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, 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 No.)
733 Third Avenue, New York, New York 10017
(Address of principal executive offices)
400 Park Avenue, New York, New York 10022
(Former address of principal executive offices)
Registrant's telephone number, including area code: (212) 599-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
- ------------------------------- ------------------------------------
Common Stock, $.50 par value New York Stock Exchange, Inc.
4.5% Convertible Subordinated
Notes due 2005 New York Stock Exchange, Inc.
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 1, 1998 was $223,043,366.81. The
aggregate market value was computed by reference to the closing price of the
Common Stock on the New York Stock Exchange on the prior day (which was
$21.9375 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 10,167,219 shares. The number of shares of
Registrant's Common Stock outstanding as of October 1, 1998 was 14,857,053
shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's proxy statement for its Annual Meeting of Stockholders, to be
held December 8, 1998, 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 9 through
26 of Registrant's 1998 Annual Report to Stockholders is incorporated by
reference in answer to Items 6, 7, 7A 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 a
nationwide independent financial services company with over $766 million of
assets. The Company finances industrial, commercial and professional equipment
through installment sales and leasing programs for manufacturers, dealers and
operators of such equipment. The Company also makes capital loans to its
customers, secured by the same types of equipment and other collateral. The
Company provides its services primarily to middle-market businesses, generally
with annual revenues of up to $20 million, that are located throughout the
nation and represent diverse industries, such as general construction, road and
infrastructure construction and repair, manufacturing, trucking, and waste
disposal. The Company focuses on financing a wide range of revenue-producing
equipment of major manufacturers that is movable, has an economic life longer
than the term of the financing, is not subject to rapid technological
obsolescence, has applications in various industries and has a relatively broad
resale market. Sample types of equipment financed by the Company 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. In substantially all cases, the Company's finance
receivables are secured by a first lien on such equipment collateral.
Currently, the Company generates profits to the extent that its income
from finance receivables exceeds its cost of borrowed funds, operating and
administrative expenses and provision for possible losses. In addition, the
Company may generate profits from investing in operating leases, portfolios of
loans and/or leases or from acquiring full or partial ownership interests of
private or public companies in the finance, leasing and/or lending businesses.
Marketing
The Company markets its services through marketing personnel based in 25
domestic locations, including 5 full service operations centers. At July 31,
1998, forty-eight (48) full-time new business marketing representatives
directly report to such operations centers. The Company 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 equipment operators for
the acquisition or use of equipment and for capital loans. 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 through the expansion of the Company's marketing efforts into new
geographic areas and further penetration in its existing areas by employing
additional marketing personnel and opening new full service operations centers.
The Company's marketing personnel are salaried rather than commission-based and
the majority participate in the Stock Option Plan. Thus, the Company believes
that its marketing personnel have a close community of interest with the
Company and its stockholders.
The Company's marketing activities are relationship and service oriented.
The Company focuses on providing prompt, responsive and customized service to
its customers and business prospects. The Company has a team of dedicated and
seasoned marketing and managerial personnel who solicit new business from the
vendors and operators of equipment. The Company's marketing and managerial
personnel have, on average, more than 15 years of specialized expertise in the
industries they serve, which generally enables them to understand customers'
businesses and be responsive to customers' needs. Management believes that the
experience, knowledge and relationships of its executives 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 which meet customers' needs and the Company's
underwriting criteria, providing direct contact between customers and Company
executives with decision-making authority and providing prompt and
knowledgeable responses to customers' 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 (operators 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 operators collateralized by equipment pursuant to personal
property security agreements. In addition, the Company purchases equipment
from vendors and, simultaneously, leases it to equipment operators, generally
under noncancelable 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.
In order to expand its customer base and broaden its marketing coverage
geographically, 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 finance receivables generally ranging in amount
from $50,000 to $1.0 million per transaction. Individual transactions
originated by the Company averaged $168,000 in fiscal 1998, $144,000 in fiscal
1997 and $140,000 in fiscal 1996.
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.
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 collateral. 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 an
operator 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. 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 applicable 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 policy 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
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credit policy provides several designations of credit officer authority levels.
A credit officer's authority level is based, among other things, on his/her
credit experience, managerial position and tenure with the Company. The dollar
amount that a credit officer can approve for a particular transaction is based
upon the credit officer's authority level, collateral coverage relative to the
Company's potential lending exposure, and the extent of recourse, if any, the
Company may have to financially responsible vendors. Credit officers only have
authority to approve credits up to their prescribed maximum level, and only
then if certain criteria have been met. Notwithstanding the foregoing, it is
current policy that 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 or President.
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, may obligate 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. The Company may also withhold an agreed upon
amount from the vendor/obligor or lessee as security or obtain cash collateral
from an obligated party as security.
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
Customer payments of finance receivables are remitted to, and processed
in a central location. Collection efforts in connection with delinquent
accounts, however, are handled by the collection personnel and managers in each
operations center 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 operators 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, management involvement in customer relationships and 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 a competitive
salary, an equity interest in the Company through participation in the Stock
Option Plan, and enhanced career opportunities. As of July 31, 1998,
approximately 70% of the Company's directors, officers and employees with at
least one year of service participate in the Stock Option Plan and/or own stock
in the Company.
Employees
At July 31, 1998, the Company had 162 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 the Stock Option Plan (which contains non-disclosure and
non-solicitation provisions) and deferred compensation agreements. Employees
who have participated in the Stock Option Plan have, among other things, agreed
not to solicit customers of the Company for a period of time following
termination of their employment. The Company considers its relations with its
employees to be satisfactory.
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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., 67, has served as Chairman of the Board of the
Company since July 1996, as Chief Executive Officer of the Company since its
inception in 1989 and as President of the Company from its inception in 1989 to
September 1998. 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.
Paul R. Sinsheimer, 51, has served as President of the Company since
September 1998, as Executive Vice President of the Company from its inception
in 1989 to September 1998 and as 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.
Michael C. Palitz, 40, has served as a Director of the Company since July
1996, 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.
William M. Gallagher, 49, has served as a 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, 37, has served as a 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).
John V. Golio, 37, has served as a Senior Vice President of the Company
since 1997 and served as a Vice President of a subsidiary of the Company since
joining the Company in January 1996. Before joining the Company, Mr. Golio was
employed by CAC in various capacities, including branch operations manager.
Daniel J. McDonough, 36, has served as a Senior Vice President of the
Company since 1997. Mr. McDonough held several positions, including Vice
President of a subsidiary of the Company, Branch Manager and Operations Manager
since joining the Company in 1989. Before joining the Company, Mr. McDonough
was employed by CAC in various capacities, including regional credit manager.
Richard W. Radom, 50, 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 733 Third Avenue, New
York, New York and consist of approximately 5,000 square feet of space. As of
July 31, 1998, the Company had five full service operations centers (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
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existing facilities are suitable and adequate for their present and proposed
uses and that suitable and adequate facilities will be available on reasonable
terms for any additional offices which the Company may open.
Item 3. LEGAL PROCEEDINGS
There are no 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, 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "FIF". Trading commenced on the New York Stock Exchange on June 22,
1998; prior to that date, the Company's common stock was traded on the American
Stock Exchange. The quarterly high and low closing sales prices per share of
the common stock as reported by the New York Stock Exchange and the American
Stock Exchange, adjusted for the July 1997 three-for-two stock split, follow:
Price Range
---------------------
High Low
------ ------
Fiscal year 1998
- -------------------------------------
First Quarter ended October 31, 1997 $19.81 $14.00
Second Quarter ended January 31, 1998 $23.63 $18.00
Third Quarter ended April 30, 1998 $26.00 $20.38
Fourth Quarter ended July 31, 1998 $28.50 $23.00
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
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
1, 1998 was 73. 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, 1998, 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,
1998, which information is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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,
1998, 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, 1998, 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 8,
1998, 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 8,
1998.
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 8,
1998.
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 8,
1998.
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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 15 through 26
of the Registrant's Annual Report to Stockholders for the
fiscal year ended July 31, 1998, as provided in Item 8
hereof:
- Consolidated Balance Sheet as at July 31, 1998 and 1997.
- Consolidated Statement of Stockholders' Equity for the
fiscal years ended July 31, 1998, 1997 and 1996.
- Consolidated Statement of Operations for the fiscal years
ended July 31, 1998, 1997 and 1996.
- Consolidated Statement of Cash Flows for the fiscal years
ended July 31, 1998, 1997 and 1996.
