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 April 30, 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)
400 Park Avenue, New York, NY 10022
(Address of principal executive offices)
(Zip code)
(212) 888-3344
(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 June 10, 1998, 14,825,428 shares of the Registrant's common stock, $.50 par
value, were outstanding.
1
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended April 30, 1998
INDEX
Part I - Financial Information Page No.
- ------------------------------ --------
Item 1 Financial Statements - FINANCIAL FEDERAL CORPORATION AND
SUBSIDIARIES
Consolidated Balance Sheet at April 30, 1998 (unaudited)
and July 31, 1997 (audited) 3
Consolidated Statement of Operations and Retained Earnings
for the three and nine month periods ended April 30, 1998
and 1997 (unaudited) 4
Consolidated Statement of Cash Flows for the nine month
periods ended April 30, 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 2 Changes in Securities 9
Item 6 Exhibits and Reports on Form 8-K 10
2
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
April 30, 1998
(Unaudited) July 31, 1997 *
----------- -------------
<S> <C> <C>
ASSETS
Finance receivables $716,347 $581,363
Allowance for possible losses 12,405 10,303
-------- --------
Finance receivables - net 703,942 571,060
Cash 2,296 2,532
Other assets 4,189 1,172
-------- --------
TOTAL ASSETS $710,427 $574,764
======== ========
LIABILITIES
Senior debt:
Long-term ($30,589 at April 30, 1998 and $16,986 at
July 31, 1997 due to related parties) $449,288 $434,680
Short-term 10,894 4,681
Subordinated debt ($4,681 at April 30, 1998 and $2,181
at July 31, 1997 due to related parties) 102,290 2,290
Accrued interest, taxes and other liabilities 16,836 16,224
Deferred income taxes 12,729 11,285
-------- --------
Total liabilities 592,037 469,160
-------- --------
STOCKHOLDERS' EQUITY
Common stock 7,412 7,382
Additional paid-in capital 57,748 57,315
Warrants 29 29
Retained earnings 53,201 40,878
-------- --------
Total stockholders' equity 118,390 105,604
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $710,427 $574,764
======== ========
<FN>
* Reproduced from balance sheet included in the 1997 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)
(In Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Finance income $18,440 $13,999 $52,431 $39,885
Interest expense 8,200 5,942 23,516 16,698
------- ------- ------- -------
Finance income before provision for possible
losses on finance receivables 10,240 8,057 28,915 23,187
Provision for possible losses on finance receivables 750 650 2,175 1,800
------- ------- ------- -------
Net finance income 9,490 7,407 26,740 21,387
Salaries and other expenses 2,292 2,062 6,588 6,116
------- ------- ------- -------
Earnings before income taxes 7,198 5,345 20,152 15,271
Provision for income taxes 2,799 2,058 7,829 5,878
------- ------- ------- -------
NET EARNINGS 4,399 3,287 12,323 9,393
Retirements of treasury stock (463)
Retained earnings - beginning of period 48,802 36,536 40,878 30,893
------- ------- ------- -------
RETAINED EARNINGS - END OF PERIOD $53,201 $39,823 $53,201 $39,823
======= ======= ======= =======
EARNINGS PER COMMON SHARE:
Diluted $0.27 $0.20 $0.75 $0.58
===== ===== ===== =====
Basic $0.30 $0.22 $0.83 $0.63
===== ===== ===== =====
<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)
(In Thousands)
<CAPTION>
Nine Months Ended
April 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $12,323 $9,393
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 182 163
Provision for possible losses on finance receivables 2,175 1,800
Amortization of deferred origination costs 3,546 3,049
Deferred income taxes 1,444 1,430
Increase in other assets (189) (112)
Increase (decrease) in accrued interest, taxes and
other liabilities 612 (411)
-------- --------
Net cash provided by operating activities 20,093 15,312
-------- --------
Cash flows from investing activities:
Finance receivables:
Originated (442,670) (332,188)
Collected 304,067 225,306
Other (323) (124)
-------- --------
Net cash (used in) investing activities (138,926) (107,006)
-------- --------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) 13,716 10,422
Maturities greater than 90 days:
Proceeds 89,734 115,167
Repayments (88,214) (75,690)
Bank borrowings (net) (66,500) 43,100
Proceeds from convertible subordinated notes 100,000
Proceeds from medium term notes 55,000
Proceeds from term loan - bank 10,000 5,000
Proceeds from variable rate senior term notes 7,085
Repayments of subordinated debentures (4,667)
Deferred debt issuance costs (2,687)
Acquisitions of treasury stock (1,630)
Proceeds from exercise of stock options 406 61
Tax benefit relating to stock options 57 74
-------- --------
Net cash provided by financing activities 118,597 91,837
-------- --------
NET INCREASE (DECREASE) IN CASH (236) 143
Cash - beginning of period 2,532 2,426
-------- --------
CASH - END OF PERIOD $2,296 $2,569
======== ========
Supplemental disclosures of cash flow information:
Interest paid $22,152 $16,453
======= =======
Income taxes paid $5,309 $4,322
======= =======
<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
April 30, 1998 and the results of operations and cash flows of the Company for
the three and nine month periods ended April 30, 1998 and 1997. These
condensed 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, 1997. The
consolidated results of operations for the three and nine month periods ended
April 30, 1998 and 1997 are not necessarily indicative of the results for the
respective full years.
