-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HiRu2MS0M2Wk6Fy+G34n5JByW+w7qcZBgOP7bT33mWbb5CEeydWfg/1QgKKDpPF3 T9oEO+RI4zsANluwRQCPcA== 0000854711-97-000009.txt : 19971029 0000854711-97-000009.hdr.sgml : 19971029 ACCESSION NUMBER: 0000854711-97-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971028 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINANCIAL FEDERAL CORP CENTRAL INDEX KEY: 0000854711 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 880244792 STATE OF INCORPORATION: NV FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20220 FILM NUMBER: 97701661 BUSINESS ADDRESS: STREET 1: 400 PARK AVE STREET 2: 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128883344 10-K 1 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, 1997 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.) 400 Park Avenue, New York, New York 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 888-3344 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $.50 par value Name of exchange on which registered: American Stock Exchange 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 20, 1997 was $169,800,281.25. The aggregate market value was computed by reference to the closing price of the Common Stock on the American 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 9,056,015 shares. The number of shares of the Registrant's Common Stock outstanding as of October 20, 1997 was 14,777,325 shares. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's proxy statement for its Annual Meeting of Stockholders, to be held December 9, 1997, 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 7 through 25 of Financial Federal Corporation's 1997 Annual Report to Stockholders is incorporated by reference in answer to Items 6, 7 and 8 of Part II. Page 1 PART I Item 1. BUSINESS The Company, incorporated under the laws of Nevada in 1989, is an independent financial services company engaged in financing industrial, commercial and professional equipment through installment sales and leasing programs for manufacturers, dealers and users of such equipment. The Company also makes capital loans to its customers, primarily secured by the same types of equipment. The Company provides its services primarily to middle-market businesses located throughout the nation in diverse industries, such as general construction, road and infrastructure construction and repair, manufacturing, trucking, and waste disposal, the majority of which businesses have annual sales of up to $20 million. The Company finances a wide range of revenue-producing equipment such as cranes, earth-movers, machine tools, personnel lifts, trailers and trucks. In substantially all cases, the Company's finance receivables are secured by a first lien on such equipment collateral. The Company generates profits to the extent that its finance income exceeds its cost of borrowed funds, operating and administrative expenses and provision for possible losses. Equipment Financed The Company finances and leases equipment of major manufacturers. Generally, the equipment financed by the Company is movable, has an economic life which is longer than the term of the financing provided by the Company, is not subject to rapid technological obsolescence, has applications in a number of different industries and has a relatively broad resale market. A majority of the equipment and machinery pledged as collateral to the Company by its obligors is used late model equipment, which is generally, at the time financed, less than five years old, except for cranes and certain other items of equipment which have economic lives in excess of 15 years. Management believes this type of collateral is less subject to rapid depreciation as compared to new equipment, and, therefore, is more stable for the purposes of determining resale values. Sample types of equipment that the Company finances 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. Most of the equipment the Company finances is used in more than one industry. Business Strategy The Company's business strategy is to increase profitably the size of its portfolio of finance receivables and its share of the equipment finance and leasing market in the United States. The principal aspects of the Company's business strategy are summarized below. Commitment to Customer Service. The Company focuses on providing prompt, responsive and customized service to its customers and business prospects. The Company's senior management has, on average, in excess of 15 years of specialized expertise in the industries they serve, which generally enables them to understand and thus be responsive to customers. The Company's customer services include making prompt credit decisions, arranging financing structures which meet customers' needs and the Company's underwriting criteria, providing direct contact between customers and Company executives with decision making authority, and providing timely and knowledgeable responses to customer inquiries. Maintenance of Underwriting Standards. The Company has developed and implemented credit underwriting policies and procedures that are designed to achieve attractive yields while minimizing delinquencies and credit losses. Unlike many of its competitors, the Company does not use credit scoring models but instead relies upon the experience of its credit officers to assess the creditworthiness of the obligors and collateral values and accordingly structure transactions to provide an appropriate risk adjusted return to the Company. Each credit submission, regardless of size, requires the approval of at least two credit officers. Focus on Specific Collateral. Virtually all finance receivables originated or acquired are secured by a first lien on the pledged collateral. The Company focuses on financing revenue-producing equipment that is movable, has an economic life longer than the term of the financing, is not subject to rapid technological obsolescence, has applications in a number of different 2 industries and has a relatively broad resale market. A majority of the collateral pledged to the Company by obligors is used late model equipment. Management believes this type of collateral is less subject to rapid depreciation as compared to new equipment, and, therefore, is more stable for the purpose of determining resale values. Expansion. The Company's five full service offices are located in the United States. Thirty-five (35) full-time new business marketing representatives directly report to such offices. The obligors represented in the Company's portfolio of finance receivables are located in all fifty states. 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 employing additional marketing personnel and opening new full service offices. Personnel Policy. The Company recognizes that, in order to continue to compete profitably, it must offer to its business prospects and customers a high level of service, which the Company believes it can accomplish by attracting and retaining the services of a team of dedicated and talented managerial, marketing and administrative personnel. The present strategy used by the Company to attract and retain such personnel is to offer competitive salary arrangements, an equity interest in the Company through participation in the Stock Option Plan, and enhanced career opportunities. Approximately 70% of the Company's directors, officers and employees who had been employed by the Company for at least one year as of July 31, 1997, are presently participants in the Stock Option Plan and/or own stock in the Company. Improved Borrowing Spread and Diversified Funding Sources. The Company continually seeks to improve its borrowing spread (which is the spread the Company pays to its funding sources over the applicable borrowing indices) and diversify its funding sources. The Company seeks to lengthen the maturities of its committed unsecured credit facilities to more closely match the average maturity of its finance receivables portfolio. As the Company's capital base increases, the Company should be better positioned to arrange for improved terms under its present and future committed unsecured credit facilities. Any such reduction in the Company's funding costs should enable the Company to become more rate competitive, develop additional vendor relationships and expand its customer base. Moreover, diversification in funding sources should provide the Company with greater flexibility to address possible future market conditions. Marketing Strategy The Company markets its services through marketing personnel based in 23 domestic locations, including 5 full service offices, and originates finance receivables through its relationships with dealers and, to a lesser extent, manufacturers (sometimes collectively called "vendors"). The Company also directly markets its finance and leasing services to end-users for the acquisition or use of equipment and for capital loans. The Company emphasizes credit/collateral quality in all of its originations. All of the Company's marketing personnel are salaried rather than commission-based and the majority of such personnel participate in the Stock Option Plan. Thus, the Company expects that its marketing personnel should have a close community of interest with the Company and its stockholders. The Company's marketing activities are relationship and service oriented. The Company has a team of dedicated and seasoned marketing and managerial personnel, with average industry experience of more than 15 years, who solicit new business from the vendors and users of equipment. Management believes that the experience, knowledge and relationships of its executives and managers and marketing personnel, related to its customer and prospect base, equipment values, resale markets, and local economic and industry conditions, enable the Company to compete effectively on the basis of prompt, responsive and customized service. The Company's customer services include making prompt credit decisions, arranging financing structures responsive to customer needs, providing direct contact between customers and Company executives and managers with decision-making authority and providing prompt and knowledgeable responses to inquiries and to temporary business problems which customers may encounter in the ordinary course of their business. The Company obtains business in several ways. Dealers and, to a lesser extent, manufacturers of equipment may refer their customers (users of equipment) to the Company, or such customers may directly approach the Company to finance equipment purchases. The Company also purchases installment sales contracts, leases and personal property security agreements from vendors who extend credit to purchasers of their equipment. The Company also makes direct loans to equipment users collateralized by equipment pursuant to personal property security agreements. In addition, the Company purchases equipment from vendors and, simultaneously, leases it to users, generally under non- cancelable leases. 3 The vendors with whom the Company seeks to establish these relationships tend to be mid-sized, since the larger vendors typically generate a volume of business which is greater than the Company can presently service with its existing financial resources. The Company is not obligated to purchase any finance receivables from vendors nor are vendors obligated to sell any finance receivables to the Company. The Company's vendor relationships generally are nonexclusive. The Company presently has relationships with more than 100 vendors and is not dependent on any single vendor. In all vendor generated business, the Company independently approves the credit of the prospective obligor or lessee. The Company may also have recourse to the vendors. In order to expand its customer base and broaden its marketing coverage to other geographic areas, the Company from time to time has purchased portfolios of finance receivables from financial institutions, vendors and others generally in the range of $1.0 million to $5.0 million. These portfolios have included finance receivables secured by a broader range of equipment than that typically financed by the Company. Originating, Structuring and Underwriting of Finance Receivables The Company originates financings typically ranging in amount from $30,000 to $1.0 million per transaction. Finance receivables originated by the Company averaged $144,000 in fiscal 1997, $140,000 in fiscal 1996 and $134,000 in fiscal 1995. The Company attempts to structure financings to meet the financial needs of its customers. Structuring includes determination of: whether the financing will be an installment sale, lease or secured loan; term and payment schedule; whether the financing provided will be funded immediately or held available (possibly subject to conditions) for future use; finance or interest rate and other fees and charges; the primary collateral, and additional equipment collateral, if any, to be pledged, and the necessity of additional credit support which may include, among other things, accounts receivable, inventory, real property, certificates of deposit and/or commercial paper, payment guarantees and full or partial recourse to the selling vendor, if any. A portion of the Company's business is providing capital loans secured by equipment. Customers seek capital loans for numerous reasons, including consolidation of obligations, working capital needs, reduction of monthly debt service costs, enhancement of bonding capacity (generally in the case of road contractors), and acquisition of additional equipment or other assets. The Company may obtain, as additional collateral, a lien on the customer's accounts receivable, inventory and real property. The Company's capital loans are generally four to five years in term, and generally provide for prepayment premiums. When a vendor seeks to sell a finance receivable to the Company or a user seeks to obtain financing from the Company, an application for credit (including cash flow and background information) is submitted to the Company with respect to the obligor and any guarantors thereof along with a description of collateral to be pledged or leased and its present or proposed use. The Company's personnel analyze the credit application, investigate the credit of the obligor and any guarantors thereof, and evaluate the primary collateral to be pledged. The extent of such analysis depends upon, among other things, the dollar amount of the proposed transaction, the obligor's and any guarantors' financial strength, financial trade and industry references, and the obligor's payment history. The Company may also obtain reports from independent credit reporting agencies and conduct lien, litigation and tax searches. Unlike many of its competitors, the Company does not use credit scoring models. The creditworthiness of obligors and guarantors is evaluated on a case-by-case basis by the Company's credit personnel and management. The primary pledged collateral and any additional collateral are evaluated as to present and possible future resale value. If the Company approves the credit application on terms acceptable to the vendor and/or the obligor, and provided the intended purchaser/lessee acquires the equipment, then the Company either purchases an installment sales contract or lease from the vendor or enters into a direct finance or lease transaction with the obligor, the proceeds of which are remitted when applicable to the vendor. Funding occurs upon the receipt by the Company of all required documentation in form and substance satisfactory to the Company and its legal department. Under the Company's documentation, the obligor/lessee is responsible for all sales, use and property taxes. The Company maintains an operating environment which permits flexibility to its managers in structuring financing transactions subject to the Company's credit policies and procedures manual. The Company has established credit