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, 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 No.)
733 Third Avenue, New York, New York 10017
(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, 1999 was $216,444,412.50. 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 $18.75
per share). For the purposes of this response, executive officers and
directors are deemed to be the affiliates of the Registrant and the holding by
non-affiliates was computed as 11,543,702 shares. The number of shares of
Registrant's Common Stock outstanding as of October 1, 1999 was 14,861,989
shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's proxy statement for its Annual Meeting of Stockholders, to be
held on December 14, 1999, 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 Annual Report to Stockholders for the fiscal year
ended July 31, 1999 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
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The Company, incorporated under the laws of Nevada in 1989, is a
nationwide independent financial services company with over $942 million of
assets. The Company finances industrial, commercial and professional equipment
through installment sales and leasing programs for manufacturers, dealers and
end users of such equipment. The Company also makes capital loans to equipment
users, 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 $25 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 finance and leasing services through marketing
personnel based in more than twenty domestic locations, including five full
service operations centers. At July 31, 1999, forty-five full-time new
business marketing representatives directly report to such operations centers.
The Company originates finance receivables through its relationships with
equipment dealers and, to a lesser extent, manufacturers ("vendors"). The
Company also directly markets its services to equipment users 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
by expanding its marketing efforts into new geographic areas, further
penetrating existing markets, employing additional marketing personnel and
possibly opening new full service operations centers. The Company's marketing
personnel are salaried rather than commission-based and the majority
participate in the Company's stock option plans. Thus, the Company believes
that its marketing personnel have a close community of interest with the
Company and its other stockholders. The Company may also expand the types of
equipment collateral it finances and leases.
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 business from vendors
and end users of equipment. The Company's marketing and managerial personnel
have, on average, more than 15 years of specialized expertise in the industries
they serve. Management believes that the experience, knowledge and
relationships of its executives and marketing personnel, related to the
Company's 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 meeting 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 temporary business problems encountered in the
ordinary course of their business.
The Company obtains business in several ways. Dealers and, to a lesser
extent, manufacturers of equipment refer their customers (equipment users) to
the Company, or such customers directly approach the Company to finance
equipment purchases. The Company also purchases installment sale contracts,
leases and personal property security agreements from vendors who extend credit
to purchasers of their equipment and the Company makes capital loans to
equipment users. Customers seek capital loans to consolidate debt, provide
working capital, reduce monthly debt service, enhance bonding capacity
(generally in the case of road contractors) and acquire additional equipment or
other assets. In addition, the Company leases equipment to end users,
generally under noncancelable leases.
2
<PAGE>
The Company has relationships with vendors that generally are mid-sized,
since larger vendors typically generate a volume of business greater than the
Company can presently service. 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 more than 100 vendor relationships and
is not dependent on any single vendor. In all vendor generated business, the
Company independently approves the credit of the prospective obligor.
In order to expand its customer base and broaden its marketing coverage
geographically, the Company 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 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 from $50,000
to $1.0 million with fixed or variable interest rates and terms of two to five
years. The Company's finance receivables generally provide for monthly
payments and may include prepayment premium provisions. The average
transaction size of finance receivables originated by the Company was $166,000
in fiscal 1999, $168,000 in fiscal 1998 and $144,000 in fiscal 1997.
The Company's underwriting policies and procedures are designed to
maximize yields and minimize 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 and management to assess the
creditworthiness of obligors and collateral values. Each credit submission,
regardless of size, requires the approval of at least two credit officers.
The Company attempts to structure transactions to meet the financial needs
of its customers. Transactions may be structured as installment sales, leases
or secured loans. Structuring includes arranging terms and repayment schedule,
determining rate and other fees and charges, identifying the primary and any
additional equipment collateral to be pledged, and evaluating the need for
additional credit support such as liens on accounts receivable, inventory
and/or real property, certificates of deposit, commercial paper, payment
guarantees, delayed funding and full or partial recourse to the selling vendor.
A vendor seeking to sell a finance receivable to the Company or an
equipment user seeking to obtain financing from the Company must submit a
credit application. The credit application includes financial and other
information of the obligor and any guarantors and a description of the
collateral to be pledged or leased and its present or proposed use. The
Company's credit personnel analyze the credit application, investigate the
credit of the obligor and any guarantors, evaluate the primary collateral to be
pledged, investigate financial, trade and industry references and review the
obligor's payment history. The Company may also obtain reports from
independent credit reporting agencies and conduct lien, UCC, litigation,
judgement and tax searches. If the credit application is approved on terms
acceptable to the vendor and/or the equipment user, the Company either
purchases an installment sale contract or lease from the vendor or enters into
a direct finance or lease transaction with the obligor. The Company funds the
transaction upon receiving all required documentation in form and substance
satisfactory to the Company and its legal department. Under the Company's
documentation, the obligor is responsible for all applicable sales, use and
property taxes.
The Company's operating environment permits its managers flexibility in
structuring transactions subject to the Company's credit policy and procedures.
The Company has established specific guidelines for credit review and approval,
including maximum credit concentrations with any one obligor based on the
Company's capital resources and other considerations. The Company's credit
policy establishes several credit officer authority levels. A credit officer's
authority level is based on their credit experience, managerial position and
tenure with the Company. The maximum amount a credit officer can approve is
based on the credit officer's authority level, collateral coverage relative to
the Company's potential lending exposure and the extent of any recourse the
Company may have to vendors. Under the Company's current credit policy, 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.
The Company may obtain full or partial recourse on finance receivables
assigned to the Company by vendors obligating them to pay the Company in the
event of an obligor's default or a breach of warranty. The Company may also
withhold an agreed upon amount from a vendor or obligor or obtain cash
collateral as security.
3
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The procedures used by the Company in purchasing a portfolio of finance
receivables include reviewing and analyzing the terms of the finance
receivables to be purchased, the credit of the related obligors, the
documentation relating to such finance receivables, the value of the related
pledged collateral, the payment history of the obligors and the implicit yield
to be earned by the Company.
Collection and Servicing
- ------------------------
Customer payments of finance receivables are remitted to lock boxes or the
Company's operating headquarters in Houston, TX. Collection efforts for
delinquent accounts are performed by collection personnel and managers in the
respective operations centers in conjunction with senior management and, if
necessary, the Company's legal department. Senior management reviews all past
due accounts at least monthly and the Company's in-house legal staff
continually monitors all accounts past due more than 60 days. Decisions
regarding collateral repossession, use of an outside source to do so and the
sale or other disposition of repossessed collateral are made 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, and
other financial institutions. Some of the Company's competitors may be better
positioned than the Company to market their services and financing programs to
vendors and end users of equipment because of their ability to offer additional
services and products and more favorable rates and terms. Many of these
competitors have longer operating histories, possess greater financial and
other resources and have a lower cost of funds than the Company, enabling them
to provide financing at rates lower than the Company may be willing to provide.
The Company typically does not compete solely 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 dedicated and talented managerial, marketing and
administrative personnel. The Company's present strategy for attracting and
retaining such personnel is to offer a competitive salary, an equity interest
in the Company through participation in its stock option plans, and enhanced
career opportunities. At July 31, 1999, more than 60% of the Company's
directors, officers and other employees with at least one year of service
participate in the Company's stock option plans and/or own stock in the
Company.
Employees
- ---------
At July 31, 1999, the Company had 173 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 or incentive
compensation arrangements with any of its employees other than deferred
compensation agreements and stock option agreements containing, without
limitation, non-disclosure and non-solicitation provisions. The Company
considers its relations with its employees to be satisfactory.