- 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. 12
- Schedule I - Condensed Financial Information of
Registrant. 13
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 17
Exhibit No. Description of Exhibit
3.1 (a) Articles of Incorporation of the Registrant
3.2 (a) By-laws of the Registrant
3.3 (a) Form of Restated and Amended By-laws of the Registrant
4.1 (a) Form of Variable Rate Subordinated Debentures Due September 1,
2000 (a "Debenture") issued by Registrant
4.6 (f) Form of Note Agreement dated as of April 15, 1996 issued by
Financial Federal Credit Inc. ("Credit") to certain
institutional noteholders
4.7 (j) Form of Note Agreement dated as of July 1, 1997 issued by Credit
to certain institutional note holders
4.8 (k) Indenture dated January 14, 1998 for Credit's Rule 144A Medium
Term Note Program
4.9 (l) Indenture, dated as of April 15, 1998, between Registrant and
First National Bank of Chicago for Registrant's $100 million
4.5% Convertible Subordinated Notes due 2005
4.10 (l) Registration Rights Agreement, dated as of April 24, 1998,
between Registrant and BancAmerica Robertson Stephens,
Donaldson, Lufkin & Jenrette Securities Corporation, Piper
Jaffray Inc., CIBC Oppenheimer Corporation, Friedman,
Billings, Ramsey & Co., Inc., Schroder & Co. Inc., and Wheat,
First Securities, Inc. for Registrant's $100 million 4.5%
Convertible Subordinated Notes due 2005
4.11 (l) Specimen 4.5% Convertible Subordinated Note Due 2005
4.12 (l) Specimen Common Stock Certificate
10.2 (a) Form of Warrant to purchase Common Stock, as amended, issued by
the Registrant to stockholders in connection with its initial
capitalization
10.3 (a) Form of Warrant to purchase Common Stock issued by the
Registrant to certain of its officers
10.8 (a) Form of Commercial Paper Note issued by the Registrant
10.9 (a) Form of Commercial Paper Note issued by Credit
10.10 (a) Stock Option Plan of the Registrant and forms of related stock
option agreements
10.11 (b) Deferred Compensation Agreement dated June 1, 1992 between
Credit and Clarence Y. Palitz, Jr.
10.12 (b) Deferred Compensation Agreement dated June 1, 1992 between
Credit and Bernard G. Palitz
10.13 (c) Deferred Compensation Agreement dated January 1, 1993 between
Credit and Clarence Y. Palitz, Jr.
10.14 (c) Deferred Compensation Agreement dated January 1, 1993 between
Credit and Bernard G. Palitz.
10.15 (d) Deferred Compensation Agreement dated January 1, 1994 between
Credit and Clarence Y. Palitz, Jr.
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10.16 (d) Deferred Compensation Agreement dated January 1, 1994 between
Credit and Bernard G. Palitz.
10.17 (e) Deferred Compensation Agreement dated January 1, 1995 between
Credit and Bernard G. Palitz.
10.18 (e) Deferred Compensation Agreement dated January 1, 1995 between
Credit and Clarence Y. Palitz, Jr.
10.19 (e) Deferred Compensation Agreement dated February 1, 1995 between
Credit and Paul Sinsheimer
10.20 (g) Deferred Compensation Agreement dated January 1, 1996 between
Credit and Clarence Y. Palitz, Jr.
10.21 (h) Form of Commercial Paper Dealer Agreement of Credit
10.22 (h) Form of Deferred Compensation Agreement with certain officers as
filed under the Top Hat Plan with the Department of Labor
10.23 (i) Deferred Compensation Agreement dated December 30, 1996 between
the Registrant and Clarence Y. Palitz, Jr.
10.24 (k) Deferred Compensation Agreement dated January 2, 1998 between
the Registrant and Clarence Y. Palitz, Jr.
12.1 Computation Of Debt-To-Equity Ratio
13.1 1998 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)
- ---------------
(a) 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).
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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).
(g) 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.
(h) 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.
(i) 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.
(j) 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,
1997.
(k) 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, 1998.
(l) Previously filed with the Securities and Exchange Commission as an
exhibit to the Company's Registration Statement on Form S-3 (Registration
No. 333-56651).
(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, 1998.
9
<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 Chief
Executive Officer
October 28, 1998
----------------
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, 1998
------------------------------------------------- ----------------
Chairman of the Board and Chief Executive Officer Date
/s/ Lawrence B. Fisher October 27, 1998
------------------------------------------------- ----------------
Director Date
/s/ William C. MacMillen, Jr. October 28, 1998
------------------------------------------------- ----------------
Director Date
/s/ Bernard G. Palitz October 27, 1998
------------------------------------------------- ----------------
Director Date
/s/ Paul R. Sinsheimer October 27, 1998
------------------------------------------------- ----------------
President, Chief Operating Officer and Director Date
/s/ Michael C. Palitz October 27, 1998
------------------------------------------------- ----------------
Executive Vice President, Treasurer, Chief Date
Financial Officer and Director
/s/ David H. Hamm October 27, 1998
------------------------------------------------- ----------------
Controller, Assistant Treasurer and Principal Date
Accounting Officer
10
<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.
11
<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 3, 1998
12
<PAGE>
Schedule I
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED BALANCE SHEET
(In Thousands)
<CAPTION>
July 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash $ 160 $ 117
Due from subsidiaries:
Advances 122,882 18,650
Subordinated notes receivable 50,000 50,000
Investment in subsidiaries - at equity 60,945 46,039
Other assets 4,979 473
-------- --------
TOTAL $238,966 $115,279
======== ========
LIABILITIES
Senior debt $ 9,881 $ 4,901
Accrued interest, taxes and other liabilities 3,566 2,484
Subordinated debt 102,290 2,290
-------- --------
Total liabilities 115,737 9,675
-------- --------
STOCKHOLDERS' EQUITY
Common stock 7,421 7,382
Additional paid-in capital 57,869 57,315
Warrants 29 29
Retained earnings 57,970 40,878
-------- --------
Total stockholders' equity 123,229 105,604
-------- --------
TOTAL $238,966 $115,279
======== ========
<FN>
The notes hereto, the consolidated financial statements and the notes thereto
are made a part hereof.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(In Thousands)
<CAPTION>
Year Ended July 31,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Equity in earnings of subsidiaries before
income taxes $24,907 $18,661 $14,205
Interest charges to subsidiaries 7,236 5,060 4,007
------- ------- -------
Total 32,143 23,721 18,212
------- ------- -------
Expenses:
Interest expense 2,033 590 972
Other expenses (net) 2,285 2,144 1,811
------- ------- -------
Total 4,318 2,734 2,783
------- ------- -------
Earnings before income taxes 27,825 20,987 15,429
Provision for income taxes 10,793 8,078 5,819
------- ------- -------
NET EARNINGS 17,032 12,909 9,610
Retirement of treasury stock (463) (840)
Three-for-two stock split (2,461) (1,372)
Retained earnings - August 1 40,878 30,893 23,495
------- ------- -------
RETAINED EARNINGS - JULY 31 $57,910 $40,878 $30,893
======= ======= =======
<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 CASH FLOWS
(In Thousands)
<CAPTION>
Year Ended July 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by operating activities $ 1,157 $ 1,922 $ 1,330
-------- -------- --------
Cash flows from investing activities:
Collections from (advances to) subsidiaries-net (104,232) 8,976 (8,301)
Subordinated notes receivable-subsidiary (advances) (5,000) (20,000)
Dividends received from subsidiary 250 200 500
-------- -------- --------
Net cash provided by (used in) investing
activities (103,982) 4,176 (27,801)
-------- -------- --------
Cash flows from financing activities:
Commercial paper:
Proceeds 103,935 66,207 76,869
Repayments (98,955) (66,272) (76,509)
Proceeds from convertible subordinated notes 100,000
Repayment of note payable - bank (500)
Repurchases of subordinated debt (4,667)
Proceeds from sale of common stock, net 26,340
Proceeds from exercise of stock options 519 61 166
Acquisition of treasury stock (1,630)
Deferred debt issuance costs (2,687)
Tax benefit relating to stock options 56 64
-------- -------- --------
Net cash provided by (used in) financing
activities 102,868 (6,237) 26,366
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 43 (139) (105)
Cash - August 1 117 256 361
-------- -------- --------
CASH - JULY 31 $ 160 $ 117 $ 256
======== ======== ========
</TABLE>
Non-cash financing activities:
In 1997, the Company retired 124 common shares held as treasury stock
resulting in decreases of common stock, additional paid-in capital and
retained earnings of $62, $1,105 and $463, 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 common shares held as treasury stock resulting
in decreases of common stock, additional paid-in capital and retained earnings
of $48, $552 and $840, respectively. Additionally, the Company authorized a
three-for-two stock split effected in the form of a stock dividend.