policies and procedures which are periodically reviewed and updated, which set forth detailed guidelines for credit review and approval, including maximum credit concentrations with any one obligor which are based on the Company's capital resources and other considerations. Each credit submission, regardless of size, requires the approval of at least two credit officers. The Company's credit policy provides several designations of credit officer authority levels. A credit officer's authority level is based, among other 4 things, on his/her credit experience, managerial position and tenure with the Company. The dollar amount that a credit officer can approve for a particular transaction is based upon the credit officer's authority level, collateral coverage relative to the Company's potential lending exposure, and the extent of recourse, if any, the Company may have to financially responsible vendors. Credit officers only have authority to approve credits up to their prescribed maximum level, and only then if certain criteria have been met. Notwithstanding the foregoing, 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, President or Chief Operating Officer. In addition to the obligor's/lessee's obligation to pay, on occasion vendors provide the Company with full or partial recourse which, among other things, obligates the vendor to pay the Company upon an obligor's default or a breach of warranty with respect to the assignment of the finance receivable to the Company by the vendor. In a small percent of cases when the Company originates or acquires a finance receivable, it may withhold an agreed upon amount from the vendor/obligor or lessee as security or obtain cash collateral from an obligated party as security (sometimes called a "dealer reserve"). The Company retains most of these dealer reserves until the Company is required (pursuant to the applicable agreement), or deems it appropriate, to release same. In most cases, the Company has the right to charge the applicable dealer reserve for any delinquent payments due on any finance receivable acquired from or originated through that vendor or obligor. In purchasing a portfolio of finance receivables, the Company reviews and analyzes the terms of the finance receivables to be purchased, the credit of the related obligors, the documentation relating to such finance receivables and the value of the related pledged collateral, the payment history of the obligors/lessees and the implicit yield to be earned by the Company. Collection and Servicing The Company collects and services all of its finance receivables. Customer payments are remitted to, and processed in, the Houston office. Collection efforts in connection with delinquent accounts, however, are handled by the collection personnel and managers in the various branch offices in conjunction with senior management and, if necessary, the Company's legal department. All past due accounts are reviewed by senior management at least monthly, and all accounts which are past due more than 60 days are continually reviewed by the Company's in-house legal staff. The decision to repossess collateral is made by the Company's senior management in conjunction with its legal staff. The Company determines, on a case-by-case basis, whether or not to use an outside source to repossess an item of collateral. The sale or other disposition of repossessed collateral is determined by the Company's senior management and legal staff in accordance with applicable law. Competition The Company's business is highly competitive. The Company competes with banks, manufacturer-owned and independent finance and leasing companies, as well as other financial institutions. Some of those competitors may be better positioned than the Company to market their services and financing programs to vendors and 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 and possess greater financial and other resources than the Company. In addition, some of these competitors have sources of funds available at a lower cost than those available to the Company, thereby enabling them to provide financing at rates lower than the Company may be willing to provide. The Company typically does not compete primarily on the basis of rate. The Company competes by emphasizing a high level of equipment and financial expertise, customer service, flexibility in structuring financing transactions and significant management involvement in customer relationships. Although there is no comprehensive data that quantifies the size of the domestic market for equipment financing and leasing, the Company believes that annual sales of the principal types of new and used equipment it finances or leases is in excess of $100 billion and its share of this market is less than 1%. Employees At July 31, 1997, the Company had 130 employees. All of the Company's employees and officers are salaried. The Company provides its employees with group health and life insurance benefits and a qualified 401(k) plan. The Company does not match employee contributions to the 401(k) plan. The Company does not have any collective bargaining, employment, pension, incentive compensation arrangements or non-solicitation agreements with any of its employees other than its stock option plan (which contains non-disclosure and non-solicitation provisions) and deferred compensation agreements. Employees who have participated in the Company's stock option plan have, among other things, agreed not to solicit customers of the Company for a period of time 5 following termination of their employment. The Company considers its relations with its employees to be satisfactory. Regulation The Company's commercial finance activities are generally not subject to regulation, except that certain states may regulate motor vehicle transactions, impose licensing requirements, and/or restrict the amount of interest or finance rates and other amounts that the Company may charge its customers. Failure to comply with such regulations can result in loss of principal and interest or finance charges, penalties and imposition of restrictions on future business activities. Executive Officers Clarence Y. Palitz, Jr., 66, has served as Chairman of the Board of the Company since July 1996 and as Chief Executive Officer and President of the Company since its inception in 1989. 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. Michael C. Palitz, 39, has served as Executive Vice President of the Company since July 1995, as Senior Vice President of the Company from February 1992 to July 1995 and as a Vice President of the Company from its inception in 1989 to February 1992. He has also served as Chief Financial Officer, Treasurer and Assistant Secretary of the Company since its inception in 1989. From 1985 to 1989, Mr. Palitz was an Assistant Vice President of Bankers Trust Company and, from 1980 to 1983, he was an Assistant Secretary of Chemical Bank. Paul Sinsheimer, 50, has served as Executive Vice President and 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. William M. Gallagher, 48, has served as Senior Vice President of the Company since 1990 and served as a Vice President of the Company from its inception in 1989 to 1990. From 1973 to 1989, Mr. Gallagher was employed by CAC, where he served successively as Collections Manager, Accounting Manager, Operations Manager of the Chicago and Houston regions and, from 1988, Vice President and Houston Branch Manager. Troy H. Geisser, 36, has served as Senior Vice President and Secretary of the Company since February 1996. From 1990 to 1996, Mr. Geisser held several positions, including Vice President and Branch Manager. From 1986 to 1990, Mr. Geisser held several positions including Division Counsel for the Northern Division of Orix Credit Alliance, Inc. (the successor to CAC). Richard W. Radom, 49, has served as Senior Vice President of the Company since 1990 and served as a Vice President of the Company from 1989 to 1990. From 1973 to 1989, Mr. Radom was employed by CAC, where he served, from 1986, as Senior Vice President. Item 2. PROPERTIES The Company's executive offices are located at 400 Park Avenue, New York, New York and consist of approximately 6,400 square feet of space. As of July 31, 1997, the Company has five full service offices (where credit analysis and approval, collection and marketing functions are performed) in Houston, Texas; Westmont (Chicago), Illinois; Teaneck (New York metropolitan area), New Jersey; Charlotte, North Carolina and Mesa (Phoenix), Arizona, which generally consist of approximately 2,000 to 7,000 square feet of space (except for the Houston office, the operating headquarters, which consists of approximately 12,500 square feet) and are occupied pursuant to leases which expire on various dates through 2004. Management believes that the Company's existing facilities are suitable and adequate for their present and proposed uses and that suitable and adequate facilities will be available on reasonable terms for any additional offices which the Company may open. 6 Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which any of its property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1997. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is listed on the American Stock Exchange under the symbol "FIF." The table below sets forth the high and low reported closing sales prices of the Common Stock as reported by the American Stock Exchange during the periods indicated, adjusted for the July 1997 and January 1996 three-for-two stock splits.
Price Range ---------------- High Low ------ ------ Fiscal year 1997 - ------------------------------------- First Quarter ended October 31, 1996 $10.58 $ 8.50 Second Quarter ended January 31, 1997 $11.83 $ 9.25 Third Quarter ended April 30, 1997 $13.00 $10.42 Fourth Quarter ended July 31, 1997 $15.58 $11.42 Fiscal year 1996 - ------------------------------------- First Quarter ended October 31, 1995 $ 9.73 $ 7.83 Second Quarter ended January 31, 1996 $11.00 $ 9.28 Third Quarter ended April 30, 1996 $11.25 $10.09 Fourth Quarter ended July 31, 1996 $11.42 $ 8.42
The Company presently has no intention of paying cash dividends on the Common Stock in the foreseeable future. The payment of cash dividends, if any, will depend upon the Company's earnings, financial condition, capital requirements, cash flow and long range plans and such other factors as the Board of Directors of the Company may deem relevant. Number of Record Holders The number of record holders of the Company's Common Stock as of October 20, 1997 was 74. Included in this number are several nominees which hold the Company's common stock on behalf of numerous other persons and institutions; these other persons and institutions are not included in the above number as their shares are held in "Street Name." Item 6. SELECTED FINANCIAL DATA Reference is made to information under the heading "Financial Highlights" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1997, which information is incorporated herein by reference. The Company has not paid any cash dividends on its Common Stock. 7 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to information under the heading "Management's Discussion and Analysis of Operations and Financial Condition" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1997, which information is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to information under the headings "Consolidated Balance Sheet," "Consolidated Statement of Stockholders' Equity," "Consolidated Statement of Operations," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1997, 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 9, 1997, except as to biographical information on Executive Officers which is contained in Item I of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 9, 1997. 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 9, 1997. 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 9, 1997. 8 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 13 through 24 of the Registrant's Annual Report to Stockholders for the fiscal year ended July 31, 1997, as provided in Item 8 hereof: - Consolidated Balance Sheet as at July 31, 1997 and 1996. - Consolidated Statement of Stockholders' Equity for the fiscal years ended July 31, 1997, 1996 and 1995. - Consolidated Statement of Operations for the fiscal years ended July 31, 1997, 1996 and 1995. - Consolidated Statement of Cash Flows for the fiscal years ended July 31, 1997, 1996 and 1995. - 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. 13 - Schedule I - Condensed Financial Information of Registrant. 14 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 18 Exhibit No. Description of Exhibit 3.1* Articles of Incorporation of the Registrant 3.2* By-laws of the Registrant 3.3* Form of Restated and Amended By-laws of the Registrant 4.1* Form of Variable Rate Subordinated Debentures Due September 1, 2000 (a "Debenture") issued by Registrant 4.6****** Form of Note Agreement dated as of April 15, 1996 issued by Financial Federal Credit Inc. ("Credit") to certain institutional note holders 4.7 Form of Note Agreement dated as of July 1, 1997 issued by Credit to certain institutional note holders 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******** Form of Commercial Paper Dealer Agreement of Credit 9 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. 11.1 Computation of Earnings Per Share 13.1 1997 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) ____________ *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). **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. ***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. ****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. *****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. ******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). *******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. ********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. *********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. (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, 1997. 10 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 President October 27, 1997 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, 1997 Chairman of the Board, President and Chief Executive Date Officer /s/Lawrence B. Fisher October 27, 1997 Director Date /s/William C. MacMillen, Jr. October 27, 1997 Director Date /s/Bernard G. Palitz October 27, 1997 Director Date /s/Paul Sinsheimer October 27, 1997 Executive Vice President and Director Date /s/Michael C. Palitz October 27, 1997 Executive Vice President, Treasurer, Chief Financial Date Officer and Director /s/David H. Hamm October 27, 1997 Controller, Assistant Treasurer and Principal Date Accounting Officer 11 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. 12 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 4, 1997 13 Schedule I FINANCIAL FEDERAL CORPORATION CONDENSED BALANCE SHEET
July 31, --------------------------- 1997 1996 ------------ ------------ ASSETS Cash $ 117,000 $ 256,000 Due from subsidiaries: Advances 18,650,000 27,626,000 Subordinated notes receivable 50,000,000 45,000,000 Investment in subsidiaries - at equity 46,039,000 34,749,000 Other assets 473,000 814,000 ------------ ------------ TOTAL $115,279,000 $108,445,000 ============ ============ LIABILITIES Senior debt $ 4,901,000 $ 4,966,000 Accrued interest, taxes and other liabilities 2,484,000 2,331,000 Subordinated debt 2,290,000 6,957,000 ------------ ------------ Total liabilities 9,675,000 14,254,000 ------------ ------------ STOCKHOLDERS' EQUITY Common stock 7,382,000 4,980,000 Additional paid-in capital 57,315,000 58,289,000 Warrants 29,000 29,000 Retained earnings 40,878,000 30,893,000 ------------ ------------ Total stockholders' equity 105,604,000 94,191,000 ------------ ------------ TOTAL $115,279,000 $108,445,000 ============ ============ The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof.
