remainder, $10.0 million, or 4%, within the following six months.
Since the amount of the Company's fixed rate finance receivables exceeds the
total of its fixed rate long-term debt, stockholders' equity and net deferred
income tax liability, its net interest spread could be affected by fluctuations
in market interest rates. During 1996, the Company reduced its reliance on
variable rate debt by issuing $55.0 million of fixed rate 5 1/2 year term debt
and by increasing its stockholders' equity by $26.3 million from the sale of 1.7
million shares of common stock.
The Company does not seek to match maturities of its debt to its receivables.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This statement requires either the recognition or disclosure of
compensation expense based on the fair value of equity instruments granted to
employees. As permitted by SFAS 123, the Company has elected to adopt the
disclosure provisions of this standard in 1997.
The Company adopted the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," as of August 1, 1995.
These statements require impaired loans to be measured based on the present
value of the expected cash flows discounted at the loan's effective interest
rate or the fair value of the collateral, if the loan is collateral dependent.
Under SFAS 114, a loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. These standards do
not apply to leases. The adoption of these standards did not have a material
effect on the Company's operating results.
STOCK PRICE HISTORY AND
DIVIDEND POLICY
The Company's common stock is traded on the American Stock Exchange under the
symbol "FIF." The table below sets forth, for the periods indicated, the high
and low closing sales prices per share of the common stock as reported by the
American Stock Exchange, adjusted for the January 1996 three-for-two stock
split.
Price Range
Fiscal year 1996 High Low
- ---------------------------------------------------------------------------
First Quarter ended
October 31, 1995 ..................... $ 14.59 $ 11.75
Second Quarter ended
January 31, 1996 ..................... $ 16.50 $ 13.92
Third Quarter ended
April 30, 1996 ....................... $ 16.88 $ 15.13
Fourth Quarter ended
July 31, 1996 ........................ $ 17.13 $ 12.63
The Company presently has no intention of paying cash dividends in the
foreseeable future.
10 FINANCIAL FEDERAL CORPORATION
<PAGE>
Financial Federal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash ................................................................................. $ 2,426,000 $ 3,090,000
Finance receivables .................................................................. 437,706,000 345,694,000
Less allowance for possible losses ................................................. (8,008,000) (6,395,000)
------------------------------------
Finance receivables--net ............................................................. 429,698,000 339,299,000
------------------------------------
Other assets ......................................................................... 963,000 547,000
------------------------------------
TOTAL ............................................................................ $ 433,087,000 $ 342,936,000
====================================
LIABILITIES
Senior debt:
Short-term ($6,816,000 due to related parties in 1995) ............................. $ 830,000 $ 99,270,000
Long-term ($9,376,000 due to related parties in 1996) .............................. 310,000,000 150,000,000
Accrued interest, taxes and other liabilities ........................................ 12,160,000 7,347,000
Senior subordinated note ............................................................. 15,000,000
Subordinated debentures ($3,178,000 due to related parties in 1996 and 1995) ......... 6,957,000 6,957,000
Deferred income taxes ................................................................ 8,949,000 6,287,000
------------------------------------
Total liabilities ................................................................ 338,896,000 284,861,000
------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock--$1 par value, authorized 500,000 shares, none issued
Common stock--$.50 par value, authorized shares: 25,000,000 in 1996 and
10,000,000 in 1995, issued shares: 9,960,000 in 1996 and 5,580,000 in 1995 ......... 4,980,000 2,790,000
Additional paid-in capital ........................................................... 58,289,000 33,201,000
Warrants--issued and outstanding 1,071,000 in 1996 and 1995 .......................... 29,000 29,000
Retained earnings .................................................................... 30,893,000 23,495,000
Treasury stock, at cost--96,000 shares ............................................... (1,440,000)
------------------------------------
Total stockholders' equity ....................................................... 94,191,000 58,075,000
------------------------------------
TOTAL ............................................................................ $ 433,087,000 $ 342,936,000
====================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
11 FINANCIAL FEDERAL CORPORATION
<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, 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 ................. 31,000 16,000 150,000
Three-for-two stock split ................. 2,745,000 1,372,000 (1,372,000)
Sale of common stock ...................... 1,700,000 850,000 25,490,000
Net earnings .............................. 9,610,000
-------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1996 .................. 9,960,000 $ 4,980,000 $ 58,289,000 $ 29,000 $ 30,893,000 $ --
=====================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
12 FINANCIAL FEDERAL CORPORATION
<PAGE>
Financial Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Finance income:
<S> <C> <C> <C>
Loan obligations ................................... $29,533,000 $24,654,000 $17,264,000
Lease obligations .................................. 13,990,000 10,297,000 8,602,000
---------------------------------------------
Total finance income ............................. 43,523,000 34,951,000 25,866,000
Interest expense ................................... 19,271,000 16,253,000 9,886,000
---------------------------------------------
Finance income before provision for possible losses on
finance receivables ................................ 24,252,000 18,698,000 15,980,000
Provision for possible losses on finance receivables . 1,710,000 1,450,000 1,475,000
---------------------------------------------
Net finance income ............................... 22,542,000 17,248,000 14,505,000
Miscellaneous income ................................. 130,000
Salaries and other expenses .......................... (7,113,000) (5,806,000) (5,021,000)
---------------------------------------------
Earnings before income taxes ......................... 15,429,000 11,572,000 9,484,000
Provision for income taxes ........................... 5,819,000 4,363,000 3,540,000
---------------------------------------------
Net Earnings ......................................... $ 9,610,000 $ 7,209,000 $ 5,944,000
=============================================
Earnings per common share:
Primary ............................................ $ 1.01 $ 0.80 $ 0.69
=============================================
Fully diluted ...................................... $ 1.01 $ 0.80 $ 0.69
=============================================
Average number of shares used:
Primary ............................................ 9,483,328 8,956,122 8,648,984
=============================================
Fully diluted ...................................... 9,508,538 8,970,057 8,649,339
=============================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
13 FINANCIAL FEDERAL CORPORATION
<PAGE>
Financial Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings ................................................. $ 9,610,000 $ 7,209,000 $ 5,944,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ............................ 206,000 156,000 103,000
Provision for possible losses on finance receivables ..... 1,710,000 1,450,000 1,475,000
Amortization of deferred origination costs ............... 3,443,000 2,896,000 2,329,000
Deferred income taxes .................................... 2,662,000 1,238,000 1,839,000
Gain on repurchase of subordinated debenture ............. (130,000)
Decrease (increase) in other assets ...................... (368,000) 79,000 121,000
Increase (decrease) in accrued interest,
taxes and other liabilities ............................ 4,813,000 (1,538,000) 3,030,000
----------------------------------------------
Net cash provided by operating activities ............ 22,076,000 11,360,000 14,841,000
----------------------------------------------
Cash flows from investing activities:
Finance receivables:
Originated ................................................. (358,512,000) (261,135,000) (226,456,000)
Collected .................................................. 262,960,000 186,132,000 160,155,000
Payments for office furniture and equipment .................. (254,000) (242,000) (127,000)
----------------------------------------------
Net cash (used in) investing activities .............. (95,806,000) (75,245,000) (66,428,000)
----------------------------------------------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) ........................... 167,750,000 (10,591,000) 13,068,000
Maturities greater than 90 days:
Proceeds ................................................. 24,866,000 21,565,000 25,929,000
Repayments ............................................... (14,341,000) (20,997,000) (31,742,000)
Notes payable--banks (net) ................................... (91,715,000) 74,445,000 17,965,000
Proceeds from institutional term notes ....................... 55,000,000
Term loans--banks:
Proceeds ................................................... 35,000,000 25,000,000
Repayments ................................................. (80,000,000) (35,000,000)
Repayment of senior subordinated note ........................ (15,000,000)
Repurchase of subordinated debenture ......................... (595,000)
Proceeds from sale of common stock, net ...................... 26,340,000
Proceeds from exercise of:
Stock options .............................................. 166,000 306,000 1,474,000
Stock warrants ............................................. 935,000
Acquisition of treasury stock ................................ (1,440,000)
Tax benefit relating to stock options ........................ 37,000 376,000
----------------------------------------------
Net cash provided by financing activities ............ 73,066,000 64,170,000 51,565,000
----------------------------------------------
Net Increase (Decrease) in Cash ................................ (664,000) 285,000 (22,000)
Cash--August 1 ................................................. 3,090,000 2,805,000 2,827,000
----------------------------------------------
Cash--July 31 .................................................. $ 2,426,000 $ 3,090,000 $ 2,805,000
==============================================
Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 18,163,000 $16,037,000 $ 9,787,000
==============================================
Income taxes paid ............................................ $ 3,003,000 $ 3,807,000 $ 367,000
==============================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
14 FINANCIAL FEDERAL CORPORATION
<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. and
Financial Federal Commercial Inc. (collectively, the Company). Intercompany
investments and advances have been eliminated.