NOTE 2 - EARNINGS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." This standard replaced the presentation of primary
and fully diluted earnings per share with basic and diluted earnings per share
for all periods presented. Basic earnings per share is net earnings divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is the sum of net earnings and the after-tax
interest cost of dilutive convertible debt, divided by the sum of the weighted
average number of common shares and the effect of dilutive stock options,
warrants and convertible securities, outstanding during the period. Earnings
per share was calculated as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net earnings (used for basic earnings per share) $4,399 $3,287 $12,323 $9,393
Effect of convertible securities (see Note 3) 17 17
------ ------ ------- ------
Adjusted net earnings (used for diluted earnings
per share) $4,416 $3,287 $12,340 $9,393
====== ====== ======= ======
Weighted average common shares outstanding
(used for basic earnings per share) 14,821 14,764 14,795 14,794
Effect of dilutive securities:
Warrants 1,416 1,223 1,380 1,184
Stock options 346 161 320 135
Convertible subordinated notes 74 24
------ ------ ------- ------
Adjusted weighted average common shares and
assumed conversions (used for diluted
earnings per share) 16,657 16,148 16,519 16,113
====== ====== ======= ======
Net earnings per common share - Diluted $0.27 $0.20 $0.75 $0.58
===== ===== ===== =====
Net earnings per common share - Basic $0.30 $0.22 $0.83 $0.63
===== ===== ===== =====
</TABLE>
NOTE 3 - LONG-TERM DEBT
At April 30, 1998, the Company had $287.5 million of committed unsecured
revolving credit facilities with various banks that expire after April 30,
1999. Long-term senior debt of $449.3 million at April 30, 1998 comprised
$10.6 million of borrowings under these facilities, $251.9 million of
commercial paper and short-term bank borrowings supported by these facilities
and $186.8 million of term notes payable.
On April 29, 1998, the Company issued $100.0 million of 4.5% convertible
subordinated notes due May 1, 2005. The notes are convertible into shares of
the Company's common stock at any time before maturity at a conversion price
6
<PAGE>
of $30.15625 per share. The Company can call the notes beginning May 4, 2001
at a premium that decreases 25% annually from 2.57%. Interest on the notes is
payable semi-annually. The notes are subordinated in right of payment to all
existing and future senior indebtedness, as defined.
In January 1998, the Company established a $100.0 million 144A Medium-Term
Note Program, rated 'BBB' by Fitch IBCA and Duff & Phelps Credit Rating Co.,
and issued $55.0 million of notes thereunder, with interest payable semi-
annually, as follows (dollars in millions):
Amount Term Maturity Rate
------ -------- ---------------- -----
$30.0 5 years January 29, 2003 6.45%
20.0 7 years January 31, 2005 6.68
5.0 10 years January 29, 2008 6.80
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended April 30, 1998 to Three Months Ended
April 30, 1997
- ---------------------------------------------------------------------
Finance income increased 32% to $18.4 million in the third quarter of fiscal
1998 from $14.0 million in the third quarter of fiscal 1997. The increase was
primarily the result of the $162 million, or 31%, increase in average finance
receivables outstanding to $685 million in the third quarter of fiscal 1998
from $523 million in the third quarter of fiscal 1997. Finance receivables
booked in the third quarter of fiscal 1998 increased 53% to $171 million from
$112 million in the third quarter of fiscal 1997 primarily as a result of the
expansion of the Company's marketing efforts into new geographic areas
(primarily in the West) and further penetration in its existing areas
(primarily in the Southeast) and an increase in the number of the Company's
marketing personnel of approximately 25%.
