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, 1997
Commission file number 1-12006
FINANCIAL FEDERAL CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 88-0244792
(State of incorporation) (I.R.S. Employer Identification No.)
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 20, 1997 was $169,800,281.25. 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 $18.75
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 9,056,015 shares.
The number of shares of the Registrant's Common Stock outstanding as of
October 20, 1997 was 14,777,325 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's proxy statement for its Annual Meeting of Stockholders, to be
held December 9, 1997, 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
7 through 25 of Financial Federal Corporation's 1997 Annual Report to
Stockholders is incorporated by reference in answer to Items 6, 7 and 8 of
Part II.
Page 1
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PART I
Item 1. BUSINESS
The Company, incorporated under the laws of Nevada 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 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
revenue-producing 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 cost of borrowed funds, operating and administrative
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, buses, 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 procedures that are designed to
achieve attractive yields while minimizing delinquencies and credit 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 assess the
creditworthiness of the obligors and collateral values and accordingly
structure transactions to 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 revenue-producing equipment that is movable,
has an economic life longer than the term of the financing, is not subject to
rapid technological obsolescence, has applications in a number of different
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industries and has a relatively broad resale market. A majority of the
collateral pledged to the Company by obligors 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 purpose of determining resale values.
Expansion. The Company's five full service offices are located in the
United States. Thirty-five (35) full-time new business marketing
representatives directly report to such offices. The obligors represented in
the Company's portfolio of finance receivables are located in 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.
Personnel Policy. The Company recognizes that, in order to continue to
compete profitably, it must offer to its business prospects and customers a
high level of service, which the Company believes it can accomplish by
attracting and retaining the services of a team of dedicated and talented
managerial, marketing and administrative personnel. The present strategy used
by the Company to attract and retain such personnel is to offer competitive
salary arrangements, an equity interest in the Company through participation
in the Stock Option Plan, and enhanced career opportunities. Approximately
70% of the Company's directors, officers and employees who had been employed
by the Company for at least one year as of July 31, 1997, are presently
participants in the Stock Option Plan and/or own stock in the Company.
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 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. Any
such reduction in the Company's funding costs should enable the Company to
become more rate competitive, 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 market
conditions.
Marketing Strategy
The Company markets its services through marketing personnel based in 23
domestic locations, including 5 full service offices, 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 end-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 compete effectively 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.
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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. The Company's vendor relationships generally are
nonexclusive. The Company presently has relationships with more than 100
vendors and is not dependent on any single vendor. In all vendor generated
business, the Company independently approves the credit of the prospective
obligor or lessee. The Company may also have recourse to the vendors.
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. Finance receivables originated by
the Company averaged $144,000 in fiscal 1997, $140,000 in fiscal 1996 and
$134,000 in fiscal 1995.
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 providing capital loans secured by
equipment. Customers seek capital loans for numerous reasons, including
consolidation of obligations, working capital needs, 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. The Company's capital loans
are generally four to five years in term, and generally provide for prepayment
premiums.
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 several designations of credit officer
authority levels. A credit officer's authority level is based, among other
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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, any single
obligor concentration above $2.0 million requires the approval of the
Company's Chairman, President or Chief Operating Officer.
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 equipment because of their ability to offer additional
services and products, and more favorable rates and terms. Many of these
competitors have longer operating histories and possess greater financial and
other resources than the Company. In addition, some of these competitors have
sources of funds available at a lower cost than those available to the
Company, thereby enabling them to provide financing at rates lower than the
Company may be willing to provide. The Company typically does not compete
primarily on the basis of rate. The Company competes by emphasizing a high
level of equipment and financial expertise, customer service, flexibility in
structuring financing transactions and significant management involvement in
customer relationships.
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 $100 billion and its share of this market is less than
1%.
Employees
At July 31, 1997, the Company had 130 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 non-disclosure and
non-solicitation provisions) 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 a period of time
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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., 66, 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, 39, 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, 50, 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, 48, 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, 36, 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, 49, 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 square feet of space. As of July
31, 1997, the Company has five full service offices (where credit analysis and
approval, collection and marketing functions are performed) in Houston, Texas;
Westmont (Chicago), Illinois; Teaneck (New York metropolitan area), New
Jersey; Charlotte, North Carolina and Mesa (Phoenix), Arizona, which generally
consist of approximately 2,000 to 7,000 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.
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Item 3. LEGAL PROCEEDINGS
There are no material 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, 1997.
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 July 1997 and January
1996 three-for-two stock splits.
<TABLE>
<CAPTION>
Price Range
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High Low
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<S> <C> <C>
Fiscal year 1997
- -------------------------------------
First Quarter ended October 31, 1996 $10.58 $ 8.50
Second Quarter ended January 31, 1997 $11.83 $ 9.25
Third Quarter ended April 30, 1997 $13.00 $10.42
Fourth Quarter ended July 31, 1997 $15.58 $11.42
Fiscal year 1996
- -------------------------------------
First Quarter ended October 31, 1995 $ 9.73 $ 7.83
Second Quarter ended January 31, 1996 $11.00 $ 9.28
Third Quarter ended April 30, 1996 $11.25 $10.09
Fourth Quarter ended July 31, 1996 $11.42 $ 8.42
</TABLE>
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
20, 1997 was 74. 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, 1997, which information is incorporated herein by reference.
The Company has not paid any cash dividends on its Common Stock.
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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,
1997, 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, 1997, 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 the Registrant's proxy statement to be filed pursuant to
Regulation 14A for its Annual Meeting of Stockholders to be held December 9,
1997, 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 the Registrant's proxy statement to be filed pursuant to
Regulation 14A for its Annual Meeting of Stockholders to be held December 9,
1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information in the Registrant's proxy statement to be filed pursuant to
Regulation 14A for its Annual Meeting of Stockholders to be held December 9,
1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information in the Registrant's proxy statement to be filed pursuant to
Regulation 14A for its Annual Meeting of Stockholders to be held December 9,
1997.
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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 13 through 24 of
the Registrant's Annual Report to Stockholders for the fiscal
year ended July 31, 1997, as provided in Item 8 hereof:
- Consolidated Balance Sheet as at July 31, 1997 and 1996.
- Consolidated Statement of Stockholders' Equity for the fiscal
years ended July 31, 1997, 1996 and 1995.
- Consolidated Statement of Operations for the fiscal years ended
July 31, 1997, 1996 and 1995.
- Consolidated Statement of Cash Flows for the fiscal years ended
July 31, 1997, 1996 and 1995.
- 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 notes thereto.
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
4.7 Form of Note Agreement dated as of July 1, 1997 issued by
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
9
<PAGE>
10.22******** Form of Deferred Compensation Agreement with certain officers
as filed under the Top Hat Plan with the Department of Labor
10.23********* Deferred Compensation Agreement dated December 30, 1996 between
the Registrant and Clarence Y. Palitz, Jr.
11.1 Computation of Earnings Per Share
13.1 1997 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.
********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,
1996.
*********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, 1997.
(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, 1997.
10
<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 27, 1997
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 27, 1997
Chairman of the Board, President and Chief Executive Date
Officer
/s/Lawrence B. Fisher October 27, 1997
Director Date
/s/William C. MacMillen, Jr. October 27, 1997
Director Date
/s/Bernard G. Palitz October 27, 1997
Director Date
/s/Paul Sinsheimer October 27, 1997
Executive Vice President and Director Date
/s/Michael C. Palitz October 27, 1997
Executive Vice President, Treasurer, Chief Financial Date
Officer and Director
/s/David H. Hamm October 27, 1997
Controller, Assistant Treasurer and Principal Date
Accounting Officer
11
<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.
12
<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
September 4, 1997
13
<PAGE>
Schedule I
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED BALANCE SHEET
<CAPTION>
July 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 117,000 $ 256,000
Due from subsidiaries:
Advances 18,650,000 27,626,000
Subordinated notes receivable 50,000,000 45,000,000
Investment in subsidiaries - at equity 46,039,000 34,749,000
Other assets 473,000 814,000
------------ ------------
TOTAL $115,279,000 $108,445,000
============ ============
LIABILITIES
Senior debt $ 4,901,000 $ 4,966,000
Accrued interest, taxes and other liabilities 2,484,000 2,331,000
Subordinated debt 2,290,000 6,957,000
------------ ------------
Total liabilities 9,675,000 14,254,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 7,382,000 4,980,000
Additional paid-in capital 57,315,000 58,289,000
Warrants 29,000 29,000
Retained earnings 40,878,000 30,893,000
------------ ------------
Total stockholders' equity 105,604,000 94,191,000
------------ ------------
TOTAL $115,279,000 $108,445,000
============ ============
<FN>
The notes hereto, the consolidated financial statements and the notes
thereto are made a part hereof.
</FN>
</TABLE>
14
<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 $18,661,000 $14,205,000 $10,891,000
Interest charges to subsidiaries 5,060,000 4,007,000 3,266,000
----------- ----------- -----------
Total 23,721,000 18,212,000 14,157,000
----------- ----------- -----------
Expenses:
Interest expense 590,000 972,000 1,004,000
Other expenses (net) 2,144,000 1,811,000 1,581,000
----------- ----------- -----------
Total 2,734,000 2,783,000 2,585,000
----------- ----------- -----------
Earnings before income taxes 20,987,000 15,429,000 11,572,000
Provision for income taxes 8,078,000 5,819,000 4,363,000
----------- ----------- -----------
NET EARNINGS 12,909,000 9,610,000 7,209,000
Retirement of treasury stock (463,000) (840,000)
Three-for-two stock split (2,461,000) (1,372,000)
Retained earnings - August 1 30,893,000 23,495,000 16,286,000
----------- ----------- -----------
RETAINED EARNINGS - JULY 31 $40,878,000 $30,893,000 $23,495,000
=========== =========== ===========
<FN>
The consolidated financial statements and the notes
thereto are made a part hereof.
</FN>
</TABLE>
15
<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 $ 1,922,000 $ 1,330,000 $ 381,000
----------- ----------- -----------
Cash flows from investing activities:
Collections from (advances to) subsidiaries-net 8,976,000 (8,301,000) 2,853,000
Subordinated notes receivable-subsidiary:
Advanced (5,000,000) (20,000,000) (25,000,000)
Collected 20,000,000
Dividends received from subsidiary 200,000 500,000 2,000,000
----------- ---------- -----------
Net cash provided by (used in) investing
activities 4,176,000 (27,801,000) (147,000)
----------- ---------- -----------
Cash flows from financing activities:
Commercial paper:
Proceeds 66,207,000 76,869,000 71,393,000
Repayments (66,272,000) (76,509,000) (71,770,000)
Note payable - bank (500,000) 500,000
Repurchase of subordinated debt (4,667,000) (595,000)
Proceeds from sale of common stock, net 26,340,000
Proceeds from exercise of stock options
and warrants 61,000 166,000 306,000
Acquisition of treasury stock (1,630,000)
Tax benefit relating to stock options 64,000 37,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities (6,237,000) 26,366,000 (129,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (139,000) (105,000) 105,000
Cash - August 1 256,000 361,000 256,000
----------- ----------- -----------
CASH - JULY 31 $ 117,000 $ 256,000 $ 361,000
=========== =========== ===========
<FN>
Non-cash financing activities:
In 1997, the Company retired 124,300 common shares held as treasury stock
resulting in decreases of common stock, additional paid-in capital and
retained earnings of $62,000, $1,105,000 and $463,000, respectively.
Additionally, the Company authorized a three-for-two stock split effected in
the form of a stock dividend.
In 1996, the Company retired 96,000 common shares held as treasury stock
resulting in decreases 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.
The consolidated financial statements and the notes thereto are made a part
hereof.
</FN>
</TABLE>
16
<PAGE>
FINANCIAL FEDERAL CORPORATION
NOTES TO CONDENSED BALANCE SHEET
1. Basis of Presentation:
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, the Condensed Financial Statements of the Registrant do
not include all of the information and notes included in the consolidated
financial statements and the notes thereto.
2. Due from Subsidiaries:
Advances to subsidiaries generally bore interest at 5.9% and 5.7% at July 31,
1997 and 1996, respectively.
Subordinated notes receivable are summarized as follows:
Maturity Interest rate Amount
----------------- ------------- -----------
July 31, 2002 8.35% $25,000,000
September 1, 2002 7.85 5,000,000
September 1, 2002 7.70 5,000,000
September 1, 2002 6.90 5,000,000
July 31, 2004 7.50 10,000,000
-----------
Total $50,000,000
===========
The notes and interest thereon are subordinated to the subsidiary's borrowings
from banks, institutional and other investors, commercial paper investors and
other debt designated by the subsidiary's Board of Directors. Interest is
receivable quarterly.
Other assets include $422,000 and $744,000 of accrued interest receivable from
subsidiaries at July 31, 1997 and 1996, respectively.
17
<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 *
4.7 Form of Note Agreement dated as of July 1, 1997 issued
by Credit to certain institutional note holders 19
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. *
10.22 Form of Deferred Compensation Agreement with certain
officers as filed under the Top Hat Plan with the
Department of Labor *
10.23 Deferred Compensation Agreement dated December 30, 1996
between the Registrant and Clarence Y. Palitz, Jr. *
11.1 Computation of Earnings Per Share 44
13.1 1997 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 45
23.1 Consent of Independent Auditors 46
27 Financial Data Schedule (EDGAR version only)
*Previously filed with the Securities and Exchange Commission as an exhibit.
18
<PAGE>
Exhibit 4.7
Financial Federal Credit Inc.
1300 Post Oak Boulevard, Suite 1300
Houston, Texas 77056
Note Agreement
U.S.$25,000,000 7.40% Series A Senior Notes
Due July 14, 2000
and
U.S. $25,000,000 7.45% Series B Senior Notes
Due December 14, 2000
Dated as of
July 1, 1997
To the Purchaser named on
Schedule I hereto which is
a signatory of this Agreement
Ladies and Gentlemen:
The undersigned, Financial Federal Credit Inc., a Texas corporation (the
"Company"), agrees with you as follows:
Section 1. Description of Notes and Commitment.
Section 1.1. Description of Notes. The Company will authorize the
issue and sale of (a) U.S.$25,000,000 aggregate principal amount of its 7.40%
Series A Senior Notes (the "Series A Notes") to be dated the date of issue, to
bear interest from such date at the rate of 7.40% per annum, payable
semiannually on the first day of each June and December in each year
(commencing on December 1, 1997) and at maturity and to bear interest on
overdue principal (including any overdue optional prepayment of principal) and
premium, if any, and (to the extent legally enforceable) on any overdue
installment of interest at the rate of 9.40% per annum after maturity, whether
by acceleration or otherwise, until paid, to be expressed to mature on
July 14, 2000, and to be substantially in the form attached hereto as Exhibit
A-1, and (b) U.S.$25,000,000 aggregate principal amount of its 7.45% Series B
Senior Notes (the "Series B Notes") to be dated the date of issue, to bear
interest from such date at the rate of 7.45% per annum, payable semiannually
on the first day of each June and December in each year (commencing on
December 1, 1997) and at maturity and to bear interest on overdue principal
(including any overdue optional prepayment of principal) and premium, if any,
and (to the extent legally enforceable) on any overdue installment of interest
at the rate of 9.45% per annum after maturity, whether by acceleration or
otherwise, until paid, to be expressed to mature on December 14, 2000, and to
be substantially in the form attached hereto as Exhibit A-2. The Series A
Notes and the Series B Notes are hereinafter collectively referred to as the
"Notes"; and the term "Series" shall include all of the Series A Notes or all
of the Series B Notes as the case may be. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months. The Notes
are not subject to prepayment or redemption at the option of the Company prior
to their expressed maturity dates except on the terms and conditions and in
the amounts and with the premium, if any, set forth in 2 of this Agreement.
The term "Notes" as used herein shall include each Note delivered pursuant to
this Agreement and the separate agreements with the other purchasers named in
Schedule I. You and the other purchasers named in Schedule I are hereinafter
sometimes referred to as the "Purchasers".
Section 1.2. Commitment, Closing Date. Subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, the Company agrees to issue and sell to you, and you
agree to purchase from the Company, Notes of the Series and in the principal
amount set forth opposite your name on Schedule I hereto at a price of 100% of
the principal amount thereof on the Closing Date hereinafter mentioned.
Delivery of the Notes will be made at the offices of Chapman and Cutler,
111 West Monroe Street, Chicago, Illinois 60603, against payment therefor in
Federal Reserve or other funds current and immediately available at the
principal office of The Chase Manhattan Bank in New York, New York in the
amount of the purchase price at 10:00 A.M., Houston time, on July 16, 1997
(the "Closing Date"). The Notes delivered to you on the Closing Date will be
delivered to you in the form of a registered Note or registered Notes of each
Series to be purchased by you in the form attached hereto as Exhibit A-1 or A-
2, as appropriate, for the full amount of your purchase (unless different
denominations are specified by you in writing at least three Business Days
prior to the Closing Date), registered in your name or in the name of such
nominee as you may specify, all as you may specify at any time prior to the
date fixed for delivery.
Section 1.3. Other Agreements. Simultaneously with the execution
and delivery of this Agreement, the Company is entering into similar
agreements with the other Purchasers under which such other Purchasers agree
to purchase from the Company the principal amount of Notes of the Series set
opposite such Purchasers' names in Schedule I, and your obligation and the
obligations of the Company hereunder are subject to the execution and delivery
of the similar agreements by the other Purchasers. This Agreement and said
similar agreements with the other Purchasers are herein collectively referred
to as the "Agreements". The obligations of each Purchaser shall be several
and not joint and no Purchaser shall be liable or responsible for the acts of
any other Purchaser.
Section 2. Prepayment of Notes.
Section 2.1. No Required Prepayments. No prepayments shall be
required with respect to the Notes.
Section 2.2. Optional Prepayment. Upon compliance with 2.4, the
Company shall have the privilege, on any interest payment date, of prepaying
the outstanding Notes of either or both Series, at the Company's election,
either in whole or in part (but if in part, then in units in multiples of
U.S.$100,000) by payment of the principal amount of such Series of Notes, or
portion thereof to be prepaid, and accrued interest thereon to the date of
such prepayment, together with a premium equal to the Make-Whole Premium,
determined five Business Days prior to the date of such prepayment.
"Make-Whole Premium" shall mean, in connection with any prepayment of a
Series of Notes, the excess, if any, of (i) the aggregate present value as of
the date of such prepayment of each dollar of principal being prepaid and the
amount of interest (exclusive of interest accrued to the date of prepayment)
that would have been payable in respect of such dollar if such prepayment had
not been made, determined by discounting such amounts at the Reinvestment Rate
from the respective dates on which they would have been payable, over (ii)
100% of the principal amount of the outstanding Notes of such Series being
prepaid. If the Reinvestment Rate is equal to or higher than 7.40%, with
respect to the Series A Notes, or 7.45%, with respect to the Series B Notes,
the Make-Whole Premium for such Series shall be zero.
As to the Notes of either Series, "Reinvestment Rate" shall mean the sum
of (x) .50% plus (y)(1) the yield reported on page "USD" of the Bloomberg
Financial Market Service (or, if not available, any other nationally
recognized trading screen reporting on-line intraday trading in United States
government securities) at 10:00 a.m. (New York time) on the date of
determination for United States government securities having a maturity
(rounded to the nearest month) corresponding to the Weighted Average Life to
Maturity of the principal being prepaid, or (2) in the event that no such
nationally recognized trading screen reporting on-line intraday trading in
United States government securities is available, the arithmetic mean of the
yields for the two columns under the heading "Week Ending" published in the
Statistical Release under the caption "Treasury Constant Maturities" for the
maturity (rounded to the nearest month) corresponding to the Weighted Average
Life to Maturity of the principal being prepaid. If no maturity exactly
corresponds to such Weighted Average Life to Maturity, yields for the two
published maturities most closely corresponding to such Weighted Average Life
to Maturity shall be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated from such
yields on a straight-line basis, rounding in each of such relevant periods to
the nearest month. For the purposes of calculating the Reinvestment Rate
pursuant to clause (y)(2) above, the most recent Statistical Release published
prior to the date of determination of the premium hereunder shall be used.