(2) Business--The Company provides collateralized lending, financing and leasing
services primarily to middle-market commercial enterprises located throughout
the United States, representing diverse industries such as general construction,
road and infrastructure construction and repair, manufacturing, trucking and
waste disposal. The Company lends against, finances and leases a wide range of
income-producing and labor-saving equipment such as cranes, earth movers,
machine tools, personnel lifts, trailers and trucks.
(3) Income Recognition--The Company's finance receivables consist of loans and
other financings and noncancelable leases. All leases are recorded as direct
financing leases, where total lease payments, plus residual values recorded at
the lowest of (i) any stated purchase option, (ii) the present value at the end
of the initial lease term of rentals under any renewal options or (iii) the
estimated fair value of the equipment at the end of the lease, less the cost of
the leased equipment is recorded as unearned finance income.
Finance income is recognized over the term of receivables using the interest
method. Costs incurred to originate or acquire receivables are deferred and
amortized over the term of receivables using the interest method.
The Company suspends income recognition on finance receivables considered
impaired (full collection of principal and interest being doubtful) by
management. This typically occurs when (i) a payment is more than 120 days past
due according to contractual terms, (ii) the counterparty becomes the subject of
a bankruptcy proceeding or (iii) the underlying collateral is being liquidated.
Impaired receivables are written down to the underlying collateral's currently
estimated net liquidation value (if less than the recorded amount). Income
recognition may be resumed when management believes full collection is probable.
Any cash collected on impaired receivables is applied to the recorded
investment.
The Company charges a general provision for possible losses on finance
receivables against income in an amount to increase the allowance for possible
losses to a level that management considers appropriate. Write-downs of impaired
receivables are charged to the allowance for possible losses and subsequent
recoveries of amounts written down are credited to the allowance. The allowance
is reviewed periodically giving consideration to present and anticipated
national and regional economic conditions, industry conditions, the status of
the finance receivables, and other factors.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," as of August 1, 1995. These
statements require impaired loans to be measured based on the present value of
the expected cash flows discounted at the loan's effective interest rate, or the
fair value of the collateral if the loan is collateral dependent. Under SFAS
114, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. These standards do not
apply to leases. The adoption of these standards did not have a material effect
on the Company's operating results.
(4) Income Taxes--The Company recognizes deferred tax assets and liabilities for
the estimated future tax effects of temporary differences between the financial
statement and tax return bases of assets and liabilities and carryforwards using
enacted tax rates. Deferred tax expense represents the net change in deferred
tax assets and liabilities during the year.
(5) Earnings Per Share--Earnings per common share is calculated by dividing net
earnings by the weighted average number of shares of common stock and common
stock equivalents outstanding during the period. Common stock equivalents
consist of dilutive stock options and warrants that are assumed to be exercised
for the calculation.