The notes hereto, the consolidated financial statements and the notes thereto
are made a part hereof.
15
<PAGE>
Schedule I
FINANCIAL FEDERAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
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 includes a $97,813 note with interest receivable
semi-annually at 6.75%. The note has a maturity date of May 1, 2005, but is
callable at any time. Other amounts advanced bore interest at weighted
average rates of 6.8% and 5.9% at July 31, 1998 and 1997, respectively.
Subordinated notes receivable are summarized as follows:
Maturity Interest rate Amount
-------------- ------------- -------
August 1, 2008 8.35% $25,000
August 1, 2008 7.85 5,000
August 1, 2008 7.70 5,000
August 1, 2008 6.90 5,000
August 1, 2008 7.50 10,000
-------
Total $50,000
=======
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 $2,186 and $422 of accrued interest receivable from
subsidiaries at July 31, 1998 and 1997, respectively.
16
<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 *
4.8 Indenture dated January 14, 1998 for Credit's Rule 144A
Medium Term Note Program *
4.9 Indenture, dated as of April 15, 1998, between Registrant
and First National Bank of Chicago for Registrant's $100
million 4.5% Convertible Subordinated Notes due 2005 *
4.10 Registration Rights Agreement, dated as of April 24, 1998,
between Registrant and BancAmerica Robertson Stephens,
Donaldson, Lufkin & Jenrette Securities Corporation, Piper
Jaffray Inc., CIBC Oppenheimer Corporation, Friedman,
Billings, Ramsey & Co., Inc., Schroder & Co. Inc., and
Wheat, First Securities, Inc. for Registrant's $100
million 4.5% Convertible Subordinated Notes due 2005 *
4.11 Specimen 4.5% Convertible Subordinated Note Due 2005 *
4.12 Specimen Common Stock Certificate *
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. *
10.24 Deferred Compensation Agreement dated January 2, 1998
between the Registrant and Clarence Y. Palitz, Jr. *
12.1 Computation of Debt-To-Equity Ratio 18
13.1 1998 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 19
23.1 Consent of Independent Auditors 20
27 Financial Data Schedule (EDGAR version only)
____________
*Previously filed with the Securities and Exchange Commission as an exhibit.
17
<PAGE>
Exhibit 12.1
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF DEBT-TO-EQUITY RATIO
(Dollars in Thousands)
July 31,
------------------------
1998 1997
-------- --------
Total debt $602,822 $441,651
Stockholders' equity $123,229 $105,604
Debt-to-equity ratio 4.9 4.2
18
<PAGE>
Exhibit 13.1
================================================================================
Financial Federal Corporation [PHOTO OMITTED]
"A Nationwide Equipment Finance & Leasing Company"
[LOGO]
1998 Annual Report
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
Corporate Profile
- --------------------------------------------------------------------------------
FINANCIAL FEDERAL CORPORATION IS A
NATIONWIDE INDEPENDENT FINANCIAL
SERVICES COMPANY SPECIALIZING IN
FINANCING INDUSTRIAL, COMMERCIAL
AND PROFESSIONAL EQUIPMENT THROUGH
INSTALLMENT SALES AND LEASING
PROGRAMS FOR MANUFACTURERS,
DEALERS AND OPERATORS OF SUCH
EQUIPMENT. IN ADDITION TO ITS NEW YORK
OFFICE, THE COMPANY HAS FIVE FULL-
SERVICE OPERATIONS CENTERS IN TEXAS,
ILLINOIS, NEW JERSEY, NORTH CAROLINA
AND ARIZONA AND ADDITIONAL MARKETING
LOCATIONS THROUGHOUT THE COUNTRY.
(www.financialfederal.com)
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For years ended July 31,
(in thousands, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finance Receivables, net $759,097 $571,060 $429,698 $339,299 $268,642
Total Assets 766,108 574,764 433,087 342,936 271,987
Total Senior Debt 500,532 439,361 310,830 249,270 184,848
Stockholders' Equity 123,229 105,604 94,191 58,075 50,523
Revenues 72,722 55,305 43,523 34,951 25,866
Net Earnings 17,032 12,909 9,610 7,209 5,944
Earnings Per Common Share, Diluted 1.03 0.80 0.68 0.54 0.46
Earnings Per Common Share, Basic 1.15 0.87 0.74 0.59 0.54
</TABLE>
[the following three bar graphs were represented below the above table]
REVENUES
- -------------
(in millions)
NET EARNINGS
- -------------
(in millions)
FINANCE
RECEIVABLES
- -------------
(in millions)
1
<PAGE>
- --------------------------------------------------------------------------------
Dear Shareholder:
- --------------------------------------------------------------------------------
It is with great pride that we inform you that fiscal 1998 represented the
Company's ninth consecutive year of record earnings and receivables growth. Net
earnings were $17 million, a 32% increase over the previous year. Finance
receivables outstanding increased 33% and reached an all-time high of $772
million at July 31, 1998. Earnings per share increased to $1.03, a 29% increase
over last year.
Other significant achievements during the year included:
o Listing the Company's Common Stock (ticker symbol "FIF") on the New York
Stock Exchange.
o Issuing $100 million, 4 1/2%, 7-year subordinated notes convertible into
Common Stock at $30.15625 per share. The notes are callable in 2001 and
are listed on the New York Stock Exchange.
o Increasing the Company's investment grade Commercial Paper program from
$250 million to $350 million.
o Increasing fixed rate senior term debt to $170 million, thus match-funding
a larger portion of the Company's fixed rate receivables portfolio.
[The following table was depicted as a pie chart in the printed material.]
DEBT 1998
---------
Commercial Paper 28.2%
Senior Term Notes 51.7%
Subordinated Debt 16.9%
Bank Borrowings 0.5%
Other 2.7%
================================================================================
"We believe Financial Federal's listing on the New York Stock Exchange will
create better visibility for the Company and its securities, thus enhancing
shareholder value."
2
<PAGE>
The Company's major competitors include the country's largest finance and
leasing companies. In addition, we compete, nationwide and locally, with
national and regional banks, insurance companies and investment banks. Despite
an increasingly competitive environment, Financial Federal has substantially
increased its receivables, posted impressive compounded earnings gains,
continued to attract exceptionally talented and experienced personnel, increased
its loss reserves, maintained what may be the lowest net loss percentage in the
industry and continued to have one of the highest returns on average earning
assets without utilizing gain-on-sale accounting.
LOAN LOSS DATA
(in millions)
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Allowance for Losses $5.2 $6.4 $8.0 $10.3 $13.3
Net Credit Losses 0.3 0.2 0.1 0.2 0.1
[represented as a dual bar graph]
================================================================================
3
<PAGE>
- --------------------------------------------------------------------------------
Steady Growth
- --------------------------------------------------------------------------------
During the fiscal year, we have all read a great deal about loan "churning."
Borrowers are actively refinancing debt at lower cost coupled with more liberal
terms. Such refinancing has become particularly troublesome for some consumer
finance companies who have front-end loaded reported income without fully
providing for the impact of increased prepayments. Financial Federal exclusively
services businesses, not consumers, and thus it incorporates in most of its
contracts prepayment premium provisions. Therefore, if a receivable is paid off
before its stated maturity, the Company can generally protect a good portion of
its anticipated profit.
Some of the many reasons for the Company's continuous record of double-digit,
profitable growth are outlined below.
o SUSTAINED AND STEADY GROWTH. Experience has taught our management that
unbridled growth for growth's sake will inevitably lead to severe, if not
fatal, financial and control trauma. Financial Federal believes in
sustained, steady growth that focuses on cash earnings.
================================================================================
"The Company possesses the financial strength to substantially expand its
receivables portfolio."