"Statistical Release" shall mean the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which establishes yields on actively traded United
States government securities adjusted to constant maturities or, if such
statistical release is not published at the time of any determination
hereunder, then such other reasonably comparable index which shall be
designated by the holders of 66-2/3% in aggregate principal amount of the
outstanding Notes (exclusive of any Notes held by a Restricted Subsidiary or
an Affiliate).
"Weighted Average Life to Maturity" of the principal amount of the Notes
of either Series being prepaid or any other Indebtedness of the Company shall
mean, as of the time of any determination thereof, the number of years
obtained by dividing the then Remaining Dollar-years of such Indebtedness by
the then outstanding principal amount of such Indebtedness; and the "Remaining
Dollar-years" of any Indebtedness means at any time the amount obtained by (a)
multiplying the amount of each then remaining installment, sinking fund,
serial maturity or other required payment, including payment at final
maturity, by the number of years (calculated to the nearest one-twelfth) which
will elapse between the time in question and the making of that payment and
(b) totaling all of the products obtained in (a).
Section 2.3 Prepayment upon Change of Control. (a) In the event the
Company has knowledge of a Change of Control Date or an impending Change of
Control Date, the Company will give immediate written notice (a "Company
Notice") of such fact to all holders of the Notes. The Company Notice shall
(i) describe the facts and circumstances of such Change of Control in
reasonable detail, (ii) state that the Company will prepay all of the
outstanding Notes, together with accrued interest to the date of prepayment
and a premium equal to the Make-Whole Premium, if any, on the date specified
in such Company Notice, (iii) refer to this 2.3 and the rights of each holder
of the Notes to elect to forgo prepayment of all of the Notes held by it, and
(iv) set forth the date, which shall be not less than 30 days following the
date of giving of the Company Notice nor after the later of (x) the Change of
Control Date and (y) 60 days following the date of giving of the Company
Notice, on which the Company will make such prepayment. Each holder of the
Notes shall have the right to elect not to have all of the Notes held by such
holder prepaid, by written notice to the Company given within 21 days
following receipt of the Company Notice. The Company shall on the prepayment
date set forth in the Company Notice prepay the entire principal amount of the
Notes as to which the holders thereof have not elected to forgo prepayment.
(b) In the event the Company fails to give the Company Notice as
required above, upon the occurrence of a Change of Control Date, each holder
of Notes shall have the right to require the Company to prepay all of the
outstanding Notes, together with accrued interest thereon to the date of
prepayment and a premium equal to the Make-Whole Premium. Notice of a
required prepayment pursuant to this 2.3(b) shall be delivered by any holder
of Notes to the Company not more than 30 days after such holder has actual
knowledge of such Change of Control Date. The date of such prepayment shall
be the same date as the Change of Control Date or, in the event the Change of
Control Date shall have occurred prior to receipt of the notice from a holder
of the Notes, then such prepayment together with accrued interest and a
premium equal to the Make-Whole Premium, if any, thereon shall be on the
Business Day designated in, and shall be not less than five nor more than ten
days following the date of, such holder's notice. Upon receipt of such
notice, the Company shall give immediate written notice of such declaration of
prepayment to each other holder of Notes which shall set forth the date of
prepayment. Each other holder shall have the right at any time prior to the
date of prepayment designated pursuant to the preceding sentence to elect not
to have all of the Notes held by such holder prepaid on such date of
prepayment designated pursuant to the preceding sentence.
Any prepayment of less than all of the outstanding Notes made pursuant
to this 2.3 shall be applied to the payment in full of the Notes held by the
holders not rejecting a notice of declaration of prepayment.
Section 2.4. Notice of Prepayments. The Company will give notice
of any prepayment of the Notes pursuant to 2.2 to each holder thereof not less
than 30 days nor more than 60 days before the date fixed for such optional
prepayment specifying (i) such date, (ii) the section of this Agreement under
which the prepayment is to be made, (iii) the principal amount of the holder's
Notes of each Series to be prepaid on such date, and (iv) the estimated Make-
Whole Premium, if any, and accrued interest applicable to the prepayment.
Notice of prepayment having been so given, the aggregate principal amount of
the Notes of each Series specified in such notice, together with the premium,
if any, and accrued interest thereon shall become due and payable on the
prepayment date. The Company will also give written notice to each holder of
the Notes, by telecopy or other same day written communication, setting forth
the computation and amount of any premium payable in connection with such
prepayment at least three days prior to the date of such prepayment.
Section 2.5. Allocation of Prepayments. All partial prepayments of
the Notes of either Series pursuant to the provisions of 2.2 shall be applied
on all outstanding Notes of such Series ratably in accordance with the unpaid
principal amounts thereof. Partial prepayments pursuant to the provisions of
2.3 shall be applied as provided therein.
Section 2.6. Direct Payment. Notwithstanding anything to the
contrary in this Agreement or the Notes, in the case of any Note owned by a
Purchaser or its nominee or owned by any other Qualified Holder who has given
written notice to the Company requesting that the provisions of this Section
shall apply, the Company will promptly and punctually pay when due the
principal thereof and premium, if any, and interest thereon, without any
presentment thereof (except as set forth in the immediately succeeding
sentence) directly to such Purchaser or such subsequent Qualified Holder at
the address of such Purchaser set forth in Schedule I or at such other address
as such Purchaser or such subsequent Qualified Holder may from time to time
designate in writing to the Company or, if a bank account is designated for
such Purchaser on Schedule I hereto or in any written notice to the Company
from such Purchaser or any such subsequent Qualified Holder, the Company will
make such payments in immediately available funds to such bank account, marked
for attention as indicated, or in such other manner or to such other account
of such Purchaser or such Qualified Holder in any bank in the United States as
such Purchaser or any such subsequent Qualified Holder may from time to time
direct in writing. The holder of any Note agrees that upon the payment in
full of the outstanding principal amount of, premium, if any, and interest on
such Note, such holder shall, at the request of the Company, surrender such
Note at the office of the Company where the Note Register is kept pursuant to
9.1. The holder of any Notes to which this Section applies agrees that in the
event it shall sell or transfer any such Notes (i) it will, prior to the
delivery of such Notes (unless it has already done so), make a notation
thereon of all principal, if any, prepaid on such Notes and will also note
thereon the date to which interest has been paid on such Notes, and (ii) it
will promptly notify the Company of the name and address of the transferee of
any Notes so transferred. As used in this 2.6 the term "Qualified Holder"
shall mean a holder of not less than 5% of the then outstanding principal
amount of the Notes.
Section 3. Representations.
Section 3.1. Representations of the Company. The Company
represents and warrants that all representations set forth in the form of
certificate attached hereto as Exhibit B are true and correct as of the date
hereof and are incorporated herein by reference with the same force and effect
as though herein set forth in full.
Section 3.2. Representations of the Purchaser. You represent, and
in entering into this Agreement the Company understands, that you are
acquiring the Notes for the purpose of investment and not with a view to the
resale or distribution thereof, and that you have no present intention of
selling, negotiating or otherwise disposing of the Notes; provided that the
disposition of your property shall at all times be and remain within your
control. You understand that the Notes have not been registered under the
Securities Act of 1933, as amended, or the "blue sky" or securities laws of
any state or jurisdiction of the United States, and may be transferred only if
so registered or if an exemption therefrom is available. You further
understand that the Company is not required to so register the Notes. You
further represent that at least one of the following statements is an accurate
representation as to the source of funds to be used by you to purchase the
Notes:
(a) such source of funds is an "insurance company general account"
within the meaning of Department of Labor Prohibited Transaction Exemption
("PTE") 95-60 (issued July 12, 1995), and you have disclosed to the Company
the names of such employee benefit plans with respect to which the amount of
the general account reserves and liabilities for all contracts held by or on
behalf of such plan exceed or are expected to exceed 10% of the total reserves
and liabilities of such general account (exclusive of separate account
liabilities) plus surplus, as set forth in your most recent annual statement
in the form required by the National Association of Insurance Commissioners as
filed with your state of domicile, as of the date of purchase (for the purpose
of this clause (a), all employee benefit plans maintained by the same employer
or employee organization are deemed to be a single plan);
(b) all or a part of such funds constitute assets of one or more
insurance company separate accounts, employee benefit plan trusts or a
commingled employee benefit plan trust maintained by you, and you have
disclosed to the Company the names of such employee benefit plans whose assets
in such separate account or accounts exceed 10% of the total assets or are
expected to exceed 10% of the total assets of such separate account or
accounts as of the date of such purchase (for the purpose of this clause (b),
all employee benefit plans maintained by the same employer or employee
organization and invested in any such separate account or accounts are deemed
to be a single plan);
(c) all or part of such funds constitute assets of a bank collective
investment fund maintained by you, and you have disclosed to the Company the
names of such employee benefit plans whose assets in such collective
investment fund exceed 10% of the total assets or are expected to exceed 10%
of the total assets of such fund as of the date of such purchase (for the
purpose of this clause (c), all employee benefit plans maintained by the same
employer or employee organization are deemed to be a single plan);
(d) all or part of such funds constitute assets of one or more
employee benefit plans, each of which has been identified to the Company in
writing;
(e) you are acquiring the Notes for the account of one or more pension
funds, trust funds or agency accounts, each of which is a "governmental plan"
as defined in Section 3(32) of ERISA;
(f) the source of funds is an "investment fund" managed by a
"qualified professional asset manager" or "QPAM" (as defined in Part V of PTE
84-14, issued March 13, 1984), provided that no other party to the
transactions described in this Agreement and no "affiliate" of such other
party (as defined in Section V(c) of PTE 84-14) has at this time, and during
the immediately preceding one year has exercised the authority to appoint or
terminate said QPAM as manager of the assets of any plan identified in writing
pursuant to this clause (f) or to negotiate the terms of said QPAM's
management agreement on behalf of any such identified plans; or
(g) if you are other than an insurance company, all or a portion of
such funds consists of funds which do not constitute "plan assets".
The Company shall deliver a certificate on the Closing Date which certificate
shall either state that (i) it is neither a "party in interest" (as defined in
Title I, Section 3(14) of ERISA) nor a "disqualified person" (as defined in
Section 4975(e)(2) of the Code), with respect to any plan identified pursuant
to paragraphs (a), (b), (c) or (d) above, or (ii) with respect to any plan
identified pursuant to paragraph (f) above, neither it nor any "affiliate" (as
defined in Section V(c) of PTE 84-14) is described in the proviso to said
paragraph
(f). As used in this 3.2, the terms "separate account", "employer
securities", and "employee benefit plan" shall have the respective meanings
assigned to them in ERISA and the term "plan assets" shall have the meaning
assigned to it in Department of Labor Regulation 29 C.F.R. 2510.3-101.
Section 4. Closing Conditions.
Your obligation to purchase the Notes on the Closing Date shall be
subject to the performance by the Company of its agreements hereunder which by
the terms hereof are to be performed at or prior to the time of delivery of
the Notes and to the following further conditions precedent:
Section 4.1. Closing Certificate. Concurrently with the delivery
of Notes to you on the Closing Date, you shall have received a certificate of
the Company dated the Closing Date, signed by the Chairman, Vice Chairman,
President or a Vice President of the Company substantially in the form
attached hereto as Exhibit B, the truth and accuracy of which shall be a
condition to your obligation to purchase the Notes proposed to be sold to you.
Section 4.2. Legal Opinions. Concurrently with the delivery of
Notes to you on the Closing Date, you shall have received from Chapman and
Cutler, who are acting as your special counsel in this transaction, and from
Troy H. Geisser, General Counsel of the Company, their respective opinions
dated the Closing Date, in form and substance satisfactory to you, and
covering the matters set forth in Exhibits C and D, respectively, hereto.
Section 4.3. Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement, and all
documents necessary to the consummation thereof, shall be satisfactory in form
and substance to you and your special counsel, and you shall have received a
copy (executed or certified as may be appropriate) of all legal documents or
proceedings taken in connection with the consummation of said transactions.
Section 4.4. Other Agreements. On the Closing Date, the Company
shall have consummated the sale of the entire principal amount of the Notes
scheduled to be sold on the Closing Date pursuant to this Agreement and the
other agreements referred to in 1.3.
Section 4.5. Waiver of Conditions. If on the Closing Date the
Company fails to tender to you the Notes to be issued to you on such date or
if the conditions specified in this 4 have not been fulfilled, you may
thereupon elect to be relieved of all further obligations under this
Agreement. Without limiting the foregoing, if the conditions specified in
this 4 have not been fulfilled, you may waive compliance by the Company with
any such condition to such extent as you may in your sole discretion
determine. Nothing in this 4.5 shall operate to relieve the Company of any of
its obligations hereunder or to waive any of your rights against the Company.
Section 5. Company Covenants.
From and after the Closing Date and continuing so long as any amount
remains unpaid on any Note:
Section 5.1. Corporate Existence, etc. The Company will preserve
and keep in force and effect, and will cause each Restricted Subsidiary to
preserve and keep in force and effect, its corporate existence and all
licenses and permits necessary to the proper conduct of its business, except
where the failure to maintain any such license or permit would not have a
material adverse effect on the properties, business, profits or condition
(financial or otherwise) of the Company and its Restricted Subsidiaries, taken
as a whole; provided that the foregoing shall not prevent (x) any transaction
permitted by 5.13, or (y) the Company from dissolving or liquidating any
Restricted Subsidiary and distributing its assets to its shareholders so long
as after giving effect thereto, no Default or Event of Default shall have
occurred and be continuing.
Section 5.2. Insurance. The Company will maintain, and will cause
each Restricted Subsidiary to maintain, insurance coverage by financially
sound and reputable insurers in such forms and amounts and against such risks
as are customary for corporations of established reputation engaged in the
same or a similar business and owning and operating similar properties;
provided that with respect to property leased to third parties, the
obligations under this 5.2 may be satisfied by imposing the same upon the
lessees of such property and by exercising such degree of supervision and
enforcement of such obligations of such lessees as shall be commercially
reasonable.
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with
Laws. The Company will promptly pay and discharge, and will cause each
Restricted Subsidiary promptly to pay and discharge, all lawful taxes,
assessments and governmental charges or levies imposed upon the Company or
such Restricted Subsidiary, respectively, or upon or in respect of all or any
part of the property or business of the Company or such Restricted Subsidiary,
all trade accounts payable in accordance with usual and customary business
terms, and all claims for work, labor or materials, which if unpaid might
become a lien or charge upon any property of the Company or such Restricted
Subsidiary; provided the Company or such Restricted Subsidiary shall not be
required to pay any such tax, assessment, charge, levy, account payable or
claim if failure to do so would not have a material adverse affect on the
properties, business, profits or condition of the Company and its Restricted
Subsidiaries, taken as a whole, or if (i) the validity, applicability or
amount thereof is being contested in good faith by appropriate actions or
proceedings, and (ii) the Company or such Restricted Subsidiary shall set
aside on its books, reserves deemed by it to be adequate with respect thereto.
The Company will promptly comply and will cause each Restricted Subsidiary to
comply with all laws, ordinances or governmental rules and regulations to
which it is subject including, without limitation, the Occupational Safety and
Health Act of 1970, ERISA and all laws, ordinances, governmental rules and
regulations relating to environmental protection in all applicable
jurisdictions, the violation of which might reasonably be expected to result
in any lien or charge upon any property of the Company or any Restricted
Subsidiary which might reasonably be expected to materially and adversely
affect the properties, business, profits or condition (financial or otherwise)
of the Company and its Restricted Subsidiaries, taken as a whole, unless the
validity or applicability thereof is being contested in good faith by
appropriate actions or proceedings, and the Company or such Restricted
Subsidiary shall set aside on its books reserves deemed by it to be adequate
with respect thereto.
Section 5.4. Maintenance, etc. The Company will maintain, preserve
and keep, and will cause each Restricted Subsidiary to maintain, preserve and
keep, its properties (other than property held for sale or lease) which are
used or useful in the conduct of its business (whether owned in fee or a
leasehold interest) in good repair and working order and from time to time
will make all necessary repairs, replacements, renewals and additions so that
at all times the efficiency thereof shall be maintained unless and to the
extent that failure to so maintain, preserve and keep certain properties will
not have a material adverse affect on the properties, business, profits or
condition (financial or otherwise) of the Company and its Restricted
Subsidiaries, taken as a whole; provided, that with respect to property leased
to third parties, the obligations under this 5.4 may be satisfied by imposing
the same upon the lessees of such property and by exercising such degree of
supervision and enforcement of such obligations as shall be commercially
reasonable.
Section 5.5. Nature of Business. Neither the Company nor any
Restricted Subsidiary will engage in any business other than the Finance
Business.
Section 5.6. Consolidated Adjusted Net Worth. The Company will at
all times keep and maintain Consolidated Adjusted Net Worth at an amount not
less than (i) in the case of its fiscal quarter ending April 30, 1997,
U.S.$70,000,000, and (ii) in the case of each fiscal quarter thereafter, an
amount equal to the sum of the amount required to be maintained in the
immediately previous fiscal quarter plus 25% of Consolidated Net Income for
such immediately previous fiscal quarter (but without deduction in the event
of a deficit in Consolidated Net Income).
Section 5.7. Permitted Indebtedness. The Company will not and will
not permit any Restricted Subsidiary to incur, create, issue, assume or permit
to exist any Indebtedness other than:
(a) Senior Debt;
(b) Subordinated Debt outstanding on the date hereof and reflected on
Annex A to Exhibit B or permitted by 5.19;
(c) Capital Debt outstanding on the date hereof and reflected on
Annex A to Exhibit B or permitted by 5.19;
(d) Guaranties of the Company or a Restricted Subsidiary;
(e) Capitalized Leases of the Company;
(f) liabilities (other than for borrowed money) incurred in the
regular operation of the Finance Business of the Company or a Restricted
Subsidiary and not more than three months overdue, unless such overdue
liabilities are either (i) less than U.S.$250,000 in any one case and less
than U.S.$2,500,000 in the aggregate, or (ii) being contested in good faith by
appropriate actions or proceedings and, with respect thereto, the Company or
such Restricted Subsidiary shall have set aside on its books reserves deemed
by it to be adequate; and
(g) Indebtedness of a Restricted Subsidiary to the Company or to a
Wholly-owned Restricted Subsidiary and Indebtedness of the Company to a
Wholly-owned Restricted Subsidiary.
Any corporation which becomes a Restricted Subsidiary after the date
hereof shall for all purposes of this 5.7 be deemed to have created, assumed
or incurred at the time it becomes a Restricted Subsidiary all Indebtedness of
such corporation existing immediately after it becomes a Restricted
Subsidiary.
Section 5.8. Limitations on Indebtedness. (a) The Company will not
at any time permit both
(i) the aggregate unpaid principal amount of Senior Obligations
to exceed 600% of the sum of (A) Consolidated Adjusted Net Worth and (B) the
aggregate unpaid principal amount of Subordinated Debt; and
(ii) the aggregate unpaid principal amount of Total Debt to
exceed 750% of Consolidated Adjusted Net Worth.
(b) The Company will not at any time permit the aggregate unpaid
amount of Priority Obligations to exceed 10% of Consolidated Adjusted Net
Worth as at the end of the fiscal year of the Company then most recently
ended.
Section 5.9. Sale or Discount of Receivables. The Company will
not, and will not permit any Restricted Subsidiary to, enter into any
Receivables Securitization Transaction; provided however the Company or any
Restricted Subsidiary may enter into any Receivables Securitization
Transaction so long as, after giving effect thereto and to the application of
the proceeds thereof, the aggregate value of assets then subject to all
Receivables Securitization Transactions does not exceed 40% of the sum of (i)
the aggregate value of assets then subject to all Receivables Securitization
Transactions, plus (without duplication) (ii) total assets of the Company and
its Restricted Subsidiaries determined on a consolidated basis in accordance
with generally accepted accounting principles.