Regulation
- ----------
The Company's commercial financing, lending and leasing activities are
generally not subject to regulation, except that certain states may regulate
motor vehicle transactions, impose licensing, documentation and lien perfection
requirements, and/or restrict the amount of interest or finance rates and other
amounts the Company may charge. The Company's failure to comply with such
regulations, requirements or restrictions could 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., 68, has served as Chairman of the Board of the
Company since August 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, 52, 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.
4
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Michael C. Palitz, 41, has served as a Director of the Company since July
1996, as an Executive Vice President of the Company since July 1995, as a
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 an 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, 50, 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, a Vice
President and Houston Branch Manager.
Troy H. Geisser, 38, 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 was employed by CAC and its successor, where he held several
positions including Northern Division Counsel.
John V. Golio, 38, has served as a Senior Vice President of the Company
since 1997 and 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 and its successor in various capacities, including branch
operations manager.
Jeanne McDonald, 47, has served as a Senior Vice President of the Company
since 1998, a Vice President of the Company from 1992 to 1998, an Assistant
Vice President of the Company from 1990 to 1992 and an Assistant Treasurer of
the Company from 1989 to 1990. From 1977 to 1989, Ms. McDonald was employed by
CAC in various capacities, including Assistant Treasurer.
Daniel J. McDonough, 37, 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, 51, has served as a Senior Vice President of the Company
since 1990 and 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 a Senior
Vice President.
David H. Hamm, CPA, 35, has served as Controller and an Assistant
Treasurer of the Company since joining the Company in 1996. From 1985 to 1996,
Mr. Hamm was employed in the public accounting profession, including eight
years with Eisner & Lubin LLP (the Company's independent auditors) where he was
the audit manager of the Company's engagement from 1992 to 1996.
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. At July 31,
1999, 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 Phoenix, Arizona, consisting
of approximately 2,000 to 8,500 square feet of space (except the Houston
office, the Company's operating headquarters, consists of approximately 12,500
square feet of space) and are occupied pursuant to office leases terminating on
various dates through 2004 (as subject to the Company's lease termination
rights). Management believes that the Company's existing facilities are
suitable and adequate for their present and proposed uses and that suitable and
adequate facilities should be available on reasonable terms for any additional
offices the Company may need to 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.
5
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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, 1999.
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 follow:
Price Range
-----------------
High Low
------ ------
Fiscal year 1999
- ----------------
First Quarter ended October 31, 1998 $25.00 $17.38
Second Quarter ended January 31, 1999 $26.81 $23.19
Third Quarter ended April 30, 1999 $23.06 $16.13
Fourth Quarter ended July 31, 1999 $24.13 $18.94
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
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
- ------------------------
There were 76 holders of record of the Company's common stock at October
1, 1999. This number included several nominees that 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
-----------------------
Refer to information under the heading "Financial Highlights" contained in
the Company's Annual Report to Stockholders for the fiscal year ended July 31,
1999, which information is incorporated herein by reference. The Company has
not paid any cash dividends on its Common Stock.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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Refer 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, 1999, which
information is incorporated herein by reference.
6
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Refer 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, 1999, which
information is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Refer 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,
1999, 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 14,
1999, except as to biographical information on Executive Officers which is
contained in Item 1 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 14,
1999.
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 14,
1999.
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 14,
1999.
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, 1999, as provided in Item 8
hereof:
7
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- Consolidated Balance Sheet as at July 31, 1999 and 1998.
- Consolidated Statement of Stockholders' Equity for the
fiscal years ended July 31, 1999, 1998 and 1997.
- Consolidated Statement of Operations for the fiscal years
ended July 31, 1999, 1998 and 1997.
- Consolidated Statement of Cash Flows for the fiscal years
ended July 31, 1999, 1998 and 1997.
- 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. 13-16
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
3.4 (n) Certificate of Amendment of Articles of Incorporation dated December
9, 1998
3.5 (n) Restated By-laws of the Registrant as amended through December 30,
1998
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
note holders
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.
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
8
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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.
10.25 (m) 1998 Stock Option Plan of the Registrant
12.1 Computation of Debt-To-Equity Ratio
13.1 1999 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).
(m) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Notice of Meeting and Proxy Statement for the fiscal year
ended July 31, 1998.
(n) 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,
1999.
(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, 1999.
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 27, 1999
------------------------
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, 1999
- --------------------------------------------------- ----------------
Chairman of the Board and Chief Executive Officer Date
/s/ Lawrence B. Fisher October 27, 1999
- --------------------------------------------------- ----------------
Director Date
/s/ William C. MacMillen, Jr. October 27, 1999
- --------------------------------------------------- ----------------
Director Date
/s/ Bernard G. Palitz October 27, 1999
- --------------------------------------------------- ----------------
Director Date
/s/ H. E. Timanus, Jr. October 27, 1999
- --------------------------------------------------- ----------------
Director Date
/s/ Paul R. Sinsheimer October 27, 1999
- --------------------------------------------------- ----------------
President, Chief Operating Officer and Director Date
/s/ Michael C. Palitz October 27, 1999
- --------------------------------------------------- ----------------
Executive Vice President, Treasurer, Chief Date
Financial Officer and Director
/s/ David H. Hamm October 27, 1999
- --------------------------------------------------- ----------------
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 2, 1999
12
<PAGE>
Schedule I
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED BALANCE SHEET
(In Thousands)
<CAPTION>
July 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash $ 125 $ 160
Due from subsidiaries:
Advances 124,144 122,882
Subordinated notes receivable 50,000 50,000
Investment in subsidiaries - at equity 80,275 60,945
Other assets 4,393 4,979
-------- --------
TOTAL $258,937 $238,966
======== ========
LIABILITIES
Senior debt $ 12,278 $ 9,881
Accrued interest, taxes and other liabilities 3,887 3,566
Subordinated debt 97,790 102,290
-------- --------
Total liabilities 113,955 115,737
-------- --------
STOCKHOLDERS' EQUITY
Common stock 7,430 7,421
Additional paid-in capital 58,115 57,869
Warrants 29 29
Retained earnings 79,408 57,970
-------- --------
Total stockholders' equity 144,982 123,229
-------- --------
TOTAL $258,937 $238,966
======== ========
<FN>
The notes hereto, the consolidated financial statements and the notes thereto
are made a part hereof.
</FN>
</TABLE>
13
<PAGE>
Schedule I
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(In Thousands)
<CAPTION>
Year Ended July 31,
-----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Equity in earnings of subsidiaries before
income taxes $31,772 $24,907 $18,661
Gain on debt retirement 685
Interest charges to subsidiaries 12,116 7,236 5,060
------- ------- -------
Total 44,573 32,143 23,721
------- ------- -------
Expenses:
Interest expense 5,438 2,033 590
Other expenses 2,306 2,285 2,144
------- ------- -------
Total 7,744 4,318 2,734
------- ------- -------
Earnings before income taxes 36,829 27,825 20,987
Provision for income taxes 14,231 10,793 8,078
------- ------- -------
NET EARNINGS 22,598 17,032 12,909
Repurchases of common stock (1,100) (463)
Three-for-two stock split (2,461)
Retained earnings - August 1, 57,910 40,878 30,893
------- ------- -------
RETAINED EARNINGS - JULY 31, $79,408 $57,910 $40,878
======= ======= =======
<FN>
The notes hereto, the consolidated financial statements and the notes thereto
are made a part hereof.