(6) Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(Note B)--Finance Receivables:
(1) Finance receivables consist of installment sales and secured loans
(including line of credit arrangements), collectively referred to as loans,
which provide for interest at fixed rates or variable rates, generally
15 FINANCIAL FEDERAL CORPORATION
<PAGE>
indexed to the prime rate (as defined), and investments in direct financing
leases, as follows:
July 31,
1996 1995
- --------------------------------------------------------
Loans:
Fixed rate ............ $190,851,000 $130,706,000
Variable rate ......... 100,053,000 103,129,000
---------------------------
Total ............... 290,904,000 233,835,000
Direct financing leases . 146,802,000 111,859,000
---------------------------
Finance receivables . $437,706,000 $345,694,000
===========================
(2) The investment in direct financing leases consists of the following:
July 31,
1996 1995
- --------------------------------------------------------
Minimum lease
payments receivable .. $154,003,000 $116,128,000
Estimated unguaranteed
residual values ...... 22,526,000 21,071,000
Unearned finance income (31,427,000) (26,763,000)
Initial direct costs ... 1,700,000 1,423,000
---------------------------
Investment in direct
financing leases . $146,802,000 $111,859,000
===========================
(3) Finance receivables generally provide for monthly installments of equal or
varying amounts over periods not exceeding five years. Contractual maturities of
finance receivables at July 31, 1996 are as follows:
Direct
Fixed Variable Financing
Rate Loans Rate Loans Leases
- ------------------------------------------------------------------------------
Year ending
July 31:
1997 ............... $ 66,041,000 $ 38,989,000 $ 54,597,000
1998 ............... 56,130,000 27,986,000 44,151,000
1999 ............... 40,288,000 19,288,000 31,756,000
2000 ............... 20,335,000 9,608,000 17,400,000
2001 ............... 7,047,000 3,541,000 5,645,000
Thereafter ......... 1,010,000 641,000 454,000
--------------------------------------------------
Total ........... $190,851,000 $100,053,000 $154,003,000
==================================================
(4) The Company has suspended income recognition on finance receivables with a
recorded investment of $5,894,000 (includes $4,489,000 of impaired loans) and
$3,453,000 at July 31, 1996 and 1995, respectively. The average recorded
investment in impaired loans was $3,185,000 in 1996.
(5) The allowance for possible losses is summarized as follows:
Year Ended July 31,
1996 1995 1994
- -----------------------------------------------------------------------
Balance--August 1 .... $ 6,395,000 $ 5,191,000 $ 4,024,000
Provision ............ 1,710,000 1,450,000 1,475,000
Write-downs .......... (1,004,000) (914,000) (792,000)
Recoveries ........... 907,000 668,000 484,000
-------------------------------------------
Balance--July 31 ..... $ 8,008,000 $ 6,395,000 $ 5,191,000
===========================================
(6) The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business. These financial instruments are commitments to
extend credit to customers. The Company uses the same credit policies in making
these commitments as it does for finance receivables as their credit risks are
substantially the same. At July 31, 1996 and 1995, the unused portion of these
commitments was $7,075,000 and $2,400,000, respectively.
(Note C)--Income Taxes:
(1) The provision for income taxes comprises the following:
Year Ended July 31,
1996 1995 1994
- ----------------------------------------------------------------------
Currently payable:
Federal ............ $ 2,773,000 $ 2,742,000 $ 1,325,000
State and local .... 384,000 346,000
--------------------------------------------
Total ............ 3,157,000 3,088,000 1,325,000
Deferred ............. 2,662,000 1,238,000 1,839,000
Tax benefit relating
to stock options
(Note J) ............. 37,000 376,000
--------------------------------------------
Provision for
income taxes ..... $ 5,819,00 $ 4,363,000 $ 3,540,000
============================================
(2) Income taxes computed at the statutory federal income tax rates are
reconciled to the provision for income taxes as follows:
Year Ended July 31,
1996 1995 1994
- ----------------------------------------------------------------------
Federal income tax
at statutory rates . $ 5,313,000 $ 3,934,000 $ 3,225,000
State and local
taxes (net of
federal income
tax benefit) ....... 506,000 429,000 315,000
-------------------------------------------
Provision for
income taxes ..... $ 5,819,000 $ 4,363,000 $ 3,540,000
===========================================
16 FINANCIAL FEDERAL CORPORATION
<PAGE>
(3) Deferred income taxes is comprised of the tax effect of the following
temporary differences and carryforwards:
July 31,
1996 1995
- -----------------------------------------------------------------
Deferred tax liabilities:
Leasing transactions .......... $ 11,069,000 $ 8,243,000
Deferred origination costs .... 1,902,000 1,555,000
---------------------------
Total ...................... 12,971,000 9,798,000
---------------------------
Deferred tax assets:
Allowance for
possible losses ............ (3,070,000) (2,463,000)
Other liabilities ............. (952,000) (751,000)
Alternative minimum tax
credit carryforward ........ (297,000)
---------------------------
Total ...................... (4,022,000) (3,511,000)
---------------------------
Deferred income taxes ...... $ 8,949,000 $ 6,287,000
===========================
(Note D)--Debt:
Debt is summarized as follows:
July 31,
1996 1995
- -----------------------------------------------------------------
Senior debt:
Commercial paper .............. $189,960,000 $ 11,685,000
Variable rate notes ........... 65,870,000 157,585,000
Institutional term notes ...... 55,000,000
Variable rate term loans ...... 80,000,000
---------------------------
Total senior debt ........... 310,830,000 249,270,000
---------------------------
Subordinated debt:
Senior subordinated
note .......................... 15,000,000
Variable rate
debentures .................... 6,957,000 6,957,000
---------------------------
Total subordinated
debt ..................... 6,957,000 21,957,000
---------------------------
Total debt .................. $317,787,000 $271,227,000
===========================
(1) The Company issues commercial paper at fixed rates of interest for periods
not exceeding 270 days. At July 31, 1996 and 1995, these rates generally ranged
from 5.4% to 6.0% and 5.7% to 7.0%, respectively.
