UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 31, 1999
Commission file number 1-12006
FINANCIAL FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0244792
(State of incorporation) (I.R.S. Employer Identification Number)
733 Third Avenue, New York, NY 10017
(Address of principal executive offices)
(Zip code)
(212) 599-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
At December 1, 1999, 14,862,439 shares of Registrant's common stock, $.50 par
value, were outstanding.
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended October 31, 1999
TABLE OF CONTENTS
Part I - Financial Information Page No.
- -------------------------------------------------------------------- --------
Item 1 Financial Statements
Consolidated Balance Sheet at October 31, 1999 (unaudited)
and July 31, 1999 (audited) 3
Consolidated Statement of Operations and Retained Earnings
for the three month periods ended October 31, 1999 and
1998 (unaudited) 4
Consolidated Statement of Cash Flows for the three month
periods ended October 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II - Other Information
- --------------------------------------------------------------------
Item 6 Exhibits and Reports on Form 8-K 9
Signatures 10
2
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<CAPTION>
October 31, July 31,
1999 * 1999
-------- --------
<S> <C> <C>
ASSETS
Finance receivables $985,207 $948,727
Allowance for possible losses (16,806) (16,202)
-------- --------
Finance receivables - net 968,401 932,525
-------- --------
Cash 4,580 5,544
Other assets 4,074 4,116
-------- --------
TOTAL ASSETS $977,055 $942,185
======== ========
LIABILITIES
Senior debt:
Long-term ($39,883 at October 31, 1999 and $38,879
at July 31, 1999 due to related parties) $597,617 $540,662
Short-term 71,444 106,990
Subordinated debt ($4,681 at October 31, 1999 and
July 31, 1999 due to related parties) 97,790 97,790
Accrued interest, taxes and other liabilities 35,507 29,500
Deferred income taxes 23,461 22,261
-------- --------
Total liabilities 825,819 797,203
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value, authorized 5,000,000
shares, none issued
Common stock - $.50 par value, authorized 100,000,000
shares, shares issued: 14,862,064 at October 31, 1999
and 14,860,207 at July 31, 1999 7,431 7,430
Additional paid-in capital 58,128 58,115
Warrants - issued and outstanding 1,606,500 29 29
Retained earnings 85,648 79,408
-------- --------
Total stockholders' equity 151,236 144,982
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $977,055 $942,185
======== ========
<FN>
* Unaudited
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended October 31, 1999 1998
- ---------------------------------------------------- ------- -------
<S> <C> <C>
Finance income $25,420 $21,116
Interest expense 11,642 9,561
------- -------
Finance income before provision for possible
losses on finance receivables 13,778 11,555
Provision for possible losses on finance receivables 675 800
------- -------
Net finance income 13,103 10,755
Gain on debt retirement 187
Salaries and other expenses (2,909) (2,491)
------- -------
Earnings before income taxes 10,194 8,451
Provision for income taxes 3,954 3,260
------- -------
NET EARNINGS 6,240 5,191
Retained earnings - beginning of period 79,408 57,910
------- -------
RETAINED EARNINGS - END OF PERIOD $85,648 $63,101
======= =======
EARNINGS PER COMMON SHARE:
Diluted $0.36 $0.30
======= =======
Basic $0.42 $0.35
======= =======
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE
4
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</TABLE>
<TABLE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Three Months Ended October 31, 1999 1998
- ---------------------------------------------------------- -------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $6,240 $5,191
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for possible losses on finance receivables 675 800
Depreciation and amortization 1,729 1,431
Deferred income taxes 1,200 1,056
Gain on debt retirement (187)
Decrease in other assets 68 371
Increase (decrease) in accrued interest, taxes and
other liabilities 6,007 (3,515)
-------- --------
Net cash provided by operating activities 15,919 5,147
-------- --------
Cash flows from investing activities:
Finance receivables:
Originated (175,583) (154,252)
Collected 137,375 117,858
Other (98) (136)
-------- --------
Net cash (used in) investing activities (38,306) (36,530)
-------- --------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) (17,755) (188,784)
Maturities greater than 90 days:
Proceeds 19,562 25,306
Repayments (25,578) (20,842)
Bank borrowings - net proceeds (repayments) (11,775) 207,070
Proceeds from senior term notes 50,000
Proceeds from term loan - bank 10,000
Repurchase of convertible subordinated notes (1,313)
Variable rate senior term notes - net proceeds
(repayments) 6,955 (125)
Proceeds from exercise of stock options 14 152
-------- --------
Net cash provided by financing activities 21,423 31,464
-------- --------
NET INCREASE (DECREASE) IN CASH (964) 81
Cash - beginning of period 5,544 2,756
-------- --------
CASH - END OF PERIOD $4,580 $2,837
======== ========
Supplemental disclosures of cash flow information:
Interest paid $8,170 $7,468
======== ========
Income taxes paid $524 $153
======== ========
<FN>
The notes to consolidated financial statements are made a part hereof.