</FN>
</TABLE>
14
<PAGE>
Schedule I
<TABLE>
FINANCIAL FEDERAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Year Ended July 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by operating activities $ 3,503 $ 1,157 $ 1,922
-------- -------- --------
Cash flows from investing activities:
Collections from (advances to) subsidiaries-net (1,262) (104,232) 8,976
Subordinated notes receivable-subsidiary (advances) (5,000)
Dividends received from subsidiary 250 200
-------- -------- --------
Net cash provided by (used in) investing
activities (1,262) (103,982) 4,176
-------- -------- --------
Cash flows from financing activities:
Commercial paper:
Proceeds 104,899 103,935 66,207
Repayments (102,502) (98,955) (66,272)
Proceeds from convertible subordinated notes (3,815) 100,000
Repurchases of subordinated debt (4,667)
Repurchases of common stock (1,721) (1,630)
Deferred debt issuance costs (2,687)
Proceeds from exercise of stock options 854 519 61
Tax benefit relating to stock options 9 56 64
-------- -------- --------
Net cash provided by (used in) financing
activities (2,276) 102,868 (6,237)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (35) 43 (139)
Cash - August 1, 160 117 256
-------- -------- --------
CASH - JULY 31, $ 125 $ 160 $ 117
======== ======== ========
<FN>
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.
The notes hereto, the consolidated financial statements and the notes thereto
are made a part hereof.
<FN>
</TABLE>
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 6.3% and 6.8% at July 31, 1999 and 1998, 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 subordinated 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 $2,129 and $2,186 of accrued interest receivable from
subsidiaries at July 31, 1999 and 1998, 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 *
3.4 Certificate of Amendment of Articles of Incorporation
dated December 9, 1998 *
3.5 Restated By-laws of the Registrant as amended through
December 30, 1998 *
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. *
10.25 1998 Stock Option Plan of the Registrant *
12.1 Computation of Debt-To-Equity Ratio 18
13.1 1999 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,
---------------------
1999 1998
-------- --------
Total debt $745,442 $602,822
Stockholders' equity $144,982 $123,229
Debt-to-equity ratio 5.1 4.9
=== ===
18
<PAGE>
[LOGO]
Financial Federal Corporation
10 Years of Equipment Financing & Leasing
1999 annual report
<PAGE>
Corporate Profile
[PHOTO OMITTED]
1989
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 users 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. Additional information regarding the Company is accessible via the
Company's website at www.financialfederal.com.
[PHOTO OMITTED]
1990
<PAGE>
Financial Highlights
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For Years Ended July 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finance Receivables--Net $932,525 $759,097 $571,060 $429,698 $339,299
Total Assets 942,185 766,108 574,764 433,087 342,936
Total Senior Debt 647,652 500,532 439,361 310,830 249,270
Stockholders' Equity 144,982 123,229 105,604 94,191 58,075
Revenues 89,118 72,722 55,305 43,523 34,951
Net Earnings 22,598 17,032 12,909 9,610 7,209
Earnings Per Common Share--Diluted 1.30 1.03 0.80 0.68 0.54
<CAPTION>
For Years Ended July 31, 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finance Receivables--Net $268,642 $206,145 $171,817 $155,255 $109,214
Total Assets 271,987 209,609 175,112 158,506 112,029
Total Senior Debt 184,848 134,628 107,884 115,488 72,395
Stockholders' Equity 50,523 41,727 36,426 15,038 13,457
Revenues 25,866 22,911 21,913 17,156 9,569
Net Earnings 5,944 4,968 3,760 1,581 1,016
Earnings Per Common Share--Diluted 0.46 0.39 0.44 0.22 0.16
</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>
Growth
[PHOTO OMITTED]
1991
Ten years ago we commenced operations with one $10.0 million senior
bank credit facility. We currently have a $350.0 million investment grade
commercial paper program, $480.0 million of senior credit facilities and term
loans with 20 banks, $205.0 million of long-term senior debt with numerous
institutional investors and $95.5 million of publicly traded convertible
subordinated notes.
[PHOTO OMITTED]
1992
[PHOTO OMITTED]
1993
2
<PAGE>
Dear Fellow Shareholder:
- ------------------------
We are pleased to report that the Company's uninterrupted record of
receivables and earnings growth continued in the 1999 fiscal year.
* Net earnings: $22.6 million, a 33% increase
* Diluted earnings per share: $1.30, a 26% increase
* Finance receivables outstanding at year-end: $948 million, a
23% increase
* Net credit losses maintained at minimal levels--0.03% of
average finance receivables outstanding
When we started Financial Federal Corporation in March 1989, our vision
was to build the finest, not necessarily the largest, commercial equipment
finance and leasing company in the United States. The Company's blueprint for
accomplishing this goal was clear and simple. The business plan which has guided
Financial Federal during its first 10 years, and which we believe will serve us
well in the future, is to--
* Consistently and profitably increase the receivables portfolio
without sacrificing creditworthiness
* Focus on long-term earnings growth
* Maximize return on assets and stockholders' equity
The basic methodology used by the Company to achieve these goals has been
to focus on--
* Providing meaningful, prompt and customized service to its
customers
* Aligning employees' interests with those of shareholders
through employee participation in the Company's Stock Option
Plan
3
<PAGE>
Return on Equity: 16.9%
-----------------------
* Attracting and retaining the highest quality managerial and
marketing executives
* Financing and leasing of "hard collateral" equipment
* Conservative accounting practices
The primary industries to which the Company markets its services are heavy
construction, waste services, over-the-road transportation and machine tools.
These businesses represent the heart and soul of middle market and small
business enterprises in the United States. In general, such businesses
* are private entities personally managed by their owners
* have fewer than 50 employees
* are local or regional, not national, in scope
* have annual sales between $1 million and $25 million
The U.S. economy continued its remarkable expansion during the Company's
fiscal year. Industrywide, credit losses for the past several years have been at
historically low levels. Unfortunately, we cannot predict with any degree of
certainty when the next economic recession will occur. However, we believe that
the Company's greatest opportunities for growth, which could include accretive
acquisitions of companies and/or portfolios of receivables,
Equipment
[GRAPHIC OMITTED]
[The following table was depicted as a pie chart in the printed material.]
Construction Related 44%
Over-the-Road Transportation 21%
Manufacturing 16%
Waste Services 13%
Other 6%
4
<PAGE>
Value
[PHOTO OMITTED]
1994
Ten years ago we commenced operations with $12.0 million of equity
contributed by five stockholders. With our $18.8 million IPO in June 1992, our
$26.3 million secondary offering in May 1996 and ten years of record earnings,
our equity has grown to $145.0 million and our stockholders number approximately
4,000.
[PHOTO OMITTED]
1995
[PHOTO OMITTED]
1996
5
<PAGE>
[PHOTO OMITTED]
1997
Service
Ten years ago we commenced operations with one full service operations center in
Houston, TX and two marketing representatives. We currently have five full
service operations centers and a team of 50 marketing executives strategically
located across the country serving approximately 5,000 customer and dealer
relationships.
[PHOTO OMITTED]
1998
[PHOTO OMITTED]
1999
6
<PAGE>
Return on Assets: 2.6%
----------------------
may occur when and as the economy slows, since the history of our industry has
proven time and again that a significant portion of the competition elects to
reduce their presence in the industry in times of economic slowdown. We believe
the Company's financial strength and superior track record have inspired the
confidence of the banking and investment community. Thus, Financial Federal is
well positioned to take advantage of any such opportunities that may arise.
For the time being, however, competition remains robust. In addition to
competition from traditional commercial equipment finance and leasing companies,
and manufacturers' captive finance companies, some banks and other specialty
finance companies have attempted to markedly increase their share of the market
in recent years. Financial Federal continues to differentiate itself from the
competition by providing a superior level of customer service, which we believe
is proven in the Company's track record to date.