Interest expense, incurred on borrowings used to fund finance receivables,
increased by 38% to $8.2 million in the third quarter of fiscal 1998 from $5.9
million in the third quarter of fiscal 1997. The increase was primarily due
to the 35% increase in average debt outstanding in the third quarter of fiscal
1998 from the third quarter of fiscal 1997 and, to a lesser extent, the slight
increases in average market interest rates and the Company's cost of funds due
to the $50.0 million and $55.0 million of term debt issued in July 1997 and
January 1998, respectively.
Finance income before provision for possible losses on finance receivables
increased by 27% to $10.2 million in the third quarter of fiscal 1998 from
$8.1 million in the third quarter of fiscal 1997. Finance income before
provision for possible losses, expressed as a percentage of average finance
receivables outstanding, decreased to 6.1% in the third quarter of fiscal 1998
from 6.3% in the third quarter of fiscal 1997 primarily due to the Company's
higher debt-to-equity ratio, 4.8 at April 30, 1998 compared to 4.0 at April
30, 1997, and to the slight overall increase in interest costs.
The provision for possible losses on finance receivables increased by 15% to
$750,000 in the third quarter of fiscal 1998 from $650,000 in the third
quarter of fiscal 1997. The increase was primarily due to the increase in
finance receivables. The allowance for possible losses, which increased to
$12.4 million at April 30, 1998 from $9.6 million at April 30, 1997, was 1.73%
and 1.78% of finance receivables at April 30, 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 $6.0 million, or 0.8% of total finance receivables, at April
30, 1998, compared to $4.8 million, or 0.9% of total finance receivables, at
April 30, 1997.
7
<PAGE>
Salaries and other expenses increased by 11% to $2.3 million in the third
quarter of fiscal 1998 from $2.1 million in the third quarter of fiscal 1997
primarily due to the increase in the number of marketing personnel and other
employees and salary increases.
Net earnings increased by 34% to $4.4 million in the third quarter of fiscal
1998 from $3.3 million in the third quarter of fiscal 1997. Diluted earnings
per share increased by 35% to $0.27 per share in the third quarter of fiscal
1998 from $0.20 per share in the third quarter of fiscal 1997 and basic
earnings per share increased by 36% to $0.30 per share in the third quarter of
fiscal 1998 from $0.22 per share in the third quarter of fiscal 1997.
Comparison of Nine months Ended April 30, 1998 to Nine months Ended
April 30, 1997
- -------------------------------------------------------------------
Finance income increased 31% to $52.4 million in the first nine months of
fiscal 1998 from $39.9 million in the first nine months of fiscal 1997. The
increase was primarily the result of the $153 million, or 31%, increase in
average finance receivables outstanding to $642 million in the first nine
months of fiscal 1998 from $489 million in the first nine months of fiscal
1997. Finance receivables booked in the first nine months of fiscal 1998
increased 34% to $441 million from $329 million in the first nine months of
fiscal 1997 primarily as a result of the expansion of the Company's marketing
efforts into new geographic areas (primarily in the West) and further
penetration in its existing areas (primarily in the Southeast) and the hiring
of additional marketing personnel.
Interest expense, incurred on borrowings used to fund finance receivables,
increased by 41% to $23.5 million in the first nine months of fiscal 1998 from
$16.7 million in the first nine months of fiscal 1997. The increase was
primarily due to the 36% increase in average debt outstanding in the first
nine months of fiscal 1998 from the first nine months of fiscal 1997 and, to a
lesser extent, the slight increases in average market interest rates and the
Company's cost of funds due to the $50.0 million and $55.0 million of term
debt issued in July 1997 and January 1998, respectively.
Finance income before provision for possible losses on finance receivables
increased by 25% to $28.9 million in the first nine months of fiscal 1998 from
$16.7 million in the first nine months of fiscal 1997. Finance income before
provision for possible losses, expressed as a percentage of average finance
receivables outstanding, decreased to 6.0% in the first nine months of fiscal
1998 from 6.3% in the first nine months of fiscal 1997 primarily due to the
Company's higher debt-to-equity ratio, 4.8 at April 30, 1998 compared to 4.0
at April 30, 1997, and to the slight overall increase in interest costs.