4
<PAGE>
- --------------------------------------------------------------------------------
FIF
Listed
- --------------------------------------------------------------------------------
NYSE
THE NEW YORK STOCK EXCHANGE
o PRUDENT ACCOUNTING PRACTICES. Gain-on-sale or "soft" accounting methods
permit financial companies to front-end income, which effectively
mortgages their future profits. Thus, in order for such companies to
maintain continued earnings growth, they must generate an ever-increasing
amount of business regardless of prevailing economic or competitive
conditions. Financial Federal believes in controlled systematic arithmetic
expansion rather than out-of-control geometric growth, coupled with sound
and conservative accounting practices.
o UNEARNED INTEREST INCOME. Financial Federal's receivables portfolio,
virtually all of which was originated by the Company, is directly held on
balance sheet. Therefore, the
BORROWING BASE
(in millions)
1996 1997 1998
-------- -------- --------
$110.1 $119.2 $241.6
[represented as a bar graph]
================================================================================
5
<PAGE>
- --------------------------------------------------------------------------------
Our Business
- --------------------------------------------------------------------------------
Company has deferred income, in the range of $150 million which equals
twice the Company's fiscal 1998 revenues.
o LOW LEVERAGE. Many financial companies, upon close scrutiny, through
securitization and other off balance sheet arrangements, are leveraged in
excess of 20 times actual tangible net worth. If a financial company is
excessively leveraged, when the economy softens and/or interest rates
rise, it may become vulnerable to major earnings, funding, control and
portfolio problems. Financial Federal's total debt to net worth leverage,
as of July 31, 1998, was under 5 times which is well below industry
average. The Company possesses the financial strength to substantially
expand its receivables portfolio, both through internal generation and
strategic acquisitions, without diluting shareholder value while still
maintaining appropriate and acceptable debt to tangible net worth ratios.
o SUPERIOR CUSTOMER SERVICE. To remain competitive and achieve our earnings
targets, we strive to maintain a creditworthy receivables portfolio and
offer our customers flexible, innovative and prompt service.
================================================================================
"In an increasingly competitive environment, Financial Federal has substantially
increased its receivables and posted impressive compounded earnings gains."
6
<PAGE>
[PHOTOS OMITTED]
[The following table was depicted as a pie chart in the printed material.]
EQUIPMENT
---------
Construction Related 45%
Trucking 20%
Manufacturing 16%
Waste Disposal 13%
Other 6%
7
<PAGE>
- --------------------------------------------------------------------------------
Our Future
- --------------------------------------------------------------------------------
Many of the Company's customers and prospects are directly or indirectly engaged
in road and infrastructure building and repair. Congress recently passed the
Building Efficient Surface Transportation and Equity Act of 1998 ("BESTEA"), a
$200+ billion highway program which is expected to be a major source of new
business opportunities for the Company and its customers for years to come.
During fiscal 1999, I will be looking to Paul R. Sinsheimer, Chief Operating
Officer, and Michael C. Palitz, Chief Financial Officer, to assume more of my
operational and administrative responsibilities. Thus, for the first time, I
have asked them to join me in signing this letter to you and, by doing so, to
commit themselves to continuing our Company's vision of measured and sustained
earnings growth, coupled with the ever-present striving to be the best in our
field.
We thank all of you for your continued support as we address the many challenges
that lie ahead.
================================================================================
October 1, 1998
/s/ Clarence Y. Palitz, Jr. /s/ Paul R. Sinsheimer /s/ Michael C. Palitz
Clarence Y. Palitz, Jr. Paul R. Sinsheimer Michael C. Palitz
Chairman and President and Chief Executive Vice President
Chief Executive Officer Operating Officer and Chief Financial Officer
8
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of
Operations and Financial Condition
Results of Operations
General--The Company derives profits to the extent that 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 provide lending, financing and leasing
services to primarily middle-market businesses nationwide. 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 business activities.
The Company's leasing activities are similar 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 1998 to Fiscal 1997--Finance income increased 31% to $72.7
million in fiscal 1998 from $55.3 million in fiscal 1997. The increase was
primarily the result of the $161 million, or 32%, increase in the amount of
average finance receivables outstanding from $507 million in 1997 to $668
million in 1998, partially offset by lower weighted average finance rates
charged by the Company on new finance receivables. Finance receivables booked
increased 36% to $629 million in 1998 from $464 million in 1997, primarily due
to 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 marketing personnel of
approximately 20%.
Interest expense, incurred on borrowings used to fund finance receivables,
increased 39% to $32.6 million in 1998 from $23.4 million in 1997. The increase
was primarily due to the 37% increase in average debt outstanding during 1998
from 1997, and, to a lesser extent, slight increases in average market interest
rates, and in the Company's cost of funds due to the issuance of additional term
debt.
Finance income before provision for possible losses on finance receivables
increased by 26% to $40.2 million in 1998 from $31.9 million in 1997. Finance
income before provision for possible losses, expressed as a percentage of
average finance receivables outstanding, decreased to 6.0% in 1998 from 6.3% in
1997, primarily due to the Company's higher debt-to-equity ratio, 4.9 at July
31, 1998 compared to 4.2 at July 31, 1997 and, to a lesser extent, the slight
increase in the Company's cost of borrowed funds.
The provision for possible losses on finance receivables increased by 25%
to $3.2 million in 1998 from $2.5 million in 1997. 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 10% to $9.2 million in 1998 from
$8.4 million in 1997. The increase was primarily due to increased marketing
costs and other costs associated with the growth in finance receivables and
salary increases.
The provision for income taxes increased to $10.8 million in 1998 from
$8.1 million in 1997 primarily due to the increase in earnings before income
taxes.
Net earnings increased by 32% to $17.0 million in 1998 from $12.9 million
in 1997. Diluted earnings per share increased by 29% to $1.03 per share in 1998
from $0.80 per share in 1997 and basic earnings per share increased by 32% to
$1.15 per share in 1998 from $0.87 per share in 1997. The increase in diluted
earnings per share was lower than the increase in net earnings primarily due to
the 87% increase in the average price of the Company's common stock in 1998 over
1997.
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
29% to $464 million from $359 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.
================================================================================
9
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of
Operations and Financial Condition
(Continued)
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.
Net earnings increased by 34% to $12.9 million in 1997 from $9.6 million
in 1996. Diluted earnings per share increased by 18% to $0.80 per share in 1997
from $0.68 per share in 1996 and basic earnings per share increased by 18% to
$0.87 per share in 1997 from $0.74 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.
Receivable Portfolio and Asset Quality
Finance receivables outstanding increased by $191.0 million, or 33%, to
$772.4 million at July 31, 1998 from $581.4 at July 31, 1997. The increase was
due to the amount of finance receivables originated exceeding amounts collected.
At July 31, 1998, Financial Federal Credit Inc. ("Credit," a wholly-owned
subsidiary) had $762.4 million, or 98.7%, of total finance receivables and First
Federal Commercial Inc. (a wholly-owned subsidiary) had the balance of finance
receivables.
The allowance for possible losses increased to $13.3 million at July 31,
1998 from $10.3 million at July 31, 1997, and was 1.73% of finance receivables
at July 31, 1998 as compared to 1.77% at July 31, 1997. 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 increases in the allowance level may be necessary based on changes in
these factors.
The equipment collateral securing the Company's finance receivables
generally possess certain characteristics that have served to mitigate potential
credit losses. Such characteristics include an economic life exceeding the term
of the receivable, low levels of technological obsolescence, applications in
various industries, ease of 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 (write-downs of receivables less subsequent recoveries)
incurred on the Company's finance receivables decreased to $123,000 in 1998 from
$230,000 in 1997. 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 0.02% in 1998, 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. An economic downturn could cause an increase in the
Company's net credit losses. 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.
Non-performing finance receivables were $6.5 million, or 0.8% of total
finance receivables, at July 31, 1998, as compared to $5.6 million, or 1.0% of
total finance receivables, at July 31, 1997. The level of non-performing finance
receivables is also historically low, again primarily due to favorable economic
and industry conditions. Adverse changes in these conditions could result in an
increase in the level of non-performing finance receivables. Such an increase
could have a negative impact on the Company's earnings through decreased
revenue.
================================================================================
10
<PAGE>
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--18%, construction--17%, cranes --13% and waste disposal--12%. The
major geographic concentrations are: Southeast--25%, Northeast--24% and
Southwest--24%.
Liquidity and Capital Resources
The Company is dependent upon the continued availability of funds 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, but cannot assure,
that the Company has available sufficient liquidity to support its future
operations.
The Company has obtained the majority of its senior borrowings through
Credit and has obtained the balance of its borrowings through Financial Federal
Corporation ("Financial," the parent company).
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 IBCA,
Inc. and Financial's and Credit's commercial paper is rated "D-2" by Duff &
Phelps Credit Rating Co. Credit's senior unsecured debt is rated "BBB" by Fitch
IBCA, Inc. and Duff & Phelps Credit Rating Co. These credit ratings provide the
Company with greater access to capital markets.
The Company's total debt outstanding increased by $161.2 million to $602.8
million at July 31, 1998 from $441.7 million at July 31, 1997. The Company also
increased its stockholders' equity by $17.6 million to $123.2 million at July
31, 1998 from $105.6 million at July 31, 1997 and its net deferred income tax
liability by $4.8 million to $16.1 million at July 31, 1998 from $11.3 million
at July 31, 1997. 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 1998, the Company improved its liquidity as follows:
o In January 1998, Credit established a $100.0 million Medium Term Note
program and issued $55.0 million of fixed rate notes thereunder with
maturities at five, seven, and ten years.
o In February 1998, Credit increased the size of its dealer commercial paper
program from $250.0 million to $350.0 million. At July 31, 1998, $311.2
million of commercial paper was outstanding.
o In April 1998, Financial sold $100.0 million of its convertible
subordinated notes due in 2005.
o During the year, the Company increased its total committed unsecured
revolving credit facilities by $35.0 million to $430.0 million at July 31,
1998.
