UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 31, 1998
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 Number)
733 Third Avenue, New York, NY 10017
(Address of principal executive offices)
(Zip code)
(212) 599-8000
(Registrant's telephone number, including area code)
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
----- -----
At December 1, 1998, 14,864,646 shares of Registrant's common stock, $.50 par
value, were outstanding.
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended October 31, 1998
INDEX
Part I - Financial Information Page No.
- ------------------------------ --------
Item 1 Financial Statements - FINANCIAL FEDERAL CORPORATION AND
SUBSIDIARIES
Consolidated Balance Sheet at October 31, 1998 (unaudited)
and July 31, 1998 (audited) 3
Consolidated Statement of Operations and Retained Earnings
for the three months ended October 31, 1998 and 1997
(unaudited) 4
Consolidated Statement of Cash Flows for the three months
ended October 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II - Other Information
- ---------------------------
Item 6 Exhibits and Reports on Form 8-K 9
2
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<CAPTION>
October 31, 1998
(Unaudited) July 31, 1998 *
-------- --------
ASSETS
<S> <C> <C>
Finance receivables $807,384 $772,427
Allowance for possible losses (14,052) (13,330)
-------- --------
Finance receivables - net 793,332 759,097
Cash 2,837 2,756
Other assets 3,948 4,255
-------- --------
TOTAL ASSETS $800,117 $766,108
======== ========
LIABILITIES
Senior debt:
Long-term ($35,779 at October 31, 1998 and $36,209
at July 31, 1998 due to related parties) $488,263 $478,388
Short-term 44,894 22,144
Subordinated debt ($4,681 at October 31, 1998 and
July 31, 1998 due to related parties) 100,790 102,290
Accrued interest, taxes and other liabilities 20,425 23,940
Deferred income taxes 17,173 16,117
-------- --------
Total liabilities 671,545 642,879
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value, authorized 500,000 shares,
none issued
Common stock - $.50 par value, authorized 25,000,000 shares;
shares issued: 14,864,646 at October 31, 1998 and
14,842,544 at July 31, 1998 7,432 7,421
Additional paid-in capital 58,010 57,869
Warrants - issued and outstanding 1,606,500 29 29
Retained earnings 63,101 57,910
-------- --------
Total stockholders' equity 128,572 123,229
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $800,117 $766,108
======== ========
<FN>
* Reproduced from balance sheet included in the 1998 Annual Report to Stockholders.
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended
October 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Finance income $21,116 $16,369
Interest expense 9,561 7,229
------- -------
Finance income before provision for possible
losses on finance receivables 11,555 9,140
Provision for possible losses on finance receivables 800 625
------- -------
Net finance income 10,755 8,515
Gain on debt retirement 187
Salaries and other expenses (2,491) (2,182)
------- -------
Earnings before income taxes 8,451 6,333
Provision for income taxes 3,260 2,459
------- -------
NET EARNINGS 5,191 3,874
Retained earnings - beginning of period 57,910 40,878
------- -------
RETAINED EARNINGS - END OF PERIOD $63,101 $44,752
======= =======
EARNINGS PER COMMON SHARE:
Diluted $0.30 $0.24
===== =====
Basic $0.35 $0.26
===== =====
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Three Months Ended
October 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $5,191 $3,874
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for possible losses on finance
receivables 800 625
Depreciation and amortization 1,431 1,194
Deferred income taxes 1,056 500
Gain on extinguishment of debt (187)
Decrease in other assets 371 43
(Decrease) in accrued interest, taxes and other
liabilities (3,515) (3,265)
------- -------
Net cash provided by operating activities 5,147 2,971
------- -------
Cash flows from investing activities:
Finance receivables:
Originated (154,252) (130,383)
Collected 117,858 97,636
Other (136) (124)
------- -------
Net cash (used in) investing activities (36,530) (32,871)
------- -------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) (188,784) (9,321)
Maturities greater than 90 days:
Proceeds 25,306 34,883
Repayments (20,842) (21,169)
Bank borrowings (net) 207,070 20,580
Proceeds from term loan - bank 10,000
Repurchase of convertible subordinated notes (1,313)
Variable rate senior term notes (net) (125) 4,248
Proceeds from exercise of stock options 152 159
------- -------
Net cash provided by financing activities 31,464 29,380
------- -------
NET INCREASE (DECREASE) IN CASH 81 (520)
Cash - beginning of period 2,756 2,532
------- -------
CASH - END OF PERIOD $2,837 $2,012
====== ======
Supplemental disclosures of cash flow information:
Interest paid $7,468 $6,959
====== ======
Income taxes paid $153 $406
====== ======
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
5
<PAGE>
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
In the opinion of the management of Financial Federal Corporation and
Subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position at
October 31, 1998 and the results of operations and cash flows of the Company
for the three month periods ended October 31, 1998 and 1997. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and note disclosures included in the
Company's Annual Report on Form 10-K for the year ended July 31, 1998. The
consolidated results of operations for the three month periods ended October
31, 1998 and 1997 are not necessarily indicative of the results for the
respective full years.