We invite you to review the 10-year statistical information contained in
this Report. The record shows that your Company has consistently achieved
substantial increases in both finance receivables outstanding and earnings, with
solid asset quality reflected in low net losses. According to a rating agency,
Financial Federal today ranks at or near the top among its major competitors
Geographic Diversity
[GRAPHIC OMITTED]
[The following table was depicted as a pie chart in the printed material.]
Southeast 26%
Northeast 23%
Southwest 21%
West 14%
Central 14%
Northwest 2%
7
<PAGE>
Leverage: 5.1 to 1
------------------
in most, if not all, of the key performance and asset quality measures, and it
is the Company's goal to continue its record performance for the foreseeable
future.
The Company is most fortunate to have the services and good counsel of Tim
Timanus, Chairman and CEO of Heritage Bank, who was elected to the Company's
Board of Directors in May 1999. He brings a special insight to our Board, having
experienced both good and bad economic times in the Texas banking environment.
Mr. Timanus' decades-long experience in building a substantial banking
organization through both internal growth and strategic acquisitions will be a
most valuable asset to the Company as it meets the challenges of the years to
come.
The Company's achievements during its first 10 years would not have been
possible without the support we have received from our employees, our customers,
the banking and investment community, and our fellow shareholders. Management
will strive to earn their continued support as Financial Federal embarks on its
next decade.
/s/ Paul R. Sinsheimer /s/ Michael C. Palitz
Paul R. Sinsheimer Michael C. Palitz
President and Executive Vice President and
Chief Operating Officer 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. State usury, lending
and lien perfection rules and laws can regulate the Company's business
activities. 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 1999 to Fiscal 1998--Finance income increased 23% to $89.1
million in fiscal 1999 from $72.7 million in fiscal 1998. The increase was
primarily the result of the $180 million, or 27%, increase in the amount of
average finance receivables outstanding from $668 million in 1998 to $849
million in 1999, partially offset by decreases in finance rates charged by the
Company on new finance receivables in response to the declining interest rate
environment and competitive factors. Finance receivables booked increased 10% to
$690 million in 1999 from $629 million in 1998 as increased competitive
pressures on finance rates and terms affected the level of originations.
Interest expense, incurred on borrowings used to fund finance receivables,
increased 20% to $39.2 million in 1999 from $32.6 million in 1998. The increase
was primarily due to the 29% increase in average debt outstanding during 1999
from 1998, partially offset by the decrease in the Company's cost of funds
resulting from (i) the approximate 8% decrease in average interest rates charged
on the Company's commercial paper and bank borrowings during 1999 from 1998 and
(ii) the issuance of the Company's 4.5% convertible subordinated notes in April
1998.
Finance income before provision for possible losses on finance receivables
increased by 24% to $49.9 million in 1999 from $40.2 million in 1998. Finance
income before provision for possible losses, expressed as a percentage of
average finance receivables outstanding, decreased slightly to 5.9% in 1999 from
6.0% in 1998.
The provision for possible losses on finance receivables decreased by 2%
to $3.1 million in 1999 from $3.2 million in 1998. The provision for possible
losses is determined by the amount required to increase the allowance for
possible losses to a level considered appropriate by management. See Note B (4)
of Notes to Consolidated Financial Statements for the summary of activity in the
allowance for possible losses.
In 1999, the Company repurchased $4.5 million face amount of its
convertible subordinated notes for $3.8 million.
Salaries and other expenses increased 16% to $10.7 million in 1999 from
$9.2 million in 1998. 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 $14.2 million in 1999 from
$10.8 million in 1998 primarily due to the increase in earnings before income
taxes.
Net earnings increased by 33% to $22.6 million in 1999 from $17.0 million
in 1998. Diluted earnings per share increased by 26% to $1.30 per share in 1999
from $1.03 per share in 1998 and basic earnings per share increased by 32% to
$1.52 per share in 1999 from $1.15 per share in 1998. The increase in diluted
earnings per share was lower than the increase in net earnings primarily due to
the effect of the convertible subordinated notes issued in April 1998.
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
9
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Operations and Financial Condition
(continued)
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.
Receivable Portfolio and Asset Quality
Finance receivables outstanding increased by $176.3 million, or 23%, to
$948.7 million at July 31, 1999 from $772.4 at July 31, 1998 as the amount of
finance receivables originated exceeded amounts collected. At July 31, 1999,
Financial Federal Credit Inc. ("Credit," a wholly-owned subsidiary) had $940.6
million, or 99.1%, 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 $16.2 million at July 31,
1999 from $13.3 million at July 31, 1998, and was 1.71% of finance receivables
at July 31, 1999 as compared to 1.73% at July 31, 1998. The allowance is
periodically reviewed by the Company's management and is estimated based on
management's current assessment of the risks inherent in the Company's finance
receivables from national and regional economic conditions, industry conditions,
concentrations, the financial condition of counterparties and other factors.
Future additions to the allowance may be necessary based on changes in these
factors.
The equipment collateral securing the Company's finance receivables
generally possesses certain characteristics that have served to mitigate
potential credit losses. Such characteristics include an economic life longer
than the term of the receivable, low levels of technological obsolescence,
applications in various industries, ease of accessibility and transporting and a
broad established 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 were $228,000 in 1999 and $123,000
in 1998. 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 0.03% in 1999, 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 of minimal net credit losses to continue. An economic downturn
could cause an increase in the level of 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.
Nonperforming finance receivables were $8.8 million, or 0.9% of total
finance receivables, at July 31, 1999, as compared to $6.5 million, or 0.8% of
total finance receivables, at July 31, 1998. The level of nonperforming finance
receivables has also been historically low, primarily due to favorable economic
and industry conditions. Adverse changes in these conditions could result in an
increase in the level of nonperforming 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--19%, construction--17%, waste disposal--12% and cranes--12%. The major
regional geographic concentrations are: Southeast--26%, Northeast--23% and
Southwest--21%.
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 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 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 notes issued under its Medium-Term Note Program. 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. Notes issued under
Credit's Medium-Term Note Program are 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 increased $142.6 million to $745.4 million at
July 31, 1999 from $602.8 million at July 31, 1998. The Company's stockholders'
equity increased by $21.8 million to $145.0 million at July 31, 1999 from $123.2
million at July 31, 1998 and its net deferred income tax liability increased by
$6.1 million to $22.3 million at July 31, 1999 from $16.1 million at July 31,
1998. These increases, combined with increases in the Company's accrued expenses
and other liabilities, were used primarily to fund the increase in finance
receivables.
During fiscal 1999, the Company increased its senior term debt by $115.0
million. The Company issued $70.0 million of senior term loans with original
maturities of three and four years with six banks and issued $45.0 million of
senior term notes under its 144A Medium-Term Note Program with an original
maturity of four years. The Company's $100.0 million Medium-Term Note Program
was fully funded at July 31, 1999.
Financial and Credit each directly issue 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, 1999 generally ranged from 5.1% to 5.6%. 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, 1999, Credit had $307.5 million of committed unsecured
revolving credit facilities with original terms ranging from two to five years
with sixteen banks under which $66.0 million was outstanding. At July 31, 1999,
Credit also had $92.5 million of committed unsecured revolving credit facilities
with an original term of one year or less with six banks under which no
borrowings were outstanding. At July 31, 1999, $267.5 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.