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
$350.0 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, 1998 generally ranged from 5.7% to 5.9%. The Company has
not obtained commitments from any purchaser of its commercial paper for
additional or future purchases. The Company's current policy is to maintain
committed revolving credit facilities from banks so that the aggregate amount
available thereunder exceeds commercial paper outstanding.
At July 31, 1998, Credit had $337.5 million of committed unsecured
revolving credit facilities with original terms ranging from two to five years
with nineteen banks under which $3.4 million of aggregate borrowings were
outstanding. At July 31, 1998, Credit also had $92.5 million of committed
unsecured revolving credit facilities with an original term of one year or less
with eight banks under which no borrowings were outstanding. At July 31, 1998,
$292.5 million 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 generally incurs a fee on the
unused portion of these facilities. The banks are not contractually obligated to
renew these facilities.
================================================================================
11
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of
Operations and Financial Condition
(Continued)
Information about the combined amounts and interest rates of the Company's
commercial paper and bank borrowings follows:
(dollars in millions) 1998 1997 1996
=============================================================================
Maximum amount outstanding
during the year $390.8 $374.7 $270.2
Average amount outstanding
during the year 333.3 316.6 216.2
Weighted average interest rate:
During the year 5.9% 5.9% 6.2%
End of the year 5.8 6.0 5.9
=============================================================================
At July 31, 1998, the Company reported $292.5 million of commercial paper
and bank borrowings as long-term senior debt on its Consolidated Balance Sheet
based on the amount of long-term revolving credit facilities expiring after one
year.
In January 1998, the Company established a $100.0 million 144A Medium-Term
Note Program, rated "BBB" by Fitch IBCA, Inc. and Duff & Phelps Credit Rating
Co., and issued $55.0 million of senior 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
==============================================================================
At July 31, 1998, the Company also had $115.0 million of senior term notes
due as follows: $25.0 million on July 14, 2000, $25.0 million on December 14,
2000, $55.0 million on September 1, 2001 and $10.0 million on August 1, 2002.
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 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.
At July 31, 1998, Credit had $15.9 million of variable rate senior term
notes outstanding with certain executive officers of the Company and their
affiliates. These notes mature in September 1999, subject to extension.
The revolving credit facilities, senior term notes and medium term notes
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, $48.7 million of the
Company's equity was free of dividend restrictions at July 31, 1998.
Market Interest Rate Risk 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 follow:
Year Ended July 31, 1998 1997 1996
============================================================================
Average yield of finance
receivables 10.9% 10.9% 11.2%
Weighted average cost
of borrowed funds 6.3% 6.2% 6.6%
- ----------------------------------------------------------------------------
Net interest spread 4.6% 4.7% 4.6%
============================================================================
The weighted average interest rate charged by the Company on its finance
receivables was 10.2% at July 31, 1998. At July 31, 1997 and 1996, the weighted
average rates were 10.7% and 11.1%, respectively. The decline is primarily due
to lower retail market interest rates, competitive pressures and prepayments of
older transactions. The decline in rates has been offset by prepayment premiums
and increases in other non-interest revenue. If competitive pressures increase
and/or market interest rates decline further, the Company may have to decrease
the rates it charges on new transactions. Such a decrease could affect
negatively the Company's earnings.
Finance receivables generally have original maturities ranging from two to
five years and provide for monthly installments. The Company experiences some
prepayments on its finance receivables which shorten the scheduled maturities.
================================================================================
12
<PAGE>
The Company's finance receivables comprise fixed rate and variable rate
transactions. At July 31, 1998, $651.2 million, or 84%, of finance receivables
provide for interest at fixed rates and $121.2 million, or 16%, of finance
receivables provide for interest at variable rates indexed to the prime rate.
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. At July 31, 1998, $216.8 million of fixed rate finance
receivables are scheduled to mature within one year.
The total of fixed rate term debt of $272.3 million, stockholders' equity
of $123.2 million and net deferred income tax liability of $16.1 million was
$411.6 million at July 31, 1998. The Company's other debt at July 31, 1998,
primarily commercial paper and bank borrowings, reprices frequently. At July 31,
1998, total commercial paper and bank borrowings outstanding of $314.6 million
mature or reprice as follows: $258.4 million, or 82%, within one month, $28.7
million, or 9%, within the following two months and the remainder, $27.5
million, or 9%, within the following six months.
Total short-term and variable rate debt decreased by $3.8 million from
July 31, 1997 to July 31, 1998. In addition, the percentage of total debt
outstanding that was short-term or variable rate has decreased from 80% at July
31, 1996 to 55% at July 31, 1998, as the Company has focused on issuing fixed
rate term debt to capitalize on low market interest rates.
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.
The Company is exposed to market risk from the effects that fluctuations
in interest rates have on its finance receivables and debt and on its net
interest spread. The Company continually monitors and manages its interest rate
exposures through risk management procedures that include using derivative
financial instruments when such is determined to be necessary. The Company has
not, to date, made any significant use of derivatives. The Company has not been
affected significantly by movements in interest rates over the last three fiscal
years as evidenced by its stable net interest spread.
The Company calculated that the effect of an assumed 100 basis point
(1.0%) increase in the weighted average year end July 31, 1998 interest rates on
its finance receivables and debt would be approximately a $700,000 reduction of
annual net after-tax earnings. The Company assumed that the rate increase would
occur at the beginning of the year. The 100 basis point increase is
approximately a 17% increase over the Company's weighted average year end
interest rate on short-term borrowings.
The calculated reduction in net earnings assumes the occurrence of an
adverse change in interest rates. Actual future changes in interest rates may
differ materially and the effect on net earnings may also differ materially due
to changes in the Company's finance receivables and debt repricing structures.
New Accounting Standards
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 total of net earnings and the after-tax
interest cost of dilutive convertible debt, divided by the total of the weighted
average number of common shares and the effect of dilutive stock options,
warrants and convertible securities, outstanding during the period.
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.
All of the Company's proprietary software was programmed in such a manner
that it was originally Year 2000 compliant. The Company is in the process of
replacing its portfolio administration software system. The current and new
systems were programmed in such a manner that they were both originally Year
2000 compliant. The Year 2000 issue did not affect the decision, nor timing, of
the replacement.
================================================================================
13
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of
Operations and Financial Condition
(Continued)
In addition, the Company is nearing the end of an initiative to add,
upgrade and replace its computer networks and its personal computers. The
initiative was undertaken in response to the vast improvements in information
technology and was not affected by the Year 2000 issue. The systems and hardware
acquired under this initiative are required to be Year 2000 compliant.
The Company has business relationships with thousands of equipment
manufacturers, dealers and operators (obligors). 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 four commercial paper dealers and
approximately twenty 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.
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 and other sections of this Annual Report contain 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,
fluctuations in market interest rates, prepayments, competitive conditions,
changes in existing laws or regulations and matters relating to the Year 2000
issue.