NOTE 2 - EARNINGS PER COMMON SHARE
- ----------------------------------
Earnings per common share was calculated as follows (in thousands, except per
share amounts):
Three months ended
October 31,
---------------------
1998 1997
------ ------
Net earnings (used for basic earnings per share) $5,191 $3,874
Effect of convertible securities 790
------ ------
Adjusted net earnings (used for diluted earnings
per share) $5,981 $3,874
====== ======
Weighted average common shares outstanding
(used for basic earnings per share) 14,853 14,770
Effect of dilutive securities:
Convertible subordinated notes 3,294
Warrants 1,401 1,342
Stock options 297 293
------ ------
Adjusted weighted average common shares and
assumed conversions (used for diluted
earnings per share) 19,845 16,405
====== ======
Net earnings per common share - Diluted $0.30 $0.24
===== =====
Net earnings per common share - Basic $0.35 $0.26
===== =====
NOTE 3 - LONG-TERM DEBT
- -----------------------
At October 31, 1998, the Company had $292.5 million of committed unsecured
revolving credit facilities with various banks that expire after October 31,
1999. Long-term senior debt of $488.3 million at October 31, 1998 comprised
$164.5 million of borrowings under these facilities, $128.0 million of
commercial paper and short-term bank borrowings supported by these facilities
and $195.8 million of term notes payable.
NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
During the quarter ended October 31, 1998, the Company entered into derivative
financial instruments to hedge its exposure to fluctuations in market interest
rates on anticipated placement(s) of senior term debt. At October 31, 1998,
the Company was a party to treasury lock agreements with an aggregate notional
amount of $40.0 million that mature within five months.
6
<PAGE>
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires the fair value
of derivatives to be recorded as assets or liabilities. Gains or losses
resulting from changes in the fair values of derivatives would be accounted
for depending on the purpose of the derivatives and whether they qualify for
hedge accounting treatment. This statement is effective for fiscal years
beginning after June 15, 1999. The Company has not yet determined the impact
SFAS 133 will have on its earnings or financial position.
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended October 31, 1998 to Three Months Ended
- -----------------------------------------------------------------------
October 31, 1997
- ----------------
Finance income increased 29% to $21.1 million in the first quarter of fiscal
1999 from $16.4 million in the first quarter of fiscal 1998. The increase was
primarily the result of the $199 million, or 34%, increase in average finance
receivables outstanding to $793 million in the first quarter of fiscal 1999
from $594 million in the first quarter of fiscal 1998, partially offset by
decreases in finance rates charged by the Company in response to the declining
interest rate environment. Finance receivables booked in the first quarter of
fiscal 1999 increased 18% to $154 million from $130 million in the first
quarter of fiscal 1998 primarily due to the increase in the number of the
Company's marketing personnel and increased business activity in the
Southeast.
Interest expense, incurred on borrowings used to fund finance receivables,
increased by 32% to $9.6 million in the first quarter of fiscal 1999 from $7.2
million in the first quarter of fiscal 1998. The increase was primarily due
to the 38% increase in average debt outstanding in the first quarter of fiscal
1999 from the first quarter of fiscal 1998, partially offset by the slight
decrease in the Company's cost of funds due to the 4.5% convertible
subordinated notes issued in April 1998.
Finance income before provision for possible losses on finance receivables
increased by 26% to $11.6 million in the first quarter of fiscal 1999 from
$9.1 million in the first quarter of fiscal 1998. Finance income before
provision for possible losses, expressed as an annualized percentage of
average finance receivables outstanding, decreased to 5.8% in the first
quarter of fiscal 1999 from 6.1% in the first quarter of fiscal 1998 primarily
due to the Company's higher debt-to-equity ratio, 4.9 at October 31, 1998
compared to 4.3 at October 31, 1997, and to lower finance rates charged by the
Company, partially offset by the slight decrease in the Company's cost of
funds.
The provision for possible losses on finance receivables increased by 28% to
$800,000 in the first quarter of fiscal 1999 from $625,000 in the first
quarter of fiscal 1998. The increase was primarily due to the increase in
finance receivables. The allowance for possible losses, which increased to
$14.1 million at October 31, 1998 from $11.0 million at October 31, 1997, was
1.74% and 1.79% of finance receivables at October 31, 1998 and 1997,
respectively. The allowance is periodically reviewed by the Company's
management and is estimated 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. Non-performing
finance receivables were $7.2 million, or 0.9% of total finance receivables,
at October 31, 1998, compared to $4.7 million, or 0.8% of total finance
receivables, at October 31, 1997.
In September 1998, the Company repurchased $1.5 million face amount of its
convertible subordinated notes for $1.3 million.
7
<PAGE>
Salaries and other expenses increased by 14% to $2.5 million in the first
quarter of fiscal 1999 from $2.2 million in the first quarter of fiscal 1998
primarily due to the increase in the number of marketing personnel and other
employees and salary increases.