Information about the combined amounts and interest rates of the Company's
commercial paper and bank borrowings follows:
(dollars in millions) 1999 1998 1997
=============================================================================
Maximum amount outstanding during the year $370.9 $390.8 $374.7
Average amount outstanding during the year 340.6 333.3 316.6
Weighted average interest rate:
During the year 5.4% 5.9% 5.9%
End of the year 5.4 5.8 6.0
==============================================================================
11
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Operations and Financial Condition
(continued)
At July 31, 1999, the Company reported $267.5 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.
The Company's revolving credit facilities and senior 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.
In August 1998, the Company expanded its common stock repurchase program
established in August 1996 to include the repurchase of its convertible
subordinated notes. The Company also increased the size of the program by $10.0
million. During 1999, the Company repurchased 99,200 shares of its common stock
for $1.7 million and $4.5 million face amount of its convertible subordinated
notes for $3.8 million. At July 31, 1999, $7.0 million remained available for
future repurchases of common stock and convertible subordinated notes.
Market Interest Rate Risk and Sensitivity
The Company's earnings are sensitive to fluctuations in market interest
rates. Generally, based on the Company's current mix of fixed rate and variable
rate finance receivables and debt, increases in interest rates could have a
negative impact on earnings and decreases in rates could have a positive impact
on earnings. This is primarily due to the Company having more variable rate or
short-term debt than fixed rate term debt and more fixed rate finance
receivables than variable rate finance receivables. Therefore, when market
interest rates rise, the Company's borrowing costs could increase more than the
yield on its finance receivables. Conversely, when market interest rates
decline, the Company's borrowing costs could decrease more than the yield on its
finance receivables. These broad statements do not take into account the effects
that market interest rate fluctuations could have on the economy and on the
level of competition.
The net yield of the Company's finance receivables less the weighted
average cost of the Company's borrowed funds represents the Company's net
interest spread, a key measure of a finance company's profitability. The
Company's net interest spread for the last five fiscal years follows:
Year Ended July 31, 1999 1998 1997 1996 1995
===============================================================================
Net yield of finance receivables 10.5% 10.9% 10.9% 11.2% 11.2%
Weighted average cost of borrowed funds 5.9% 6.3% 6.2% 6.6% 6.9%
- -------------------------------------------------------------------------------
Net interest spread 4.6% 4.6% 4.7% 4.6% 4.3%
===============================================================================
Market interest rates over the past five fiscal years have not fluctuated
widely and the Company's net interest spread has been stable during this period.
It is not known whether this narrow range of interest rates will continue,
especially since the Federal Reserve has recently twice raised the Federal Funds
rate by 25 basis points. Therefore, management cannot assure that the Company's
net interest spread will remain within its recent range.
The Company continually monitors and manages its exposure to market
interest rate fluctuations through risk management procedures that include using
certain derivative financial instruments such as interest rate swaps and
changing the proportion of its term versus short-term debt. The Company uses
derivative financial instruments to hedge its exposure to interest rate risk on
certain debt obligations. The Company does not use derivatives for speculation
and the Company does not trade in derivatives.
During 1999, the Company entered into interest rate swap agreements with a
notional amount of $25.0 million and a term of two years. These swap agreements
allowed the Company to effectively convert variable rate term debt into fixed
rate term debt. The Company also entered into treasury lock agreements in 1999
with a notional amount of $50.0 million in anticipation of issuing term debt.
Treasury locks effectively allow a debt issuer to "lock-in" current interest
rates prior to the actual issuance of debt to hedge against future increases in
interest rates. The Company may enter into additional interest rate swaps and
treasury locks and other derivative financial instruments in the future to
stabilize its net interest spread.
During the last three fiscal years the Company has increased significantly
its fixed rate term debt as a percentage of its total debt, from 17% at July 31,
1996 to 47% at July 31, 1999. The Company's focus has been to issue fixed rate
term debt to capitalize on low market interest rates and to protect its net
interest spread against future increases in market interest rates.
12
<PAGE>
The Company's other debt, comprising commercial paper, bank borrowings and
variable rate term loans, reprices frequently, as follows: $335.1 million, or
85%, within one month, $18.9 million, or 5%, within the following two months and
the remainder, $38.7 million, or 10%, within the following six months.
The Company's 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.
Finance receivables comprise fixed rate and variable rate transactions. At
July 31, 1999, $819.1 million, or 86%, of finance receivables provide for
interest at fixed rates and $129.6 million, or 14%, 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, 1999, $294.9 million of fixed rate finance receivables are scheduled to
mature within one year and the weighted average remaining term of fixed rate
finance receivables was 3.4 years.
The total of fixed rate term debt of $352.8 million, stockholders' equity
of $145.0 million and net deferred income tax liability of $22.3 million was
$520.0 million at July 31, 1999. Due to the excess of the Company's fixed rate
finance receivables over this amount, 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 periodically calculates the effect on net earnings of a
hypothetical, immediate 100 basis point (1.0%) increase in market interest
rates. At July 31, 1999, such a hypothetical increase in market interest rates
would reduce annual net earnings by approximately $800,000 and would reduce the
Company's net interest spread by approximately 30 basis points (0.3%). The 100
basis point increase represents an 18% increase over the weighted average
interest rate on the Company's short-term and variable rate borrowings at July
31, 1999.
The calculated reduction in net earnings assumes the occurrence of an
adverse change in market interest rates. Actual future changes in interest rates
may differ materially and its effect on net earnings may also differ materially
due to changes in the Company's finance receivable and debt repricing
structures. The calculation also does not take into account the complexities
that would be involved in an actual 100 basis point increase in market interest
rates.
New Accounting Standards
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, 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.
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.
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 existing and new
systems were programmed in such a manner that each one was originally Year 2000
compliant. The Year 2000 issue did not affect the decision, or timing, of the
replacement.
In addition, the Company has completed 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 Year 2000 compliant.
13
<PAGE>
Financial Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Operations and Financial Condition
(continued)
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
approximately twenty 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 its credit providers and the review of their public
statements, the Company has been assured that substantially all of its credit
providers either already are or expect to be Year 2000 compliant. In addition, a
joint release issued on September 16, 1999 by the Office of the Comptroller of
the Currency, Federal Deposit Insurance Corporation, Office of Thrift
Supervision, Board of Governors of the Federal Reserve System and National
Credit Union Administration stated that 99.7% of banks and other insured
financial institutions already have the highest rating for Year 2000 readiness.