================================================================================
14
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
July 31, (dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Finance receivables $772,427 $581,363
Allowance for possible losses (13,330) (10,303)
- -----------------------------------------------------------------------------------------------------
Finance receivables--net 759,097 571,060
Cash 2,756 2,532
Other assets 4,255 1,172
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $766,108 $574,764
=====================================================================================================
LIABILITIES
Senior debt:
Long-term ($36,209 at July 31, 1998 and $16,986 at July 31, 1997
due to related parties) $478,388 $434,680
Short-term 22,144 4,681
Subordinated debt ($4,681 at July 31, 1998 and $2,181 at July 31, 1997
due to related parties) 102,290 2,290
Accrued interest, taxes and other liabilities 23,940 16,224
Deferred income taxes 16,117 11,285
- -----------------------------------------------------------------------------------------------------
Total liabilities 642,879 469,160
- -----------------------------------------------------------------------------------------------------
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: 14,842,544 in 1998 and 14,763,713 in 1997 7,421 7,382
Additional paid-in capital 57,869 57,315
Warrants--issued and outstanding 1,607,000 in 1998 and 1997 29 29
Retained earnings 57,910 40,878
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 123,229 105,604
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $766,108 $574,764
=====================================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
================================================================================
15
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock--$.50 Par Value
-----------------------------
Number Additional
of Paid-in Retained Treasury
(dollars and share amounts in thousands) Shares Par Value Capital Warrants Earnings Stock
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 5,580 $2,790 $33,201 $29 $23,495 $(1,440)
Retirement of treasury stock (96) (48) (552) (840) 1,440
Exercise of stock options 31 16 150
Three-for-two stock split 2,745 1,372 (1,372)
Sale of common stock 1,700 850 25,490
Net earnings 9,610
- ------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 9,960 4,980 58,289 29 30,893 --
Acquisitions of treasury stock (1,630)
Retirement of treasury stock (124) (62) (1,105) (463) 1,630
Exercise of stock options 7 3 58
Three-for-two stock split 4,921 2,461 (2,461)
Tax benefit relating to stock options 73
Net earnings 12,909
- ------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 14,764 7,382 57,315 29 40,878 --
Exercise of stock options 79 39 480
Tax benefit relating to stock options 74
Net earnings 17,032
- ------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1998 14,843 $7,421 $57,869 $29 $57,910 $ --
======================================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
================================================================================
16
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Year Ended July 31, (dollars in thousands, except per share amounts) 1998 1997 1996
=====================================================================================================
<S> <C> <C> <C>
Finance income:
Loan obligations $50,180 $38,374 $29,533
Lease obligations 22,542 16,931 13,990
- -----------------------------------------------------------------------------------------------------
Total finance income 72,722 55,305 43,523
Interest expense 32,552 23,437 19,271
- -----------------------------------------------------------------------------------------------------
Finance income before provision for possible losses on
finance receivables 40,170 31,868 24,252
Provision for possible losses on finance receivables 3,150 2,525 1,710
- -----------------------------------------------------------------------------------------------------
Net finance income 37,020 29,343 22,542
Salaries and other expenses 9,195 8,356 7,113
- -----------------------------------------------------------------------------------------------------
Earnings before income taxes 27,825 20,987 15,429
Provision for income taxes 10,793 8,078 5,819
- -----------------------------------------------------------------------------------------------------
NET EARNINGS $17,032 $12,909 $ 9,610
=====================================================================================================
EARNINGS PER COMMON SHARE:
DILUTED $ 1.03 $ 0.80 $ 0.68
=====================================================================================================
BASIC $ 1.15 $ 0.87 $ 0.74
=====================================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
================================================================================
17
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended July 31, (dollars in thousands) 1998 1997 1996
=====================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 17,032 $ 12,909 $ 9,610
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for possible losses on finance receivables 3,150 2,525 1,710
Depreciation and amortization 5,203 4,464 3,649
Deferred income taxes 4,832 2,336 2,662
Increase in other assets (243) (253) (368)
Increase in accrued interest, taxes and other liabilities 7,716 4,064 4,813
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,690 26,045 22,076
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Finance receivables:
Originated (628,631) (464,283) (358,512)
Collected 432,512 316,164 262,960
Other (424) (188) (254)
- -----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (196,543) (148,307) (95,806)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) 59,626 32,908 167,750
Maturities greater than 90 days:
Proceeds 120,687 149,470 24,866
Repayments (113,690) (127,747) (14,341)
Bank borrowings--net proceeds (repayments) (76,660) 14,220 (91,715)
Proceeds from convertible subordinated notes 100,000
Proceeds from senior term notes 65,000 50,000 55,000
Repayments of senior term notes (80,000)
Proceeds from variable rate senior term notes 6,208 9,680
Repayments of subordinated debt (4,667) (15,000)
Deferred debt issuance costs (2,687)
Proceeds from sale of common stock 26,340
Acquisitions of treasury stock (1,630)
Proceeds from exercise of stock options 519 61 166
Tax benefit relating to stock options 74 73
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 159,077 122,368 73,066
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 224 106 (664)
Cash--beginning of period 2,532 2,426 3,090
- -----------------------------------------------------------------------------------------------------
CASH--END OF PERIOD $ 2,756 $ 2,532 $ 2,426
=====================================================================================================
Supplemental disclosures of cash flow information:
Interest paid $ 30,329 $ 22,464 $ 18,163
=====================================================================================================
Income taxes paid $ 7,345 $ 5,710 $ 3,003
=====================================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
================================================================================
18
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
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 nationwide to primarily middle-market commercial enterprises
representing diverse industries such as general construction, road and
infrastructure construction and repair, manufacturing, trucking and waste
disposal. The Company lends against, finances and leases a wide range of
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.
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 bankruptcy
proceeding or (iii) the underlying collateral is being liquidated. Impaired
receivables are written down to the underlying collateral's currently estimated
net liquidation value (if less than the recorded amount). Income recognition may
be resumed when management believes full collection is probable. Any collections
on impaired receivables are 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 write-downs 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 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 total of net
earnings and the after-tax interest cost of dilutive convertible debt, divided
by the total of the weighted average number of common shares and the effect of
dilutive stock options, warrants and convertible securities, outstanding during
the period.
(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.
================================================================================
19
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Continued)
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, 1998 1997
==========================================================================
Loans:
Fixed rate $399,912 $291,221
Variable rate 111,132 103,590
- --------------------------------------------------------------------------
Total 511,044 394,811
Direct financing leases 261,383 186,552
- --------------------------------------------------------------------------
Finance receivables $772,427 $581,363
==========================================================================
The approximate weighted average interest rates charged on fixed rate
loans were 10.2% and 10.7% at July 31, 1998 and 1997, respectively, and 2.0%
and 2.6% over the prime rate on variable rate loans at July 31, 1998 and 1997,
respectively.
(2) The investment in direct financing leases comprises the following:
July 31, 1998 1997
===========================================================================
Minimum lease payments receivable $270,727 $193,201
Residual values 42,727 30,047
Unearned finance income (52,071) (36,696)
- ---------------------------------------------------------------------------
Investment in direct financing leases $261,383 $186,552
===========================================================================
(3) Finance receivables generally provide for monthly installments of equal or
varying amounts for terms of two to five years. Annual contractual maturities of
finance receivables at July 31, 1998 are as follows:
Direct
Fixed Variable Financing
Rate Loans Rate Loans Leases
=============================================================================
1999 $139,995 $ 50,416 $ 91,452
2000 114,549 26,530 76,721
2001 81,305 18,560 56,749
2002 40,733 10,058 30,821
2003 17,490 3,982 11,663
Thereafter 5,840 1,586 3,321
- -----------------------------------------------------------------------------
Total $399,912 $111,132 $270,727
=============================================================================
(4) The activity of the allowance for possible losses is summarized as follows:
Year Ended July 31, 1998 1997 1996
============================================================================
Balance--August 1 $10,303 $ 8,008 $ 6,395
Provision 3,150 2,525 1,710
Write-downs (1,210) (1,168) (1,004)
Recoveries 1,087 938 907
- ----------------------------------------------------------------------------
Balance--July 31 $13,330 $10,303 $ 8,008
============================================================================
(5) Income recognition has been suspended on finance receivables with a recorded
investment of $6,489 (includes $3,709 of impaired loans) at July 31, 1998 and
$5,626 (includes $3,979 of impaired loans) at July 31, 1997. The average
recorded investment in impaired loans was $3,336 in 1998 and $3,915 in 1997.
Impaired loans exclude direct financing leases.
(6) The Company grants to its customers commitments to extend credit. These
commitments contain off-balance sheet risk. 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, 1998
and 1997, the unused portion of these commitments was $10,147 and $5,805,
respectively.
NOTE C: Debt
Debt is summarized as follows:
July 31, 1998 1997
==============================================================================
Senior debt:
Fixed rate term notes:
7.40% due 2000 $ 25,000 $ 25,000
7.45% due 2001 25,000 25,000
6.76% due 2002 55,000 55,000
6.29% due 2003 10,000
6.45% due 2003* 30,000
6.68% due 2005* 20,000
6.80% due 2008* 5,000
- ------------------------------------------------------------------------------
Total fixed rate term notes 170,000 105,000
Commercial paper 311,214 244,591
Bank borrowings 3,430 80,090
Variable rate term notes 15,888 9,680
- ------------------------------------------------------------------------------
Total senior debt 500,532 439,361
Subordinated debt:
4.5% convertible notes due 2005 100,000
8.0% debentures due 2003 2,290 2,290
- ------------------------------------------------------------------------------
Total subordinated debt 102,290 2,290
- ------------------------------------------------------------------------------
Total debt $602,822 $441,651
==============================================================================
*issued under Medium Term Note Program
================================================================================
20
<PAGE>
(1) The senior fixed rate term notes are Credit's obligations. Interest on the
notes 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, minimum net worth, and sales of assets.