Section 5.10. Limitation on Liens. The Company will not, and will
not permit any Restricted Subsidiary to, create or incur, or suffer to be
incurred or to exist, any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind on its or their property or assets, whether now
owned or hereafter acquired, or upon any income or profits therefrom, or
transfer any property for the purpose of subjecting the same to the payment of
obligations in priority to the payment of its or their general creditors, or
acquire or agree to acquire, or permit any Restricted Subsidiary to acquire,
any property or assets upon conditional sales agreements or other title
retention devices, except:
(a) liens for property taxes and assessments and/or governmental
charges or levies and liens securing claims or demands of mechanics and
materialmen; provided that payment thereof is not at the time required by 5.3;
(b) liens of or resulting from any judgment or award, (x) which, if
unpaid would not otherwise be an Event of Default or (y) the time for the
appeal or petition for rehearing of which shall not have expired, or in
respect of which the Company or a Restricted Subsidiary shall at any time in
good faith be prosecuting an appeal or proceeding for a review and in respect
of which a stay of execution pending such appeal or proceeding for review
shall have been secured and for which the Company or such Restricted
Subsidiary has set aside on its books reserves deemed by it to be adequate
with respect thereto; provided, that the aggregate amount so secured by liens
pursuant to this clause (b) shall not at any time exceed an amount equal to
10% of Consolidated Adjusted Net Worth;
(c) liens, charges, encumbrances and priority claims incidental to the
conduct of business or the ownership of properties and assets (including
warehousemen's and attorneys' liens and statutory landlords' liens) and
deposits, pledges or liens to secure the performance of bids, tenders or trade
contracts, or to secure statutory obligations, surety or appeal bonds or other
liens of like general nature incurred in the ordinary course of business and
not in connection with the borrowing of money; provided in each case, the
obligation secured is not overdue or, if overdue, is being contested in good
faith by appropriate actions or proceedings;
(d) minor survey exceptions or minor encumbrances, easements or
reservations, or rights of others for rights-of-way, utilities and other
similar purposes, or zoning or other restrictions as to the use of real
properties, which do not materially impair their use in the operation of the
business of the Company and its Restricted Subsidiaries;
(e) mortgages, liens or security interests securing Indebtedness of a
Restricted Subsidiary to the Company;
(f) mortgages, liens or security interests securing Non-Recourse Debt;
provided that such mortgages, liens or security interests shall be limited to
the property financed by such Non-Recourse Debt and the lease or security
agreement to which such property is subject;
(g) mortgages, conditional sale contracts, security interests or other
arrangements for the retention of title (including Capitalized Leases)
incurred after the date hereof given to secure the payment of the purchase
price incurred in connection with the acquisition of fixed assets useful and
intended to be used in carrying on the business of the Company or a Restricted
Subsidiary, which liens are incurred contemporaneously with or within 180 days
after such acquisition, and liens existing on such fixed assets at the time of
acquisition thereof or at the time of acquisition by the Company or a
Restricted Subsidiary of any business entity then owning such fixed assets,
whether or not such existing liens were given to secure the payment of the
purchase price of the fixed assets to which they attach so long as they were
not incurred, extended or renewed in contemplation of such acquisition;
provided that (i) the lien or charge shall attach solely to the property
acquired or purchased, (ii) at the time of acquisition of such fixed assets,
the aggregate amount remaining unpaid on all Indebtedness secured by liens on
such fixed assets whether or not assumed by the Company or a Restricted
Subsidiary shall not exceed the lesser of the total purchase price or fair
market value at the time of acquisition of such fixed assets (as determined in
good faith by the Board of Directors of the Company) and (iii) all such
Indebtedness shall comply with the applicable limitations provided in 5.8;
(h) liens incurred in connection with any Receivables Securitization
Transaction permitted by 5.9; provided that such liens attach solely to the
accounts receivable subject to such Receivables Securitization Transaction;
and
(i) in addition to the liens permitted by the preceding paragraphs (a)
through (h) of this 5.10, liens securing Senior Debt of the Company or any
Restricted Subsidiary; provided that such Senior Debt shall be permitted by
5.8.
Section 5.11. Dividends, Stock Purchases. The Company will not
except as hereinafter provided:
(a) Declare or pay any dividends, either in cash or property, on any
shares of its capital stock of any class (except dividends or other
distributions payable solely in shares of capital stock of the Company); or
(b) Directly or indirectly, or through any Subsidiary, purchase,
redeem or retire any shares of its capital stock of any class or any warrants,
rights or options to purchase or acquire any shares of its capital stock or
other securities convertible into stock; or
(c) Make any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock; or
(d) Purchase, redeem, prepay or otherwise retire or acquire the whole
or any part of any issue of Capital Debt other than (i) in exchange for shares
of capital stock of the Company or (ii) out of the proceeds of the concurrent
issuance of Capital Debt permitted by 5.19 with a Weighted Average Life to
Maturity equal to or greater than the longer of (A) the Weighted Average Life
to Maturity of the Capital Debt being purchased, redeemed, prepaid or
otherwise retired or acquired or (B) the Weighted Average Life to Maturity
required by 5.19; or
(e) Purchase, redeem, prepay or otherwise retire or acquire the whole
or any part of any issue of Subordinated Debt other than (i) in exchange for
shares of capital stock of the Company or (ii) out of the proceeds of the
concurrent issuance of Capital Debt or Subordinated Debt permitted by 5.8 and
5.19, in each case, with a Weighted Average Life to Maturity equal to or
greater than the longer of (A) the Weighted Average Life to Maturity of the
Subordinated Debt being purchased, redeemed, prepaid or otherwise retired or
acquired or (B) the Weighted Average Life to Maturity required by 5.19.
(such declarations or payments of dividends, purchases, redemptions or
retirements of capital stock or Capital Debt or Subordinated Debt and
warrants, rights or options, and all such other distributions being herein
collectively called "Restricted Payments"), if at such time or after giving
effect thereto the aggregate amount of Restricted Payments made during the
period from and after January 31, 1997, to and including the date of the
making of the Restricted Payment in question, would exceed the sum of (i)
U.S.$10,000,000 plus (ii) to the extent that Capital Debt outstanding on the
date hereof is exchanged for capital stock of the Company, an amount equal to
all interest which would have been payable with respect to such exchanged
Capital Debt during the period from the date of such exchange to the date of
any determination hereunder, plus (iii) the net cash proceeds to the Company
from the issue or sale subsequent to January 31, 1997 of Capital Debt,
Subordinated Debt or shares of capital stock of the Company or warrants,
rights or options to purchase or acquire any shares of its capital stock, plus
(iv) 75% of Consolidated Net Income for such period, computed on a cumulative
basis for said entire period (or if such Consolidated Net Income is a deficit
figure, then minus 100% of such deficit).
The Company will not declare any dividend which constitutes a Restricted
Payment payable more than 60 days after the date of declaration thereof and
will not declare or make any Restricted Payment if at such time or after
giving effect thereto a Default or an Event of Default has occurred and is
continuing.
For the purposes of this 5.11 the amount of any Restricted Payment
declared, paid or distributed in property of the Company shall be deemed to be
the greater of the book value or fair market value (as determined in good
faith by the Board of Directors of the Company) of such property at the time
of the making of the Restricted Payment in question.
Section 5.12. Limitation on Sale and Leasebacks. The Company will
not, and will not permit any Restricted Subsidiary to, enter into any
arrangement whereby the Company or any Restricted Subsidiary shall sell or
transfer any property owned by the Company or such Restricted Subsidiary to
any Person other than the Company or a Restricted Subsidiary and thereupon the
Company or any Restricted Subsidiary shall lease or intend to lease, as
lessee, the same property, except that the Company or a Restricted Subsidiary
may enter into such an arrangement if (i) such property is newly acquired or
constructed property, (ii) the Company or such Restricted Subsidiary shall
enter into such arrangement within 180 days following the acquisition or
construction of such property, and (iii) after giving effect to the
consummation of such arrangement, the aggregate sale price of the property
subject to such arrangements entered into by the Company and its Restricted
Subsidiaries since January 31, 1997 does not exceed 10% of the consolidated
assets of the Company and its Restricted Subsidiaries, determined as of the
end of the immediately preceding fiscal year.
Section 5.13. Mergers, Consolidations and Sales of Assets.
(a) The Company will not, and will not permit any Restricted
Subsidiary to (i) consolidate with or be a party to a merger with any other
corporation or (ii) sell, discount, lease or otherwise dispose (other than in
the ordinary course of business, which shall include the sale of
participations in the Company's financing transactions) of all or any
substantial part (as defined in paragraph (d) of this 5.13) of the assets of
the Company and its Restricted Subsidiaries, provided, however, that:
(1) any Restricted Subsidiary may merge or consolidate with or into
the Company or any other Wholly-owned Restricted Subsidiary or any corporation
which, immediately after giving effect to such transaction, will become a
Wholly-owned Restricted Subsidiary so long as in any merger or consolidation
involving the Company, the Company shall be the surviving or continuing
corporation;
(2) the Company may, subject to the provisions of 2.3, consolidate
with, or merge into, another corporation or sell, lease or dispose of all or
substantially all of its assets to another corporation if
(i) either (x) the Company is the surviving or continuing corporation
in such merger or consolidation or (y) if the Company is not the surviving or
continuing corporation, the corporation formed by such consolidation or into
which the Company is merged or the corporation that acquires or leases, all or
substantially all of the assets of the Company (the "New Company") shall be a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall expressly
assume, in an instrument executed and delivered to the holders of all the
Notes (in form not unsatisfactory to the holder or holders of 33-1/3% or more
of the aggregate unpaid principal amount of the Notes at the time outstanding,
exclusive of any Notes held by a Restricted Subsidiary or Affiliate), the due
and punctual payment of the principal of and premium, if any, and interest on,
the Notes and the due observance and performance of each of the covenants and
other terms of the Notes and this Agreement to be observed or performed by the
Company; and
(ii) immediately after such transactions, and after giving effect
thereto, no Default or Event of Default would exist; and
(3) any Restricted Subsidiary may sell, lease or otherwise dispose of
all or any substantial part of its assets to the Company or any other Wholly-
owned Restricted Subsidiary.
(b) The Company will not permit any Restricted Subsidiary to issue or
sell any shares of stock of any class (including as "stock" for the purposes
of this 5.13, any warrants, rights or options to purchase or otherwise acquire
stock or other Securities exchangeable for or convertible into stock) of such
Restricted Subsidiary to any Person other than the Company or a Wholly-owned
Restricted Subsidiary if, as a result thereof, the Restricted Subsidiary
issuing or selling its stock ceases to be a Restricted Subsidiary.
(c) The Company will not, and will not permit any Restricted
Subsidiary to, sell, transfer or otherwise dispose of (x) any shares of stock
in any Restricted Subsidiary if, as a result thereof, the Restricted
Subsidiary whose stock is being sold, transferred or disposed of ceases to be
a Restricted Subsidiary, or (y) any Indebtedness of any Restricted Subsidiary,
unless:
(1) simultaneously with such sale, transfer, or disposition, all
shares of stock and all Indebtedness of such Restricted Subsidiary at the time
owned by the Company and by every other Subsidiary shall be sold, transferred
or disposed of as an entirety;
(2) the Board of Directors of the Company shall have determined, as
evidenced by a resolution thereof, that the retention of such stock and
Indebtedness is no longer in the best interests of the Company;
(3) such stock and Indebtedness is sold, transferred or otherwise
disposed of to a Person, for a cash consideration and on terms reasonably
deemed by the Board of Directors to be adequate and satisfactory;
(4) the Restricted Subsidiary being disposed of shall not have any
continuing investment in the Company or any other Restricted Subsidiary not
being simultaneously disposed of; and
(5) such sale or other disposition does not involve a substantial part
(as hereinafter defined) of the assets of the Company and its Restricted
Subsidiaries.
(d) As used in this 5.13, a sale, discount, lease or other disposition
of assets shall be deemed to be a "substantial part" of the assets of the
Company and its Restricted Subsidiaries if the book value of such assets, when
added to the book value of all other assets sold, leased or otherwise disposed
of by the Company and its Restricted Subsidiaries (other than in the ordinary
course of business) during the fiscal year in which such sale, lease or other
disposition occurs, exceeds 10% of consolidated assets of the Company and its
Restricted Subsidiaries, determined as of the end of the immediately preceding
fiscal year. The book value of assets sold, leased or otherwise disposed of
shall be excluded from the calculation of "substantial part" if (A) (i) such
disposition shall be for an amount not less than the fair market value of such
assets as determined in good faith by the board of directors of the Company,
(ii) after giving effect to such disposition, no Default or Event of Default
shall have occurred and be continuing, and (iii) within 180 days of such
disposition an amount equal to the net proceeds received from such sale shall
be used to (x) acquire property, plant or equipment used or useful in carrying
on the business of the Company and its Restricted Subsidiaries, or (y) retire
Senior Debt of the Company or any Restricted Subsidiary, (B) such disposition
is a sale and leaseback transaction permitted by 5.12, or (C) such disposition
is a Receivables Securitization Transaction permitted by 5.9. For purposes of
the immediately preceding sentence, any prepayment of the Notes shall be
pursuant to 2.2.
Section 5.14. Guaranties. The Company will not and will not permit
any Restricted Subsidiary to become or be liable in respect of any Guaranty
except Guaranties of the Company or a Restricted Subsidiary which are limited
in amount to a stated maximum dollar exposure and included in Senior
Obligations or Subordinated Obligations.
Section 5.15. Repurchase of Notes. Neither the Company nor any
Restricted Subsidiary or Affiliate, directly or indirectly, may repurchase or
make any offer to repurchase any Notes unless the offer has been made to
repurchase Notes, pro rata, from all holders of the Notes at the same time and
upon the same terms. In case the Company repurchases any Notes, such Notes
shall thereafter be cancelled and no Notes shall be issued in substitution
therefor.
Section 5.16. Transactions with Affiliates. The Company will not,
and will not permit any Restricted Subsidiary to, enter into or be a party to
any transaction or arrangement with any Affiliate (including, without
limitation, the purchase from, sale to or exchange of property with, or the
rendering of any service by or for, any Affiliate), except in the ordinary
course of and pursuant to the reasonable requirements of the Company's or such
Restricted Subsidiary's business and upon fair and reasonable terms no less
favorable to the Company or such Restricted Subsidiary than would obtain in a
comparable arm's-length transaction with a Person other than an Affiliate.
In the event a Restricted Subsidiary is redesignated as an Unrestricted
Subsidiary pursuant to 5.23(b)(i), all transactions and arrangements between
such Subsidiary and the Company or any Restricted Subsidiary which occurred or
existed at any time during the 12-month period ending with the date of such
redesignation shall, for purposes of this Section, be deemed to have been
entered into immediately after such redesignation.
Section 5.17. Investments. The Company will not, and will not
permit any Restricted Subsidiary to, make any investments in or loans,
advances or extensions of credit to, any Person, except:
(a) investments, loans and advances by the Company and its Restricted
Subsidiaries in and to Restricted Subsidiaries, including any investment in a
corporation which, after giving effect to such investment, will become a
Restricted Subsidiary and loans and advances by a Wholly-owned Restricted
Subsidiary to the Company;
(b) investments, maturing in five years or less from the date of
acquisition, in bills, notes and bonds of the United States of America, or any
agency thereof;
(c) investments in corporate debt obligations, maturing within twelve
months or less from the date of acquisition, which (i) are issued by
corporations having substantially all of their assets located in the United
States, and (ii) at the time of acquisition, are accorded one of the two
highest ratings by a Qualified Rating Agency;
(d) investments in commercial paper which is issued by corporations
having substantially all of their assets located in the United States, and
which matures in 270 days or less from the date of acquisition and, at the
time of acquisition, is accorded one of the two highest ratings by a Qualified
Rating Agency;
(e) investments in certificates of deposit, maturing within twelve
months or less from the date of acquisition, issued by commercial banks
located in the United States having capital, surplus and undivided profits
aggregating more than U.S.$100,000,000 and accorded at the time of acquisition
one of the two highest ratings by a Qualified Rating Agency;
(f) investments in marketable obligations, maturing within three years
or less from the date of acquisition, of any state, territory or possession of
the United States of America or any political subdivision of any of the
foregoing, or the District of Columbia, which are, at the time of acquisition,
accorded one of the two highest ratings by a Qualified Rating Agency;
(g) investments in certificates of deposit which are denominated in
U.S. dollars, maturing within 7 days or less from the date of acquisition,
issued by (i) commercial banks located in Canada, Japan or in a country which
was a member of the European Economic Community on the Closing Date, having
capital, surplus and undivided profits aggregating more than the equivalent of
U.S.$250,000,000, and having outstanding unsecured long-term indebtedness
which, at the time of acquisition, is accorded one of the two highest ratings
by a Qualified Rating Agency, or (ii) off-shore subsidiaries of United States
banks qualifying under paragraph (e) of this 5.17;
(h) investments evidenced by repurchase agreements providing for the
repurchase within 7 days from the date of the making of such investment of
obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America which agreements are
issued by a bank qualifying under paragraph (e) of this 5.17;
(i) interest rate exchange agreements, or interest rate cap, floor and
collar agreements, (collectively, "Interest Rate Protection Agreements");
provided that, (1) such Interest Rate Protection Agreements are not entered
into for the purpose of hedging one or more Interest Rate Protection
Agreements which themselves are hedges of certain risks to the Company or any
Restricted Subsidiary, and (2) any such Interest Rate Protection Agreements
shall be entered into (x) solely for the purpose of hedging against changes in
prevailing interest rates and not for purposes of speculation, and (y) only
with commercial or investment banks having outstanding unsecured long-term
indebtedness which, at the effective date of such Interest Rate Protection
Agreement, is accorded at a rating of "A" or better by a Qualified Rating
Agency or insurance companies which are accorded a rating of A-XII, or better,
by A.M. Best Co. (or an equivalent rating by another nationally recognized
insurance rating agency of similar standing if A.M. Best Co. is not then in
the business of rating insurance companies);
(j) receivables arising in the ordinary course of the Finance
Business; and
(k) other investments, loans and advances (in addition to those
permitted by the foregoing provisions of this 5.17); provided that the
aggregate amount of all such other investments, loans and advances at any time
owned by the Company and its Restricted Subsidiaries shall not exceed an
amount equal to 15% of Consolidated Adjusted Net Worth.
In valuing any investments, loans and advances for the purpose of
applying the limitations set forth in this 5.17, such investments, loans and
advances shall be valued at cost less (i) any net return of capital through
the sale or liquidation thereof or other return of capital thereon, and (ii)
decreases in value charged against Consolidated Adjusted Net Income, or
directly against Consolidated Adjusted Net Worth, subsequent to July 31, 1996.
For purposes of this 5.17, (i) at any time when a corporation becomes a
Restricted Subsidiary, all investments of such corporation at such time shall
be deemed to have been made by such corporation, as a Restricted Subsidiary,
at such time; and (ii) all investments of the Company and its Restricted
Subsidiaries in a Restricted Subsidiary which is redesignated as an
Unrestricted Subsidiary pursuant to 5.23(b)(i) shall be deemed to have been
made immediately after such redesignation.
Section 5.18. Pension Plans. The Company will not and will not
permit any Subsidiary to (i) permit any employee benefit plan maintained by it
to be terminated in a manner reasonably likely to result in the imposition of
a lien on any property of the Company or any Subsidiary pursuant to Section
4068 of ERISA, or (ii) permit the present value of all benefits vested under
all such plans to exceed the value of the assets of such plans allocable to
such vested benefits by an amount greater than U.S.$500,000 in the aggregate.
Section 5.19. Issuance of Subordinated Debt or Capital Debt. The
Company will not create, issue, assume, guarantee or in any manner become
liable after the date hereof in respect of any Subordinated Debt or Capital
Debt unless such Subordinated Debt or Capital Debt shall have a Weighted
Average Life to Maturity equal to or greater than the remaining Weighted
Average Life to Maturity of the Notes.