Net earnings increased by 34% to $5.2 million in the first quarter of fiscal
1999 from $3.9 million in the first quarter of fiscal 1998. Diluted earnings
per share increased by 25% to $0.30 per share in the first quarter of fiscal
1999 from $0.24 per share in the first quarter of fiscal 1998 and basic
earnings per share increased by 35% to $0.35 per share in the first quarter of
fiscal 1999 from $0.26 per share in the first quarter of fiscal 1998. The
increase in diluted earnings per share was lower than the increase in net
earnings due to the effects of the convertible subordinated notes issued in
April 1998 and an increase in the number of weighted average common shares.
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, placements of term debt
and sales of common and preferred equity. Management believes that the
Company has available sufficient liquidity to support its future operations.
The Company issues investment grade commercial paper directly and through a
program with recognized commercial paper dealers. Commercial paper
outstanding at October 31, 1998 was $126.9 million. The Company's commercial
paper is unsecured and matures within 270 days. Increases in commercial paper
are generally offset by decreases in bank and other borrowings, and vice
versa. The Company's current policy is to maintain bank facilities so that
the aggregate amount available thereunder exceeds commercial paper
outstanding.
At October 31, 1998, the Company had $137.5 million of short-term committed
unsecured revolving credit facilities with various banks under which $46.0
million was outstanding, and $292.5 million of long-term committed unsecured
revolving credit facilities with various banks under which $164.5 million was
outstanding.
At October 31, 1998, the Company had $45.0 million available under its 144A
Medium-Term Note Program.
YEAR 2000
The Company has determined that its information technology systems are
primarily Year 2000 compliant (non information technology systems are not
critical to the Company's operations). Therefore, any future costs the
Company may incur relating to the Year 2000 issue are not expected to be
significant. The Company has not, and does not expect to, incur any specific
quantifiable costs that can be directly and solely related to the Year 2000
issue.
The Company has business relationships with thousands of equipment
manufacturers, dealers and operators (customers). The failure by any one or
several of these third parties to be Year 2000 compliant is not expected to
result in a material loss in the Company's revenue.
The Company has relationships with three commercial paper dealers and eighteen
banks to fund its daily operations. The failure by any one of these credit
providers to be Year 2000 compliant is not expected to affect materially the
Company's liquidity. Through direct communications with these credit
providers and the review of their public statements, the Company has been
assured that substantially all of its credit providers expect to be Year 2000
compliant. In addition, all banks are required to be Year 2000 compliant by
the Office of the Controller of the Currency.
Neither the Company, nor anyone else, can predict, or envision, the potential
direct and residual effects of technology's inability to properly recognize
the year 2000. These possible effects include extended, nationwide
interruptions in telecommunications services, utility services, public
transportation, air travel and global banking and electronic payment systems.
Based on the unknown effects of these potentially significant interruptions,
the Company believes that it is impossible to assure full Year 2000 compliance
even though the Company has taken appropriate measures to be compliant.
8
<PAGE>
In the event that the advent of the Year 2000 causes a material business
interruption, the Company believes, but cannot assure, that, to the extent
possible (except for the interruptions listed in the prior paragraph), any
such interruption could be overcome manually.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Operations and Financial
Condition contains forward-looking statements that involve risks,
uncertainties and assumptions due to their subjective nature. Therefore,
actual outcomes and results could differ materially from those anticipated by
such forward-looking statements due to the impact of many factors beyond the
Company's control, including economic, geographic and industry conditions,
availability of funding sources, market risk from fluctuations in interest
rates, prepayments, competitive conditions, changes in existing laws or
regulations and matters relating to the Year 2000 issue.
PART II
Item 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated October 2, 1998
reporting, under Item 5, the announcement that Paul R.
Sinsheimer was promoted to President and Chief Operating
Officer, effective immediately.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL FEDERAL CORPORATION
-----------------------------
(Registrant)
By: /s/ Michael C. Palitz
----------------------------
Executive Vice President and
Chief Financial Officer
By: /s/ David H. Hamm
----------------------------
Controller and Assistant
Treasurer
December 7, 1998
- ----------------
(Date)
10
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibits Page
- ----------- -------- ----
27 Financial Data Schedule (EDGAR version only)
<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 OF OCTOBER 31, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS FOR THE THREE MONTH PERIOD THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 2837
<SECURITIES> 0
<RECEIVABLES> 807384
<ALLOWANCES> 14052
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 800117
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 7432
<OTHER-SE> 121140
<TOTAL-LIABILITY-AND-EQUITY> 800117
<SALES> 0
<TOTAL-REVENUES> 21303
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 800
<INTEREST-EXPENSE> 9561
<INCOME-PRETAX> 8451
<INCOME-TAX> 3260
<INCOME-CONTINUING> 5191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5191
<EPS-PRIMARY> .35
<EPS-DILUTED> .30
<FN>
<F1>THE FINANCIAL STATEMENTS INCLUDE A NONCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