The senior fixed rate term notes include $55,000 of notes issued under
Credit's $100,000 144A Medium-Term Note Program established in January 1998.
(2) The Company issues commercial paper with a maximum term of 270 days. The
weighted average interest rates on commercial paper outstanding at July 31, 1998
and 1997 were 5.8%. Commercial paper transactions with officers and other
related parties are summarized as follows:
1998 1997 1996
===============================================================================
Year ended July 31:
Issued $47,226 $31,409 $34,778
Matured 34,211 33,479 32,218
Interest expense 654 721 497
At July 31:
Outstanding 20,321 7,306 9,376
Accrued interest 234 91 99
===============================================================================
(3) At July 31, 1998, Credit had $430,000 of committed unsecured revolving
credit facilities with various banks expiring as follows: $137,500 within one
year and $292,500 on various dates from November 1999 through July 2003. These
facilities contain certain restrictive covenants including limitations on
indebtedness, encumbrances, dividends to Financial, capital expenditures and
minimum net worth. Credit generally incurs a fee on the unused portion of these
facilities.
Outstanding borrowings under these credit facilities, $3,430 at July 31,
1998, generally mature between 1 and 90 days and bear interest based on domestic
money market rates or LIBOR, at Credit's option. The weighted average interest
rates on bank borrowings were 6.2% and 6.3% at July 31, 1998 and 1997,
respectively.
(4) The variable rate senior term notes are payable by Credit to certain
executive officers of the Company and their affiliates. The notes bear interest
at variable rates indexed to LIBOR or domestic money market rates, and mature in
September 1999, subject to extension.
(5) In April 1998, Financial sold $100,000 of its convertible subordinated notes
due May 1, 2005. The notes are convertible into shares of the Company's common
stock, at any time prior to maturity, at a conversion price of $30.15625 per
share. Financial 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.
(6) 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 of these debentures were repaid ($997 to related parties) and
$2,290 of amended debentures were issued ($2,181 to related parties) on
September 1, 1996. The amended debentures mature March 1, 2003, bear interest,
payable semi-annually, at an annual fixed rate of 8.0%, contain a prepayment
penalty through August 31, 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.
(7) Under the most restrictive of the above dividend payment covenants, $48,699
of the Company's equity was free from dividend restrictions at July 31, 1998.
(8) At July 31, 1998, 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: $110,888 in 2000, $192,500 in 2001,
$95,000 in 2002, $57,290 in 2003 and $125,000 thereafter.
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.
================================================================================
21
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Continued)
(2) In August 1996, the Company established a program to repurchase up to $4,130
(as increased in May 1997) of its common stock. In 1997 (prior to the
three-for-two stock split), 124 shares were repurchased for $1,630. No shares
were repurchased in 1998. Shares repurchased are retired. In August 1998, the
Company increased the amount available under the program by $10,000, and amended
the program to provide for the repurchase of the Company's convertible
subordinated notes.
(3) In December 1995, the Company's stockholders approved (i) an increase in the
number of authorized shares of common stock from 10,000 to 25,000 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 to 2,250.
(4) In May 1996, the Company sold 1,700 shares of its common stock in a public
offering. Net proceeds of $26,340 were used to repay bank borrowings.
Warrants:
In 1989, the Company issued warrants to purchase 1,125 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 482 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
Directors. The Company may grant non-qualified and incentive stock options to
officers, directors and employees for the purchase of 2,250 shares of common
stock under the plan. 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, 1998 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 113 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, 1998, 957
shares of common stock were available for future grants of options.
Stock option activity and related information follows:
Weighted
Number of Average
Options Exercise Price
================================================================================
Outstanding at August 1, 1995 355 $ 5.92
Granted 258 9.05
Exercised (50) 3.35
Canceled (48) 6.64
- -----------------------------------------------------------
Outstanding at July 31, 1996 515 7.68
Granted 132 11.17
Exercised (10) 6.39
Canceled (45) 8.10
- -----------------------------------------------------------
Outstanding at July 31, 1997 592 8.45
Granted 220 22.14
Exercised (79) 6.58
Canceled (7) 8.97
- -----------------------------------------------------------
Outstanding at July 31, 1998 726 12.80
===========================================================
Exercisable at July 31:
1998 162 $ 7.27
1997 149 6.68
1996 97 6.78
================================================================================
The Company adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation," and 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, compensation expense is not recorded when the exercise price of
stock options is at least equal to the market price of the stock on the grant
date.
================================================================================
22
<PAGE>
The exercise prices of options outstanding at July 31, 1998 ranged from
$6.22 to $23.06. Additional information by price range follows:
Price Range Over $22 $8-$12 Below $8
===============================================================================
Outstanding:
Number 220 248 258
Weighted average
exercise price $22.14 $10.58 $6.95
Weighted average
remaining contractual
life (in years) 5.6 4.2 3.2
Exercisable:
Number -- 28 134
Weighted average
exercise price $ 9.94 $6.72
===============================================================================
Pro forma amounts of net earnings and earnings per share, determined as if
compensation expense attributable to stock options had been recognized using the
fair value method under SFAS 123, follow:
Year Ended July 31, 1998 1997 1996
=============================================================================
Net earnings $16,593 $12,720 $9,473
Earnings per share:
Diluted $ 1.01 $ 0.79 $ 0.67
Basic $ 1.12 $ 0.86 $ 0.73
=============================================================================
The pro forma effect on net earnings in 1998, 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.
The Company estimated the weighted average grant date fair values per
option for stock options granted using the Black-Scholes option-pricing model
based on the following assumptions:
Year Ended July 31, 1998 1997 1996
===============================================================================
Weighted average grant date
fair value $7.65 $3.78 $3.55
Assumptions:
Weighted average risk-free
interest rate 5.7% 6.7% 6.0%
Expected stock price
volatility rate 28% 27% 27%
Weighted average expected
life of options granted
(in years) 4.7 4.3 6.2
===============================================================================
NOTE F: Earnings Per Common Share
Earnings per common share was calculated as follows:
Year Ended July 31, 1998 1997 1996
=============================================================================
Net earnings (used for basic
earnings per share) $17,032 $12,909 $9,610
Effect of convertible securities
(see Note C(5)) 802 -- --
- -----------------------------------------------------------------------------
Adjusted net earnings (used for
diluted earnings per share) $17,834 $12,909 $9,610
=============================================================================
Weighted average common
shares outstanding (used for
basic earnings per share) 14,804 14,787 12,926
Effect of dilutive securities:
Warrants 1,392 1,208 1,148
Stock options 332 159 151
Convertible subordinated
notes 854 -- --
- -----------------------------------------------------------------------------
Adjusted weighted average
common shares and
assumed conversions
(used for diluted earnings
per share) 17,382 16,154 14,225
=============================================================================
Net earnings per common
share--Diluted $ 1.03 $ 0.80 $ 0.68
=============================================================================
Net earnings per common
share--Basic $ 1.15 $ 0.87 $ 0.74
=============================================================================
NOTE G: Income Taxes
(1) The provision for income taxes comprises the following:
Year Ended July 31, 1998 1997 1996
=============================================================================
Currently payable:
Federal $ 5,087 $ 4,887 $2,773
State and local 800 782 384
- -----------------------------------------------------------------------------
Total 5,887 5,669 3,157
Deferred 4,832 2,336 2,662
Tax benefit relating to
stock options 74 73
- -----------------------------------------------------------------------------
Provision for income taxes $10,793 $ 8,078 $5,819
=============================================================================
================================================================================
23
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Continued)
(2) Income taxes computed at statutory federal income tax rates are reconciled
to the provision for income taxes as follows:
Year Ended July 31, 1998 1997 1996
==============================================================================
Federal income tax at
statutory rates $ 9,739 $ 7,345 $ 5,313
State and local taxes (net of
federal income tax benefit) 1,054 733 506
- ------------------------------------------------------------------------------
Provision for income taxes $10,793 $ 8,078 $ 5,819
==============================================================================
(3) Deferred income taxes comprises the tax effect of the following temporary
differences:
July 31, 1998 1997
================================================================================
Deferred tax liabilities:
Leasing transactions $19,960 $14,193
Deferred costs 2,695 2,218
- --------------------------------------------------------------------------------
Total 22,655 16,411
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for possible losses (5,180) (3,993)
Other liabilities (1,358) (1,133)
- --------------------------------------------------------------------------------
Total (6,538) (5,126)
- --------------------------------------------------------------------------------
Deferred income taxes $16,117 $11,285
================================================================================
NOTE H: Lease Commitments
The Company occupies office space under leases expiring through 2004. At
July 31, 1998, minimum future annual rentals due under these leases are $650 in
1999, $657 in 2000, $576 in 2001, $364 in 2002, $225 in 2003 and $17 in 2004.