</FN>
</TABLE>
5
<PAGE>
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
In the opinion of the management of Financial Federal Corporation and
Subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position at October
31, 1999 and the results of operations and cash flows of the Company for the
three month periods ended October 31, 1999 and 1998. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and note disclosures included in the
Company's Annual Report on Form 10-K for the year ended July 31, 1999. The
consolidated results of operations for the three month periods ended October
31, 1999 and 1998 are not necessarily indicative of the results for the
respective full years.
NOTE 2 - EARNINGS PER COMMON SHARE
- ----------------------------------
Earnings per common share was calculated as follows (in thousands, except per
share amounts):
Three months ended October 31, 1999 1998
------------------------------------------------ ------ ------
Net earnings (used for basic earnings per share) $6,240 $5,191
Effect of convertible securities 762 790
------ ------
Adjusted net earnings (used for diluted earnings
per share) $7,002 $5,981
====== ======
Weighted average common shares outstanding
(used for basic earnings per share) 14,861 14,853
Effect of dilutive securities:
Convertible subordinated notes 3,167 3,294
Warrants 1,385 1,401
Stock options 245 297
------ ------
Adjusted weighted average common shares and
assumed conversions (used for diluted
earnings per share) 19,658 19,845
====== ======
Net earnings per common share - Diluted $0.36 $0.30
====== ======
Net earnings per common share - Basic $0.42 $0.35
====== ======
NOTE 3 - SENIOR DEBT
- --------------------
At October 31, 1999, the Company had $405.0 million of committed unsecured
revolving credit facilities with various banks including $267.5 million that
expire after October 31, 2000 and $137.5 million that expire before October
31, 2000. Long-term senior debt of $597.6 million at October 31, 1999
comprised $54.2 million of borrowings under credit facilities that expire
after October 31, 2000, $213.3 million of commercial paper supported by credit
facilities that expire after October 31, 2000 and $330.1 million of term notes
payable. In September 1999, the Company issued $50.0 million of 7.57% fixed
rate senior term notes that mature in September 2002.
NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
At October 31, 1999, the Company had variable to fixed interest rate swaps
with a notional amount of $25.0 million, weighted average receive and pay
rates of 6.0% and 5.2%, respectively, and a weighted average remaining term of
1.1 years.
6
<PAGE>
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires the fair value
of derivatives to be recorded as assets or liabilities. Gains or losses
resulting from changes in the fair values of derivatives would be accounted
for depending on the purpose of the derivatives and whether they qualify for
hedge accounting treatment. This statement, as deferred by SFAS No. 137,
"Accounting for Derivatives and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," issued in June 1999, is effective for fiscal
years beginning after June 15, 2000. The Company has not yet determined the
impact SFAS 133 will have on its earnings or financial position.
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Comparison of Three Months Ended October 31, 1999 to Three Months Ended
- -----------------------------------------------------------------------
October 31, 1998
- ----------------
Finance income increased by 20% to $25.4 million in the first quarter of
fiscal 2000 from $21.1 million in the first quarter of fiscal 1999. The
increase was primarily due to the 22%, or $171 million, increase in average
finance receivables outstanding to $964 million in the first quarter of fiscal
2000 from $793 million in the first quarter of fiscal 1999. The increase in
finance income from the growth in finance receivables was partially offset by
slightly lower finance rates charged by the Company due to the slight decrease
in average market interest rates and competitive factors. Finance receivables
booked in the first quarter of fiscal 2000 increased by 14% to $176 million
from $154 million in the first quarter of fiscal 1999 even though competitive
pressures remained strong during the quarter. The increase in finance
receivables booked was primarily due to increased business activity in the
Midwest and an increase in the number of marketing personnel.
Interest expense, incurred on borrowings used to fund finance receivables,
increased by 22% to $11.6 million in the first quarter of fiscal 2000 from
$9.6 million in the first quarter of fiscal 1999. The increase was primarily
due to the 22% increase in average debt outstanding in the first quarter of
fiscal 2000 from the first quarter of fiscal 1999. The Company's average cost
of funds in the first quarter of fiscal 2000 and in the first quarter of
fiscal 1999 were the same since the effects of the recent issuances of
additional term debt were offset by the slight decrease in average market
interest rates.
Finance income before provision for possible losses on finance receivables
increased by 19% to $13.8 million in the first quarter of fiscal 2000 from
$11.6 million in the first quarter of fiscal 1999. Finance income before
provision for possible losses, expressed as an annualized percentage of
average finance receivables outstanding, decreased to 5.7% in the first
quarter of fiscal 2000 from 5.8% in the first quarter of fiscal 1999.
The provision for possible losses on finance receivables decreased by 16% to
$675,000 in the first quarter of fiscal 2000 from $800,000 in the first
quarter of fiscal 1999. The provision for possible losses is determined by
the amount required to increase the allowance for possible losses to a level
that management considers appropriate. The allowance for possible losses was
$16.8 million, or 1.71% of finance receivables at October 31, 1999, as
compared to $14.1 million, or 1.74% of finance receivables, at October 31,
1998. The allowance is periodically reviewed by the Company's management and
is estimated based on total finance receivables, net credit losses incurred
and management's current assessment of the risks inherent in the Company's
finance receivables from national and regional economic conditions, industry
conditions, concentrations, the financial condition of counterparties and
other factors. Future additions to the allowance may be necessary based on
changes in these factors. Non-performing finance receivables were $9.2
million, or 0.9% of total finance receivables, at October 31, 1999, compared
to $7.2 million, or 0.9% of total finance receivables, at October 31, 1998.