The provision for possible losses on finance receivables increased by 21% to
$2.2 million in the first nine months of fiscal 1998 from $1.8 million in the
first nine months of fiscal 1997. The increase was primarily due to the
increase in finance receivables. The allowance for possible losses, which
increased to $12.4 million at April 30, 1998 from $9.6 million at April 30,
1997, was 1.73% and 1.78% of finance receivables at April 30, 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 $6.0 million, or 0.8% of total finance receivables,
at April 30, 1998, compared to $4.8 million, or 0.9% of total finance
receivables, at April 30, 1997.
Salaries and other expenses increased by 8% to $6.6 million in the first nine
months of fiscal 1998 from $6.1 million in the first nine months of fiscal
1997 primarily due to the increase in the number of employees and salary
increases, partially offset by the reduction in overhead costs that resulted
from the relocation of the Company's machine tool division into the Company's
Charlotte, NC office in November 1996.
Net earnings increased by 31% to $12.3 million in the first nine months of
fiscal 1998 from $9.4 million in the first nine months of fiscal 1997.
Diluted earnings per share increased by 29% to $0.75 per share in the first
nine months of fiscal 1998 from $0.58 per share in the first nine months of
fiscal 1997 and basic earnings per share increased by 32% to $0.83 per share
in the first nine months of fiscal 1998 from $0.63 per share in the first nine
months of fiscal 1997.
8
<PAGE>
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 operations.
The Company issues investment grade commercial paper directly and through a
program with recognized commercial paper dealers. The Company increased the
size of the program to $350 million in February 1998 from $250 million.
Commercial paper outstanding at April 30, 1998 was $259.8 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 April 30, 1998, the Company had $112.5 million of short-term committed
unsecured revolving credit facilities with various banks under which $3.0
million was outstanding, and $287.5 million of long-term committed unsecured
revolving credit facilities with various banks under which $10.6 million was
outstanding.
The Company used the $97.3 million of net proceeds received on April 29, 1998
from the issuance of its convertible subordinated notes to repay commercial
paper and bank borrowings, thereby increasing the availability of these
funding sources.
At April 30, 1998, the Company had $45.0 million available under its 144A
Medium-Term Note Program.
YEAR 2000
The Company has determined that its information systems are primarily already
Year 2000 compliant. Therefore, any future costs the Company may incur to
become fully Year 2000 compliant are not expected to be significant. The
Company expects to become fully compliant by December 31, 1998 through the
normal course of updating its information systems.
FORWARD-LOOKING STATEMENTS
The above discussion contains forward-looking statements that involve 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, availability of
funding sources, prepayments, competitive conditions and changes in existing
laws or regulations.
PART II
Item 2
CHANGES IN SECURITIES
---------------------
On April 29, 1998, the Company issued $100.0 million of 4.5% convertible
subordinated notes due May 1, 2005 to qualified investors. The notes are
convertible into shares of the Company's common stock at a conversion price of
$30.15625 per share. The notes are subordinated in right of payment to all
existing and future senior indebtedness, as defined.
9
<PAGE>
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 two reports on Form 8-K dated April 16, 1998
and April 24, 1998 reporting, under Item 5, the announcement of
its proposed offering of, and subsequent placement of, $100
million of convertible subordinated notes.
10
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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 Treasurer
By: /s/ David H. Hamm
------------------------
Controller and
Assistant Treasurer
June 12, 1998
- -------------
(Date)
11
<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 APRIL 30, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS AND
RETAINED EARNINGS FOR THE NINE MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> APR-30-1998
<CASH> 2296
<SECURITIES> 0
<RECEIVABLES> 716347
<ALLOWANCES> 12405
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 710427
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 7412
<OTHER-SE> 110978
<TOTAL-LIABILITY-AND-EQUITY> 716347
<SALES> 0
<TOTAL-REVENUES> 52431
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2175
<INTEREST-EXPENSE> 23516
<INCOME-PRETAX> 20152
<INCOME-TAX> 7829
<INCOME-CONTINUING> 12323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12323
<EPS-PRIMARY> .83
<EPS-DILUTED> .75
<FN>
<F1>THE FINANCIAL STATEMENTS INCLUDE A NONCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