14 FINANCIAL FEDERAL CORPORATION CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended July 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Equity in earnings of subsidiaries before income taxes $18,661,000 $14,205,000 $10,891,000 Interest charges to subsidiaries 5,060,000 4,007,000 3,266,000 ----------- ----------- ----------- Total 23,721,000 18,212,000 14,157,000 ----------- ----------- ----------- Expenses: Interest expense 590,000 972,000 1,004,000 Other expenses (net) 2,144,000 1,811,000 1,581,000 ----------- ----------- ----------- Total 2,734,000 2,783,000 2,585,000 ----------- ----------- ----------- Earnings before income taxes 20,987,000 15,429,000 11,572,000 Provision for income taxes 8,078,000 5,819,000 4,363,000 ----------- ----------- ----------- NET EARNINGS 12,909,000 9,610,000 7,209,000 Retirement of treasury stock (463,000) (840,000) Three-for-two stock split (2,461,000) (1,372,000) Retained earnings - August 1 30,893,000 23,495,000 16,286,000 ----------- ----------- ----------- RETAINED EARNINGS - JULY 31 $40,878,000 $30,893,000 $23,495,000 =========== =========== =========== The consolidated financial statements and the notes thereto are made a part hereof.
15 FINANCIAL FEDERAL CORPORATION CONDENSED STATEMENT OF CASH FLOWS
Year Ended July 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net cash provided by operating activities $ 1,922,000 $ 1,330,000 $ 381,000 ----------- ----------- ----------- Cash flows from investing activities: Collections from (advances to) subsidiaries-net 8,976,000 (8,301,000) 2,853,000 Subordinated notes receivable-subsidiary: Advanced (5,000,000) (20,000,000) (25,000,000) Collected 20,000,000 Dividends received from subsidiary 200,000 500,000 2,000,000 ----------- ---------- ----------- Net cash provided by (used in) investing activities 4,176,000 (27,801,000) (147,000) ----------- ---------- ----------- Cash flows from financing activities: Commercial paper: Proceeds 66,207,000 76,869,000 71,393,000 Repayments (66,272,000) (76,509,000) (71,770,000) Note payable - bank (500,000) 500,000 Repurchase of subordinated debt (4,667,000) (595,000) Proceeds from sale of common stock, net 26,340,000 Proceeds from exercise of stock options and warrants 61,000 166,000 306,000 Acquisition of treasury stock (1,630,000) Tax benefit relating to stock options 64,000 37,000 ----------- ----------- ----------- Net cash provided by (used in) financing activities (6,237,000) 26,366,000 (129,000) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH (139,000) (105,000) 105,000 Cash - August 1 256,000 361,000 256,000 ----------- ----------- ----------- CASH - JULY 31 $ 117,000 $ 256,000 $ 361,000 =========== =========== =========== Non-cash financing activities: In 1997, the Company retired 124,300 common shares held as treasury stock resulting in decreases of common stock, additional paid-in capital and retained earnings of $62,000, $1,105,000 and $463,000, respectively. Additionally, the Company authorized a three-for-two stock split effected in the form of a stock dividend. In 1996, the Company retired 96,000 common shares held as treasury stock resulting in decreases of common stock, additional paid-in capital and retained earnings of $48,000, $552,000 and $840,000, respectively. Additionally, the Company authorized a three-for-two stock split effected in the form of a stock dividend. The consolidated financial statements and the notes thereto are made a part hereof.
16 FINANCIAL FEDERAL CORPORATION NOTES TO CONDENSED BALANCE SHEET 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 generally bore interest at 5.9% and 5.7% at July 31, 1997 and 1996, respectively. Subordinated notes receivable are summarized as follows: Maturity Interest rate Amount ----------------- ------------- ----------- July 31, 2002 8.35% $25,000,000 September 1, 2002 7.85 5,000,000 September 1, 2002 7.70 5,000,000 September 1, 2002 6.90 5,000,000 July 31, 2004 7.50 10,000,000 ----------- Total $50,000,000 =========== The notes and interest thereon are subordinated to the subsidiary's borrowings from banks, institutional and other investors, commercial paper investors and other debt designated by the subsidiary's Board of Directors. Interest is receivable quarterly. Other assets include $422,000 and $744,000 of accrued interest receivable from subsidiaries at July 31, 1997 and 1996, respectively. 17 EXHIBIT INDEX Exhibit No. Description of Exhibit Page No. 3.1 Articles of Incorporation of the Registrant * 3.2 By-laws of the Registrant * 3.3 Form of Restated and Amended By-laws of the Registrant * 4.1 Form of Variable Rate Subordinated Debentures Due September 1, 2000 (a "Debenture")issued by Registrant * 4.6 Form of Note Agreement, dated as of April 15, 1996, issued by Financial Federal Credit Inc. ("Credit") to certain institutional note holders * 4.7 Form of Note Agreement dated as of July 1, 1997 issued by Credit to certain institutional note holders 19 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. * 11.1 Computation of Earnings Per Share 44 13.1 1997 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 45 23.1 Consent of Independent Auditors 46 27 Financial Data Schedule (EDGAR version only) *Previously filed with the Securities and Exchange Commission as an exhibit. 18 EX-4.7 2 Exhibit 4.7 Financial Federal Credit Inc. 1300 Post Oak Boulevard, Suite 1300 Houston, Texas 77056 Note Agreement U.S.$25,000,000 7.40% Series A Senior Notes Due July 14, 2000 and U.S. $25,000,000 7.45% Series B Senior Notes Due December 14, 2000 Dated as of July 1, 1997 To the Purchaser named on Schedule I hereto which is a signatory of this Agreement Ladies and Gentlemen: The undersigned, Financial Federal Credit Inc., a Texas corporation (the "Company"), agrees with you as follows: Section 1. Description of Notes and Commitment. Section 1.1. Description of Notes. The Company will authorize the issue and sale of (a) U.S.$25,000,000 aggregate principal amount of its 7.40% Series A Senior Notes (the "Series A Notes") to be dated the date of issue, to bear interest from such date at the rate of 7.40% per annum, payable semiannually on the first day of each June and December in each year (commencing on December 1, 1997) and at maturity and to bear interest on overdue principal (including any overdue optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue installment of interest at the rate of 9.40% per annum after maturity, whether by acceleration or otherwise, until paid, to be expressed to mature on July 14, 2000, and to be substantially in the form attached hereto as Exhibit A-1, and (b) U.S.$25,000,000 aggregate principal amount of its 7.45% Series B Senior Notes (the "Series B Notes") to be dated the date of issue, to bear interest from such date at the rate of 7.45% per annum, payable semiannually on the first day of each June and December in each year (commencing on December 1, 1997) and at maturity and to bear interest on overdue principal (including any overdue optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue installment of interest at the rate of 9.45% per annum after maturity, whether by acceleration or otherwise, until paid, to be expressed to mature on December 14, 2000, and to be substantially in the form attached hereto as Exhibit A-2. The Series A Notes and the Series B Notes are hereinafter collectively referred to as the "Notes"; and the term "Series" shall include all of the Series A Notes or all of the Series B Notes as the case may be. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. The Notes are not subject to prepayment or redemption at the option of the Company prior to their expressed maturity dates except on the terms and conditions and in the amounts and with the premium, if any, set forth in 2 of this Agreement. The term "Notes" as used herein shall include each Note delivered pursuant to this Agreement and the separate agreements with the other purchasers named in Schedule I. You and the other purchasers named in Schedule I are hereinafter sometimes referred to as the "Purchasers". Section 1.2. Commitment, Closing Date. Subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to you, and you agree to purchase from the Company, Notes of the Series and in the principal amount set forth opposite your name on Schedule I hereto at a price of 100% of the principal amount thereof on the Closing Date hereinafter mentioned. Delivery of the Notes will be made at the offices of Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, against payment therefor in Federal Reserve or other funds current and immediately available at the principal office of The Chase Manhattan Bank in New York, New York in the amount of the purchase price at 10:00 A.M., Houston time, on July 16, 1997 (the "Closing Date"). The Notes delivered to you on the Closing Date will be delivered to you in the form of a registered Note or registered Notes of each Series to be purchased by you in the form attached hereto as Exhibit A-1 or A- 2, as appropriate, for the full amount of your purchase (unless different denominations are specified by you in writing at least three Business Days prior to the Closing Date), registered in your name or in the name of such nominee as you may specify, all as you may specify at any time prior to the date fixed for delivery. Section 1.3. Other Agreements. Simultaneously with the execution and delivery of this Agreement, the Company is entering into similar agreements with the other Purchasers under which such other Purchasers agree to purchase from the Company the principal amount of Notes of the Series set opposite such Purchasers' names in Schedule I, and your obligation and the obligations of the Company hereunder are subject to the execution and delivery of the similar agreements by the other Purchasers. This Agreement and said similar agreements with the other Purchasers are herein collectively referred to as the "Agreements". The obligations of each Purchaser shall be several and not joint and no Purchaser shall be liable or responsible for the acts of any other Purchaser. Section 2. Prepayment of Notes. Section 2.1. No Required Prepayments. No prepayments shall be required with respect to the Notes. Section 2.2. Optional Prepayment. Upon compliance with 2.4, the Company shall have the privilege, on any interest payment date, of prepaying the outstanding Notes of either or both Series, at the Company's election, either in whole or in part (but if in part, then in units in multiples of U.S.$100,000) by payment of the principal amount of such Series of Notes, or portion thereof to be prepaid, and accrued interest thereon to the date of such prepayment, together with a premium equal to the Make-Whole Premium, determined five Business Days prior to the date of such prepayment. "Make-Whole Premium" shall mean, in connection with any prepayment of a Series of Notes, the excess, if any, of (i) the aggregate present value as of the date of such prepayment of each dollar of principal being prepaid and the amount of interest (exclusive of interest accrued to the date of prepayment) that would have been payable in respect of such dollar if such prepayment had not been made, determined by discounting such amounts at the Reinvestment Rate from the respective dates on which they would have been payable, over (ii) 100% of the principal amount of the outstanding Notes of such Series being prepaid. If the Reinvestment Rate is equal to or higher than 7.40%, with respect to the Series A Notes, or 7.45%, with respect to the Series B Notes, the Make-Whole Premium for such Series shall be zero. As to the Notes of either Series, "Reinvestment Rate" shall mean the sum of (x) .50% plus (y)(1) the yield reported on page "USD" of the Bloomberg Financial Market Service (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in United States government securities) at 10:00 a.m. (New York time) on the date of determination for United States government securities having a maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal being prepaid, or (2) in the event that no such nationally recognized trading screen reporting on-line intraday trading in United States government securities is available, the arithmetic mean of the yields for the two columns under the heading "Week Ending" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal being prepaid. If no maturity exactly corresponds to such Weighted Average Life to Maturity, yields for the two published maturities most closely corresponding to such Weighted Average Life to Maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For the purposes of calculating the Reinvestment Rate pursuant to clause (y)(2) above, the most recent Statistical Release published prior to the date of determination of the premium hereunder shall be used. "Statistical Release" shall mean the statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded United States government securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination hereunder, then such other reasonably comparable index which shall be designated by the holders of 66-2/3% in aggregate principal amount of the outstanding Notes (exclusive of any Notes held by a Restricted Subsidiary or an Affiliate). "Weighted Average Life to Maturity" of the principal amount of the Notes of either Series being prepaid or any other Indebtedness of the Company shall mean, as of the time of any determination thereof, the number of years obtained by dividing the then Remaining Dollar-years of such Indebtedness by the then outstanding principal amount of such Indebtedness; and the "Remaining Dollar-years" of any Indebtedness means at any time the amount obtained by (a) multiplying the amount of each then remaining installment, sinking fund, serial maturity or other required payment, including payment at final maturity, by the number of years (calculated to the nearest one-twelfth) which will elapse between the time in question and the making of that payment and (b) totaling all of the products obtained in (a). Section 2.3 Prepayment upon Change of Control. (a) In the event the Company has knowledge of a Change of Control Date or an impending Change of Control Date, the Company will give immediate written notice (a "Company Notice") of such fact to all holders of the Notes. The Company Notice shall (i) describe the facts and circumstances of such Change of Control in reasonable detail, (ii) state that the Company will prepay all of the outstanding