7
<PAGE>
In September 1998, the Company repurchased $1.5 million face amount of its
convertible subordinated notes for $1.3 million.
Salaries and other expenses increased by 17% to $2.9 million in the first
quarter of fiscal 2000 from $2.5 million in the first quarter of fiscal 1999
primarily due to the increase in the number of employees and salary increases.
Net earnings increased by 20% to $6.2 million in the first quarter of fiscal
2000 from $5.2 million in the first quarter of fiscal 1999. Diluted earnings
per share increased by 20% to $0.36 per share in the first quarter of fiscal
2000 from $0.30 per share in the first quarter of fiscal 1999 and basic
earnings per share increased by 20% to $0.42 per share in the first quarter of
fiscal 2000 from $0.35 per share in the first quarter of fiscal 1999.
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, dealer placed and directly issued commercial
paper, borrowings under committed unsecured revolving credit facilities,
private and public issuances of term debt, securitizations and sales of common
and preferred equity. Management believes, but cannot assure, that the
Company has available sufficient liquidity to support its future operations
(see the following Year 2000 disclosure).
The Company issues investment grade commercial paper directly and through a
$350.0 million program with recognized dealers. Commercial paper outstanding
at October 31, 1999 was $259.7 million. The Company's commercial paper is
unsecured and matures within 270 days. Increases in commercial paper are
generally offset by decreases in bank and other borrowings, and vice versa.
The Company's current policy is to maintain committed revolving credit
facilities from banks so that the aggregate amount available thereunder
exceeds commercial paper outstanding.
At October 31, 1999, the Company had $405.0 million of committed unsecured
revolving credit facilities with various banks including $267.5 million that
expire after one year and $137.5 million that expire within one year. At
October 31, 1999, the Company had $54.2 million of borrowings outstanding
under credit facilities expiring after one year.
In September 1999 the Company issued $50.0 million of senior term notes due in
September 2002.
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. However, if any of the Company's information technology systems do not
function properly as a result of the turn of the century, the Company believes
the total cost to repair/replace such system(s) would not exceed $500,000.
The Company has business relationships with thousands of equipment
manufacturers, dealers and end users (customers). The failure by any one or
several of these third parties to be Year 2000 compliant is not expected to
result in a material loss in the Company's revenue or to adversely affect the
Company's cash flows.
The Company has relationships with four commercial paper dealers and nineteen
banks to access the financial markets for its daily funding requirements. The
failure by any one of these credit providers to be Year 2000 compliant is not
expected to affect materially the Company's liquidity. However, a significant
disruption in financial markets caused by the Year 2000 issue, impairing the
Company's ability to obtain required funds over a period of time, could have a
material adverse effect on the Company's operations. Through direct
communications with these credit providers and the review of their public
statements, the Company has been assured that its credit providers expect to
be Year 2000 compliant.
8
<PAGE>
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 turn of the century 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 through manual processes. The Company is
in the process of establishing procedures to ensure that adequate resources
will be in place and that required information will be available to enable the
Company to operate in a manual environment.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Operations and Financial
Condition contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve risks, uncertainties and assumptions due to their subjective nature.
Therefore, actual outcomes and results could differ materially from those
anticipated by such forward-looking statements due to the impact of many
factors beyond the Company's control, including economic, geographic and
industry conditions, availability of funding sources, market risk from
fluctuations in interest rates, prepayments, competition, changes in laws or
regulations and matters relating to the Year 2000 issue.
PART II
Item 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
None
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL FEDERAL CORPORATION
-----------------------------
(Registrant)
By: /s/ Michael C. Palitz
----------------------------
Executive Vice President and
Chief Financial Officer
By: /s/ David H. Hamm
----------------------------
Controller and Assistant
Treasurer
December 10, 1999
(Date)
10
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibits
- ----------- ------------------------------------------------------------
27 Financial Data Schedule (EDGAR version only)
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
AS OF OCTOBER 31, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS FOR THE THREE MONTH PERIOD THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 4580
<SECURITIES> 0
<RECEIVABLES> 985207
<ALLOWANCES> 16806
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 977055
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 7431
<OTHER-SE> 143805
<TOTAL-LIABILITY-AND-EQUITY> 977055
<SALES> 0
<TOTAL-REVENUES> 25420
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 675
<INTEREST-EXPENSE> 11642
<INCOME-PRETAX> 10194
<INCOME-TAX> 3954
<INCOME-CONTINUING> 6240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6240
<EPS-BASIC> .42
<EPS-DILUTED> .36
<FN>
<F1>THE FINANCIAL STATEMENTS INCLUDE A NONCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