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 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, market risk
from fluctuations in 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
(Dollars in Thousands)
<TABLE>
<CAPTION>
July 31, 1999 1998
=========================================================================================
<S> <C> <C>
ASSETS
Finance receivables $948,727 $772,427
Allowance for possible losses (16,202) (13,330)
- -----------------------------------------------------------------------------------------
Finance receivables--net 932,525 759,097
Cash 5,544 2,756
Other assets 4,116 4,255
- -----------------------------------------------------------------------------------------
TOTAL ASSETS $942,185 $766,108
=========================================================================================
LIABILITIES
Senior debt:
Long-term ($38,879 at July 31, 1999 and $36,209 at
July 31, 1998 due to related parties) $540,662 $478,388
Short-term 106,990 22,144
Subordinated debt ($4,681 at July 31, 1999 and 1998 due to
related parties) 97,790 102,290
Accrued interest, taxes and other liabilities 29,500 23,940
Deferred income taxes 22,261 16,117
- -----------------------------------------------------------------------------------------
Total liabilities 797,203 642,879
- -----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock--$1 par value, authorized 5,000,000
shares in 1999 and 500,000 shares in 1998, none issued
Common stock--$.50 par value, authorized 100,000,000
shares in 1999 and 25,000,000 shares in 1998, shares
issued: 14,860,207 in 1999 and 14,842,544 in 1998 7,430 7,421
Additional paid-in capital 58,115 57,869
Warrants--issued and outstanding 1,607,000 in 1999 and 1998 29 29
Retained earnings 79,408 57,910
- -----------------------------------------------------------------------------------------
Total stockholders' equity 144,982 123,229
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $942,185 $766,108
=========================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
15
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Dollars and Share Amounts in Thousands)
<TABLE>
<CAPTION>
Common Stock--$.50 Par Value
-------------------------------
Number Additional
of Paid-In Retained Treasury
Shares Par Value Capital Warrants Earnings Stock
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 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 --
Repurchases of common stock (99) (49) (572) (1,100)
Exercise of stock options 116 58 796
Tax benefit relating to stock options 22
Net earnings 22,598
- ------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1999 14,860 $7,430 $58,115 $29 $79,408 $ --
============================================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
16
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Statement of Operations
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended July 31, 1999 1998 1997
==========================================================================================
<S> <C> <C> <C>
Finance income:
Loan obligations $ 59,705 $50,180 $38,374
Lease obligations 29,413 22,542 16,931
- ------------------------------------------------------------------------------------------
Total finance income 89,118 72,722 55,305
Interest expense 39,169 32,552 23,437
- ------------------------------------------------------------------------------------------
Finance income before provision for possible losses
on finance receivables 49,949 40,170 31,868
Provision for possible losses on finance receivables 3,100 3,150 2,525
- ------------------------------------------------------------------------------------------
Net finance income 46,849 37,020 29,343
Gain on debt retirement 685
Salaries and other expenses (10,705) (9,195) (8,356)
- ------------------------------------------------------------------------------------------
Earnings before income taxes 36,829 27,825 20,987
Provision for income taxes 14,231 10,793 8,078
- ------------------------------------------------------------------------------------------
NET EARNINGS $ 22,598 $17,032 $12,909
==========================================================================================
EARNINGS PER COMMON SHARE:
Diluted $ 1.30 $ 1.03 $ 0.80
==========================================================================================
Basic $ 1.52 $ 1.15 $ 0.87
==========================================================================================
</TABLE>
The notes to consolidated financial statements are made a part hereof.
17
<PAGE>
Financial Federal Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended July 31, 1999 1998 1997
=======================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 22,598 $ 17,032 $ 12,909
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for possible losses on finance receivables 3,100 3,150 2,525
Depreciation and amortization 6,140 5,203 4,464
Deferred income taxes 6,144 4,832 2,336
Gain on debt retirement (685)
Decrease (increase) in other assets 187 (243) (253)
Increase in accrued interest, taxes and other liabilities 5,560 7,716 4,064
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 43,044 37,690 26,045
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Finance receivables:
Originated (689,718) (628,631) (464,283)
Collected 507,364 432,512 316,164
Other (362) (424) (188)
- -------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (182,716) (196,543) (148,307)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) (29,949) 59,626 32,908
Maturities greater than 90 days:
Proceeds 96,360 120,687 149,470
Repayments (94,135) (113,690) (127,747)
Bank borrowings--net proceeds (repayments) 62,570 (76,660) 14,220
Proceeds from (repurchases of) convertible subordinated notes (3,815) 100,000
Proceeds from senior term notes 115,000 65,000 50,000
Variable rate senior term notes--net proceeds (repayments) (2,726) 6,208 9,680
Repayments of subordinated debt (4,667)
Deferred debt issuance costs (2,687)
Repurchases of common stock (1,721) (1,630)
Proceeds from exercise of stock options 854 519 61
Tax benefit relating to stock options 22 74 73
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 142,460 159,077 122,368
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 2,788 224 106
Cash--beginning of year 2,756 2,532 2,426
- -------------------------------------------------------------------------------------------------------
CASH--END OF YEAR $ 5,544 $ 2,756 $ 2,532
=======================================================================================================
Supplemental disclosures of cash flow information:
Interest paid $ 38,519 $ 30,329 $ 22,464
=======================================================================================================
Income taxes paid $ 6,660 $ 7,345 $ 5,710
=======================================================================================================
</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.
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.
(3) Income Recognition--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--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) Derivative Financial Instruments--Derivative financial instruments are used
by the Company to hedge its exposure to the effects of fluctuations in market
interest rates on its debt. The Company does not use derivatives for speculation
and the Company does not trade in derivatives. Derivatives used include interest
rate swaps and treasury locks. The net interest differentials on interest rate
swaps are recorded as an adjustment to interest expense as incurred. The cash
settlements on treasury locks are deferred and amortized over the term of the
underlying hedged debt obligations.
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, 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.
(8) Use of Estimates--The consolidated financial statements and the notes
thereto were prepared in accordance with generally accepted accounting
principles
19
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Per Share Amounts)
(continued)
which requires estimates and assumptions to be made by management that affect
the amounts reported therein. Actual results could differ from those estimates.
NOTE B: Finance Receivables
(1) Finance receivables comprise installment sale agreements 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, 1999 1998
================================================================================
Loans:
Fixed rate $513,447 $399,912
Variable rate 117,362 111,132
- --------------------------------------------------------------------------------
Total 630,809 511,044
Direct financing leases 317,918 261,383
- --------------------------------------------------------------------------------
Finance receivables $948,727 $772,427
================================================================================
The approximate weighted average interest rates were 9.8% and 10.2% on
fixed rate loans at July 31, 1999 and 1998, respectively, and 1.8% and 2.0% over
the prime rate on variable rate loans at July 31, 1999 and 1998, respectively.
(2) The investment in direct financing leases comprises the following:
July 31, 1999 1998
================================================================================
Minimum lease payments receivable $324,731 $270,727
Residual values 54,099 42,727
Unearned finance income (60,912) (52,071)
- --------------------------------------------------------------------------------
Investment in direct financing leases $317,918 $261,383
================================================================================
(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, 1999 are as follows:
Direct
Fixed Variable Financing
Rate Loans Rate Loans Leases
================================================================================
2000 $184,906 $ 49,067 $112,316
2001 147,465 29,536 91,681
2002 100,569 22,652 64,808
2003 52,328 10,457 37,440
2004 17,381 2,886 13,644
Thereafter 10,798 2,764 4,842
- --------------------------------------------------------------------------------
Total $513,447 $117,362 $324,731
================================================================================
(4) The activity of the allowance for possible losses is summarized as follows:
Year Ended July 31, 1999 1998 1997
================================================================================
Balance--August 1 $13,330 $10,303 $ 8,008
Provision 3,100 3,150 2,525
Write-downs (1,125) (1,210) (1,168)
Recoveries 897 1,087 938
- --------------------------------------------------------------------------------
Balance--July 31 $16,202 $13,330 $10,303
================================================================================
(5) Income recognition has been suspended on finance receivables with a recorded
investment of $8,787 (includes $4,806 of impaired loans) at July 31, 1999 and
$6,489 (includes $3,709 of impaired loans) at July 31, 1998. The average
recorded investment in impaired loans was $4,515 in 1999 and $3,336 in 1998.
Impaired loans exclude direct financing leases.
(6) The Company also provides 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, 1999 and 1998, the
unused portion of these commitments was $7,142 and $10,147, respectively.