Section 5.20. Voluntary Retirement of Subordinated Debt or Capital
Debt. The Company will not, except as permitted under 5.11, directly or
indirectly or through any Subsidiary, purchase, redeem or otherwise retire or
acquire prior to the respective stated maturities thereof, the whole or any
part of any issue of Subordinated Debt or Capital Debt except in accordance
with the applicable provisions thereof or of any indenture, agreement or
similar instrument under or pursuant to which such Subordinated Debt or
Capital Debt has been issued, unconditionally requiring payments into a
sinking fund, periodic prepayments, or other analogous payments for the
amortization of such Subordinated Debt or Capital Debt.
Section 5.21. Amendment of Subordinated Debt or Capital Debt. The
Company will not, at any time, be a party to any amendment or modification of
any payment or subordination provisions applicable to Subordinated Debt or
Capital Debt other than an amendment or modification which extends the
Weighted Average Life to Maturity thereof, reduces the interest rate thereon
or further subordinates such Subordinated Debt or Capital Debt.
Section 5.22. Reports and Rights of Inspection. The Company will
keep, and will cause each Subsidiary to keep, proper books of record and
account in which full and correct entries will be made of all dealings or
transactions of or in relation to the business and affairs of the Company or
such Subsidiary, in accordance with generally accepted accounting principles
consistently maintained (except for changes disclosed in the financial
statements furnished to you pursuant to this 5.22 and concurred in by the
independent public accountants referred to in 5.22(b) hereof), and will
furnish to you so long as you are the holder of any Note and to each other
institutional holder of the then outstanding Notes (in duplicate if so
specified below or otherwise requested):
(a) Quarterly Statements. As soon as available and in any event
within 60 days after the end of each quarterly fiscal period (except the last)
of each fiscal year, one copy of:
(1) consolidated and consolidating balance sheets of the Company and
its Restricted Subsidiaries as of the close of such quarter setting forth in
comparative form the consolidated figures for the corresponding period of the
preceding fiscal year,
(2) consolidated and consolidating statements of income and retained
earnings of the Company and its Restricted Subsidiaries for such quarterly
period, setting forth in comparative form the consolidated figures for the
corresponding period of the preceding fiscal year, and
(3) consolidated and consolidating statements of cash flows of the
Company and its Restricted Subsidiaries for the portion of the fiscal year
ending with such quarter, setting forth in comparative form the consolidated
figures for the corresponding period of the preceding fiscal year,
all in reasonable detail and certified, on behalf of the Company, by an
authorized financial officer thereof, as having been prepared in accordance
with generally accepted accounting principles and presenting fairly, in all
material respects, the financial condition of the Company and its Restricted
Subsidiaries, subject to year-end audit adjustments;
(b) Annual Statements. As soon as available and in any event within
120 days after the close of each fiscal year of the Company, one copy of:
(1) consolidated and consolidating balance sheets of the Company and
its Restricted Subsidiaries as of the close of such fiscal year, and
(2) consolidated and consolidating statements of income and retained
earnings and cash flows of the Company and its Restricted Subsidiaries for
such fiscal year,
in each case setting forth in comparative form the consolidated figures for
the preceding fiscal year, all in reasonable detail and accompanied by a
report thereon of Eisner & Lubin or a firm of independent public accountants
of recognized national or regional standing selected by the Company to the
effect that the consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and present fairly,
in all material respects, the financial condition of the Company and its
Restricted Subsidiaries and that the examination of such accountants in
connection with such financial statements has been made in accordance with
generally accepted auditing standards and accordingly includes such tests of
the accounting records and such other auditing procedures as were considered
necessary to provide a reasonable basis for the opinion expressed in the
report;
(c) Audit Reports. Promptly upon receipt thereof, one copy of each
interim or special audit made by independent accountants of the books of the
Company or any Restricted Subsidiary and one copy of any response by the
Company or such Restricted Subsidiary to any such interim or special audit;
(d) SEC and Other Reports. Promptly upon their becoming available,
one copy of each financial statement, report, notice or proxy statement sent
by the Company to stockholders generally and of each regular or periodic
report, and any registration statement or prospectus filed by the Company or
any Subsidiary with any securities exchange or the Securities and Exchange
Commission or any successor agency, and, to the extent that such proceedings,
if determined adversely, might reasonably be expected to have a material,
adverse affect on the properties, business, profits or conditions of the
Company and its Restricted Subsidiaries, taken as a whole, copies of any
orders in any proceedings to which the Company or any of its Subsidiaries is a
party, issued by any governmental agency, Federal or state, having
jurisdiction over the Company or any of its Subsidiaries;
(e) Requested Information. With reasonable promptness, such other
data and information as you or any such institutional holder may reasonably
request;
(f) Officer's Certificates. Within the periods provided in paragraphs
(a) and (b) above, a certificate of the Company signed by an authorized
financial officer of the Company stating that such officer has reviewed the
provisions of this Agreement and setting forth: (i) the information and
computations (in sufficient detail) required in order to establish whether the
Company was in compliance with the requirements of 5.6 through 5.21,
inclusive, at the end of the period covered by the financial statements then
being furnished, and (ii) whether there existed as of the date of such
financial statements and whether, to the best of such officer's knowledge,
there exists on the date of the certificate or existed at any time during the
period covered by such financial statements any Default or Event of Default
and, if any such condition or event exists on the date of the certificate,
specifying the nature and period of existence thereof and the action the
Company is taking and proposes to take with respect thereto;
(g) Accountants' Certificates. Within the period provided in
paragraph (b) above, a certificate of the accountants who render an opinion
with respect to such financial statements, stating that nothing came to their
attention that caused them to believe that the Company failed to comply with
any term, covenant, provision or condition of this Agreement and stating
further whether, in making their audit, such accountants have become aware of
any Default or Event of Default under any of the terms or provisions of this
Agreement insofar as any such terms or provisions pertain to or involve
accounting matters or determinations, and if any such condition or event then
exists, specifying the nature and period of existence thereof;
(h) Unrestricted Subsidiaries. Within the period provided in
paragraph (b) above, financial statements of the character and for the date
and period as in said paragraph (b) provided covering each Unrestricted
Subsidiary (or groups of Unrestricted Subsidiaries on a consolidated basis);
and
(i) Receivables Reports. Within the period provided in paragraph (a)
above with respect to the second fiscal quarter in each fiscal year of the
Company and within the period provided in paragraph (b) above with respect to
each fiscal year of the Company, a report with respect to accounts receivable
of the Company and its Restricted Subsidiaries providing information regarding
delinquencies, repossessions and charge-offs.
Without limiting the foregoing, the Company will permit you, so long as
you are the holder of any Note, and each institutional holder of the then
outstanding Notes who is not a Competitor (or such Persons as either you or
such holder may designate), to visit and inspect any of the properties of the
Company or any Subsidiary, to examine all their books of account, records,
reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers, employees, and independent public accountants (and by this provision
the Company authorizes said accountants to discuss with you the finances and
affairs of the Company and its Subsidiaries) all at such reasonable times and
as often as may be reasonably requested. The Company shall not be required to
pay or reimburse you or any such holder for expenses which you or such holder
may incur in connection with any such visitation or inspection so long as no
Default or Event of Default shall have occurred and be continuing.
For the purposes of this paragraph, "Confidential Information" means
information delivered to you by or on behalf of the Company or any Subsidiary
in connection with the transactions contemplated by or otherwise pursuant to
this Agreement that is proprietary in nature and that was delivered to you
prior to the Closing Date or was clearly marked or labeled or otherwise
adequately identified when received by you as being confidential information
of the Company or such Subsidiary, provided that such term does not include
information that (a) was publicly known or otherwise known to you prior to the
time of such disclosure, (b) subsequently becomes publicly known through no
act or omission by you or any person acting on your behalf, (c) otherwise
becomes known to you other than through disclosure by the Company or any
Subsidiary or (d) constitutes financial statements delivered to you under this
Section that are otherwise publicly available. You will maintain the
confidentiality of such Confidential Information in accordance with procedures
adopted by you in good faith to protect confidential information of third
parties delivered to you, provided that you may deliver or disclose
Confidential Information to (i) your directors, officers, employees, agents,
attorneys and affiliates (to the extent such disclosure reasonably relates to
the administration of the investment represented by your Notes), (ii) your
financial advisors and other professional advisors who agree to hold
confidential the Confidential Information substantially in accordance with the
terms of this paragraph, (iii) any other holder of any Note, (iv) any
Institutional Investor to which you sell or offer to sell such Note or any
part thereof or any participation therein (if such Person has agreed in
writing prior to its receipt of such Confidential Information to be bound by
the provisions of this paragraph), (v) any Person from which you offer to
purchase any security of the Company (if such Person has agreed in writing
prior to its receipt of such Confidential Information to be bound by the
provisions of this paragraph), (vi) any federal or state regulatory authority
having jurisdiction over you, (vii) the National Association of Insurance
Commissioners or any similar organization, or any nationally recognized rating
agency that requires access to information about your investment portfolio or
(viii) any other Person to which such delivery or disclosure may be necessary
or appropriate (w) to effect compliance with any law, rule, regulation, order,
policy or investigation applicable to you, (x) in connection with or in
response to any subpoena or other legal process, (y) in connection with any
litigation to which you are a party or (z) if an Event of Default has occurred
and is continuing, to the extent you may reasonably determine such delivery
and disclosure to be necessary or appropriate in the enforcement or for the
protection of the rights and remedies under your Notes and this Agreement.
Each holder of a Note, by its acceptance of a Note, will be deemed to have
agreed to be bound by and to be entitled to the benefits of this paragraph as
though it were a party to this Agreement. On reasonable request by the
Company in connection with the delivery to any holder of a Note of information
required to be delivered to such holder under this Agreement or requested by
such holder (other than a holder that is a party to this Agreement or its
nominee), such holder will enter into an agreement with the Company embodying
the provisions of this paragraph.
Section 5.23. Restricted Subsidiaries.
(a) Limitation on Restrictive Covenants. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries, or pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries;
(ii) make loans or advances to the Company or any Restricted
Subsidiary; or
(iii) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
(b) Designation of Subsidiaries. (i) The Board of Directors of the
Company may at any time and from time to time, upon not less than 15 days'
prior written notice given to each holder of a Note, designate a Restricted
Subsidiary as an Unrestricted Subsidiary; provided that (x) such Restricted
Subsidiary has not previously been designated an Unrestricted Subsidiary
pursuant to this 5.23(b)(i) and (y) at the time of such designation and after
giving effect thereto no Default or Event of Default shall have occurred and
be continuing.
(ii) The Board of Directors of the Company may at any time and from
time to time, upon not less than 15 days' prior written notice given to each
holder of a Note, designate an Unrestricted Subsidiary as a Restricted
Subsidiary; provided that (x) such Unrestricted Subsidiary has not previously
been designated a Restricted Subsidiary pursuant to this 5.23(b)(ii) and
(y) at the time of such designation and after giving effect thereto no Default
or Event of Default shall have occurred and be continuing.
(iii) Any notice of designation pursuant to this 5.23(b) shall be
accompanied by a certificate signed by an authorized financial officer of the
Company demonstrating by calculations in reasonable detail that the provisions
of this 5.23(b) have been complied with in connection with such designation
and setting forth the name of each other Subsidiary (if any) which has or will
become an Unrestricted Subsidiary or a Restricted Subsidiary, as the case may
be, as a result of any such designation.
Section 6. Events of Default and Remedies Therefor.
Section 6.1. Events of Default. Any one or more of the following
shall constitute an "Event of Default" as the term is used herein:
(a) Default shall occur in the payment of interest on any Note when
the same shall have become due and such default shall continue for more than
five Business Days; or
(b) Default shall occur in the making of any payment of the principal
of any Note or the premium thereon at the expressed or any accelerated
maturity date or at any date fixed for prepayment; or
(c) Default shall be made in the payment of the principal of or
interest on any Indebtedness of the Company or any Restricted Subsidiary,
aggregating in excess of U.S.$2,000,000, as and when the same shall become due
and payable by the lapse of time, by declaration, by call for redemption or
otherwise, and such default shall continue beyond the period of grace, if any,
allowed with respect thereto; or
(d) Default or the happening of any event shall occur under any
indentures, agreements, or other instruments under which any Indebtedness of
the Company or any Restricted Subsidiary aggregating in excess of
U.S.$2,000,000 is outstanding if the effect of such default or happening is to
cause the acceleration of the maturity of any Indebtedness of the Company or
any Restricted Subsidiary outstanding thereunder; or
(e) Default shall occur in the observance or performance of any
covenant or agreement contained in 5.6 through 5.21, hereof; or
(f) Default shall occur in the observance or performance of any other
provision of this Agreement and continue for more than 30 days after the
earlier of (i) notice of such default being given to the Company by any holder
of a Note, or (ii) such default becoming known to the Chairman, Vice Chairman,
President, Executive Vice President, Chief Financial Officer or Treasurer of
the Company; or
(g) If any representation or warranty made by the Company herein, or
made by the Company in any written statement or certificate furnished by the
Company in connection with the consummation of the issuance and delivery of
the Notes or furnished by the Company pursuant hereto, is untrue in any
material adverse respect as of the date of the issuance or making thereof; or
(h) One or more final judgments for the payment of money aggregating
in excess of U.S.$2,000,000 is or are outstanding against the Company or any
Restricted Subsidiary or against any property or assets of either and such
judgment or judgments have remained unpaid, unvacated, unbonded or unstayed by
appeal or otherwise for a period of 30 days from the date of its or their
entry; or
(i) The Company or any Restricted Subsidiary becomes insolvent or
bankrupt, is generally not paying its debts as they become due or makes an
assignment for the benefit of creditors, or the Company or any Restricted
Subsidiary applies for or consents to the appointment of a custodian, trustee
or receiver for the Company or such Restricted Subsidiary or for the major
part of the property of either; or
(j) A custodian, trustee or receiver is appointed for the Company or
any Restricted Subsidiary or for the major part of the property of either and
is not discharged within 60 days after such appointment; or
(k) Bankruptcy, reorganization, arrangement or insolvency proceedings,
or other proceedings for relief under any bankruptcy or similar law or laws
for the relief of debtors, are instituted by or against the Company or any
Restricted Subsidiary and, if instituted against the Company or any Restricted
Subsidiary, remain in effect for more than (x) 60 days after such institution
if such proceedings are instituted by a holder of Indebtedness of the Company
or a Restricted Subsidiary for borrowed money, or (y) 120 days after such
institution if such proceedings are instituted by any Person other than a
holder of such Indebtedness for borrowed money and, in each such case, are not
being contested by the Company or such Restricted Subsidiary in good faith by
appropriate actions or proceedings.
Section 6.2. Notice to Holders. When any Event of Default
described in the foregoing 6.1 has occurred, or if the holder of any Note or
of any other evidence of Indebtedness of the Company outstanding in the
principal amount of U.S.$500,000, or more, gives any notice or takes any other
action with respect to a claimed default, the Company agrees to give notice
within three Business Days of such Event of Default or such notice or action
to all holders of the Notes then outstanding, such notice to be in writing and
sent by registered or certified mail or by telefacsimile.
Section 6.3. Acceleration of Maturities. When any Event of Default
described in paragraph (a) or (b) of 6.1 has happened and is continuing, any
holder of any Note may, and when any Event of Default described in paragraphs
(c) through (h), inclusive, of said 6.1 has happened and is continuing, the
holder or holders of 33-1/3% or more of the principal amount of Notes at the
time outstanding (exclusive of any Notes held by a Restricted Subsidiary or
Affiliate) may, by notice in writing sent by registered or certified mail to
the Company, declare the entire principal and all interest accrued on all
Notes to be, and all Notes shall thereupon become, forthwith due and payable,
without any presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived. When any Event of Default described in
paragraphs (i) through (k), inclusive, of 6.1 has occurred, then all
outstanding Notes shall immediately become due and payable without
presentment, demand or notice of any kind. Upon the Notes becoming due and
payable as a result of any Event of Default as aforesaid, the Company will
forthwith pay to the holders of the Notes the entire principal and interest
accrued on the Notes and, to the extent permitted by law, a premium in the
amount which would be payable if the Company then had elected to prepay the
Notes pursuant to 2.2. No course of dealing on the part of any holder of the
Notes nor any delay or failure on the part of any holder of the Notes to
exercise any right shall operate as a waiver of such right or otherwise
prejudice such holder's rights, powers and remedies. The Company further
agrees, to the extent permitted by law, to pay to the holder or holders of the
Notes all costs and expenses incurred by them in the collection of any Notes
upon any default hereunder or thereon, including reasonable compensation to
such holder's or holders' attorneys for all services rendered in connection
therewith.
Section 6.4. Rescission of Acceleration. The provisions of 6.3 are
subject to the condition that if the principal of and accrued interest on all
or any outstanding Notes have been declared immediately due and payable by
reason of the occurrence of any Event of Default described in paragraphs (c)
through (k), inclusive, of 6.1, the holders of 67% in aggregate principal
amount of the Notes then outstanding (exclusive of any Notes held by a
Restricted Subsidiary or Affiliate) may, by written instrument filed with the
Company, rescind and annul such declaration and the consequences thereof;
provided that at the time such declaration is annulled and rescinded:
(a) no judgment or decree has been entered for the payment of any
monies due pursuant to the Notes or this Agreement;
(b) all arrears of interest upon all the Notes and all other sums
payable under the Notes and under this Agreement (except any principal,
interest or premium on the Notes which has become due and payable solely by
reason of such declaration under 6.3) shall have been duly paid; and
(c) each and every other Default and Event of Default shall have been
made good, cured or waived pursuant to 7.1;
and provided further, that no such rescission and annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right
consequent thereto.
Section 7. Amendments, Waivers and Consents.
Section 7.1. Consent Required. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended
or compliance therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if the Company shall have
obtained the consent in writing of the holders of at least 51% in aggregate
principal amount of outstanding Notes (exclusive of any Notes held by a
Restricted Subsidiary or Affiliate); provided that without the written consent
of the holders of all of the Notes then outstanding, no such waiver,
modification, alteration or amendment shall be effective (i) which will change
the time of payment of the principal of or the interest on any Note or reduce
the principal amount thereof or change the rate of interest thereon, or (ii)
which will change any of the provisions with respect to optional prepayments,
or (iii) which will amend or modify the provisions of 2.3 hereof or the
definition of the term "Change of Control" set forth in 8.1 hereof, or (iv)
which will change the percentage of holders of the Notes required to consent
to any such amendment, alteration or modification or any of the provisions of
this 7.
Section 7.2. Solicitation of Noteholders. The Company will not
solicit, request or negotiate for or with respect to any proposed waiver or
amendment of any of the provisions of this Agreement or the Notes unless each
holder of the Notes (irrespective of the amount of Notes then owned by it)
shall be informed thereof by the Company and shall be afforded the opportunity
of considering the same and shall be supplied by the Company with sufficient
information to enable it to make an informed decision with respect thereto.
Executed or true and correct copies of any waiver or consent effected pursuant
to the provisions of this 7.2 shall be delivered by the Company to each holder
of outstanding Notes forthwith following the date on which the same shall have
been executed and delivered by the holder or holders of the requisite
percentage of outstanding Notes. The Company will not, directly or
indirectly, pay or cause to be paid any remuneration, whether by way of
supplemental or additional interest, fee or otherwise, to any holder of the
Notes as consideration for or as an inducement to the entering into by any
holder of the Notes of any waiver or amendment of any of the terms and
provisions of this Agreement unless such remuneration is concurrently paid, on
the same terms, ratably to the holders of all of the Notes then outstanding.
Section 7.3. Effect of Amendment or Waiver. Any such amendment or
waiver shall apply equally to all of the holders of the Notes and shall be
binding upon them, upon each future holder of any Note and upon the Company,
whether or not such Note shall have been marked to indicate such amendment or
waiver. No such amendment or waiver shall extend to or affect any obligation
not expressly amended or waived or impair any right consequent thereon.
Section 8. Interpretation of Agreement; Definitions.