Notes, together with accrued interest to the date of prepayment and a premium equal to the Make-Whole Premium, if any, on the date specified in such Company Notice, (iii) refer to this 2.3 and the rights of each holder of the Notes to elect to forgo prepayment of all of the Notes held by it, and (iv) set forth the date, which shall be not less than 30 days following the date of giving of the Company Notice nor after the later of (x) the Change of Control Date and (y) 60 days following the date of giving of the Company Notice, on which the Company will make such prepayment. Each holder of the Notes shall have the right to elect not to have all of the Notes held by such holder prepaid, by written notice to the Company given within 21 days following receipt of the Company Notice. The Company shall on the prepayment date set forth in the Company Notice prepay the entire principal amount of the Notes as to which the holders thereof have not elected to forgo prepayment. (b) In the event the Company fails to give the Company Notice as required above, upon the occurrence of a Change of Control Date, each holder of Notes shall have the right to require the Company to prepay all of the outstanding Notes, together with accrued interest thereon to the date of prepayment and a premium equal to the Make-Whole Premium. Notice of a required prepayment pursuant to this 2.3(b) shall be delivered by any holder of Notes to the Company not more than 30 days after such holder has actual knowledge of such Change of Control Date. The date of such prepayment shall be the same date as the Change of Control Date or, in the event the Change of Control Date shall have occurred prior to receipt of the notice from a holder of the Notes, then such prepayment together with accrued interest and a premium equal to the Make-Whole Premium, if any, thereon shall be on the Business Day designated in, and shall be not less than five nor more than ten days following the date of, such holder's notice. Upon receipt of such notice, the Company shall give immediate written notice of such declaration of prepayment to each other holder of Notes which shall set forth the date of prepayment. Each other holder shall have the right at any time prior to the date of prepayment designated pursuant to the preceding sentence to elect not to have all of the Notes held by such holder prepaid on such date of prepayment designated pursuant to the preceding sentence. Any prepayment of less than all of the outstanding Notes made pursuant to this 2.3 shall be applied to the payment in full of the Notes held by the holders not rejecting a notice of declaration of prepayment. Section 2.4. Notice of Prepayments. The Company will give notice of any prepayment of the Notes pursuant to 2.2 to each holder thereof not less than 30 days nor more than 60 days before the date fixed for such optional prepayment specifying (i) such date, (ii) the section of this Agreement under which the prepayment is to be made, (iii) the principal amount of the holder's Notes of each Series to be prepaid on such date, and (iv) the estimated Make- Whole Premium, if any, and accrued interest applicable to the prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes of each Series specified in such notice, together with the premium, if any, and accrued interest thereon shall become due and payable on the prepayment date. The Company will also give written notice to each holder of the Notes, by telecopy or other same day written communication, setting forth the computation and amount of any premium payable in connection with such prepayment at least three days prior to the date of such prepayment. Section 2.5. Allocation of Prepayments. All partial prepayments of the Notes of either Series pursuant to the provisions of 2.2 shall be applied on all outstanding Notes of such Series ratably in accordance with the unpaid principal amounts thereof. Partial prepayments pursuant to the provisions of 2.3 shall be applied as provided therein. Section 2.6. Direct Payment. Notwithstanding anything to the contrary in this Agreement or the Notes, in the case of any Note owned by a Purchaser or its nominee or owned by any other Qualified Holder who has given written notice to the Company requesting that the provisions of this Section shall apply, the Company will promptly and punctually pay when due the principal thereof and premium, if any, and interest thereon, without any presentment thereof (except as set forth in the immediately succeeding sentence) directly to such Purchaser or such subsequent Qualified Holder at the address of such Purchaser set forth in Schedule I or at such other address as such Purchaser or such subsequent Qualified Holder may from time to time designate in writing to the Company or, if a bank account is designated for such Purchaser on Schedule I hereto or in any written notice to the Company from such Purchaser or any such subsequent Qualified Holder, the Company will make such payments in immediately available funds to such bank account, marked for attention as indicated, or in such other manner or to such other account of such Purchaser or such Qualified Holder in any bank in the United States as such Purchaser or any such subsequent Qualified Holder may from time to time direct in writing. The holder of any Note agrees that upon the payment in full of the outstanding principal amount of, premium, if any, and interest on such Note, such holder shall, at the request of the Company, surrender such Note at the office of the Company where the Note Register is kept pursuant to 9.1. The holder of any Notes to which this Section applies agrees that in the event it shall sell or transfer any such Notes (i) it will, prior to the delivery of such Notes (unless it has already done so), make a notation thereon of all principal, if any, prepaid on such Notes and will also note thereon the date to which interest has been paid on such Notes, and (ii) it will promptly notify the Company of the name and address of the transferee of any Notes so transferred. As used in this 2.6 the term "Qualified Holder" shall mean a holder of not less than 5% of the then outstanding principal amount of the Notes. Section 3. Representations. Section 3.1. Representations of the Company. The Company represents and warrants that all representations set forth in the form of certificate attached hereto as Exhibit B are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.2. Representations of the Purchaser. You represent, and in entering into this Agreement the Company understands, that you are acquiring the Notes for the purpose of investment and not with a view to the resale or distribution thereof, and that you have no present intention of selling, negotiating or otherwise disposing of the Notes; provided that the disposition of your property shall at all times be and remain within your control. You understand that the Notes have not been registered under the Securities Act of 1933, as amended, or the "blue sky" or securities laws of any state or jurisdiction of the United States, and may be transferred only if so registered or if an exemption therefrom is available. You further understand that the Company is not required to so register the Notes. You further represent that at least one of the following statements is an accurate representation as to the source of funds to be used by you to purchase the Notes: (a) such source of funds is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995), and you have disclosed to the Company the names of such employee benefit plans with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan exceed or are expected to exceed 10% of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in your most recent annual statement in the form required by the National Association of Insurance Commissioners as filed with your state of domicile, as of the date of purchase (for the purpose of this clause (a), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (b) all or a part of such funds constitute assets of one or more insurance company separate accounts, employee benefit plan trusts or a commingled employee benefit plan trust maintained by you, and you have disclosed to the Company the names of such employee benefit plans whose assets in such separate account or accounts exceed 10% of the total assets or are expected to exceed 10% of the total assets of such separate account or accounts as of the date of such purchase (for the purpose of this clause (b), all employee benefit plans maintained by the same employer or employee organization and invested in any such separate account or accounts are deemed to be a single plan); (c) all or part of such funds constitute assets of a bank collective investment fund maintained by you, and you have disclosed to the Company the names of such employee benefit plans whose assets in such collective investment fund exceed 10% of the total assets or are expected to exceed 10% of the total assets of such fund as of the date of such purchase (for the purpose of this clause (c), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (d) all or part of such funds constitute assets of one or more employee benefit plans, each of which has been identified to the Company in writing; (e) you are acquiring the Notes for the account of one or more pension funds, trust funds or agency accounts, each of which is a "governmental plan" as defined in Section 3(32) of ERISA; (f) the source of funds is an "investment fund" managed by a "qualified professional asset manager" or "QPAM" (as defined in Part V of PTE 84-14, issued March 13, 1984), provided that no other party to the transactions described in this Agreement and no "affiliate" of such other party (as defined in Section V(c) of PTE 84-14) has at this time, and during the immediately preceding one year has exercised the authority to appoint or terminate said QPAM as manager of the assets of any plan identified in writing pursuant to this clause (f) or to negotiate the terms of said QPAM's management agreement on behalf of any such identified plans; or (g) if you are other than an insurance company, all or a portion of such funds consists of funds which do not constitute "plan assets". The Company shall deliver a certificate on the Closing Date which certificate shall either state that (i) it is neither a "party in interest" (as defined in Title I, Section 3(14) of ERISA) nor a "disqualified person" (as defined in Section 4975(e)(2) of the Code), with respect to any plan identified pursuant to paragraphs (a), (b), (c) or (d) above, or (ii) with respect to any plan identified pursuant to paragraph (f) above, neither it nor any "affiliate" (as defined in Section V(c) of PTE 84-14) is described in the proviso to said paragraph (f). As used in this 3.2, the terms "separate account", "employer securities", and "employee benefit plan" shall have the respective meanings assigned to them in ERISA and the term "plan assets" shall have the meaning assigned to it in Department of Labor Regulation 29 C.F.R. 2510.3-101. Section 4. Closing Conditions. Your obligation to purchase the Notes on the Closing Date shall be subject to the performance by the Company of its agreements hereunder which by the terms hereof are to be performed at or prior to the time of delivery of the Notes and to the following further conditions precedent: Section 4.1. Closing Certificate. Concurrently with the delivery of Notes to you on the Closing Date, you shall have received a certificate of the Company dated the Closing Date, signed by the Chairman, Vice Chairman, President or a Vice President of the Company substantially in the form attached hereto as Exhibit B, the truth and accuracy of which shall be a condition to your obligation to purchase the Notes proposed to be sold to you. Section 4.2. Legal Opinions. Concurrently with the delivery of Notes to you on the Closing Date, you shall have received from Chapman and Cutler, who are acting as your special counsel in this transaction, and from Troy H. Geisser, General Counsel of the Company, their respective opinions dated the Closing Date, in form and substance satisfactory to you, and covering the matters set forth in Exhibits C and D, respectively, hereto. Section 4.3. Satisfactory Proceedings. All proceedings taken in connection with the transactions contemplated by this Agreement, and all documents necessary to the consummation thereof, shall be satisfactory in form and substance to you and your special counsel, and you shall have received a copy (executed or certified as may be appropriate) of all legal documents or proceedings taken in connection with the consummation of said transactions. Section 4.4. Other Agreements. On the Closing Date, the Company shall have consummated the sale of the entire principal amount of the Notes scheduled to be sold on the Closing Date pursuant to this Agreement and the other agreements referred to in 1.3. Section 4.5. Waiver of Conditions. If on the Closing Date the Company fails to tender to you the Notes to be issued to you on such date or if the conditions specified in this 4 have not been fulfilled, you may thereupon elect to be relieved of all further obligations under this Agreement. Without limiting the foregoing, if the conditions specified in this 4 have not been fulfilled, you may waive compliance by the Company with any such condition to such extent as you may in your sole discretion determine. Nothing in this 4.5 shall operate to relieve the Company of any of its obligations hereunder or to waive any of your rights against the Company. Section 5. Company Covenants. From and after the Closing Date and continuing so long as any amount remains unpaid on any Note: Section 5.1. Corporate Existence, etc. The Company will preserve and keep in force and effect, and will cause each Restricted Subsidiary to preserve and keep in force and effect, its corporate existence and all licenses and permits necessary to the proper conduct of its business, except where the failure to maintain any such license or permit would not have a material adverse effect on the properties, business, profits or condition (financial or otherwise) of the Company and its Restricted Subsidiaries, taken as a whole; provided that the foregoing shall not prevent (x) any transaction permitted by 5.13, or (y) the Company from dissolving or liquidating any Restricted Subsidiary and distributing its assets to its shareholders so long