(2) At July 31, 1996, the Company had $377,500,000 of committed unsecured
revolving credit facilities with various banks which expire as follows:
$122,500,000 within one year and $255,000,000 on various dates from January 1998
through July 2001. These facilities contain certain restrictive covenants
including limitations on indebtedness, encumbrances, dividends to Financial from
Credit, capital expenditures and minimum net worth. The Company generally incurs
a fee on the unused portion of these facilities.
Outstanding borrowings which were $65,870,000 at July 31, 1996 mature within 90
days and bear interest at variable rates which are indexed to domestic money
market rates or LIBOR, at the Company's option.
(3) The institutional term notes, which are Credit's obligation, are due
September 1, 2001 and bear interest, payable semi-annually, at the annual rate
of 6.76%. Prepayments of the notes are subject to a premium based on a yield
maintenance formula. The notes contain certain restrictive covenants including
limitations on indebtedness, encumbrances, dividends to Financial and minimum
net worth. At July 31, 1996, $43,600,000 of the Company's equity was free of
dividend restrictions under these notes.
(4) In July 1996, Financial called its variable rate subordinated debentures at
face value, offering holders the option to receive amended debentures. As a
result, $4,667,000 of these debentures were repaid and $2,290,000 of amended
debentures were issued subsequent to year-end. The amended debentures, due March
1, 2003, bear interest, payable semi-annually, at an annual rate of 8.0%,
contain a penalty for prepayments made prior to September 1, 1999 and are
subordinated to senior debt and other debt designated by the Board of Directors
of Financial and to certain other liabilities as provided for in the debentures.
The original debentures bore interest at the prime rate with minimum and maximum
rates of 8.0% and 13.0%.
Officers and other related parties holding $3,178,000 of these debentures at
July 31, 1996, elected to have $997,000 of their debentures repaid and
$2,181,000 amended. In 1994, $352,000 of debentures were exchanged by related
parties in connection with the exercise of stock warrants.
In 1995, Financial repurchased a debenture with a face amount of $725,000 from a
non-related party for $595,000.
(5) At July 31, 1996, long-term senior debt (including commercial paper and bank
borrowings supported by credit facilities expiring after one year) and amended
subordinated debt are due as follows: $60,000,000 in 1998, $185,000,000 in 1999,
$5,000,000 in 2000, $5,000,000 in 2001 and $57,290,000 thereafter.
(Note E)--Stockholders' Equity:
(1) In December 1995, the Board of Directors authorized a three-for-two stock
split effected in the form of a stock dividend, payable in January 1996. Prior
period average shares outstanding, share equivalents and per share amounts have
been restated to reflect the stock split. Shares sold or acquired prior to the
split have not been restated.
17 FINANCIAL FEDERAL CORPORATION
<PAGE>
(2) In December 1995, the Company's stockholders 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 increasing the number of shares of
common stock available in the plan from 750,000 to 1,500,000.