Section 8.1. Definitions. Unless the context otherwise requires,
the terms hereinafter set forth when used herein shall have the following
meanings and the following definitions shall be equally applicable to both the
singular and plural forms of any of the terms herein defined:
The term "affiliate" shall mean with respect to any Person any other
Person (i) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such first
Person, (ii) which beneficially owns or holds 10% or more of any class of the
Voting Stock of such first Person or (iii) 10% or more of the Voting Stock (or
in the case of a Person which is not a corporation, 10% or more of the equity
interest) of which is beneficially owned or held, directly or indirectly or
through any subsidiary, by such first Person. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of Voting Stock, by contract or otherwise. The term "Affiliate"
shall mean any affiliate of the Company other than a Wholly-owned Restricted
Subsidiary.
"Approved Owners" shall mean (i) Bernard G. Palitz, Clarence Y. Palitz,
Jr., Michael C. Palitz, Richard W. Radom, Paul Sinsheimer and W. Michael
Gallagher; (ii) the spouses, lineal descendants and spouses of the lineal
descendants of the persons named in clause (i); and (iii) the estates or legal
representatives of the persons named in clause (i) and (ii).
"Business Day" shall mean a day other than a Saturday, a Sunday or, in
the case of any Note with respect to which the provisions of 2.6 hereof are
applicable, a day on which the bank designated by the holder of such Note to
receive payments on such Note for such holders account is, or banks located in
the State of New York are, required by law (other than a general banking
moratorium or holiday for a period exceeding four consecutive days) to be
closed.
"Capital Debt" shall mean all unsecured Indebtedness of the Company
which (i) has been issued and sold to, and is owned and held by, Financial
Federal, (ii) bears interest at a rate which is no less favorable to the
Company than would be obtainable in an arm's length transaction with a Person
other than an Affiliate, and (iii) contains or has applicable thereto
subordination provisions substantially in the form set forth in Exhibit F
attached hereto or such other provisions as may be approved in writing by the
holders of not less than 66-2/3% in aggregate principal amount of the Notes
(exclusive of any Notes held by the Company, a Restricted Subsidiary or
Affiliate).
"Capitalized Lease" shall mean any lease the obligation for Rentals with
respect to which is required to be capitalized on a balance sheet of the
lessee in accordance with generally accepted accounting principles.
"Capitalized Rentals" shall mean as of the date of any determination the
amount at which the aggregate Rentals due and to become due under all
Capitalized Leases under which the Company is a lessee would be reflected as a
liability on a consolidated balance sheet of the Company and its Restricted
Subsidiaries.
"Change of Control" shall mean (i) each and every issue, sale or other
disposition of shares of stock of the Company which results in any Person or
group of Persons acting in concert (a "New Control Person"), other than
Financial Federal or the Approved Owners, beneficially owning or controlling,
directly or indirectly, more than 50% (by number of votes) of the Voting Stock
of the Company, or (ii) each and every issue, sale or other disposition of
shares of stock of Financial Federal which results in any Person or group of
Persons acting in concert (a "New Control Person"), other than the Approved
Owners, beneficially owning or controlling, directly or indirectly, more than
50% (by number of votes) of the Voting Stock of Financial Federal; provided,
however, that a Change of Control shall not be deemed to have occurred if the
long-term debt of any New Control Person is accorded a rating of "A" or better
by a Qualified Rating Agency immediately prior to, and immediately after,
beneficially acquiring the Voting Stock of the Company or Financial Federal,
as the case may be.
"Change of Control Date" shall mean any date upon which a Change of
Control shall occur.
"Closing Date" is defined in 1.2.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
regulations from time to time promulgated thereunder.
"Company" is defined at the beginning of this Agreement.
"Competitor" shall mean any Person (i) whose primary business is the
Finance Business and (ii) who is not a regular investor in privately placed
Securities.
"Consolidated Adjusted Net Income" shall mean as of the date of any
determination thereof the sum of (i) Consolidated Net Income, plus (ii) to the
extent deducted in the computation of Consolidated Net Income, all taxes on
income.
"Consolidated Adjusted Net Worth" shall mean, as of the date of any
determination thereof:
(a) the sum of (i) the total stockholders equity account of the
Company and its Restricted Subsidiaries on a consolidated basis as determined
in accordance with generally accepted accounting principles, plus
(ii) deferred income tax liabilities, plus (iii) the aggregate unpaid
principal amount of outstanding Capital Debt,
less, without duplication
(b) all Intangible Assets.
"Consolidated Net Income" for any period shall mean the gross revenues
of the Company and its Restricted Subsidiaries for such period less all
expenses and other proper charges (including taxes on income), determined on a
consolidated basis in accordance with generally accepted accounting principles
consistently applied and after eliminating earnings or losses attributable to
outstanding Minority Interests, but excluding in any event:
(a) any gains or losses on the sale or other disposition of fixed or
capital assets (other than the sale of repossessed collateral or residual
interests in the ordinary course of the Finance Business), and any taxes on
such excluded gains and any tax deductions or credits on account of any such
excluded losses;
(b) the proceeds of any life insurance policy (other than insurance
supporting the payment of a receivable obligation);
(c) net earnings and losses of any Restricted Subsidiary accrued prior
to the date it became a Restricted Subsidiary;
(d) net earnings and losses of any corporation (other than a
Restricted Subsidiary), substantially all the assets of which have been
acquired in any manner, realized by such other corporation prior to the date
of such acquisition;
(e) net earnings and losses of any corporation (other than a
Restricted Subsidiary) with which the Company or a Restricted Subsidiary shall
have consolidated or which shall have merged into or with the Company or a
Restricted Subsidiary prior to the date of such consolidation or merger;
(f) net earnings of any business entity (other than a Restricted
Subsidiary) in which the Company or any Restricted Subsidiary has an ownership
interest unless such net earnings shall have actually been received by the
Company or such Subsidiary in the form of cash distributions;
(g) any portion of the net earnings of any Restricted Subsidiary which
for any reason (other than solely because of a business determination which is
subject to reversal at the sole election of the Company) is unavailable for
payment of dividends to the Company or any other Restricted Subsidiary;
(h) earnings resulting from any reappraisal, revaluation or write-up
of assets except to the extent that such reappraisal, revaluation or write-up
has been approved by the independent public accountants then reporting on the
Company's annual financial statements described in 5.22(b);
(i) any gain arising from the acquisition of any Securities of the
Company or any Restricted Subsidiary; and
(j) any reversal of allowances for possible losses in excess of actual
recovery, except to the extent that provision for such losses shall have been
made from income arising during the applicable period or periods being tested
under 5.11.
"D&P" shall mean Duff & Phelps Credit Rating Co.
"Default" shall mean any event or condition the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default as defined in 6.1.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Event of Default" is defined in 6.1.
"Finance Business" shall mean the business of lending, consulting,
guaranteeing obligations of others, financing and leasing property, the
acquisition and ownership of receivables arising therefrom and the transaction
of such other business as may be reasonably incidental thereto including,
without limitation, the sale of repossessed collateral or property previously
subject to lease.
"Financial Federal" shall mean Financial Federal Corporation, a Nevada
corporation.
"Fitch" shall mean Fitch Investors Service, L.P.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect, guaranteeing
any Indebtedness, dividend or other obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, all obligations incurred through an agreement, contingent
or otherwise, by such Person: (i) to purchase such Indebtedness or obligation
or any property or assets constituting security therefor, (ii) to advance or
supply funds (x) for the purchase or payment of such Indebtedness or
obligation, or (y) to maintain working capital or other balance sheet
condition or otherwise to advance or make available funds for the purchase or
payment of such Indebtedness or obligation, or (iii) to lease property or to
purchase Securities or other property or services primarily for the purpose of
assuring the owner of such Indebtedness or obligation of the ability of the
primary obligor to make payment of the Indebtedness or obligation, or (iv)
otherwise to assure the owner of the Indebtedness or obligation of the primary
obligor against loss in respect thereof. For the purposes of all computations
made under this Agreement, a Guaranty in respect of any Indebtedness for
borrowed money shall be deemed to be Indebtedness equal to the principal
amount of such Indebtedness for borrowed money, but not more than the portion
thereof which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness
equal to the maximum aggregate amount of such obligation, liability or
dividend, but not more than the portion thereof which has been guaranteed.
"Indebtedness" of any Person shall mean and include all obligations of
such Person (other than Non-Recourse Debt) which in accordance with generally
accepted accounting principles shall be classified upon a balance sheet of
such Person as liabilities of such Person, and in any event shall include all
(i) obligations of such Person for borrowed money or which has been incurred
in connection with the acquisition of property or assets, (ii) obligations
secured by any lien or other charge upon property or assets owned by such
Person, even though such Person has not assumed or become liable for the
payment of such obligations, (iii) obligations created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person, notwithstanding the fact that the rights and remedies
of the seller, lender or lessor under such agreement in the event of default
are limited to repossession or sale of property, (iv) all Guaranties of such
Person, and (v) Capitalized Rentals under any Capitalized Lease. For the
purpose of computing the "Indebtedness" of any Person, there shall be excluded
any particular Indebtedness to the extent that, upon or prior to the maturity
thereof, there shall have been deposited with the proper depository in trust
the necessary funds (or evidences of such Indebtedness, if permitted by the
instrument creating such Indebtedness) for the payment, redemption or
satisfaction of such Indebtedness; and thereafter such funds and evidences of
Indebtedness so deposited shall not be included in any computation of the
assets of such Person.
"Intangible Assets" shall mean, as of the date of any determination
thereof, the total amount of goodwill, patents, trade names, trade marks,
copyrights, franchises, experimental expense, organization expense,
unamortized debt discount and expense, the excess of cost of shares acquired
over book value of related assets and such other assets as are properly
classified as "intangible assets" in accordance with generally accepted
accounting principles.
"Institutional Investor" shall mean (a) any original purchaser of a
Note, (b) any holder of a Note holding more than 5% of the aggregate principal
amount of the Notes then outstanding, and (c) any holder which is a bank,
trust company, savings and loan association or other financial institution,
any pension plan, any investment company, any insurance company, any broker or
dealer, or any other similar financial institution or entity, regardless of
legal form.
"Make-Whole Premium" is defined in 2.2.
"Minority Interests" shall mean any shares of stock of any class of a
Restricted Subsidiary (other than directors' qualifying shares as required by
law) that are not owned by the Company and/or one or more of its Restricted
Subsidiaries. Minority Interests shall be valued by valuing Minority
Interests constituting preferred stock at the voluntary or involuntary
liquidating value of such preferred stock, whichever is greater, and by
valuing Minority Interests constituting common stock at the book value of
capital and surplus applicable thereto adjusted, if necessary, to reflect any
changes from the book value of such common stock required by the foregoing
method of valuing Minority Interests in preferred stock.
"Moody's" shall mean Moody's Investors Service, Inc.
"Non-Recourse Debt" shall mean Indebtedness of the Company or of a
Restricted Subsidiary incurred in connection with the acquisition of property
which, in turn, is subject to a lease or security agreement under which a
Person other than a Restricted Subsidiary is the lessee or debtor, to the
extent that (a) such lease or security agreement provides for rentals or other
payments sufficient to pay the entire principal of and interest on such
Indebtedness on or before the date or dates for payment thereof, and (b) such
Indebtedness does not constitute a general obligation of the Company or any
Restricted Subsidiary but is repayable solely out of the rentals or other sums
payable under the lease or security agreement and/or the property subject
thereto.
"Note Register" is defined in 9.1.
"Notes" is defined in 1.1.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political
subdivision thereof.
"Priority Obligations" shall mean at any date the sum at such date of
the unpaid principal amount of (i) all Senior Debt of the Company secured by
liens permitted by 5.10(i) and (ii) all Senior Debt and all Guaranties of
Restricted Subsidiaries other than Indebtedness to the Company or a Wholly-
owned Restricted Subsidiary.
"Purchasers" is defined in 1.1.
"Qualified Rating Agency" shall mean D&P, Fitch, Moody's, S&P or another
nationally recognized credit rating agency of similar standing if none of the
aforementioned rating agencies are in the business of rating the investment or
indebtedness, as the case may be, in question.
"Receivables Securitization Transaction" shall mean any transaction
pursuant to which (i) accounts receivable are sold or transferred, and (ii)
the seller (a) retains an interest in the accounts receivable sold or
transferred or (b) assumes any credit liability in connection with such sale
or transfer.
"Reinvestment Rate" is defined in 2.2.
"Rentals" shall mean and include all fixed rents (including as such all
payments which the lessee is obligated to make to the lessor on termination of
the lease or surrender of the property) payable by the Company or a Restricted
Subsidiary, as lessee or sublessee under a lease of real or personal property,
but shall be exclusive of any amounts required to be paid by the Company or a
Restricted Subsidiary (whether or not designated as rents or additional rents)
on account of maintenance, repairs, insurance, taxes and similar charges.
Fixed rents under any so-called "percentage leases" shall be computed solely
on the basis of the minimum rents, if any, required to be paid by the lessee
regardless of sales volume or gross revenues.
"Restricted Payments" is defined in 5.11.
"Restricted Subsidiary" shall mean any Subsidiary (i) which is organized
under the laws of the United States or any State, territory or possession
thereof, or Canada or any Province thereof; (ii) which conducts substantially
all of its business and has substantially all of its assets within the United
States, territories or possessions thereof and Canada; (iii) of which more
than 80% (by number of votes) of the Voting Stock is owned by the Company
and/or one or more Restricted Subsidiaries; and (iii) which has been
designated by the Board of Directors of the Company to be included in the
definition of Restricted Subsidiary for all purposes of this Agreement.
"S&P" shall mean Standard & Poor's Rating Group, a division of McGraw
Hill, Inc.
"Security" shall have the same meaning as in Section 2(1)of the
Securities Act of 1933, as amended.
"Senior Debt" shall mean all Indebtedness of the Company for borrowed
money or incurred in connection with the acquisition of assets which is not
expressed to be subordinate or junior to any other Indebtedness of the Company
and all Indebtedness of Restricted Subsidiaries for borrowed money or incurred
in connection with the acquisition of assets.
"Senior Guaranties" shall mean all Guaranties of the Company which are
not expressed to be subordinated or junior to any other Indebtedness of the
Company and all Guaranties of Restricted Subsidiaries.
"Senior Obligations" shall mean the sum of (i) the aggregate unpaid
principal amount of Senior Debt, (ii) the aggregate outstanding contingent
liability with respect to Senior Guaranties, (iii) the aggregate amount of
Capitalized Rentals and (iv) recourse obligations of the Company under
Receivables Securitization Transactions.
"Series A Notes" is defined in 1.1.
"Series B Notes" is defined in 1.1.
"Statistical Release" is defined in 2.2.
"Subordinated Debt" shall mean all unsecured Indebtedness of the Company
for borrowed money which shall contain or have applicable thereto
subordination provisions substantially identical in effect to those contained
in Exhibit E hereof or such other provisions as may be approved in writing by
the holders of not less than 66-2/3% in aggregate principal amount of the
outstanding Notes (exclusive of any Notes held by a Restricted Subsidiary or
Affiliate).
"Subordinated Guaranties" shall mean all Guaranties of the Company which
shall contain or have applicable thereto subordination provisions
substantially identical in effect to those contained in Exhibit E hereof or
such other provisions as may be approved in writing by the holders of not less
than 66 2/3% in aggregate principal amount of the outstanding Notes (exclusive
of Notes held by a Restricted Subsidiary or Affiliate).
"Subordinated Obligations" shall mean the sum of (i) the aggregate
unpaid principal amount of Subordinated Debt, and (ii) the aggregate
outstanding contingent liability with respect to Subordinated Guaranties of
the Company.
The term "subsidiary" shall mean, as to any particular parent
corporation, any corporation of which more than 50% (by number of votes) of
the Voting Stock shall be owned by such parent corporation and/or one or more
corporations which are themselves subsidiaries of such parent corporation.
The term "Subsidiary" shall mean a subsidiary of the Company.
"Total Debt" shall mean the sum of Senior Obligations and Subordinated
Obligations.
"Unrestricted Subsidiary" shall mean any Subsidiary which is not a
Restricted Subsidiary.
"Voting Stock" shall mean Securities of any class or classes the holders
of which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors (or Persons performing similar functions).
"Weighted Average Life to Maturity" is defined in 2.2.
"Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) and all Indebtedness for
borrowed money shall be owned by the Company and/or one or more of its Wholly-
owned Subsidiaries.
Section 8.2. Accounting Principles. Where the character or amount
of any asset or liability or item of income or expense is required to be
determined or any consolidation or other accounting computation is required to
be made for the purposes of this Agreement, the same shall be done in
accordance with generally accepted accounting principles in effect at the time
of calculation, to the extent applicable, except where such principles are
inconsistent with the requirements of this Agreement.
Section 8.3. Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether the action
in question is taken directly or indirectly by such Person.
Section 9. Miscellaneous.
Section 9.1. Registered Notes. The Company shall cause to be kept
at its office specified in the penultimate sentence of 9.6 or at such other
address as may be designated in the future pursuant to the penultimate
sentence of 9.6, a register for the registration and transfer of the Notes
(hereinafter called the "Note Register"), and the Company will register or
transfer or cause to be registered or transferred, as hereinafter provided and
under such reasonable regulations as it may prescribe, any Note issued
pursuant to this Agreement.
At any time and from time to time the registered holder of any Note
which has been duly registered as hereinabove provided may transfer such Note
upon surrender thereof at the principal office of the Company duly endorsed or
accompanied by a written instrument of transfer duly executed by the
registered holder of such Note or its attorney duly authorized in writing.
Notwithstanding anything contained herein to the contrary, in no event
shall the holder of a Note transfer such Note to a Competitor.
The Person in whose name any registered Note shall be registered shall
be deemed and treated as the owner and holder thereof for all purposes of this
Agreement. Payment of or on account of the principal, premium, if any, and
interest on any registered Note shall be made to or upon the written order of
such registered holder.
Section 9.2. Exchange of Notes. At any time and from time to time,
upon not less than ten days' notice to that effect given by the holder of any
Note initially delivered or of any Note substituted therefor pursuant to 9.1,
this 9.2 or 9.3, and, upon surrender of such Note at its office, the Company
will deliver in exchange therefor, without expense to the holder, except as
set forth below, Notes of the same Series and for the same aggregate principal
amount as the then unpaid principal amount of the Note so surrendered, in the
denomination of U.S.$100,000 or any amount in excess thereof as such holder
shall specify, dated as of the date to which interest has been paid on the
Note so surrendered or, if such surrender is prior to the payment of any
interest thereon, then dated as of the date of issue, payable to such Person
or Persons, or registered assigns, as may be designated by such holder, and
otherwise of the same form and tenor as the Notes so surrendered for exchange.
The Company may require the payment of a sum sufficient to cover any stamp
tax or governmental charge imposed upon such exchange or transfer.
Section 9.3. Loss, Theft, etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
any Note, and in the case of any such loss, theft or destruction upon delivery
of a bond of indemnity in such form and amount as shall be reasonably
satisfactory to the Company, or in the event of such mutilation upon surrender
and cancellation of the Note, the Company will make and deliver without
expense to the holder thereof (other than the expense of the above-referenced
bond of indemnity), a new Note, of the same Series and of like tenor, in lieu
of such lost, stolen, destroyed or mutilated Note. If the Purchaser or any
subsequent institutional holder is the owner of any such lost, stolen or
destroyed Note, then the affidavit of an authorized officer of such owner,
setting forth the fact of loss, theft or destruction and of its ownership of
the Note at the time of such loss, theft or destruction shall be accepted as
satisfactory evidence thereof and no further indemnity shall be required as a
condition to the execution and delivery of a new Note other than the written
agreement of such owner to indemnify the Company.