as after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. Section 5.2. Insurance. The Company will maintain, and will cause each Restricted Subsidiary to maintain, insurance coverage by financially sound and reputable insurers in such forms and amounts and against such risks as are customary for corporations of established reputation engaged in the same or a similar business and owning and operating similar properties; provided that with respect to property leased to third parties, the obligations under this 5.2 may be satisfied by imposing the same upon the lessees of such property and by exercising such degree of supervision and enforcement of such obligations of such lessees as shall be commercially reasonable. Section 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws. The Company will promptly pay and discharge, and will cause each Restricted Subsidiary promptly to pay and discharge, all lawful taxes, assessments and governmental charges or levies imposed upon the Company or such Restricted Subsidiary, respectively, or upon or in respect of all or any part of the property or business of the Company or such Restricted Subsidiary, all trade accounts payable in accordance with usual and customary business terms, and all claims for work, labor or materials, which if unpaid might become a lien or charge upon any property of the Company or such Restricted Subsidiary; provided the Company or such Restricted Subsidiary shall not be required to pay any such tax, assessment, charge, levy, account payable or claim if failure to do so would not have a material adverse affect on the properties, business, profits or condition of the Company and its Restricted Subsidiaries, taken as a whole, or if (i) the validity, applicability or amount thereof is being contested in good faith by appropriate actions or proceedings, and (ii) the Company or such Restricted Subsidiary shall set aside on its books, reserves deemed by it to be adequate with respect thereto. The Company will promptly comply and will cause each Restricted Subsidiary to comply with all laws, ordinances or governmental rules and regulations to which it is subject including, without limitation, the Occupational Safety and Health Act of 1970, ERISA and all laws, ordinances, governmental rules and regulations relating to environmental protection in all applicable jurisdictions, the violation of which might reasonably be expected to result in any lien or charge upon any property of the Company or any Restricted Subsidiary which might reasonably be expected to materially and adversely affect the properties, business, profits or condition (financial or otherwise) of the Company and its Restricted Subsidiaries, taken as a whole, unless the validity or applicability thereof is being contested in good faith by appropriate actions or proceedings, and the Company or such Restricted Subsidiary shall set aside on its books reserves deemed by it to be adequate with respect thereto. Section 5.4. Maintenance, etc. The Company will maintain, preserve and keep, and will cause each Restricted Subsidiary to maintain, preserve and keep, its properties (other than property held for sale or lease) which are used or useful in the conduct of its business (whether owned in fee or a leasehold interest) in good repair and working order and from time to time will make all necessary repairs, replacements, renewals and additions so that at all times the efficiency thereof shall be maintained unless and to the extent that failure to so maintain, preserve and keep certain properties will not have a material adverse affect on the properties, business, profits or condition (financial or otherwise) of the Company and its Restricted Subsidiaries, taken as a whole; provided, that with respect to property leased to third parties, the obligations under this 5.4 may be satisfied by imposing the same upon the lessees of such property and by exercising such degree of supervision and enforcement of such obligations as shall be commercially reasonable. Section 5.5. Nature of Business. Neither the Company nor any Restricted Subsidiary will engage in any business other than the Finance Business. Section 5.6. Consolidated Adjusted Net Worth. The Company will at all times keep and maintain Consolidated Adjusted Net Worth at an amount not less than (i) in the case of its fiscal quarter ending April 30, 1997, U.S.$70,000,000, and (ii) in the case of each fiscal quarter thereafter, an amount equal to the sum of the amount required to be maintained in the immediately previous fiscal quarter plus 25% of Consolidated Net Income for such immediately previous fiscal quarter (but without deduction in the event of a deficit in Consolidated Net Income). Section 5.7. Permitted Indebtedness. The Company will not and will not permit any Restricted Subsidiary to incur, create, issue, assume or permit to exist any Indebtedness other than: (a) Senior Debt; (b) Subordinated Debt outstanding on the date hereof and reflected on Annex A to Exhibit B or permitted by 5.19; (c) Capital Debt outstanding on the date hereof and reflected on Annex A to Exhibit B or permitted by 5.19; (d) Guaranties of the Company or a Restricted Subsidiary; (e) Capitalized Leases of the Company; (f) liabilities (other than for borrowed money) incurred in the regular operation of the Finance Business of the Company or a Restricted Subsidiary and not more than three months overdue, unless such overdue liabilities are either (i) less than U.S.$250,000 in any one case and less than U.S.$2,500,000 in the aggregate, or (ii) being contested in good faith by appropriate actions or proceedings and, with respect thereto, the Company or such Restricted Subsidiary shall have set aside on its books reserves deemed by it to be adequate; and (g) Indebtedness of a Restricted Subsidiary to the Company or to a Wholly-owned Restricted Subsidiary and Indebtedness of the Company to a Wholly-owned Restricted Subsidiary. Any corporation which becomes a Restricted Subsidiary after the date hereof shall for all purposes of this 5.7 be deemed to have created, assumed or incurred at the time it becomes a Restricted Subsidiary all Indebtedness of such corporation existing immediately after it becomes a Restricted Subsidiary. Section 5.8. Limitations on Indebtedness. (a) The Company will not at any time permit both (i) the aggregate unpaid principal amount of Senior Obligations to exceed 600% of the sum of (A) Consolidated Adjusted Net Worth and (B) the aggregate unpaid principal amount of Subordinated Debt; and (ii) the aggregate unpaid principal amount of Total Debt to exceed 750% of Consolidated Adjusted Net Worth. (b) The Company will not at any time permit the aggregate unpaid amount of Priority Obligations to exceed 10% of Consolidated Adjusted Net Worth as at the end of the fiscal year of the Company then most recently ended. Section 5.9. Sale or Discount of Receivables. The Company will not, and will not permit any Restricted Subsidiary to, enter into any Receivables Securitization Transaction; provided however the Company or any Restricted Subsidiary may enter into any Receivables Securitization Transaction so long as, after giving effect thereto and to the application of the proceeds thereof, the aggregate value of assets then subject to all Receivables Securitization Transactions does not exceed 40% of the sum of (i) the aggregate value of assets then subject to all Receivables Securitization Transactions, plus (without duplication) (ii) total assets of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. Section 5.10. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, create or incur, or suffer to be incurred or to exist, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of obligations in priority to the payment of its or their general creditors, or acquire or agree to acquire, or permit any Restricted Subsidiary to acquire, any property or assets upon conditional sales agreements or other title retention devices, except: (a) liens for property taxes and assessments and/or governmental charges or levies and liens securing claims or demands of mechanics and materialmen; provided that payment thereof is not at the time required by 5.3; (b) liens of or resulting from any judgment or award, (x) which, if unpaid would not otherwise be an Event of Default or (y) the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Company or a Restricted Subsidiary shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured and for which the Company or such Restricted Subsidiary has set aside on its books reserves deemed by it to be adequate with respect thereto; provided, that the aggregate amount so secured by liens pursuant to this clause (b) shall not at any time exceed an amount equal to 10% of Consolidated Adjusted Net Worth; (c) liens, charges, encumbrances and priority claims incidental to the conduct of business or the ownership of properties and assets (including warehousemen's and attorneys' liens and statutory landlords' liens) and deposits, pledges or liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (d) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which do not materially impair their use in the operation of the business of the Company and its Restricted Subsidiaries; (e) mortgages, liens or security interests securing Indebtedness of a Restricted Subsidiary to the Company; (f) mortgages, liens or security interests securing Non-Recourse Debt; provided that such mortgages, liens or security interests shall be limited to the property financed by such Non-Recourse Debt and the lease or security agreement to which such property is subject; (g) mortgages, conditional sale contracts, security interests or other arrangements for the retention of title (including Capitalized Leases) incurred after the date hereof given to secure the payment of the purchase price incurred in connection with the acquisition of fixed assets useful and intended to be used in carrying on the business of the Company or a Restricted Subsidiary, which liens are incurred contemporaneously with or within 180 days after such acquisition, and liens existing on such fixed assets at the time of acquisition thereof or at the time of acquisition by the Company or a Restricted Subsidiary of any business entity then owning such fixed assets, whether or not such existing liens were given to secure the payment of the purchase price of the fixed assets to which they attach so long as they were not incurred, extended or renewed in contemplation of such acquisition; provided that (i) the lien or charge shall attach solely to the property acquired or purchased, (ii) at the time of acquisition of such fixed assets, the aggregate amount remaining unpaid on all Indebtedness secured by liens on such fixed assets whether or not assumed by the Company or a Restricted Subsidiary shall not exceed the lesser of the total purchase price or fair market value at the time of acquisition of such fixed assets (as determined in good faith by the Board of Directors of the Company) and (iii) all such Indebtedness shall comply with the applicable limitations provided in 5.8; (h) liens incurred in connection with any Receivables Securitization Transaction permitted by 5.9; provided that such liens attach solely to the accounts receivable subject to such Receivables Securitization Transaction; and (i) in addition to the liens permitted by the preceding paragraphs (a) through (h) of this 5.10, liens securing Senior Debt of the Company or any Restricted Subsidiary; provided that such Senior Debt shall be permitted by 5.8. Section 5.11. Dividends, Stock Purchases. The Company will not except as hereinafter provided: (a) Declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Company); or (b) Directly or indirectly, or through any Subsidiary, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock or other securities convertible into stock; or (c) Make any other payment or distribution, either directly or indirectly or through any Subsidiary, in respect of its capital stock; or (d) Purchase, redeem, prepay or otherwise retire or acquire the whole or any part of any issue of Capital Debt other than (i) in exchange for shares of capital stock of the Company or (ii) out of the proceeds of the concurrent issuance of Capital Debt permitted by 5.19 with a Weighted Average Life to Maturity equal to or greater than the longer of (A) the Weighted Average Life to Maturity of the Capital Debt being purchased, redeemed, prepaid or otherwise retired or acquired or (B) the Weighted Average Life to Maturity required by 5.19; or (e) Purchase, redeem, prepay or otherwise retire or acquire the whole or any part of any issue of Subordinated Debt other than (i) in exchange for shares of capital stock of the Company or (ii) out of the proceeds of the concurrent issuance of Capital Debt or Subordinated Debt permitted by 5.8 and 5.19, in each case, with a Weighted Average Life to Maturity equal to or greater than the longer of (A) the Weighted Average Life to Maturity of the Subordinated Debt being purchased, redeemed, prepaid or otherwise retired or acquired or (B) the Weighted Average Life to Maturity required by 5.19. (such declarations or payments of dividends, purchases, redemptions or retirements of capital stock or Capital Debt or Subordinated Debt and warrants, rights or options, and all such other distributions being herein collectively called "Restricted Payments"), if at such time or after giving effect thereto the aggregate amount of Restricted Payments made during the period from and after January 31, 1997, to and including the date of the making of the Restricted Payment in question, would exceed the sum of (i) U.S.