(3) In May 1996, the Company sold 1,700,000 shares of its common stock in a
public offering. Net proceeds of $26,340,000 were used to repay bank borrowings.
Had this sale occurred August 1, 1995, earnings per common share, as adjusted
for the increase in net earnings from the elimination of interest expense on the
repaid debt, net of income taxes, and the increase in the average number of
shares used, would have been $0.97 in 1996.
(4) Warrants:
(a) In 1989, the Company issued warrants to purchase 750,000 shares of common
stock at $4.25 per share to its original stockholders. The warrants were
purchased for $.0033 each and expire February 1, 2001.
(b) In 1991, the Company issued warrants to purchase 321,000 shares of common
stock at $4.08 per share to its officers. The warrants were purchased for $.0833
each and expire August 31, 2001.
(c) In 1994, holders of subordinated debentures exercised warrants to purchase
444,000 shares of common stock for $2,442,000 of cash and subordinated
debentures. Related parties purchased 76,500 of these shares.
(5) In August 1996, the Company established a program to repurchase its common
stock. Total repurchases are limited to $2,500,000 under the program. As of
August 30, 1996, 74,300 shares were repurchased for $941,000. Shares repurchased
will be held in treasury for corporate purposes.
(Note F)--Lease Commitments:
The Company occupies office space under leases expiring through 2004. At July
31, 1996, minimum future annual rentals due under these leases are as follows:
$575,000 in 1997, $566,000 in 1998, $393,000 in 1999, $334,000 in 2000, $190,000
in 2001 and $427,000 thereafter. Certain of these leases provide for additional
rentals for increases in real estate taxes and other operating expenses and may
be terminated at the Company's option subject to a penalty.
Office rent expense was $550,000 in 1996, $473,000 in 1995 and $428,000 in 1994.
(Note G)--Related Party Transactions:
Commercial paper transactions with officers and other related parties are
summarized as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Year ended July 31:
Issued .....................$ 34,778,000 $ 55,270,000 $ 67,342,000
Matured .................... 32,218,000 65,596,000 60,339,000
Interest expense ........... 497,000 730,000 683,000
At July 31:
Outstanding ................ 9,376,000 6,816,000
Accrued interest ........... 99,000 130,000
(Note H)--Concentration of Credit Risk:
The Company seeks to control its exposure to the credit risks associated with
its finance receivables through established credit policies and procedures which
include obtaining a first lien on equipment collateral on all transactions. The
Company evaluates the equipment collateral on an ongoing basis and focuses on
lending against, financing and leasing equipment collateral that has an economic
life longer than the term of the receivable, is not subject to rapid
technological obsolescence, has applications in various industries, is easily
accessible and movable and has a broad resale market. The Company may also
obtain third party guarantees and/or hold back a portion of the financing.
Concentrations of credit risks arise when counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Company
does not have a significant concentration of such credit risks with any one
counterparty. The major concentrations of such credit risks grouped by the
industries and geographic regions of counterparties, expressed as a percentage
of finance receivables, were as follows:
July 31,
1996 1995
- -----------------------------------------------------------
Industry:
Trucking 20% 18%
Construction 17 17
Waste disposal 13 14
Cranes 11 16
Geographic region:
Southwest 27% 34%
Southeast 25 23
Northeast 21 17
Central 17 18
18 FINANCIAL FEDERAL CORPORATION
<PAGE>
(Note I)--Fair Values of Financial Instruments:
The Company's financial instruments consist of cash, finance receivables
(excluding leases), commitments to extend credit and debt. The following
summarizes the methods used to estimate the fair value of these financial
instruments.
The carrying values of cash, commercial paper and borrowings under revolving
credit facilities approximate their fair values due to their short-term
maturities.
The carrying value of the subordinated debentures is estimated to approximate
fair value since the debentures were either repaid or replaced by debentures
with similar terms at face value in August 1996.
The fair value of the $55,000,000 of institutional term notes at July 31, 1996
is estimated at $53,300,000 based on their future cash flows discounted at a
current rate for debt with similar terms and maturity.
It is not practicable for the Company to estimate the fair value of its finance
receivables and commitments to extend credit. These financial instruments
consist of a substantial number of transactions with commercial obligors in
numerous industries and are secured by liens on various types of equipment. Each
transaction would be valued by a potential buyer based on 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.