Section 9.4. Expenses, Stamp Tax Indemnity. Whether or not the
transactions herein contemplated shall be consummated, the Company agrees to
pay directly all of your out-of-pocket expenses in connection with the
preparation, execution and delivery of this Agreement and the transactions
contemplated hereby, including but not limited to the charges and
disbursements of Chapman and Cutler, your special counsel, duplicating and
printing costs and charges for shipping the Notes, adequately insured to you
at your home office or at such other place as you may designate, and all such
expenses relating to any amendment, waivers or consents pursuant to the
provisions hereof, whether or not any such amendment, waiver or consent shall
become effective, including, without limitation, any amendments, waivers or
consents resulting from any work-out, restructuring or similar proceedings
relating to the performance by the Company of its obligations under this
Agreement and the Notes. The Company also agrees that it will pay and save
the Purchasers harmless against any and all liability with respect to stamp
and other taxes, if any, which may be payable or which may be determined to be
payable in connection with the execution and delivery of this Agreement or the
Notes on the Closing Date, whether or not any Notes are then outstanding. The
Company agrees to protect and indemnify you against any liability for any and
all brokerage fees and commissions payable or claimed to be payable to any
Person engaged by any Person other than you in connection with the
transactions contemplated by this Agreement. Without limiting the foregoing,
the Company agrees to pay the cost of obtaining a private placement number for
each Series of the Notes and authorizes the submission of such information as
may be required by Standard & Poor's CUSIP Service Bureau for the purpose of
obtaining such numbers.
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative. No
delay or failure on the part of the holder of any Note in the exercise of any
power or right shall operate as a waiver thereof; nor shall any single or
partial exercise of the same preclude any other or further exercise thereof,
or the exercise of any other power or right, and the rights and remedies of
the holder of any Note are cumulative to and are not exclusive of any rights
or remedies any such holder would otherwise have, and no waiver or consent,
given or extended pursuant to 7 hereof, shall extend to or affect any
obligation or right not expressly waived or consented to.
Section 9.6. Notices. All communications provided for hereunder
shall be in writing and, if to you, delivered or mailed by registered or
certified mail or by overnight air courier, in each case prepaid and addressed
to you at your address appearing on Schedule I to this Agreement or such other
address as you or the subsequent holder of any Note initially issued to you
may designate to the Company in writing, and if to the Company, delivered or
mailed by registered or certified mail or by overnight air courier, in each
case prepaid and addressed to the Company at 1300 Post Oak Boulevard, Suite
1300, Houston, Texas 77056, Attention: President, or to such other address as
the Company may in writing designate to you or to a subsequent holder of the
Notes initially issued to you. Holders of the Notes are requested to send
copies of any written communications delivered or mailed to the Company as
contemplated herein to Financial Federal Credit Inc., 400 Park Avenue, New
York, New York 10022, Attention: General Counsel, or to such other address as
the Company may in writing designate to you or to a subsequent holder of the
Notes initially issued to you. Failure to send such a copy shall in no way
alter the effectiveness of any communication delivered or mailed to the
Company as hereinabove provided or give rise to any liability on the part of
the holder giving or mailing such communication.
Section 9.7. Successors and Assigns. This Agreement shall be
binding upon, and inure to the benefit of, the Company and its successors and
assigns and shall be binding upon, and inure to the benefit of, you and your
successors and assigns, including each successive holder or holders of any
Notes.
Section 9.8. Survival of Covenants and Representations. All
covenants, representations and warranties made by the Company herein and in
any certificates delivered pursuant hereto, whether or not in connection with
the Closing Date, shall survive the closing and the delivery of this Agreement
and the Notes; provided, however, unless otherwise specified herein or
therein, all such representations and warranties are deemed to be made on and
as of the date made and shall not be deemed to have been made on and as of any
subsequent date.
Section 9.9. Severability. Should any part of this Agreement for
any reason be declared invalid, such decision shall not affect the validity of
any remaining portion, which remaining portion shall remain in force and
effect as if this Agreement had been executed with the invalid portion thereof
eliminated and it is hereby declared the intention of the parties hereto that
they would have executed the remaining portion of this Agreement without
including therein any such part, parts, or portion which may, for any reason,
be hereafter declared invalid.
Section 9.10. Governing Law. This Agreement and the Notes issued
and sold hereunder shall be governed by and construed in accordance with New
York law.
Section 9.11. Captions. The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.
Section 9.12. Payments Due on Non-Business Days. If any payment due
on, or with respect to, any Note shall fall due on a day other than a Business
Day, then such payment shall be made on the first Business Day following the
day on which such payment shall have so fallen due.
The execution hereof by you shall constitute a contract between us for the
uses and purposes hereinabove set forth, and this Agreement may be executed in
any number of counterparts, each executed counterpart constituting an original
but all together only one agreement.
Financial Federal Credit Inc.
By
Its
By
Its
Accepted as of July 1, 1997.
43
<PAGE>
Exhibit 11.1
<TABLE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
For Year Ended July 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Primary
- -------------------------------------------
Net earnings for primary per share amounts $12,909,000 $9,610,000 $7,209,000
=========== ========== ==========
Weighted average number of common shares
outstanding 14,786,520 12,926,337 12,299,529
Add - common equivalent shares (determined
using the "treasury stock" method) 1,367,232 1,298,655 1,134,654
---------- ---------- ----------
Weighted average number of shares used in
calculation of primary net earnings per
common share 16,153,752 14,224,992 13,434,183
========== ========== ==========
Primary net earnings per common share $0.80 $0.68 $0.54
===== ===== =====
Fully Diluted
- -------------------------------------------
Net earnings for fully diluted per share
amounts $12,909,000 $9,610,000 $7,209,000
=========== ========== ==========
Weighted average number of shares used in
calculation of fully diluted net earnings
per common share 16,357,347 14,262,807 13,455,086
========== ========== ==========
Fully diluted net earnings per common share $0.79 $0.67 $0.54
===== ===== =====
</TABLE>
44
<PAGE>
FINANCIAL
FEDERAL
CORPORATION
[embossed logo]
19
ANNUAL REPORT
97
[front cover]
<PAGE>
CORPORATE PROFILE
- -----------------
Financial Federal Corporation is an independent financial services company
specializing in financing mid and large ticket industrial, commercial and
professional equipment through installment sales and leasing programs for
manufacturers, dealers and users of such equipment nationwide. The Company
has an executive office located in New York, NY, five full-service offices
located in Houston, TX; Westmont, IL; Teaneck, NJ; Charlotte, NC; and Mesa, AZ
and 18 marketing locations throughout the country.
[inside front cover]
<PAGE>
FISCAL YEAR IN REVIEW
---------------------
JULY 1997 THE COMPANY SPLIT ITS COMMON STOCK THROUGH A THREE-FOR-TWO
STOCK DIVIDEND FOR THE SECOND TIME IN EIGHTEEN MONTHS.
A $50 MILLION PRIVATE PLACEMENT RAISED TOTAL INSTITUTIONAL
TERM DEBT OUTSTANDING TO OVER $100 MILLION, REPRESENTING
24% OF TOTAL DEBT OUTSTANDING AT YEAR END.
ANNUAL REVENUES EXCEEDED $50 MILLION AND QUARTERLY
REVENUES EXCEEDED $15 MILLION.
MAY 1997 NET EARNINGS SURPASSED $10 MILLION, SUBSEQUENTLY
INCREASING TO $12.9 MILLION FOR THE YEAR, A 34% INCREASE
OVER LAST YEAR.
MARCH 1997 STOCKHOLDERS' EQUITY REACHED $100 MILLION, ENDING THE YEAR
AT $105.6 MILLION. YEAR END LEVERAGE WAS 4 TO 1, A LOW
LEVEL FOR A FINANCE COMPANY.
DECEMBER 1996 FINANCE RECEIVABLES OUTSTANDING SURPASSED $500 MILLION
APPROXIMATELY ONE MONTH PRIOR TO THE COMPANY'S EIGHTH
ANNIVERSARY. GROWTH IN FINANCE RECEIVABLES WAS GENERATED
INTERNALLY.
NOVEMBER 1996 THE COMPANY OPENED A NEW FULL SERVICE OFFICE IN ARIZONA TO
SERVICE THE WESTERN UNITED STATES. AT YEAR END, FINANCE
RECEIVABLES IN THIS REGION INCREASED APPROXIMATELY 40% FROM
THE TIME THE OFFICE WAS OPENED.
SEPTEMBER 1996 THE COMPANY'S INVESTMENT GRADE DEALER COMMERCIAL PAPER
PROGRAM WAS INCREASED AGAIN TO $250 MILLION FROM $200
MILLION. THE PROGRAM BEGAN IN MAY 1996 WITH AN INITIAL
SIZE OF $100 MILLION.
<PAGE>
[logo]
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
-------------------------------------
(in thousands, except per share data)
<CAPTION>
For Years Ended July 31, 1997 1996 1995 1994 1993
- -------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Finance Receivables, net $571,060 $429,698 $339,299 $268,642 $206,145
Total Assets 574,764 433,087 342,936 271,987 209,609
Total Senior Debt 439,361 310,830 249,270 184,848 134,628
Stockholders' Equity 105,604 94,191 58,075 50,523 41,727
Revenues 55,305 43,523 34,951 25,866 22,911
Net Earnings 12,909 9,610 7,209 5,944 4,968
Earnings Per Common Share,
Primary 0.80 0.68 0.54 0.46 0.39
Earnings Per Common Share,
Fully Diluted 0.79 0.67 0.54 0.46 0.38
</TABLE>
[the following three bar graphs were represented to the right of the above
table]
NET EARNINGS
- -------------
(IN MILLIONS)
FINANCE
RECEIVABLES
- -------------
(IN MILLIONS)
REVENUES
- -------------
(IN MILLIONS)
1
<PAGE>
DEAR SHAREHOLDER:
-----------------
Fiscal 1997 was the Company's best year ever and represented its 8th
consecutive year of record earnings since the Company started business in 1989
with $12 million of equity. Net earnings for this year were $12.9 million.
Over the last five years, net earnings have grown at a compound annual rate of
27%. One of management's objectives over the next several years is, at a
minimum, to achieve, on average, a compound annual earnings growth rate in the
20% per annum range.
FISCAL 1997 ACCOMPLISHMENTS/EVENTS:
* Net earnings of $12.9 million.
* Earnings per share of $.80 - fully diluted $.79.
* Tangible net worth in excess of $105 million.
* Finance receivables in excess of $580 million.
* Continued geographic expansion with the opening of our 5th full service
office in Mesa, Arizona.
* Continued decrease in funding costs expressed as a premium over LIBOR and
US Treasuries.
* A 3 for 2 stock dividend, which was paid in July 1997, increased
outstanding shares to over 14.7 million.
* Institutional term debt increased to $105 million.
* The Dealer Commercial Paper program increased to $250 million.
* Minimal net credit losses. Loss reserve now in excess of $10.3 million.
* Per share price of the Company's common stock reached an all-time high.
* A stock repurchase program was commenced and 186,450 shares were bought
back at an average cost of $8.74 per share (as adjusted to reflect the
3 for 2 stock dividend paid in July 1997).
Financial Federal's outstanding financial and operating results were
achieved despite competitive pressures which have intensified in our primary
markets. Notwithstanding such pressures, the Company's interest spread,
which is the difference between the net receivable portfolio yield and the
Company's total direct cost for borrowings, was a strong 4.7%.
With a strong and healthy national economic climate, we believe that
fiscal 1998 could be another record year which should provide the platform for
the Company to grow its net receivables to over $1 billion over the next
several years. Our five full-service offices in Houston, TX; Westmont, IL;
Teaneck, NJ; Charlotte, NC; and Mesa, AZ provide a broad geographic base for
future growth, and we have the management and infrastructure in place to
support such growth. The Company has sufficient financial capacity to
increase its portfolio of loans, financings and leases, as well as to purchase
portfolios of receivables when such opportunities arise, without having to
acquire additional equity.
We are very proud of the quality and consistency of Financial Federal's
earnings. Unlike many other financial service and leasing companies, we have
not to date engaged in securitizing or selling any of our receivables; our
earnings were generated entirely from our owned portfolio and have not been
enhanced by gain-on-sale accounting. If we were to securitize or sell a
2
<PAGE>
portion of our receivables portfolio, we could, under present accounting
rules, elect to immediately recognize a substantial portion of the net book
gain derived from such sales into net profit. The basic difference between
accruing revenue over the full term of a receivable, as we do today, or
recognizing an instant gain upon the sale of such receivable, is primarily one
--------------------------------------------------------------------
Our customers are the cornerstone and fiber of the
country's domestic economy...All of us at Financial
Federal are proud to be part of the "American dream".
--------------------------------------------------------------------
of profit timing. Over the contractual life of a receivable under either
method, providing the Company's funding costs are identical, the Company
generally earns the equivalent amount of income. Currently, the projected all-
in cost of securitizing a portion of the Company's finance receivables appears
to be slightly higher than the cost of internally funding such receivables.
Management believes that the potential quantifiable risk of loss, whether its
receivables are securitized or held in portfolio to maturity, is basically the
same. However, we do regularly reevaluate such costs, risks and other
important considerations relating to securitization and we may in the future
determine that it is in the best interest of the Company and its shareholders
to take advantage of a securitization conduit or without recourse
sale/participation of receivables.
Administrative and operating expenses were contained during the past
fiscal year, and we believe our operating expense ratio of 1.6% is one of the
best in our industry. The Company's Hilton Head, South Carolina office was
consolidated with the Company's regional office in Charlotte, North Carolina.
This consolidation created efficiencies and cost savings. Almost
concurrently, we opened a new full service office in Mesa, AZ, near Phoenix,
to expand our service in the Southwest region.
Financial Federal plays an important and consistent role in providing the
financial building blocks necessary for its middle-market customers to create
and maintain viable, profitable and expanding businesses. Our customers are
the cornerstone and fiber of the country's domestic economy. They create and
maintain our country's infrastructure, transport our goods and products,
preserve our environment and manufacture our tools of production. They employ
hundreds of thousands of workers, providing the economy with the necessary
ingredients to continue its present healthy growth and to keep the United
States a world economic leader. All of us at Financial Federal are proud to
be part of the "American dream".
On behalf of the Company's Board of Directors, I want to thank all of our
major constituencies for their support since our inception in 1989: our
customers, shareholders, creditors and, last but most importantly, our loyal
employees, who serve to make Financial Federal the best in its field.
/s/ Clarence Y. Palitz, Jr.
Clarence Y. Palitz, Jr.
President and Chief Executive Officer
October 1, 1997
3
<PAGE>
OUR BUSINESS
------------
FINANCIAL FEDERAL CORPORATION is one of the larger independent finance and
leasing companies in the United States. Since its founding in 1989, the
Company has recorded consecutive quarterly increases in profitability and
finance receivables outstanding. The price per share of Financial Federal's
common stock today is more than four times that of its initial public offering
price in May 1992 and, today, our market capitalization is well over one
quarter billion dollars.
--------------------------------------------------------------------
Providing superior customer service is what has permitted
us to compete and grow in a very competitive industry.
--------------------------------------------------------------------
The Company concentrates its operations on the financing and leasing of
revenue-producing equipment nationwide. Such equipment represents important
"tools of production" to our middle market customers. By focusing on "hard
collateral" equipment --which can be described generally as long-lasting,
readily moveable and not subject to rapid technological obsolescence, such as
construction equipment and cranes, over-the-road transportation equipment such
as trucks, trailers and buses, machine tools, waste services equipment and
others -- we have been able to enjoy minimal net credit losses since the
inception of the Company.
Throughout the United States, Financial Federal employs 130 people full-
time and has five full-service operation centers in Houston, TX; Westmont, IL;
Teaneck, NJ; Charlotte, NC; and Mesa, AZ, and 18 marketing locations. New
business is developed by our dedicated marketing and management team on a
nationwide basis through the direct solicitation of equipment manufacturers,
dealers and end-users.
Today we have over 6,000 active accounts which represent almost 3,000
customers. Our customers are generally smaller to mid-sized businesses with
fewer than 500 employees. Such customers and prospects are the productive
core of the American economy and, according to government statistics, generate
roughly 40% of our gross domestic product; since 1990, these businesses have
created almost eight million new jobs.
Providing superior customer service is what has permitted us to compete
and grow in a very competitive industry. Controlling expenses is a difficult
task for any service-oriented business to achieve. The Company consistently
strives to appropriately manage all of its operating and administrative costs,
while maintaining our commitment to customer service. We believe our expense
ratios are among the best in the industry.
4
<PAGE>
The Company is also focused on managing its funding costs. Any small
improvement can have a visible impact on earnings. Our $250 million
investment grade commercial paper program has been very well received in the
market and, through that program, we have been able to lower our overall
short-term borrowing costs. We believe Financial Federal is the smallest
independent financial services company to actively market its investment grade
commercial paper. Three dealers currently place the Company's commercial
paper: BankAmerica Robertson Stephens, ABN AMRO Chicago Corporation and Chase
Securities Inc. In addition, we have successfully placed new issues of senior
term debt with a highly regarded group of institutional lenders at a cost of
.75% over comparable term Treasuries. The Company enjoys strong support from
its bank lenders. Today, we have over $400 million of committed, unsecured
senior credit facilities from 19 major domestic and foreign banks.
--------------------------------------------------------------------
We believe we afford our customers a higher level of
service and responsiveness than our competitors.
--------------------------------------------------------------------
5
<PAGE>
What makes Financial Federal unique is the breadth, talent, experience
and dedication of our management and marketing group. All of our senior
managers and most senior marketing representatives have 15 or more years of
proven success in our business, and particularly in the specific markets we
serve. Most middle market customers and equipment vendors consider direct
access to very experienced and knowledgeable senior managers an important
factor when selecting a funding source. We consider the high level of senior
management involvement one of the important elements that has permitted
Financial Federal to maintain stable profit margins and increased
profitability.
--------------------------------------------------------------------
What makes Financial Federal unique is the
breadth, talent, experience and dedication
of our management and marketing group.
--------------------------------------------------------------------
Our loyal customers are a very important asset. In today's competitive
environment, they generally have numerous sources of financing available.
When they choose Financial Federal, we believe they do so because we afford
them a higher level of service and responsiveness than our competitors.
MARKET CAPITALIZATION
---------------------
(in millions)
July 31,
- ------------------------------
1995 1996 1997
- -------- -------- --------
$97.3 $129.5 $223.3
[represented as a bar graph]
LOAN LOSS RATIOS
------------------------------------------
July 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Net Credit Losses 0.31% 0.13% 0.08% 0.03% 0.05%
Allowance for Losses 1.91% 1.90% 1.85% 1.83% 1.77%
[represented as a dual bar graph]
EXPENSES AS A PERCENTAGE
OF AVERAGE RECEIVABLES
------------------------
For Years Ended July 31,
- ----------------------------------------------------
1993 1994 1995 1996 1997
- -------- -------- -------- -------- --------
2.75% 2.11% 1.86% 1.83% 1.60%
[represented as a line graph]
DEBT 1997
- ---------------------------
Commercial paper 55%
Senior term notes 24%
Bank borrowings 18%
Other 3%
[represented as a pie chart]
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
General -- The Company derives profits to the extent that income earned on its
finance receivables 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. The Company's business activities
can be regulated by state usury, lending and lien perfection rules and laws.
Certain states also 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. A transaction is characterized and documented as a lease based on
management's evaluations of the customer's credit and the equipment
collateral, the customer's preference and other factors. The types of
equipment that the Company lends against, finances and leases, and the ongoing
operational treatment of a transaction, are generally the same, regardless of
the documentation used. The Company accounts for all transactions as
financing arrangements.
Comparison of Fiscal 1997 to Fiscal 1996 -- Finance income increased 27% to
$55.3 million in fiscal 1997 from $43.5 million in fiscal 1996. The increase
was primarily the result of the $119 million, or 31%, increase in the amount
of average finance receivables outstanding from $388 million in 1996 to $507
million in 1997, partially offset by reduced weighted average finance rates
charged by the Company on new finance receivables and the year to year decline
in average market interest rates. Finance receivables booked in 1997
increased 30% to $459 million from $354 million in 1996 primarily as a result
of the expansion of the Company's marketing efforts into new geographic areas
and further penetration in its existing areas. In November 1996, the Company
opened a new full service office in Mesa, Arizona.
Interest expense, incurred on borrowings used to fund finance
receivables, increased 22% to $23.4 million in 1997 from $19.3 million in
1996. The overall increase was mainly due to the 29% increase in average
borrowings during 1997 from 1996, partially offset by decreases in costs of
funds and average market interest rates.