$10,000,000 plus (ii) to the extent that Capital Debt outstanding on the date hereof is exchanged for capital stock of the Company, an amount equal to all interest which would have been payable with respect to such exchanged Capital Debt during the period from the date of such exchange to the date of any determination hereunder, plus (iii) the net cash proceeds to the Company from the issue or sale subsequent to January 31, 1997 of Capital Debt, Subordinated Debt or shares of capital stock of the Company or warrants, rights or options to purchase or acquire any shares of its capital stock, plus (iv) 75% of Consolidated Net Income for such period, computed on a cumulative basis for said entire period (or if such Consolidated Net Income is a deficit figure, then minus 100% of such deficit). The Company will not declare any dividend which constitutes a Restricted Payment payable more than 60 days after the date of declaration thereof and will not declare or make any Restricted Payment if at such time or after giving effect thereto a Default or an Event of Default has occurred and is continuing. For the purposes of this 5.11 the amount of any Restricted Payment declared, paid or distributed in property of the Company shall be deemed to be the greater of the book value or fair market value (as determined in good faith by the Board of Directors of the Company) of such property at the time of the making of the Restricted Payment in question. Section 5.12. Limitation on Sale and Leasebacks. The Company will not, and will not permit any Restricted Subsidiary to, enter into any arrangement whereby the Company or any Restricted Subsidiary shall sell or transfer any property owned by the Company or such Restricted Subsidiary to any Person other than the Company or a Restricted Subsidiary and thereupon the Company or any Restricted Subsidiary shall lease or intend to lease, as lessee, the same property, except that the Company or a Restricted Subsidiary may enter into such an arrangement if (i) such property is newly acquired or constructed property, (ii) the Company or such Restricted Subsidiary shall enter into such arrangement within 180 days following the acquisition or construction of such property, and (iii) after giving effect to the consummation of such arrangement, the aggregate sale price of the property subject to such arrangements entered into by the Company and its Restricted Subsidiaries since January 31, 1997 does not exceed 10% of the consolidated assets of the Company and its Restricted Subsidiaries, determined as of the end of the immediately preceding fiscal year. Section 5.13. Mergers, Consolidations and Sales of Assets. (a) The Company will not, and will not permit any Restricted Subsidiary to (i) consolidate with or be a party to a merger with any other corporation or (ii) sell, discount, lease or otherwise dispose (other than in the ordinary course of business, which shall include the sale of participations in the Company's financing transactions) of all or any substantial part (as defined in paragraph (d) of this 5.13) of the assets of the Company and its Restricted Subsidiaries, provided, however, that: (1) any Restricted Subsidiary may merge or consolidate with or into the Company or any other Wholly-owned Restricted Subsidiary or any corporation which, immediately after giving effect to such transaction, will become a Wholly-owned Restricted Subsidiary so long as in any merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation; (2) the Company may, subject to the provisions of 2.3, consolidate with, or merge into, another corporation or sell, lease or dispose of all or substantially all of its assets to another corporation if (i) either (x) the Company is the surviving or continuing corporation in such merger or consolidation or (y) if the Company is not the surviving or continuing corporation, the corporation formed by such consolidation or into which the Company is merged or the corporation that acquires or leases, all or substantially all of the assets of the Company (the "New Company") shall be a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, in an instrument executed and delivered to the holders of all the Notes (in form not unsatisfactory to the holder or holders of 33-1/3% or more of the aggregate unpaid principal amount of the Notes at the time outstanding, exclusive of any Notes held by a Restricted Subsidiary or Affiliate), the due and punctual payment of the principal of and premium, if any, and interest on, the Notes and the due observance and performance of each of the covenants and other terms of the Notes and this Agreement to be observed or performed by the Company; and (ii) immediately after such transactions, and after giving effect thereto, no Default or Event of Default would exist; and (3) any Restricted Subsidiary may sell, lease or otherwise dispose of all or any substantial part of its assets to the Company or any other Wholly- owned Restricted Subsidiary. (b) The Company will not permit any Restricted Subsidiary to issue or sell any shares of stock of any class (including as "stock" for the purposes of this 5.13, any warrants, rights or options to purchase or otherwise acquire stock or other Securities exchangeable for or convertible into stock) of such Restricted Subsidiary to any Person other than the Company or a Wholly-owned Restricted Subsidiary if, as a result thereof, the Restricted Subsidiary issuing or selling its stock ceases to be a Restricted Subsidiary. (c) The Company will not, and will not permit any Restricted Subsidiary to, sell, transfer or otherwise dispose of (x) any shares of stock in any Restricted Subsidiary if, as a result thereof, the Restricted Subsidiary whose stock is being sold, transferred or disposed of ceases to be a Restricted Subsidiary, or (y) any Indebtedness of any Restricted Subsidiary, unless: (1) simultaneously with such sale, transfer, or disposition, all shares of stock and all Indebtedness of such Restricted Subsidiary at the time owned by the Company and by every other Subsidiary shall be sold, transferred or disposed of as an entirety; (2) the Board of Directors of the Company shall have determined, as evidenced by a resolution thereof, that the retention of such stock and Indebtedness is no longer in the best interests of the Company; (3) such stock and Indebtedness is sold, transferred or otherwise disposed of to a Person, for a cash consideration and on terms reasonably deemed by the Board of Directors to be adequate and satisfactory; (4) the Restricted Subsidiary being disposed of shall not have any continuing investment in the Company or any other Restricted Subsidiary not being simultaneously disposed of; and (5) such sale or other disposition does not involve a substantial part (as hereinafter defined) of the assets of the Company and its Restricted Subsidiaries. (d) As used in this 5.13, a sale, discount, lease or other disposition of assets shall be deemed to be a "substantial part" of the assets of the Company and its Restricted Subsidiaries if the book value of such assets, when added to the book value of all other assets sold, leased or otherwise disposed of by the Company and its Restricted Subsidiaries (other than in the ordinary course of business) during the fiscal year in which such sale, lease or other disposition occurs, exceeds 10% of consolidated assets of the Company and its Restricted Subsidiaries, determined as of the end of the immediately preceding fiscal year. The book value of assets sold, leased or otherwise disposed of shall be excluded from the calculation of "substantial part" if (A) (i) such disposition shall be for an amount not less than the fair market value of such assets as determined in good faith by the board of directors of the Company, (ii) after giving effect to such disposition, no Default or Event of Default shall have occurred and be continuing, and (iii) within 180 days of such disposition an amount equal to the net proceeds received from such sale shall be used to (x) acquire property, plant or equipment used or useful in carrying on the business of the Company and its Restricted Subsidiaries, or (y) retire Senior Debt of the Company or any Restricted Subsidiary, (B) such disposition is a sale and leaseback transaction permitted by 5.12, or (C) such disposition is a Receivables Securitization Transaction permitted by 5.9. For purposes of the immediately preceding sentence, any prepayment of the Notes shall be pursuant to 2.2. Section 5.14. Guaranties. The Company will not and will not permit any Restricted Subsidiary to become or be liable in respect of any Guaranty except Guaranties of the Company or a Restricted Subsidiary which are limited in amount to a stated maximum dollar exposure and included in Senior Obligations or Subordinated Obligations. Section 5.15. Repurchase of Notes. Neither the Company nor any Restricted Subsidiary or Affiliate, directly or indirectly, may repurchase or make any offer to repurchase any Notes unless the offer has been made to repurchase Notes, pro rata, from all holders of the Notes at the same time and upon the same terms. In case the Company repurchases any Notes, such Notes shall thereafter be cancelled and no Notes shall be issued in substitution therefor. Section 5.16. Transactions with Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, enter into or be a party to any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would obtain in a comparable arm's-length transaction with a Person other than an Affiliate. In the event a Restricted Subsidiary is redesignated as an Unrestricted Subsidiary pursuant to 5.23(b)(i), all transactions and arrangements between such Subsidiary and the Company or any Restricted Subsidiary which occurred or existed at any time during the 12-month period ending with the date of such redesignation shall, for purposes of this Section, be deemed to have been entered into immediately after such redesignation. Section 5.17. Investments. The Company will not, and will not permit any Restricted Subsidiary to, make any investments in or loans, advances or extensions of credit to, any Person, except: (a) investments, loans and advances by the Company and its Restricted Subsidiaries in and to Restricted Subsidiaries, including any investment in a corporation which, after giving effect to such investment, will become a Restricted Subsidiary and loans and advances by a Wholly-owned Restricted Subsidiary to the Company; (b) investments, maturing in five years or less from the date of acquisition, in bills, notes and bonds of the United States of America, or any agency thereof; (c) investments in corporate debt obligations, maturing within twelve months or less from the date of acquisition, which (i) are issued by corporations having substantially all of their assets located in the United States, and (ii) at the time of acquisition, are accorded one of the two highest ratings by a Qualified Rating Agency; (d) investments in commercial paper which is issued by corporations having substantially all of their assets located in the United States, and which matures in 270 days or less from the date of acquisition and, at the time of acquisition, is accorded one of the two highest ratings by a Qualified Rating Agency; (e) investments in certificates of deposit, maturing within twelve months or less from the date of acquisition, issued by commercial banks located in the United States having capital, surplus and undivided profits aggregating more than U.S.$100,000,000 and accorded at the time of acquisition one of the two highest ratings by a Qualified Rating Agency; (f) investments in marketable obligations, maturing within three years or less from the date of acquisition, of any state, territory or possession of the United States of America or any political subdivision of any of the foregoing, or the District of Columbia, which are, at the time of acquisition, accorded one of the two highest ratings by a Qualified Rating Agency; (g) investments in certificates of deposit which are denominated in U.S. dollars, maturing within 7 days or less from the date of acquisition, issued by (i) commercial banks located in Canada, Japan or in a country which was a member of the European Economic Community on the Closing Date, having capital, surplus and undivided profits aggregating more than the equivalent of U.S.$250,000,000, and having outstanding unsecured long-term indebtedness which, at the time of acquisition, is accorded one of the two highest ratings by a Qualified Rating Agency, or (ii) off-shore subsidiaries of United States banks qualifying under paragraph (e) of this 5.17; (h) investments evidenced by repurchase agreements providing for the repurchase within 7 days from the date of the making of such investment of obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America which agreements are issued by a bank qualifying under paragraph (e) of this 5.17; (i) interest rate exchange agreements, or interest rate cap, floor and collar agreements, (collectively, "Interest Rate Protection Agreements"); provided that, (1) such Interest Rate Protection Agreements are not entered into for the purpose of hedging one or more Interest Rate Protection Agreements which themselves are hedges of certain risks to the Company or any Restricted Subsidiary, and (2) any such Interest Rate Protection Agreements shall be entered into (x) solely for the purpose of hedging against changes in prevailing interest rates and not for purposes of speculation, and (y) only with commercial or investment banks having outstanding unsecured long-term indebtedness which, at the effective date of such Interest Rate Protection Agreement, is accorded at a rating of "A" or better by a Qualified Rating Agency or insurance companies which are accorded a rating of A-XII, or better, by A.M. Best Co. (or an equivalent rating by another nationally recognized insurance rating agency of similar standing if A.M. Best Co. is not then in the business of rating insurance companies); (j) receivables arising in the ordinary course of the Finance Business; and (k) other investments, loans and advances (in addition to those permitted by the foregoing provisions of this 5.17); provided that the aggregate amount of all such other investments, loans and advances at any time owned by the Company and its Restricted Subsidiaries shall not exceed an amount equal to 15% of Consolidated Adjusted Net Worth. In valuing any investments, loans and advances for the purpose of applying the limitations set forth in this 5.17, such investments, loans and advances shall be valued at cost less (i) any net return of capital through the sale or liquidation thereof or other return of capital thereon, and (ii) decreases in value charged against Consolidated Adjusted Net Income, or directly against Consolidated Adjusted Net Worth, subsequent to July 31, 1996. For purposes of this 5.17, (i) at any time when a corporation becomes a Restricted Subsidiary, all investments of such corporation at such time shall be deemed to have been made by such corporation, as a Restricted Subsidiary, at such time; and (ii) all investments of the Company and its Restricted Subsidiaries in a Restricted Subsidiary which is redesignated as an Unrestricted Subsidiary pursuant to 5.23(b)(i) shall be deemed to have been made immediately after such redesignation. Section 5.18. Pension Plans. The Company will not and will not permit any Subsidiary to (i) permit any employee benefit plan maintained by it to be terminated in a manner reasonably likely to result in the imposition of a lien on any property of the Company or any Subsidiary pursuant to Section 4068 of ERISA, or (ii) permit the present value of all benefits vested under all such plans to exceed the value of the assets of such plans allocable to such vested benefits by an amount greater than U.S.