Office rent expense was $782 in 1998, $677 in 1997 and $550 in 1996.
NOTE I: 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 obtaining a first lien on equipment collateral on each transaction. 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 accessible and
movable and has a broad resale market. The Company may also obtain additional
equipment or other collateral, 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, follow:
July 31, 1998 1997
===========================================================================
Industry:
Trucking 18% 19%
Construction 17 15
Cranes 13 12
Waste disposal 12 14
Geographic region:
Southeast 25% 24%
Northeast 24 25
Southwest 24 25
===========================================================================
NOTE J: Fair Values of Financial Instruments
The Company's financial instruments comprise cash, finance receivables
(excluding leases), commitments to extend credit and debt. The following methods
were used to estimate the fair value of these financial instruments.
The carrying values of cash, commercial paper and bank borrowings
approximated their fair values based on their short-term maturities.
The carrying values of the fixed rate senior term notes, the variable rate
senior term notes and the subordinated debentures were estimated to approximate
their fair values at July 31, 1998 and 1997 based on their future cash flows
discounted at current rates for debt with similar terms and maturities.
================================================================================
24
<PAGE>
The carrying value of the convertible subordinated notes were estimated to
approximate their fair value at July 31, 1998 based on their quoted market
price.
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. Any difference between the
carrying value and the fair value of each transaction would be affected by a
potential buyer's assessment of the transaction's credit quality, collateral
value, third party guarantee(s), payment history, yield, maturity, documentation
and other legal matters, and many other subjective considerations of the buyer.
In addition, the value received in a fair market sale of a transaction would be
based on the terms 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.
NOTE K: Selected Quarterly Data (Unaudited)
Earnings
per Share
Net ---------------
Revenues Earnings Diluted Basic
================================================================================
Fiscal 1998, three
months ended:
October 31, 1997 $16,369 $3,874 $0.24 $0.26
January 31, 1998 17,622 4,050 0.25 0.27
April 30, 1998 18,440 4,399 0.27 0.30
July 31, 1998 20,291 4,709 0.28 0.32
Fiscal 1997, three
months ended:
October 31, 1996 $12,530 $2,972 $0.18 $0.20
January 31, 1997 13,356 3,134 0.19 0.21
April 30, 1997 13,999 3,287 0.20 0.22
July 31, 1997 15,420 3,516 0.22 0.24
================================================================================
================================================================================
25
<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, 1998 and 1997, and the
related consolidated statements of stockholders' equity, operations and cash
flows for each of the three years in the period ended July 31, 1998. 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, 1998 and 1997, and
their consolidated operating results and their cash flows for each of the three
years in the period ended July 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Eisner & Lubin LLP
- ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
September 3, 1998
================================================================================
26
<PAGE>
Financial Federal Corporation and Subsidiaries
Stock Price History and Dividend Policy
The Company's common stock is traded on the New York Stock Exchange under
the symbol "FIF." Trading commenced on the New York Stock Exchange on June 22,
1998; prior to that date the Company's common stock was traded on the American
Stock Exchange. The quarterly high and low closing sales prices per share of the
common stock as reported by the New York Stock Exchange and the American Stock
Exchange, adjusted for the July 1997 three-for-two stock split, follow:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ended October 31 $19.81 $14.00 $10.58 $ 8.50
Second Quarter ended January 31 $23.63 $18.00 $11.83 $ 9.25
Third Quarter ended April 30 $26.00 $20.38 $13.00 $10.42
Fourth Quarter ended July 31 $28.50 $23.00 $15.58 $11.42
</TABLE>
The Company presently has no intention of paying cash dividends in the
foreseeable future.
================================================================================
27
<PAGE>
Financial Federal Corporation and Subsidiaries
Corporate Directory
OFFICERS
Clarence Y. Palitz, Jr.
Chairman of the Board and
Chief Executive Officer
Paul R. Sinsheimer
President and
Chief Operating Officer
Michael C. Palitz
Executive Vice President, Treasurer and
Chief Financial Officer
William M. Gallagher
Senior Vice President
Troy H. Geisser
Senior Vice President and Secretary
John V. Golio
Senior Vice President
Daniel J. McDonough
Senior Vice President
Richard W. Radom
Senior Vice President
Julian C. Green, Jr.
Vice President
Jeanne McDonald
Vice President
Fred J. Palumbo
Vice President
Ted Wooldridge
Administrative Vice President
David H. Hamm
Controller
OFFICERS OF SUBSIDIARIES ONLY
Vice Presidents:
William J. Flaherty
W. J. Mattocks
Donald G. Pokorny
Rodney Sepulvado
Luther C. Whitlock
Administrative Vice Presidents:
Kevin McGinn
Gary L. Pace
Regional Vice Presidents:
Jeff Anderson
Gary Barnes
Kenneth Blackman
Johnie E. Christ
Thomas A. Fahl
Gary S. Fisher
Frank J. Gullo
Bruce James
James M. Keesee
Gregory D. Lile
James H. Mayes, Jr.
Michael A. Nelson
James R. Scappi
William K. Toon
Thomas L. Tornee
Assistant Vice Presidents:
Joan E. Bischer
Linda Brown
Donna L. Frate
Robert Grawl, Jr.
Donald L. Hamann
Mark A. Scott
Kimberly P. Walter
Assistant Treasurer:
Barbara Constantino
Assistant Secretaries:
Anthony Cornacchia
Chris L. Jones
Thomas G. Kassakatis
Jeffrey Lanigan
Andrew Remias
Gregory Treichler
================================================================================
28
<PAGE>
Corporate Directory
(Continued)
DIRECTORS
Lawrence B. Fisher
Partner
Orrick, Herrington and Sutcliffe LLP
Attorneys
William C. MacMillen, Jr.
President
William C. MacMillen and Co., Inc.
Investment Bankers
Bernard G. Palitz
President
Gregory Capital Corporation
Investments
Clarence Y. Palitz, Jr.
Chairman of the Board and
Chief Executive Officer
Financial Federal Corporation
Michael C. Palitz
Executive Vice President, Treasurer and
Chief Financial Officer
Financial Federal Corporation
Paul R. Sinsheimer
President and Chief Operating Officer
Financial Federal Corporation
AUDITORS
Eisner and Lubin LLP
Certified Public Accountants
444 Madison Avenue
New York, NY 10022
GENERAL COUNSEL
Orrick, Herrington and Sutcliffe LLP
666 Fifth Avenue
New York, NY 10103
TRANSFER AGENTS AND REGISTRARS
Common stock:
The Bank of New York
New York, NY
Convertible subordinated notes:
The First National Bank of Chicago
New York, NY
LOCATIONS
Headquarters:
733 Third Avenue
New York, NY 10017
(212) 599-8000
Full Service Operations Centers:
1300 Post Oak Boulevard
Houston, TX 77056
(713) 439-1177
601 Oakmont Lane
Westmont, IL 60559
(630) 986-3900
300 Frank W. Burr Boulevard
Teaneck, NJ 07666
(201) 801-0300
201 McCullough Drive
Charlotte, NC 28262
(704) 549-1009
1855 W. Baseline Road
Mesa, AZ 85202
(602) 491-1300
Website:
www.financialfederal.com
SECURITIES LISTINGS:
Common stock:
New York Stock Exchange
Symbol FIF
Convertible subordinated notes:
New York Stock Exchange
CORPORATE INFORMATION
The annual meeting of shareholders will be held at 270 Park Avenue, New York, NY
on December 8, 1998 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
733 Third Avenue, New York, NY 10017
(212) 599-8000
Designed by Curran & Connors, Inc.
<PAGE>
Financial Federal Corporation
733 Third Avenue
New York, NY 10017
<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, 1998
as defined by Rule 1-02(w) of Regulation S-X.
19
<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 3, 1998, 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 12 of this Form 10-K.
/s/ Eisner & Lubin LLP
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
October 2, 1998
20
<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
AT JULY 31, 1998 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-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 2756
<SECURITIES> 0
<RECEIVABLES> 772427
<ALLOWANCES> 13330
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 766108
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 602822
0
0
<COMMON> 7421
<OTHER-SE> 115808
<TOTAL-LIABILITY-AND-EQUITY> 766108
<SALES> 0
<TOTAL-REVENUES> 72722
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3150
<INTEREST-EXPENSE> 32552
<INCOME-PRETAX> 27825
<INCOME-TAX> 10793
<INCOME-CONTINUING> 17032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17032
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.03
<FN>
THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