Finance income before provision for possible losses on finance
receivables increased by 31% to $31.9 million in 1997 from $24.3 million in
1996. Finance income before provision for possible losses, expressed as a
percentage of average finance receivables outstanding, was 6.3% in 1997 and in
1996.
The provision for possible losses on finance receivables increased by
48% to $2.5 million in 1997 from $1.7 million in 1996. The increase was
primarily due to the increase in finance receivables. See Note B(4) of Notes
to Consolidated Financial Statements for the summary of activity in the
allowance for possible losses.
Salaries and other expenses increased 17% to $8.4 million in 1997 from
$7.1 million in 1996. The increase was primarily due to increased marketing
costs and other costs associated with the growth in finance receivables and
salary increases, partially offset by the reduction in overhead costs that
resulted from the merging of the Company's Hilton Head, SC office into the
Company's Charlotte, NC office in November 1996.
The provision for income taxes increased to $8.1 million in 1997 from
$5.8 million in 1996 primarily due to the increase in earnings before income
taxes.
7
<PAGE>
Net earnings increased by 34% to $12.9 million in 1997 from $9.6 million
in 1996. Primary earnings per share increased by 18% to $0.80 per share in
1997 from $0.68 per share in 1996 and fully diluted earnings per share
increased by 18% to $0.79 per share in 1997 from $0.67 per share in 1996. The
increases in earnings per share were lower than the increase in net earnings
primarily due to the sale of 1.7 million shares of the Company's common stock
in a public offering in May 1996.
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 in 1996 from $312.3 million in 1995. The growth
in finance receivables was due to new financings which totaled $354.2 million
in 1996, an increase of 38% 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 used primarily 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.
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, which
increases the allowance, 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(4) 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 earnings per share increased by 26% to $0.68 per share in
1996 from $0.54 per share in 1995 and fully diluted earnings per share
increased by 24% to $0.67 per share in 1996 from $0.54 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.
RECEIVABLE PORTFOLIO AND ASSET QUALITY
Finance receivables outstanding increased by $143.7 million, or 33%, to $581.4
million at July 31, 1997 from $437.7 at July 31, 1996. The increase was
primarily due to the amount of finance receivables originated exceeding
8
<PAGE>
amounts collected. At July 31, 1997, Financial Federal Credit Inc. ("Credit",
a wholly-owned subsidiary) had $579.9 million, or 99.7%, of total finance
receivables and First Federal Commercial Inc. ("Commercial," a wholly-owned
subsidiary) had the balance of finance receivables.
The allowance for possible losses, which increased to $10.3 million at
July 31, 1997 from $8.0 million at July 31, 1996, was 1.77% of finance
receivables at July 31, 1997 as compared to 1.83% at July 31, 1996. 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 counterparties and
other factors. Future additions to the allowance may be necessary based on
changes in these factors.
The equipment collateral securing the Company's finance receivables
generally possess certain characteristics that serve to mitigate potential
credit losses. Such characteristics include an economic life exceeding the
term of the receivable, low rates of technological obsolescence, applications
in various industries, easy accessibility and transporting and a broad resale
market. These characteristics, combined with management's experience and
expertise with the equipment collateral, have minimized the Company's net
credit losses.
Net credit losses incurred on the Company's finance receivables, defined
as write-downs of receivables less subsequent recoveries, increased to
$230,000 in 1997 from $97,000 in 1996. Management believes that the Company's
net credit losses have been historically low primarily due to favorable
economic and industry conditions. Net credit losses expressed as a percentage
of average finance receivables outstanding was 0.05% in 1997, 0.03% in 1996,
0.08% in 1995, 0.13% in 1994 and 0.31% in 1993. Management does not currently
expect this trend to continue. Future increases in the Company's net credit
losses could have a negative impact on the Company's earnings through
additional increases in the provision for possible losses.
Finance receivables that the Company has suspended income recognition on
decreased to $5.6 million, or 1.0% of total finance receivables, at July 31,
1997, from $5.9 million, or 1.3% of total finance receivables, at July 31,
1996.
The Company's finance receivables reflect certain industry and
geographic concentrations of credit risk. 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-19%, construction-15%, waste disposal-14% and
cranes-12%. The major geographic concentrations are: southwest-25%,
northeast-25% and southeast-24%.
LIQUIDITY AND CAPITAL RESOURCES
The Company is dependent upon the continued availability of funds primarily to
originate or acquire finance receivables and to purchase portfolios of finance
receivables. The Company may obtain required funds from a variety of sources,
including internal generation, direct issuance of and dealer placed commercial
paper, borrowings under revolving credit facilities, sales of common and
preferred equity and placements of term debt. Management believes that the
Company has available sufficient liquidity to support its operations.
The Company has obtained the majority of its borrowings through Credit,
98.4% at July 31, 1997, and has obtained the balance of its borrowings through
Financial Federal Corporation ("Financial", the parent company), 1.6% at July
31, 1997.
9
<PAGE>
The Company has received investment grade credit ratings on its
commercial paper and senior debt. Credit's commercial paper is rated "F-2" by
Fitch Investors Services Inc. and Financial's and Credit's commercial paper is
rated "D-2" by Duff & Phelps Credit Rating Co. Credit's ability to meet
senior obligations is rated BBB by Fitch Investors Services Inc. These credit
ratings provide the Company with greater access to capital markets.
The Company's total debt outstanding increased $123.9 million to $441.7
million at July 31, 1997 from $317.8 million at July 31, 1996. The Company
also increased its stockholders' equity by $11.4 million to $105.6 million at
July 31, 1997 from $94.2 million at July 31, 1996 and its net deferred income
tax liability by $2.3 million to $11.3 million at July 31, 1997 from $8.9
million at July 31, 1996. These increases, together with increases in the
Company's accrued expenses and other liabilities, were used primarily to fund
the increase in finance receivables.
During fiscal 1997, the Company improved its liquidity as follows:
* In September 1996, Credit increased the size of its dealer commercial
paper program from $200.0 million to $250.0 million. At July 31,
1997, $244.6 million of commercial paper was outstanding.
* In July 1997, Credit issued $50.0 million of fixed rate senior term
notes with maturities of three years and three and one half years.
* During the year, the Company increased its total committed unsecured
revolving credit facilities by $17.5 million to $395.0 million at July
31, 1997 and increased the amount of such facilities with original
terms of two or more years by $55.0 million to $320.0 million at July
31, 1997.
In July 1997, the Company declared and paid a three-for-two stock split
effected in the form of a stock dividend.
In August 1996, the Company announced a $2.5 million common stock
repurchase program which was increased to $4.1 million in May 1997. During
fiscal 1997 (prior to the three-for-two stock split), the Company repurchased
124,300 shares of its common stock for $1,630,000. Shares repurchased are
retired. This program has not and is not expected to impact significantly the
Company's earnings per share.
The sources of the Company's borrowings are described below:
Financial and Credit are each direct issuers of investment grade
commercial paper. Credit also issues investment grade commercial paper
through a $250.0 million program with recognized dealers. The Company's
commercial paper is unsecured and matures within 270 days. Interest rates on
commercial paper outstanding at July 31, 1997 generally ranged from 5.7% to
6.1%. The Company has not obtained commitments from any purchaser of its
commercial paper for additional or future purchases. The Company's policy is
to maintain unused committed revolving credit facilities from banks in an
amount greater than commercial paper outstanding.
At July 31, 1997, Credit had $75.0 million of committed unsecured
revolving credit facilities with an original term of one year or less with
eight banks under which $30.0 million of aggregate borrowings were
outstanding. At July 31, 1997, Credit also had $310.0 million of committed
unsecured revolving credit facilities with original terms ranging from two to
five years with seventeen banks under which $50.1 million of aggregate
borrowings were outstanding, and Financial had a $10.0 million committed
10
<PAGE>
unsecured revolving credit facility with an original term of five years with a
bank under which no borrowings were outstanding. At July 31, 1997, all of the
long-term revolving credit facilities expire after one year. Interest rates
on borrowings under these facilities are based on either domestic money
market rates or LIBOR. The Company incurs a fee on the unused portion of
these facilities. The banks are not contractually obligated to renew these
facilities.
Information about the combined amounts and interest rates of the
Company's commercial paper and bank borrowings is as follows:
(dollars in millions) 1997 1996 1995
- -------------------------------------------------------------------
Maximum amount outstanding
during the year $374.7 $270.2 $169.3
Average amount outstanding
during the year 316.6 216.2 113.2
Weighted average interest rate:
During the year 5.9% 6.2% 6.4%
End of the year 6.0% 5.9% 6.6%
At July 31, 1997, the Company reported $320.0 million of commercial
paper and bank borrowings as long-term senior debt in the consolidated
financial statements based on the amount of long-term revolving credit
facilities expiring after one year.
In July 1997, Credit issued $50.0 million of senior term notes to
institutional investors. These notes are due as follows: $25.0 million on
July 14, 2000 and $25.0 million on December 14, 2000. Interest is payable
semi-annually at fixed annual rates of 7.40% and 7.45%, respectively.
Prepayments of the notes are subject to a premium based on a yield maintenance
formula.
At July 31, 1997, the Company also had $55.0 million of senior term
notes due on September 1, 2001.
In July 1997, the Company issued $9.7 million of variable rate senior
term notes to certain executive officers and their affiliates. These notes
mature in September 1998 subject to extension.
In July 1996, Financial called the $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 on September 1, 1996. The
amended debentures are 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 senior term notes and the 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. Under the most
restrictive of the above dividend payment covenants, $34.8 million of the
Company's equity was free from dividend restrictions at July 31, 1997.
INTEREST RATES AND SENSITIVITY
The net yield of the Company's finance receivables, the cost of the Company's
borrowed funds and the resulting net interest spread were as follows:
1997 1996 1995
- ------------------------------------------------------
Average yield of finance
receivables 10.9% 11.2% 11.2%
Weighted average cost
of borrowed funds 6.2% 6.6% 6.9%
----------------------
Net interest spread 4.7% 4.6% 4.3%
======================
11
<PAGE>
The Company's finance receivables comprise fixed rate and variable rate
transactions. At July 31, 1997, $465.3 million, or 80%, of finance
receivables provide for interest at fixed rates and $116.0 million, or 20%, of
finance receivables provide for interest at variable rates indexed to the
prime rate, as defined. The percentage of finance receivables that provide
for fixed interest rates has increased from 66% at July 31, 1995 primarily due
to continued low market interest rates.
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 which shorten the scheduled
maturities. At July 31, 1997, $157.2 million of fixed rate finance
receivables are scheduled to mature within one year.
The total of fixed rate term debt of $107.3 million, stockholders'
equity of $105.6 million and net deferred income tax liability of $11.3
million was $224.2 million at July 31, 1997. The Company's other debt at July
31, 1997, primarily commercial paper and bank borrowings, reprices frequently.
At July 31, 1997, total commercial paper and bank borrowings outstanding of
$324.7 million mature or reprice as follows: $262.0 million, or 81%, within
one month, $38.2 million, or 12%, within the following two months and the
remainder, $24.5 million, or 7%, within the following six months.
Due to the excess of the Company's fixed rate finance receivables over
the total of its fixed rate term debt, stockholders' equity and net deferred
income tax liability, the Company's net interest spread could be affected by
fluctuations in market interest rates.
The Company does not seek to match the maturities of its debt to its
finance receivables.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
standard replaces the current presentation of primary and fully diluted
earnings per share with basic and diluted earnings per share effective in the
Company's fiscal quarter ending January 31, 1998. Under SFAS 128, the
Company's basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period (common
stock equivalents are excluded) and the Company's diluted earnings per share
is calculated similar to primary earnings per share. See Note A(6) of Notes
to Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
The above discussions contain forward-looking statements that involve certain
risks and uncertainties. The Company's actual results could differ materially
from those anticipated by such forward-looking statements due to the impact of
many factors outside the Company's control including economic, geographic and
industry conditions, fluctuations in market interest rates, prepayments,
competitive conditions and changes in existing laws or regulations.
12
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
July 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 2,532,000 $ 2,426,000
------------ ------------
Finance receivables 581,363,000 437,706,000
Less allowance for possible losses (10,303,000) (8,008,000)
------------ ------------
Finance receivables - net 571,060,000 429,698,000
------------ ------------
Other assets 1,172,000 963,000
------------ ------------
TOTAL ASSETS $574,764,000 $433,087,000
============ ============
LIABILITIES
Senior debt:
Short-term $ 4,681,000 $ 830,000
Long-term ($16,986,000 in 1997 and $9,376,000 in 1996
due to related parties) 434,680,000 310,000,000
Accrued interest, taxes and other liabilities 16,224,000 12,160,000
Subordinated debentures ($2,181,000 in 1997 and $3,178,000
in 1996 due to related parties) 2,290,000 6,957,000
Deferred income taxes 11,285,000 8,949,000
------------ ------------
Total liabilities 469,160,000 338,896,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value, authorized 500,000 shares, none issued
Common stock - $.50 par value, authorized shares: 25,000,000,
issued shares: 14,764,000 in 1997 and 9,960,000 in 1996 7,382,000 4,980,000
Additional paid-in capital 57,315,000 58,289,000
Warrants - issued and outstanding 1,607,000 in 1997 and 1996 29,000 29,000
Retained earnings 40,878,000 30,893,000
------------ ------------
Total stockholders' equity 105,604,000 94,191,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $574,764,000 $433,087,000
============ ============
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<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, 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 --
Acquisitions of teasury stock (1,630,000)
Retirement of treasury stock (124,000) (62,000) (1,105,000) (463,000) 1,630,000
Exercise of stock options 7,000 3,000 58,000
Three-for-two stock split 4,921,000 2,461,000 (2,461,000)
Tax benefit relating to stock
options 73,000
Net earnings 12,909,000
----------- ----------- ------------ ---------- ------------ ------------
BALANCE AT JULY 31, 1997 14,764,000 $7,382,000 $57,315,000 $29,000 $40,878,000 $ --
=========== =========== ============ ========== ============ ============
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Year Ended July 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Finance income:
Loan obligations $38,374,000 $29,533,000 $24,654,000
Lease obligations 16,931,000 13,990,000 10,297,000
----------- ----------- -----------
Total finance income 55,305,000 43,523,000 34,951,000
Interest expense 23,437,000 19,271,000 16,253,000
----------- ----------- -----------
Finance income before provision for possible losses
on finance receivables 31,868,000 24,252,000 18,698,000
Provision for possible losses on finance receivables 2,525,000 1,710,000 1,450,000
----------- ----------- -----------
Net finance income 29,343,000 22,542,000 17,248,000
Miscellaneous income 130,000
Salaries and other expenses (8,356,000) (7,113,000) (5,806,000)
----------- ----------- -----------
Earnings before income taxes 20,987,000 15,429,000 11,572,000
Provision for income taxes 8,078,000 5,819,000 4,363,000
----------- ----------- -----------
NET EARNINGS $12,909,000 $ 9,610,000 $ 7,209,000
=========== =========== ===========
Earnings per common share:
Primary $0.80 $0.68 $0.54
=========== =========== ===========
Fully diluted $0.79 $0.67 $0.54
=========== =========== ===========
Average number of shares used:
Primary 16,153,752 14,224,992 13,434,183
=========== =========== ===========
Fully diluted 16,357,347 14,262,807 13,455,086
=========== =========== ===========
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Year Ended July 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,909,000 $ 9,610,000 $ 7,209,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 232,000 206,000 156,000
Provision for possible losses on finance receivables 2,525,000 1,710,000 1,450,000
Amortization of deferred origination costs 4,232,000 3,443,000 2,896,000
Deferred income taxes 2,336,000 2,662,000 1,238,000
Gain on repurchase of subordinated debentures (130,000)
Decrease (increase) in other assets (253,000) (368,000) 79,000
Increase (decrease) in accrued interest, taxes and
other liabilities 4,064,000 4,813,000 (1,538,000)
------------ ------------ ------------
Net cash provided by operating activities 26,045,000 22,076,000 11,360,000
------------ ------------ ------------
Cash flows from investing activities:
Finance receivables:
Originated (464,283,000) (358,512,000) (261,135,000)
Collected 316,164,000 262,960,000 186,132,000
Other (188,000) (254,000) (242,000)
------------ ------------ ------------
Net cash (used in) investing activities (148,307,000) (95,806,000) (75,245,000)
------------ ------------ ------------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) 32,908,000 167,750,000 (10,591,000)
Maturities greater than 90 days:
Proceeds 149,470,000 24,866,000 21,565,000
Repayments (127,747,000) (14,341,000) (20,997,000)
Bank borrowings:
Maturities 90 days or less (net) 9,220,000 (91,715,000) 74,445,000
Maturities greater than 90 days:
Proceeds 5,000,000 35,000,000
Repayments (80,000,000) (35,000,000)
Proceeds from senior term notes 50,000,000 55,000,000
Proceeds from variable rate senior term notes 9,680,000
Repayment of senior subordinated note (15,000,000)
Repayments of subordinated debentures (4,667,000) (595,000)
Proceeds from sale of common stock 26,340,000
Acquisitions of treasury stock (1,630,000)
Proceeds from exercise of stock options 61,000 166,000 306,000
Tax benefit relating to stock options 73,000 37,000
------------ ------------ ------------
Net cash provided by financing activities 122,368,000 73,066,000 64,170,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 106,000 (664,000) 285,000
Cash - beginning of period 2,426,000 3,090,000 2,805,000
------------ ------------ ------------
CASH - END OF PERIOD $ 2,532,000 $ 2,426,000 $ 3,090,000
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 22,464,000 $ 18,163,000 $ 16,037,000
============ ============ ============
Income taxes paid $ 5,710,000 $ 3,003,000 $ 3,807,000
============ ============ ============
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
16
<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 accounts and transactions have been eliminated.
(2) Business - The Company provides collateralized lending, financing and
leasing services throughout the United States primarily to middle-market
commercial enterprises in 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 revenue-producing equipment such as cranes, earth movers, machine tools,
personnel lifts, trailers and trucks.
(3) Income Recognition - Finance receivables comprise loans and other
financings and noncancelable leases. All leases are accounted for as direct
financing leases, where total lease payments, plus residual values, less the
cost of the leased equipment is recorded as unearned finance income. Residual
values are recorded at the lowest of (i) any stated purchase option, (ii) the
present value at the end of the initial lease term of rentals due under any
renewal options or (iii) the estimated fair value of the equipment at the end
of the lease.
Finance income is recognized over the term of receivables using the
interest method. Costs incurred to originate or acquire finance receivables
are deferred and amortized over the term of receivables using the interest
method.
Income recognition is suspended on finance receivables that are
considered impaired (full collection of principal and interest being doubtful)
by management. This typically occurs when (i) a contractual payment is more
than 120 days past due, (ii) the counterparty becomes the subject of a bank-
ruptcy 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.
(4) Allowance for Possible Losses - A general provision for possible losses
on finance receivables is charged 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. Management periodically reviews the allowance
giving consideration to present and anticipated national and regional economic
conditions, industry conditions, the status of the finance receivables, and
other factors.
(5) Income Taxes - Deferred tax assets and liabilities are recognized for the
estimated future tax effects of temporary differences between the financial
statement and tax return bases of assets and liabilities using enacted tax
rates. Deferred tax expense represents the net change in deferred tax assets
and liabilities during the year.
(6) 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 comprise dilutive stock options and warrants that are assumed to
be exercised for the calculation.
17
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This standard replaces the current presentation of primary and fully
diluted earnings per share, which both include the effects of common stock
equivalents, with basic and diluted earnings per share effective in the
Company's fiscal quarter ending January 31, 1998. Under SFAS 128, basic
earnings per share, calculated by dividing net income by the weighted average
number of common shares outstanding during the period, would be $0.87, $0.74
and $0.59 per share in 1997, 1996 and 1995, respectively. Diluted earnings
per share would be the same as primary earnings per share for each of the
three years.
(7) Use of Estimates - The consolidated financial statements and the notes
thereto were prepared in accordance with generally accepted accounting
principles which requires estimates and assumptions to be made by management
that affect the amounts reported therein. Actual results could differ from
those estimates.