$500,000 in the aggregate. Section 5.19. Issuance of Subordinated Debt or Capital Debt. The Company will not create, issue, assume, guarantee or in any manner become liable after the date hereof in respect of any Subordinated Debt or Capital Debt unless such Subordinated Debt or Capital Debt shall have a Weighted Average Life to Maturity equal to or greater than the remaining Weighted Average Life to Maturity of the Notes. Section 5.20. Voluntary Retirement of Subordinated Debt or Capital Debt. The Company will not, except as permitted under 5.11, directly or indirectly or through any Subsidiary, purchase, redeem or otherwise retire or acquire prior to the respective stated maturities thereof, the whole or any part of any issue of Subordinated Debt or Capital Debt except in accordance with the applicable provisions thereof or of any indenture, agreement or similar instrument under or pursuant to which such Subordinated Debt or Capital Debt has been issued, unconditionally requiring payments into a sinking fund, periodic prepayments, or other analogous payments for the amortization of such Subordinated Debt or Capital Debt. Section 5.21. Amendment of Subordinated Debt or Capital Debt. The Company will not, at any time, be a party to any amendment or modification of any payment or subordination provisions applicable to Subordinated Debt or Capital Debt other than an amendment or modification which extends the Weighted Average Life to Maturity thereof, reduces the interest rate thereon or further subordinates such Subordinated Debt or Capital Debt. Section 5.22. Reports and Rights of Inspection. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Company or such Subsidiary, in accordance with generally accepted accounting principles consistently maintained (except for changes disclosed in the financial statements furnished to you pursuant to this 5.22 and concurred in by the independent public accountants referred to in 5.22(b) hereof), and will furnish to you so long as you are the holder of any Note and to each other institutional holder of the then outstanding Notes (in duplicate if so specified below or otherwise requested): (a) Quarterly Statements. As soon as available and in any event within 60 days after the end of each quarterly fiscal period (except the last) of each fiscal year, one copy of: (1) consolidated and consolidating balance sheets of the Company and its Restricted Subsidiaries as of the close of such quarter setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, (2) consolidated and consolidating statements of income and retained earnings of the Company and its Restricted Subsidiaries for such quarterly period, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, and (3) consolidated and consolidating statements of cash flows of the Company and its Restricted Subsidiaries for the portion of the fiscal year ending with such quarter, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, all in reasonable detail and certified, on behalf of the Company, by an authorized financial officer thereof, as having been prepared in accordance with generally accepted accounting principles and presenting fairly, in all material respects, the financial condition of the Company and its Restricted Subsidiaries, subject to year-end audit adjustments; (b) Annual Statements. As soon as available and in any event within 120 days after the close of each fiscal year of the Company, one copy of: (1) consolidated and consolidating balance sheets of the Company and its Restricted Subsidiaries as of the close of such fiscal year, and (2) consolidated and consolidating statements of income and retained earnings and cash flows of the Company and its Restricted Subsidiaries for such fiscal year, in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail and accompanied by a report thereon of Eisner & Lubin or a firm of independent public accountants of recognized national or regional standing selected by the Company to the effect that the consolidated financial statements have been prepared in accordance with generally accepted accounting principles and present fairly, in all material respects, the financial condition of the Company and its Restricted Subsidiaries and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and accordingly includes such tests of the accounting records and such other auditing procedures as were considered necessary to provide a reasonable basis for the opinion expressed in the report; (c) Audit Reports. Promptly upon receipt thereof, one copy of each interim or special audit made by independent accountants of the books of the Company or any Restricted Subsidiary and one copy of any response by the Company or such Restricted Subsidiary to any such interim or special audit; (d) SEC and Other Reports. Promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and of each regular or periodic report, and any registration statement or prospectus filed by the Company or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency, and, to the extent that such proceedings, if determined adversely, might reasonably be expected to have a material, adverse affect on the properties, business, profits or conditions of the Company and its Restricted Subsidiaries, taken as a whole, copies of any orders in any proceedings to which the Company or any of its Subsidiaries is a party, issued by any governmental agency, Federal or state, having jurisdiction over the Company or any of its Subsidiaries; (e) Requested Information. With reasonable promptness, such other data and information as you or any such institutional holder may reasonably request; (f) Officer's Certificates. Within the periods provided in paragraphs (a) and (b) above, a certificate of the Company signed by an authorized financial officer of the Company stating that such officer has reviewed the provisions of this Agreement and setting forth: (i) the information and computations (in sufficient detail) required in order to establish whether the Company was in compliance with the requirements of 5.6 through 5.21, inclusive, at the end of the period covered by the financial statements then being furnished, and (ii) whether there existed as of the date of such financial statements and whether, to the best of such officer's knowledge, there exists on the date of the certificate or existed at any time during the period covered by such financial statements any Default or Event of Default and, if any such condition or event exists on the date of the certificate, specifying the nature and period of existence thereof and the action the Company is taking and proposes to take with respect thereto; (g) Accountants' Certificates. Within the period provided in paragraph (b) above, a certificate of the accountants who render an opinion with respect to such financial statements, stating that nothing came to their attention that caused them to believe that the Company failed to comply with any term, covenant, provision or condition of this Agreement and stating further whether, in making their audit, such accountants have become aware of any Default or Event of Default under any of the terms or provisions of this Agreement insofar as any such terms or provisions pertain to or involve accounting matters or determinations, and if any such condition or event then exists, specifying the nature and period of existence thereof; (h) Unrestricted Subsidiaries. Within the period provided in paragraph (b) above, financial statements of the character and for the date and period as in said paragraph (b) provided covering each Unrestricted Subsidiary (or groups of Unrestricted Subsidiaries on a consolidated basis); and (i) Receivables Reports. Within the period provided in paragraph (a) above with respect to the second fiscal quarter in each fiscal year of the Company and within the period provided in paragraph (b) above with respect to each fiscal year of the Company, a report with respect to accounts receivable of the Company and its Restricted Subsidiaries providing information regarding delinquencies, repossessions and charge-offs. Without limiting the foregoing, the Company will permit you, so long as you are the holder of any Note, and each institutional holder of the then outstanding Notes who is not a Competitor (or such Persons as either you or such holder may designate), to visit and inspect any of the properties of the Company or any Subsidiary, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees, and independent public accountants (and by this provision the Company authorizes said accountants to discuss with you the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested. The Company shall not be required to pay or reimburse you or any such holder for expenses which you or such holder may incur in connection with any such visitation or inspection so long as no Default or Event of Default shall have occurred and be continuing. For the purposes of this paragraph, "Confidential Information" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was delivered to you prior to the Closing Date or was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under this Section that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this paragraph, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this paragraph), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this paragraph), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation, order, policy or investigation applicable to you, (x) in connection with or in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this paragraph as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this paragraph. Section 5.23. Restricted Subsidiaries. (a) Limitation on Restrictive Covenants. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to: (i) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries, or pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries; (ii) make loans or advances to the Company or any Restricted Subsidiary; or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. (b) Designation of Subsidiaries. (i) The Board of Directors of the Company may at any time and from time to time, upon not less than 15 days' prior written notice given to each holder of a Note, designate a Restricted Subsidiary as an Unrestricted Subsidiary; provided that (x) such Restricted Subsidiary has not previously been designated an Unrestricted Subsidiary pursuant to this 5.23(b)(i) and (y) at the time of such designation and after giving effect thereto no Default or Event of Default shall have occurred and be continuing. (ii) The Board of Directors of the Company may at any time and from time to time, upon not less than 15 days' prior written notice given to each holder of a Note, designate an Unrestricted Subsidiary as a Restricted Subsidiary; provided that (x) such Unrestricted Subsidiary has not previously been designated a Restricted Subsidiary pursuant to this 5.23(b)(ii) and (y) at the time of such designation and after giving effect thereto no Default or Event of Default shall have occurred and be continuing. (iii) Any notice of designation pursuant to this 5.23(b) shall be accompanied by a certificate signed by an authorized financial officer of the Company demonstrating by calculations in reasonable detail that the provisions of this 5.23(b) have been complied with in connection with such designation and setting forth the name of each other Subsidiary (if any) which has or will become an Unrestricted Subsidiary or a Restricted Subsidiary, as the case may be, as a result of any such designation. Section 6. Events of Default and Remedies Therefor. Section 6.1. Events of Default. Any one or more of the following shall constitute an "Event of Default" as the term is used herein: (a) Default shall occur in the payment of interest on any Note when the same shall have become due and such default shall continue for more than five Business Days; or (b) Default shall occur in the making of any payment of the principal of any Note or the premium thereon at the expressed or any accelerated maturity date or at any date fixed for prepayment; or (c) Default shall be made in the payment of the principal of or interest on any Indebtedness of the Company or any Restricted Subsidiary, aggregating in excess of U.S.$2,000,000, as and when the same shall become due and payable by the lapse of time, by declaration, by call for redemption or otherwise, and such default shall continue beyond the period of grace, if any, allowed with respect thereto; or (d) Default or the happening of any event shall occur under any indentures, agreements, or other instruments under which any Indebtedness of the Company or any Restricted Subsidiary aggregating in excess of U.S.$2,000,000 is outstanding if the effect of such default or happening is to cause the acceleration of the maturity of any Indebtedness of the Company or any Restricted Subsidiary outstanding thereunder; or (e) Default shall occur in the observance or performance of any covenant or agreement contained in 5.6 through 5.21, hereof; or (f) Default shall occur in the observance or performance of any other provision of this Agreement and continue for more than 30 days after the earlier of (i) notice of such default being given to the Company by any holder of a Note, or (ii) such default becoming known to the Chairman, Vice Chairman, President, Executive Vice President, Chief Financial Officer or Treasurer of the Company; or (g) If any representation or warranty made by the Company herein, or made by the Company in any written statement or certificate furnished by the Company in connection with the consummation of the issuance and delivery of the Notes or furnished by the Company pursuant hereto, is untrue in any material adverse respect as of the date of the issuance or making thereof; or (h) One or more final judgments for the payment of money aggregating in excess of U.S.