20
<PAGE>
NOTE C: Debt
Debt is summarized as follows:
July 31, 1999 1998
================================================================================
Senior debt:
Fixed rate term notes:
5.52%-5.90% due 2002-2003 $ 40,000
6.29%-6.80% due 2002-2008 120,000 $120,000
7.27%-7.45% due 2000-2003 95,000 50,000
- --------------------------------------------------------------------------------
Total fixed rate term notes 255,000 170,000
Variable rate term notes due 2001-2002 43,162 15,888
- --------------------------------------------------------------------------------
Total term notes 298,162 185,888
Commercial paper 283,490 311,214
Bank borrowings 66,000 3,430
- --------------------------------------------------------------------------------
Total senior debt 647,652 500,532
- --------------------------------------------------------------------------------
Subordinated debt:
4.5% convertible subordinated notes due 2005 95,500 100,000
8.0% subordinated debentures due 2003 2,290 2,290
- --------------------------------------------------------------------------------
Total subordinated debt 97,790 102,290
- --------------------------------------------------------------------------------
Total debt $745,442 $602,822
================================================================================
(1) The senior term notes were issued by Credit. Interest on fixed rate notes is
generally payable semiannually. Interest on variable rate notes is indexed to
LIBOR or domestic money market rates. Prepayments of the notes are generally
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.
Certain executive officers of the Company and their affiliates hold
$13,162 of the variable rate notes. These notes mature in September 2000,
subject to extension.
(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, 1999
and 1998 were 5.3% and 5.8%, respectively. Commercial paper transactions with
officers and other related parties are summarized as follows:
1999 1998 1997
================================================================================
Year ended July 31:
Issued $99,765 $47,226 $31,409
Matured 94,369 34,211 33,479
Interest expense 1,276 654 721
At July 31:
Outstanding 25,717 20,321 7,306
Accrued interest 234 234 91
================================================================================
(3) At July 31, 1999, Credit had $400,000 of committed unsecured revolving
credit facilities with various banks expiring as follows: $132,500 within one
year and $267,500 on various dates from November 2000 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.
Borrowings under these credit facilities, $66,000 at July 31, 1999,
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 borrowings outstanding at July 31, 1999 and 1998 were 5.6% and 6.2%,
respectively.
(4) 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
semiannually. The notes are subordinated in right of payment to all existing and
future senior indebtedness, as defined. In 1999, Financial repurchased $4,500
face amount of these notes for $3,815.
(5) In July 1996, Financial called its variable rate subordinated debentures at
face value offering holders the option to receive amended debentures. As a
result, $4,667 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 with interest
payable
21
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Per Share Amounts)
(continued)
semiannually. The debentures 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.
(6) At July 31, 1999, 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: $165,662 in 2001, $235,000 in 2002,
$117,290 in 2003, $115,500 in 2005 and $5,000 in 2008.
NOTE D: Derivative Financial Instruments
During 1999, the Company entered into interest rate swaps and treasury
lock agreements with other financial institutions as a hedge against increases
in market interest rates on issued term debt in the case of swaps and planned
issues of term debt in the case of treasury locks. The interest rate swaps
allowed the Company to issue variable rate term debt and effectively convert the
debt into fixed rate term debt at rates that were lower than those otherwise
obtainable on direct fixed rate term debt. The Company used treasury locks to
effectively "lock-in" the then current base rates for term debt planned to be
issued generally within six months.
At July 31, 1999, the Company had variable to fixed rate swaps in place
with a notional amount of $25,000, weighted average receive and pay rates of
5.5% and 5.2%, respectively and a weighted average remaining term of 1.4 years.
There were no open treasury locks at July 31, 1999. The use of derivatives
increased interest expense by $73 in 1999.
The derivatives used by the Company involve credit risk from the remote
possibility of nonperformance of the major financial institutions that issued
them. The Company's actual credit risk is not considered to be significant.
NOTE E: 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. Prior period
average shares outstanding, share equivalents and per share amounts have been
restated to reflect the stock split. Shares sold or acquired prior to the stock
split have not been restated.
(2) The Company established a common stock repurchase program in August 1996 and
expanded the program in August 1998 to include repurchases of its convertible
subordinated notes. Through July 31, 1999, 223 shares of common stock and $4,500
face amount of convertible subordinated notes have been repurchased. At July 31,
1999, $6,964 was available under the program for future repurchases.
(3) In December 1998, the Company's stockholders approved (i) an increase in the
number of authorized shares of common stock from 25,000 to 100,000 and (ii) an
increase in the number of authorized shares of preferred stock from 500 to
5,000.
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 $0.0022 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
$0.0555 each and expire August 31, 2001.
NOTE F: Stock Options
In December 1998, the Company's stockholders approved a new stock option
plan (the "1998 Plan") that was adopted by the Board of Directors of the Company
in September 1998. The 1998 Plan provides for a total of 2,500 incentive or
nonqualified stock options to be granted to officers, other employees and
directors of the Company and terminates in September 2008. The Company's old
stock option plan will terminate in September 1999. Under both plans, 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.
22
<PAGE>
Options outstanding at July 31, 1999 were generally granted with a six or
ten year term and generally vest (become exercisable) ratably over periods of
four to seven years. Shares of common stock available for future grants of
options at July 31, 1999 were 2,500 under the 1998 Plan and 765 under the old
plan.
Stock option activity and related information is summarized as follows:
Number of Weighted Average
Options Exercise Price
================================================================================
Outstanding at August 1, 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
Granted 200 18.63
Exercised (116) 7.31
Canceled (8) 18.68
- ---------------------------------------------------------
Outstanding at July 31, 1999 802 15.00
=========================================================
Exercisable at July 31:
1999 167 $ 8.19
1998 162 7.27
1997 149 6.68
================================================================================
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.
The exercise prices of options outstanding at July 31, 1999 ranged from
$6.22 to $23.06. Additional information by price range follows:
Price Range Over $18 $8-$12 Below $8
================================================================================
Outstanding:
Number 415 224 163
Weighted average exercise price $20.44 $10.61 $7.13
Weighted average remaining
contractual life (in years) 7.3 3.2 2.6
Exercisable:
Number -- 68 99
Weighted average exercise price -- $10.42 $6.65
================================================================================
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, 1999 1998 1997
================================================================================
Net earnings $21,706 $16,593 $12,720
Earnings per share:
Diluted $ 1.26 $ 1.01 $ 0.79
Basic $ 1.46 $ 1.12 $ 0.86
================================================================================
The pro forma effect on net earnings in 1999, 1998 and 1997 may not be
representative of the effect in future years as 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, 1999 1998 1997
================================================================================
Weighted average grant date fair value $7.08 $7.65 $3.78
Assumptions:
Weighted average risk-free interest rate 4.6% 5.7% 6.7%
Expected stock price volatility rate 29% 28% 27%
Weighted average expected life of options
granted (in years) 6.0 4.7 4.3
================================================================================
23
<PAGE>
Financial Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Per Share Amounts)
(continued)
NOTE G: Earnings Per Common Share
Earnings per common share was calculated as follows:
Year Ended July 31, 1999 1998 1997
================================================================================
Net earnings (used for basic earnings per share) $22,598 $17,032 $12,909
Effect of convertible securities 3,066 802 --
- --------------------------------------------------------------------------------
Adjusted net earnings (used for diluted
earnings per share) $25,664 $17,834 $12,909
- --------------------------------------------------------------------------------
Weighted average common shares outstanding
(used for basic earnings per share) 14,860 14,804 14,787
Effect of dilutive securities:
Convertible subordinated notes 3,237 854 --
Warrants 1,400 1,392 1,208
Stock options 314 332 159
- --------------------------------------------------------------------------------
Adjusted weighted average common shares
and assumed conversions (used for
diluted earnings per share) 19,811 17,382 16,154
================================================================================
Net earnings per common share:
Diluted $ 1.30 $ 1.03 $ 0.80
================================================================================
Basic $ 1.52 $ 1.15 $ 0.87
================================================================================
NOTE H: Income Taxes
(1) The provision for income taxes comprises the following:
Year Ended July 31, 1999 1998 1997
================================================================================
Currently payable:
Federal $ 7,022 $ 5,087 $4,887
State and local 1,043 800 782
- --------------------------------------------------------------------------------
Total 8,065 5,887 5,669
Deferred 6,144 4,832 2,336
Tax benefit relating to stock options 22 74 73
- --------------------------------------------------------------------------------
Provision for income taxes $14,231 $10,793 $8,078
================================================================================
(2) Income taxes computed at statutory federal income tax rates are reconciled
to the provision for income taxes as follows:
Year Ended July 31, 1999 1998 1997
================================================================================
Federal income tax at statutory rates $12,890 $ 9,739 $7,345
State and local taxes (net of federal
income tax benefit) 1,341 1,054 733
- --------------------------------------------------------------------------------
Provision for income taxes $14,231 $10,793 $8,078
================================================================================
(3) Deferred income taxes comprises the tax effect of the following temporary
differences:
July 31, 1999 1998
================================================================================
Deferred tax liabilities:
Leasing transactions $26,785 $19,960
Finance income and other 3,410 2,695
- --------------------------------------------------------------------------------
Total 30,195 22,655
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for possible losses (6,274) (5,180)
Other liabilities (1,660) (1,358)
- --------------------------------------------------------------------------------
Total (7,934) (6,538)
- --------------------------------------------------------------------------------
Deferred income taxes $22,261 $16,117
================================================================================
NOTE I: Lease Commitments
The Company occupies office space under leases expiring through 2004. At
July 31, 1999, minimum future annual rentals due under these leases are $733 in
2000, $654 in 2001, $450 in 2002, $230 in 2003 and $17 in 2004. Office rent
expense was $836 in 1999, $782 in 1998 and $677 in 1997.