NOTE B: FINANCE RECEIVABLES
(1) Finance receivables comprise 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 indexed
to the prime rate (as defined) and investments in direct financing leases, as
follows:
July 31,
---------------------------
1997 1996
Loans: ------------ ------------
Fixed rate $291,221,000 $190,851,000
Variable rate 103,590,000 100,053,000
------------ ------------
Total 394,811,000 290,904,000
Direct financing leases 186,552,000 146,802,000
------------ ------------
Finance receivables $581,363,000 $437,706,000
============ ============
The approximate weighted average interest rates were 10.7% and 11.1% on
fixed rate loans at July 31, 1997 and 1996, respectively, and 2.6% and 2.8%
over the prime rate on variable rate loans at July 31, 1997 and 1996,
respectively.
(2) The investment in direct financing leases comprises the following:
July 31,
---------------------------
1997 1996
------------ ------------
Minimum lease payments receivable $193,201,000 $154,003,000
Residual values 30,047,000 22,526,000
Unearned finance income (36,696,000) (29,727,000)
------------ ------------
Investment in direct
financing leases $186,552,000 $146,802,000
============ ============
(3) Finance receivables generally provide for monthly installments of equal
or varying amounts over periods ranging from two to five years. Annual
contractual maturities of finance receivables at July 31, 1997 are as follows:
Direct
Fixed Variable Financing
Rate Loans Rate Loans Leases
------------ ------------ ------------
1998 $105,719,000 $ 46,898,000 $ 66,815,000
1999 85,801,000 26,454,000 56,405,000
2000 59,758,000 18,109,000 40,470,000
2001 29,149,000 7,413,000 21,788,000
2002 8,118,000 3,097,000 7,023,000
Thereafter 2,676,000 1,619,000 700,000
------------ ------------ ------------
Total $291,221,000 $103,590,000 $193,201,000
============ ============ ============
(4) The activity of the allowance for possible losses is summarized as
follows:
Year Ended July 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
Balance - August 1 $8,008,000 $6,395,000 $5,191,000
Provision 2,525,000 1,710,000 1,450,000
Write-downs (1,168,000) (1,004,000) (914,000)
Recoveries 938,000 907,000 668,000
----------- ---------- ----------
Balance - July 31 $10,303,000 $8,008,000 $6,395,000
=========== ========== ==========
18
<PAGE>
(5) Income recognition has been suspended on finance receivables with a
recorded investment of $5,626,000 (includes $3,979,000 of impaired loans) at
July 31, 1997 and $5,894,000 (includes $4,489,000 of impaired loans) at July
31, 1996. The average recorded investment in impaired loans was $3,915,000 in
1997 and $3,185,000 in 1996. Impaired loans exclude direct financing leases.
(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 and procedures in making these commitments as it does for finance
receivables as the credit risks are substantially the same. At July 31, 1997
and 1996, the unused portion of these commitments was $5,805,000 and
$7,075,000, respectively.
NOTE C: DEBT
Debt is summarized as follows:
July 31,
---------------------------
1997 1996
------------ ------------
Senior debt:
Commercial paper $244,591,000 $189,960,000
Bank borrowings 80,090,000 65,870,000
Term notes:
7.40% due 2000 25,000,000
7.45% due 2001 25,000,000
6.76% due 2002 55,000,000 55,000,000
Variable rate term notes 9,680,000
------------ ------------
Total senior debt 439,361,000 310,830,000
Subordinated debentures 2,290,000 6,957,000
------------ ------------
Total debt $441,651,000 $317,787,000
============ ============
(1) The Company issues commercial paper with a maximum term of 270 days. The
weighted average interest rates on commercial paper outstanding at July 31,
1997 and 1996 were 5.8% and 5.7%, respectively.
Commercial paper transactions with officers and other related parties are
summarized as follows:
1997 1996 1995
----------- ----------- -----------
Year ended July 31:
Issued $31,409,000 $34,778,000 $55,270,000
Matured 33,479,000 32,218,000 65,596,000
Interest expense 721,000 497,000 730,000
At July 31:
Outstanding 7,306,000 9,376,000
Accrued interest 91,000 99,000
(2) At July 31, 1997, the Company had $395,000,000 of committed unsecured
revolving credit facilities with various banks expiring as follows:
$75,000,000 within one year and $320,000,000 on various dates from December
1998 through November 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 of $80,090,000 at July 31, 1997 generally mature
between 1 and 90 days and bear interest based on domestic money market rates
or LIBOR, at the Company's option. The weighted average interest rates on
bank borrowings were 6.3% and 6.1% at July 31, 1997 and 1996, respectively.
(3) The senior term notes are Credit's obligations. Interest is payable
semi-annually. Prepayments of the notes are subject to a premium based on
yield maintenance formulas. The notes contain certain restrictive covenants
including limitations on indebtedness, encumbrances, dividends to Financial
and minimum net worth.
(4) The variable rate senior term notes are payable to certain executive
officers and their affiliates. The notes bear interest at variable rates
19
<PAGE>
indexed to LIBOR or domestic money market rates and mature in September 1998
subject to extension.
(5) 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 ($997,000 to related
parties) and $2,290,000 of amended debentures were issued ($2,181,000 to
related parties) on September 1, 1996. The amended debentures mature March 1,
2003, bear interest, payable semi-annually, at the fixed 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 and to certain other liabilities as provided for in the debentures.
In 1995, Financial repurchased a debenture with a face amount of
$725,000 from a non-related party for $595,000.
(6) Under the most restrictive of the above dividend payment covenants,
$34,826,000 of the Company's equity was free from dividend restrictions at
July 31, 1997.
(7) At July 31, 1997, long-term senior debt (includes commercial paper and
bank borrowings supported by credit facilities expiring after one year) and
subordinated debt are due as follows: $154,680,000 in 1999, $130,000,000 in
2000, $45,000,000 in 2001, $105,000,000 in 2002 and $2,290,000 in 2003.
NOTE D: STOCKHOLDERS' EQUITY
(1) In July 1997, the Board of Directors authorized a three-for-two stock
split effected in the form of a stock dividend, payable on July 30, 1997.
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 splits. Shares sold or
acquired prior to the stock splits have not been restated.
(2) In August 1996, the Company established a program to repurchase its
common stock. Total repurchases are limited to $4,130,000 under the program
as increased in May 1997. In 1997 (prior to the three-for-two stock split),
124,300 shares were repurchased for $1,630,000. Shares repurchased are
retired.
(3) In December 1995, the Company's stockholders approved (i) an increase in
the number of authorized shares of common stock from 10,000,000 to 25,000,000
and (ii) an amendment to the Company's stock option plan to increase the
number of shares of common stock available in the plan from 1,125,000 to
2,250,000.
(4) 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.
(5) Warrants:
In 1989, the Company issued warrants to purchase 1,125,000 shares of common
stock at $2.83 per share to its original stockholders. The warrants were
purchased for $.0022 each and expire February 1, 2001.
In 1991, the Company issued warrants to purchase 481,500 shares of common
stock at $2.72 per share to certain officers. The warrants were purchased for
$.0555 each and expire August 31, 2001.
NOTE E: STOCK OPTIONS:
The Company's stock option plan was adopted in September 1989 (as amended) and
expires in September 1999 subject to earlier termination by the Board of
20
<PAGE>
Directors. Under the plan, the Company may grant non-qualified and incentive
stock options to officers, directors and employees for the purchase of
2,250,000 shares of common stock. The exercise price of each option granted
may not be less than the fair market value of the common stock on the grant
date and the maximum term of an option is ten years.
Options outstanding at July 31, 1997 were granted with a six year term
and vest (become exercisable) in four equal cumulative annual installments
commencing with the second anniversary of the grant date, except for 112,500
options that were granted to certain executive officers in 1996 with an eight
year term and vest in eight varying annual cumulative installments. At July
31, 1997, 1,170,754 shares of common stock were available for future grants of
options.
Stock option activity and related information is summarized as follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Outstanding at August 1, 1994 473,512 $ 5.23
Granted 2,700 6.78
Exercised (108,450) 2.85
Canceled (13,275) 6.69
-------
Outstanding at July 31, 1995 354,487 5.92
Granted 258,225 9.05
Exercised (50,513) 3.35
Canceled (47,588) 6.64
-------
Outstanding at July 31, 1996 514,611 7.68
Granted 131,925 11.17
Exercised (9,537) 6.39
Canceled (45,302) 8.10
-------
Outstanding at July 31, 1997 591,697 8.45
=======
Exercisable at July 31:
1995 66,937 $4.33
1996 97,480 6.78
1997 149,534 6.68
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation," and therefore continues to apply
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its stock
options. Under APB 25, no compensation expense is recognized when the
exercise price of stock options is at least equal to the market price of the
stock on the grant date.
The exercise prices of options outstanding at July 31, 1997 ranged from
$6.22 to $11.17. Additional information of these options, by price range, is
summarized as follows:
Price Range
-------------------
Under $8 Over $8
-------- -------
Outstanding:
Number 336,397 255,300
Weighted average exercise price $6.83 $10.58
Weighted average remaining
contractual life (in years) 3.8 5.1
Exercisable:
Number 149,534 --
Weighted average exercise price $6.68
Pro forma amounts of net earnings and earnings per share, determined as
if compensation expense attributable to stock options had been recognized
under SFAS 123 using the fair value method, are as follows:
Year Ended July 31,
------------------------
1997 1996
----------- ----------
Net earnings $12,720,000 $9,473,000
Earnings per share:
Primary $0.79 $0.67
Fully diluted $0.78 $0.67
The pro forma effect on net earnings in 1997 and 1996 may not be
representative of the effect in future years since compensation expense
attributable to stock options under SFAS 123 is measured over an option's
vesting period and only applies to options granted by the Company after
August 1, 1995.
21
<PAGE>
The Company estimated the weighted average grant date fair values at
$3.78 and $3.55 for stock options granted in 1997 and 1996, respectively,
using the Black-Scholes option-pricing model based on the following
assumptions: weighted average risk-free interest rates of 6.7% in 1997 and
6.0% in 1996; expected volatility rates of the price of the Company's common
stock of 27%; and weighted average expected life of options granted of 4.3
years in 1997 and 6.2 years in 1996.
NOTE F: INCOME TAXES
(1) The provision for income taxes comprises the following:
Year Ended July 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Currently payable:
Federal $4,887,000 $2,773,000 $2,742,000
State and local 782,000 384,000 346,000
---------- ---------- ----------
Total 5,669,000 3,157,000 3,088,000
Deferred 2,336,000 2,662,000 1,238,000
Tax benefit relating
to stock options 73,000 37,000
---------- ---------- ----------
Provision for
income taxes $8,078,000 $5,819,000 $4,363,000
========== ========== ==========
(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,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Federal income tax at
statutory rates $7,345,000 $5,313,000 $3,934,000
State and local taxes
(net of federal
income tax benefit) 733,000 506,000 429,000
---------- ---------- ----------
Provision for
income taxes $8,078,000 $5,819,000 $4,363,000
========== ========== ==========
(3) Deferred income taxes comprises the tax effect of the following temporary
differences:
July 31,
-------------------------
1997 1996
----------- -----------
Deferred tax liabilities:
Leasing transactions $14,193,000 $11,069,000
Deferred origination costs 2,218,000 1,902,000
----------- -----------
Total 16,411,000 12,971,000
----------- -----------
Deferred tax assets:
Allowance for possible losses (3,993,000) (3,070,000)
Other liabilities (1,133,000) (952,000)
----------- -----------
Total (5,126,000) (4,022,000)
----------- -----------
Deferred income taxes $11,285,000 $ 8,949,000
=========== ===========
NOTE G: LEASE COMMITMENTS
The Company occupies office space under leases expiring through 2004.
At July 31, 1997, minimum future annual rentals due under these leases are
$627,000 in 1998, $496,000 in 1999, $439,000 in 2000, $308,000 in 2001,
$322,000 in 2002 and $242,000 thereafter.
Office rent expense was $677,000 in 1997, $550,000 in 1996 and $473,000
in 1995.
NOTE H: CONCENTRATION OF CREDIT RISK
The Company manages its exposure to the credit risk associated with its
finance receivables through established credit policies and procedures which
include requiring 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 exceeding the term of the receivable, is not subject to rapid
technological obsolescence, has applications in various industries, is easily
22
<PAGE>
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 amount
financed.
Concentrations of credit risk 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 credit
risk with any one counterparty. The major concentrations of credit risk
grouped by the industries and geographic regions of counterparties, expressed
as a percentage of finance receivables, were as follows:
July 31,
---------------
1997 1996
------ ------
Industry:
Trucking 19% 20%
Construction 15 17
Waste disposal 14 13
Cranes 12 11
Geographic region:
Southwest 25% 27%
Northeast 25 21
Southeast 24 25
NOTE I: FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments comprise 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 bank borrowings
approximate their fair values based on their short-term maturities.
The carrying values of the senior term notes, the variable rate senior
term notes and the subordinated debentures are estimated to approximate their
fair values at July 31, 1997 and 1996 based on their future cash flows
discounted at current rates for debt with similar terms and maturities.
It is not practicable for the Company to estimate the fair value of its
finance receivables and commitments to extend credit. These financial
instruments comprise a substantial number of transactions with commercial
obligors in numerous industries, are secured by liens on various types of
equipment and may be guaranteed by third parties. Each transaction would be
valued by a potential buyer based on its credit quality, collateral value,
third party guarantee(s), payment history, interest rate, maturity,
documentation and other legal matters, and many other considerations which
would involve the buyer's subjective judgment. The value received in a fair
market sale of each of these transactions would be based on the nature of the
sale, the documentation governing such sale, the Company's and the buyer's
views of general economic conditions, industry dynamics, the Company's and
the buyer's tax considerations, and numerous other factors.
23
<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, 1997 and 1996, and the
related consolidated statements of stockholders' equity, operations and
cash flows for each of the three years in the period ended July 31, 1997.
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, 1997 and 1996,
and their consolidated operating results and their cash flows for each of the
three years in the period ended July 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Eisner & Lubin LLP
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
September 4, 1997
24
<PAGE>
SELECTED QUARTERLY DATA
-----------------------
The following table sets forth quarterly financial data for the years ended
July 31, 1997 and 1996 adjusted for the July 1997 and January 1996
three-for-two stock splits.
<TABLE>
<CAPTION>
Earnings per Share
------------------
Fully
Revenues Net Earnings Primary Diluted
----------- ------------ ------- -------
<S> <C> <C> <C> <C>
Fiscal 1997, three months ended:
October 31, 1996 $12,530,000 $2,972,000 $0.18 $0.18
January 31, 1997 13,356,000 3,134,000 0.19 0.19
April 30, 1997 13,999,000 3,287,000 0.20 0.20
July 31, 1997 15,420,000 3,516,000 0.22 0.22
Fiscal 1996, three months ended:
October 31, 1995 $10,175,000 $2,124,000 $0.16 $0.16
January 31, 1996 10,741,000 2,317,000 0.17 0.17
April 30, 1996 10,905,000 2,439,000 0.18 0.18
July 31, 1996 11,702,000 2,730,000 0.17 0.17
</TABLE>
STOCK PRICE HISTORY AND DIVIDEND POLICY
---------------------------------------
The Company's common stock is traded on the American Stock Exchange under the
symbol "FIF". The following table sets forth the quarterly high and low
closing sales prices per share of the common stock as reported by the American
Stock Exchange adjusted for the July 1997 and January 1996 three-for-two stock
splits.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
--------------- ---------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter ended October 31 $10.58 $ 8.50 $ 9.73 $ 7.83
Second Quarter ended January 31 $11.83 $ 9.25 $11.00 $ 9.28
Third Quarter ended April 30 $13.00 $10.42 $11.25 $10.09
Fourth Quarter ended July 31 $15.58 $11.42 $11.42 $ 8.42
</TABLE>
The Company presently has no intention of paying cash dividends in the
foreseeable future.
25
<PAGE>
CORPORATE DIRECTORY
-------------------
OFFICERS
Chairman of the Board and President
Clarence Y. Palitz, Jr.
Executive Vice President and Treasurer
Michael C. Palitz
Executive Vice President
Paul Sinsheimer
Senior Vice President
William M. Gallagher
Senior Vice President & Secretary
Troy H. Geisser
Senior Vice President
Richard W. Radom
Vice President
Julian C. Green, Jr.
Vice President
Jeanne McDonald
Vice President
Fred J. Palumbo
Administrative Vice President
Ted Wooldridge
Controller and Assistant Treasurer
David H. Hamm
OFFICERS OF SUBSIDIARIES ONLY
Senior Vice Presidents:
John V. Golio
Daniel J. McDonough
Vice Presidents:
Donald G. Pokorny
Luther C. Whitlock
Divisional Vice President:
William J. Flaherty
Regional Vice Presidents:
Gary Barnes
Johnie E. Christ
Thomas Fahl
James M. Keesee
W. J. Mattocks
Michael A. Nelson
James R. Scappi
Rodney Sepulvado
Thomas L. Tornee
Assistant Vice Presidents:
Donald Hamann
Gregory Lile
James H. Mayes, Jr.
Kevin McGinn
Gary L. Pace
Kimberly P. Walter
Gerry H. Wilson
Assistant Secretaries:
Joan E. Bischer
Donna L. Frate
Robert Grawl, Jr.
Chris Jones
Thomas G. Kassakatis
Gregory Treichler
Assistant Controllers:
Barbara Constantino
E. Scott Megason
26
<PAGE>
DIRECTORS
Lawrence B. Fisher
Partner
Orrick, Herrington & Sutcliffe LLP
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
AUDITORS
Eisner & Lubin LLP
Certified Public Accountants
250 Park Avenue, New York, NY 10177
GENERAL COUNSEL
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue, New York, NY 10103
TRANSFER AGENT AND REGISTRAR
The Bank of New York
New York, NY
LOCATIONS
Headquarters:
400 Park Avenue, 8th Floor
New York, NY 10022
(212) 888-3344
Full Service Offices:
1300 Post Oak Boulevard, Suite 1300
Houston, TX 77056
(713) 439-1177
601 Oakmont Lane, Suite 270
Westmont, IL 60559
(630) 986-3900
300 Frank W. Burr Boulevard
Teaneck, NJ 07666
(201) 801-0300
201 McCullough Drive, Suite 320
Charlotte, NC 28262
(704) 549-1009
1855 W. Baseline Road, Suites 145 and 155
Mesa, AZ 85202
(602) 491-1300
CORPORATE INFORMATION
The annual meeting of shareholders will be held at 270 Park Avenue, New York,
NY on December 9, 1997 at 10 a.m. Eastern Time.
For a copy of Form 10-K or other information about the Corporation contact:
Investor Relations
Financial Federal Corporation
400 Park Avenue, 8th Floor
New York, NY 10022
(212) 888-3344
[INSIDE BACK COVER]
<PAGE>
[logo]
FINANCIAL
FEDERAL
CORPORATION
400 PARK AVENUE
NEW YORK, NY 10022
[BACK COVER]
<PAGE>
Exhibit 22.1
SUBSIDIARIES OF REGISTRANT
Name State of incorporation
- ----------------------------- ----------------------
Financial Federal Credit Inc. Texas
Names of other particular subsidiaries have been omitted since in the
aggregate they do not constitute a significant subsidiary as of July 31, 1997
as defined by Rule 1-02(w) of Regulation S-X.
45
<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 September 4, 1997, 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 22, 1997
46
<PAGE>
<TABLE> <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, 1997 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-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 2532
<SECURITIES> 0
<RECEIVABLES> 581363
<ALLOWANCES> 10303
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 574764
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 441651
0
0
<COMMON> 7382
<OTHER-SE> 98222
<TOTAL-LIABILITY-AND-EQUITY> 574764
<SALES> 0
<TOTAL-REVENUES> 55305
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2525
<INTEREST-EXPENSE> 23437
<INCOME-PRETAX> 20987
<INCOME-TAX> 8078
<INCOME-CONTINUING> 12909
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12909
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.79
<FN>
THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