The approximate weighted average interest rate was 11.1% and 11.6% on fixed rate
loans at July 31, 1996 and 1995, respectively, and 2.8% over the prime rate on
variable rate loans at July 31, 1996 and 1995.
(Note J)--Stock Options:
The Company adopted a stock option plan in September 1989 (as amended) providing
for grants 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 subject to earlier termination by the Board of
Directors.
The activity of the plan, adjusted to reflect the three-for-two stock split, is
summarized as follows:
Number of Exercise Price
Options Per Option
- ------------------------------------------------------------------------
Outstanding at
August 1, 1993 ................ 559,950 $ 4.17-$11.00
Granted (includes
replacement options) ....... 183,675 9.33
Exercised ................... (352,200) 4.17- 4.96
Canceled (includes
replaced options) .......... (75,750) 10.67- 11.00
---------
Outstanding at July 31, 1994
(105,600 exercisable) ......... 315,675 4.17- 11.00
Granted ..................... 1,800 10.17
Exercised ................... (72,300) 4.17- 4.96
Canceled .................... (8,850) 9.33- 11.00
---------
Outstanding at July 31, 1995
(44,625 exercisable) .......... 236,325 4.96- 11.00
Granted ..................... 172,150 10.17- 15.00
Exercised ................... (33,675) 4.96- 11.00
Canceled .................... (31,725) 9.33- 11.00
---------
Outstanding at July 31, 1996
(64,988 exercisable) .......... 343,075 9.33- 15.00
=========
All options were granted at exercise prices not less than the fair market value
of the common stock on the date of the grant. Options granted have a six year
term and vest (become exercisable) in four equal cumulative annual installments
commencing on the second anniversary of the grant date except for 75,000 options
granted to certain executive officers in 1996 which have an eight year term and
vest in eight varying annual cumulative installments. At July 31, 1996, 838,250
shares of common stock were available for future grants of options.
In June 1994, 71,475 options granted in 1993 were replaced by options with an
exercise price of $9.33 and a longer vesting period.
Certain dispositions of stock acquired through the exercise of incentive stock
options resulted in federal and state income tax benefits to the Company of
$37,000 in 1995 and $376,000 in 1994.
In November 1993, the Company acquired 96,000 optioned shares of common stock
from an officer/ director for $1,440,000. The cost was $10 per share as restated
to reflect the January 1996 stock split. These shares were retired during 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This standard requires either the
recognition or disclosure of compensation expense based on the fair value of
equity instruments granted to employees. As permitted by SFAS 123, the Company
has elected to adopt the disclosure provisions of this standard in 1997.
19 FINANCIAL FEDERAL CORPORATION
<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, 1996 and 1995, and the
related consolidated statements of stockholders' equity, operations and cash
flows for each of the three years in the period ended July 31, 1996. 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, 1996 and 1995, and
their consolidated operating results and their cash flows for each of the three
years in the period ended July 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Eisner & Lubin LLP
---------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
August 30, 1996
Financial Federal Corporation and Subsidiaries
SELECTED
QUARTERLY DATA
Operations for the quarters included in the years ended July 31, 1996 and 1995
are summarized as follows:
Earnings
per Share
- --------------------------------------------------------------------------------
Net Fully
Revenues Earnings Primary Diluted
- --------------------------------------------------------------------------------
Fiscal 1996, three
months ended:
October 31,
1995 ........... $10,175,000 $ 2,124,000 $ 0.24 $ 0.23
January 31,
1996 ........... 10,741,000 2,317,000 0.25 0.25
April 30,
1996 ........... 10,905,000 2,439,000 0.27 0.27
July 31,
1996 ........... 11,702,000 2,730,000 0.26 0.26
Fiscal 1995, three
months ended:
October 31,
1994 ........... $ 7,611,000 $ 1,706,000 $ 0.19 $ 0.19
January 31,
1995 ........... 8,464,000 1,751,000 0.19 0.19
April 30,
1995 ........... 9,055,000 1,835,000 0.21 0.21
July 31,
1995 ........... 9,821,000 1,917,000 0.21 0.21
20 FINANCIAL FEDERAL CORPORATION
<PAGE>
CORPORATE DIRECTORY
Officers
Clarence Y. Palitz, Jr.