NOTE J: 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 equipment collateral on an ongoing basis and focuses on
lending against, financing and leasing equipment collateral that has an economic
life exceeding the
24
<PAGE>
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
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, 1999 1998
================================================================================
Industry:
Trucking 19% 18%
Construction 17 17
Waste disposal 12 12
Cranes 12 13
Geographic region:
Southeast 26% 25%
Northeast 23 24
Southwest 21 24
================================================================================
NOTE K: Fair Values of Financial Instruments
The Company's financial instruments comprise cash, finance receivables
(excluding leases), commitments to extend credit, debt and interest rate swaps.
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 senior term debt and subordinated debentures were
estimated to approximate their fair values at July 31, 1999 and 1998 based on
their future cash flows discounted at current rates for debt with similar terms
and maturities.
The fair value of the convertible subordinated notes was approximately
$89,770 at July 31, 1999 based on their quoted market price.
The fair value of the interest rate swaps was not material at July 31,
1999.
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 L: Selected Quarterly Data (Unaudited)
Earnings Per Share
-------------------
Revenues Net Earnings Diluted Basic
================================================================================
Fiscal 1999, three months ended:
October 31, 1998 $21,116 $5,191 $0.30 $0.35
January 31, 1999 21,508 5,416 0.31 0.36
April 30, 1999 22,279 5,898 0.34 0.40
July 31, 1999 24,215 6,093 0.35 0.41
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
================================================================================
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, 1999 and 1998, and the
related consolidated statements of stockholders' equity, operations and cash
flows for each of the three years in the period ended July 31, 1999. 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, 1999 and 1998, and
their consolidated operating results and their cash flows for each of the three
years in the period ended July 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Eisner & Lupin LLP
- ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
September 2, 1999
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 follow:
Fiscal 1999 Fiscal 1998
-------------------------------------------
High Low High Low
================================================================================
First Quarter ended October 31 $25 $17.375 $19.8125 $14
Second Quarter ended January 31 $26.8125 $23.1875 $23.625 $18
Third Quarter ended April 30 $23.0625 $16.125 $26 $20.375
Fourth Quarter ended July 31 $24.125 $18.9375 $28.5 $23
================================================================================
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
Jeanne McDonald
Senior Vice President
Daniel J. McDonough
Senior Vice President
Richard W. Radom
Senior Vice President
Julian C. Green, Jr.
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
James H. Mayes, Jr.
Michael A. Nelson
Donald G. Pokorny
Rodney S. Sepulvado
Luther C. Whitlock
Administrative Vice Presidents
- ------------------------------
Kevin McGinn
Gary L. Pace
Divisional Vice President
- -------------------------
Dennis W. Shupe
Regional Vice Presidents
- ------------------------
Patrick Armbrister
Gary Barnes
Kenneth Blackman
Linda Brown
Johnie E. Christ
M. R. Escamilla
Thomas A. Fahl
Gary S. Fisher
Peter M. Hurstak
Bruce James
Howard L. Jester, Jr.
James M. Keesee
Laurence F. Kimmel
Gregory D. Lile
James R. Scappi
Mark A. Scott
William K. Toon
Thomas L. Tornee
Assistant Vice Presidents
- -------------------------
Harry Cassady
Barbara A. Constantino
Donna L. Frate
Robert Grawl, Jr.
Donald L. Hamann
Thomas G. Kassakatis
Kimberly P. Walter
Assistant Secretaries
- ---------------------
Scott W. Brandau
Anthony Cornacchia
Chris L. Jones
Jeffrey P. Lanigan
Christopher T. Messer
Andrew G. Remias
Geoffrey A. Sprigle
Gregory R. Treichler
Assistant Controllers
- ---------------------
Sheri A. Barajas
Gigi A. Radley
28
<PAGE>
Financial Federal Corporation and Subsidiaries
Corporate Directory
(continued)
Directors
Lawrence B. Fisher
Partner
Orrick, Herrington & Sutcliffe LLP
Attorneys
William C. MacMillen, Jr.
President
William C. MacMillen & Co., Inc.
Investment Bankers
Bernard G. Palitz
President
Gregory Capital Corporation
Investments
Clarence Y. Palitz, Jr.
Chairman of the Board and
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
H. E. "Tim" Timanus, Jr.
Chairman and Chief Executive Officer
Heritage Bank
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
9633 South 48th Street
Phoenix, AZ 85044
(480) 785-4880
Website
- ------------------------
www.financialfederal.com
Securities Listings
Common stock
- -----------------------
New York Stock Exchange
Symbol FIF
Convertible subordinated notes
- ------------------------------
New York Stock Exchange
Auditors
Eisner & Lubin LLP
Certified Public Accountants
444 Madison Avenue
New York, NY 10022
General Counsel
Orrick, Herrington & 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
- ------------------------------
Bank One, N.A.
New York, NY
Corporate Information
The annual meeting of shareholders will be held at 270 Park Avenue, New York, NY
on December 14, 1999 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. / www.curran-connors.com
<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, 1999
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 2, 1999, 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 1, 1999
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, 1999 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-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 5544
<SECURITIES> 0
<RECEIVABLES> 948727
<ALLOWANCES> 16202
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 942185
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 745442
0
0
<COMMON> 7430
<OTHER-SE> 137552
<TOTAL-LIABILITY-AND-EQUITY> 942185
<SALES> 0
<TOTAL-REVENUES> 89118
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3100
<INTEREST-EXPENSE> 39169
<INCOME-PRETAX> 36829
<INCOME-TAX> 14231
<INCOME-CONTINUING> 22598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22598
<EPS-BASIC> 1.52
<EPS-DILUTED> 1.30
<FN>
THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