Chairman of the Board and President
Michael C. Palitz
Executive Vice President and Treasurer
Paul Sinsheimer
Executive Vice President
William M. Gallagher
Senior Vice President
Troy H. Geisser
Senior Vice President and Secretary
Richard W. Radom
Senior Vice President
Julian C. Green, Jr.
Vice President
Jeanne McDonald
Vice President
Fred J. Palumbo
Vice President
Ted Wooldridge
Administrative Vice President
David H. Hamm
Controller and Assistant Treasurer
Directors
Lawrence B. Fisher
Partner
Orrick, Herrington & Sutcliffe
Attorneys
William C. MacMillen, Jr.
President
William C. MacMillen & Co., Inc.
Investment Bankers
Bernard G. Palitz
President
Gregory Capital Corporation
Investments
Clarence Y. Palitz, Jr.
Chairman of the Board and President
Financial Federal Corporation
Michael C. Palitz
Executive Vice President and Treasurer
Financial Federal Corporation
Paul Sinsheimer
Executive Vice President
Financial Federal Corporation
Officers of
Subsidiaries Only
John V. Golio
Vice President
Daniel J. McDonough
Vice President
Donald G. Pokorny
Vice President
Luther C. Whitlock
Vice President
William J. Flaherty
Administrative Vice President
Johnie E. Christ
Regional Vice President
Thomas Fahl
Regional Vice President
James M. Keesee
Regional Vice President
Michael A. Nelson
Regional Vice President
James R. Scappi
Regional Vice President
Kevin McGinn
Assistant Vice President
Gary L. Pace
Assistant Vice President
Rodney S. Sepulvado
Assistant Vice President
Kimberly P. Walter
Assistant Vice President
Gerry H. Wilson
Assistant Vice President
Donna L. Frate
Assistant Secretary
Robert Grawl, Jr.
Assistant Secretary
John M. Impens
Assistant Secretary
Bart Chinnici
Assistant Controller
Barbara Constantino
Assistant Controller
E. Scott Megason
Assistant Controller
Headquarters
400 Park Avenue
New York, NY 10022
(212) 888-3344
Full Service Branches:
1300 Post Oak Blvd.
Houston, TX 77056
(713) 439-1177
601 Oakmont Lane
Westmont, IL 60559
(630) 986-3900
300 Frank W. Burr Blvd.
Teaneck, NJ 07666
(201) 801-0300
One University Place
8801 J. M. Keynes Drive
Charlotte, NC 28262
(704) 549-1009
1855 W. Baseline Road
Mesa, AZ 85202
Auditors
Eisner & Lubin LLP,
Certified Public Accountants,
250 Park Avenue,
New York, NY 10177
General Counsel
Orrick Herrington & Sutcliffe,
666 Fifth Avenue,
New York, NY 10103
Transfer Agent
and Registrar
The Bank of New York,
New York, NY
The annual meeting of shareholders will be held at 270 Park Avenue, New York, NY
on December 10, 1996 at 10 a.m. Eastern Time.
Corporate Information
For a copy of Form 10-K or other information about the Corporation contact:
Investor Relations
Financial Federal Corporation
400 Park Avenue
New York, NY 10022
(212) 888-3344
Designed by Curran & Connors, Inc.
<PAGE>
[BACK COVER]
[LOGO]
FINANCIAL
FEDERAL
CORPORATION
400 Park Avenue
New York, NY 10022
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES AS
AT JULY 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 2426
<SECURITIES> 0
<RECEIVABLES> 437706
<ALLOWANCES> 8008
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 433087
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 317787
0
0
<COMMON> 4980
<OTHER-SE> 89211
<TOTAL-LIABILITY-AND-EQUITY> 433087
<SALES> 0
<TOTAL-REVENUES> 43523
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1710
<INTEREST-EXPENSE> 19271
<INCOME-PRETAX> 15429
<INCOME-TAX> 5819
<INCOME-CONTINUING> 9610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9610
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<FN>
<F1>THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