$2,000,000 is or are outstanding against the Company or any Restricted Subsidiary or against any property or assets of either and such judgment or judgments have remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 30 days from the date of its or their entry; or (i) The Company or any Restricted Subsidiary becomes insolvent or bankrupt, is generally not paying its debts as they become due or makes an assignment for the benefit of creditors, or the Company or any Restricted Subsidiary applies for or consents to the appointment of a custodian, trustee or receiver for the Company or such Restricted Subsidiary or for the major part of the property of either; or (j) A custodian, trustee or receiver is appointed for the Company or any Restricted Subsidiary or for the major part of the property of either and is not discharged within 60 days after such appointment; or (k) Bankruptcy, reorganization, arrangement or insolvency proceedings, or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors, are instituted by or against the Company or any Restricted Subsidiary and, if instituted against the Company or any Restricted Subsidiary, remain in effect for more than (x) 60 days after such institution if such proceedings are instituted by a holder of Indebtedness of the Company or a Restricted Subsidiary for borrowed money, or (y) 120 days after such institution if such proceedings are instituted by any Person other than a holder of such Indebtedness for borrowed money and, in each such case, are not being contested by the Company or such Restricted Subsidiary in good faith by appropriate actions or proceedings. Section 6.2. Notice to Holders. When any Event of Default described in the foregoing 6.1 has occurred, or if the holder of any Note or of any other evidence of Indebtedness of the Company outstanding in the principal amount of U.S.$500,000, or more, gives any notice or takes any other action with respect to a claimed default, the Company agrees to give notice within three Business Days of such Event of Default or such notice or action to all holders of the Notes then outstanding, such notice to be in writing and sent by registered or certified mail or by telefacsimile. Section 6.3. Acceleration of Maturities. When any Event of Default described in paragraph (a) or (b) of 6.1 has happened and is continuing, any holder of any Note may, and when any Event of Default described in paragraphs (c) through (h), inclusive, of said 6.1 has happened and is continuing, the holder or holders of 33-1/3% or more of the principal amount of Notes at the time outstanding (exclusive of any Notes held by a Restricted Subsidiary or Affiliate) may, by notice in writing sent by registered or certified mail to the Company, declare the entire principal and all interest accrued on all Notes to be, and all Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. When any Event of Default described in paragraphs (i) through (k), inclusive, of 6.1 has occurred, then all outstanding Notes shall immediately become due and payable without presentment, demand or notice of any kind. Upon the Notes becoming due and payable as a result of any Event of Default as aforesaid, the Company will forthwith pay to the holders of the Notes the entire principal and interest accrued on the Notes and, to the extent permitted by law, a premium in the amount which would be payable if the Company then had elected to prepay the Notes pursuant to 2.2. No course of dealing on the part of any holder of the Notes nor any delay or failure on the part of any holder of the Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. The Company further agrees, to the extent permitted by law, to pay to the holder or holders of the Notes all costs and expenses incurred by them in the collection of any Notes upon any default hereunder or thereon, including reasonable compensation to such holder's or holders' attorneys for all services rendered in connection therewith. Section 6.4. Rescission of Acceleration. The provisions of 6.3 are subject to the condition that if the principal of and accrued interest on all or any outstanding Notes have been declared immediately due and payable by reason of the occurrence of any Event of Default described in paragraphs (c) through (k), inclusive, of 6.1, the holders of 67% in aggregate principal amount of the Notes then outstanding (exclusive of any Notes held by a Restricted Subsidiary or Affiliate) may, by written instrument filed with the Company, rescind and annul such declaration and the consequences thereof; provided that at the time such declaration is annulled and rescinded: (a) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement; (b) all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal, interest or premium on the Notes which has become due and payable solely by reason of such declaration under 6.3) shall have been duly paid; and (c) each and every other Default and Event of Default shall have been made good, cured or waived pursuant to 7.1; and provided further, that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereto. Section 7. Amendments, Waivers and Consents. Section 7.1. Consent Required. Any term, covenant, agreement or condition of this Agreement may, with the consent of the Company, be amended or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), if the Company shall have obtained the consent in writing of the holders of at least 51% in aggregate principal amount of outstanding Notes (exclusive of any Notes held by a Restricted Subsidiary or Affiliate); provided that without the written consent of the holders of all of the Notes then outstanding, no such waiver, modification, alteration or amendment shall be effective (i) which will change the time of payment of the principal of or the interest on any Note or reduce the principal amount thereof or change the rate of interest thereon, or (ii) which will change any of the provisions with respect to optional prepayments, or (iii) which will amend or modify the provisions of 2.3 hereof or the definition of the term "Change of Control" set forth in 8.1 hereof, or (iv) which will change the percentage of holders of the Notes required to consent to any such amendment, alteration or modification or any of the provisions of this 7. Section 7.2. Solicitation of Noteholders. The Company will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or the Notes unless each holder of the Notes (irrespective of the amount of Notes then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this 7.2 shall be delivered by the Company to each holder of outstanding Notes forthwith following the date on which the same shall have been executed and delivered by the holder or holders of the requisite percentage of outstanding Notes. The Company will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of the Notes as consideration for or as an inducement to the entering into by any holder of the Notes of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to the holders of all of the Notes then outstanding. Section 7.3. Effect of Amendment or Waiver. Any such amendment or waiver shall apply equally to all of the holders of the Notes and shall be binding upon them, upon each future holder of any Note and upon the Company, whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon. Section 8. Interpretation of Agreement; Definitions. Section 8.1. Definitions. Unless the context otherwise requires, the terms hereinafter set forth when used herein shall have the following meanings and the following definitions shall be equally applicable to both the singular and plural forms of any of the terms herein defined: The term "affiliate" shall mean with respect to any Person any other Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such first Person, (ii) which beneficially owns or holds 10% or more of any class of the Voting Stock of such first Person or (iii) 10% or more of the Voting Stock (or in the case of a Person which is not a corporation, 10% or more of the equity interest) of which is beneficially owned or held, directly or indirectly or through any subsidiary, by such first Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. The term "Affiliate" shall mean any affiliate of the Company other than a Wholly-owned Restricted Subsidiary. "Approved Owners" shall mean (i) Bernard G. Palitz, Clarence Y. Palitz, Jr., Michael C. Palitz, Richard W. Radom, Paul Sinsheimer and W. Michael Gallagher; (ii) the spouses, lineal descendants and spouses of the lineal descendants of the persons named in clause (i); and (iii) the estates or legal representatives of the persons named in clause (i) and (ii). "Business Day" shall mean a day other than a Saturday, a Sunday or, in the case of any Note with respect to which the provisions of 2.6 hereof are applicable, a day on which the bank designated by the holder of such Note to receive payments on such Note for such holders account is, or banks located in the State of New York are, required by law (other than a general banking moratorium or holiday for a period exceeding four consecutive days) to be closed. "Capital Debt" shall mean all unsecured Indebtedness of the Company which (i) has been issued and sold to, and is owned and held by, Financial Federal, (ii) bears interest at a rate which is no less favorable to the Company than would be obtainable in an arm's length transaction with a Person other than an Affiliate, and (iii) contains or has applicable thereto subordination provisions substantially in the form set forth in Exhibit F attached hereto or such other provisions as may be approved in writing by the holders of not less than 66-2/3% in aggregate principal amount of the Notes (exclusive of any Notes held by the Company, a Restricted Subsidiary or Affiliate). "Capitalized Lease" shall mean any lease the obligation for Rentals with respect to which is required to be capitalized on a balance sheet of the lessee in accordance with generally accepted accounting principles. "Capitalized Rentals" shall mean as of the date of any determination the amount at which the aggregate Rentals due and to become due under all Capitalized Leases under which the Company is a lessee would be reflected as a liability on a consolidated balance sheet of the Company and its Restricted Subsidiaries. "Change of Control" shall mean (i) each and every issue, sale or other disposition of shares of stock of the Company which results in any Person or group of Persons acting in concert (a "New Control Person"), other than Financial Federal or the Approved Owners, beneficially owning or controlling, directly or indirectly, more than 50% (by number of votes) of the Voting Stock of the Company, or (ii) each and every issue, sale or other disposition of shares of stock of Financial Federal which results in any Person or group of Persons acting in concert (a "New Control Person"), other than the Approved Owners, beneficially owning or controlling, directly or indirectly, more than 50% (by number of votes) of the Voting Stock of Financial Federal; provided, however, that a Change of Control shall not be deemed to have occurred if the long-term debt of any New Control Person is accorded a rating of "A" or better by a Qualified Rating Agency immediately prior to, and immediately after, beneficially acquiring the Voting Stock of the Company or Financial Federal, as the case may be. "Change of Control Date" shall mean any date upon which a Change of Control shall occur. "Closing Date" is defined in 1.2. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations from time to time promulgated thereunder. "Company" is defined at the beginning of this Agreement. "Competitor" shall mean any Person (i) whose primary business is the Finance Business and (ii) who is not a regular investor in privately placed Securities. "Consolidated Adjusted Net Income" shall mean as of the date of any determination thereof the sum of (i) Consolidated Net Income, plus (ii) to the extent deducted in the computation of Consolidated Net Income, all taxes on income. "Consolidated Adjusted Net Worth" shall mean, as of the date of any determination thereof: (a) the sum of (i) the total stockholders equity account of the Company and its Restricted Subsidiaries on a consolidated basis as determined in accordance with generally accepted accounting principles, plus (ii) deferred income tax liabilities, plus (iii) the aggregate unpaid principal amount of outstanding Capital Debt, less, without duplication (b) all Intangible Assets. "Consolidated Net Income" for any period shall mean the gross revenues of the Company and its Restricted Subsidiaries for such period less all expenses and other proper charges (including taxes on income), determined on a consolidated basis in accordance with generally accepted accounting principles consistently applied and after eliminating earnings or losses attributable to outstanding Minority Interests, but excluding in any event: (a) any gains or losses on the sale or other disposition of fixed or capital assets (other than the sale of repossessed collateral or residual interests in the ordinary course of the Finance Business), and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; (b) the proceeds of any life insurance policy (other than insurance supporting the payment of a receivable obligation); (c) net earnings and losses of any Restricted Subsidiary accrued prior to the date it became a Restricted Subsidiary; (d) net earnings and losses of any corporation (other than a Restricted Subsidiary), substantially all the assets of which have been acquired in any manner, realized by such other corporation prior to the date of such acquisition; (e) net earnings and losses of any corporation (other than a Restricted Subsidiary) with which the Company or a Restricted Subsidiary shall have consolidated or which shall have merged into or with the Company or a Restricted Subsidiary prior to the date of such consolidation or merger; (f) net earnings of any business entity (other than a Restricted Subsidiary) in which the Company or any Restricted Subsidiary has an ownership interest unless such net earnings shall have actually been received by the Company or such Subsidiary in the form of cash distributions; (g) any portion of the net earnings of any Restricted Subsidiary which for any reason (other than solely because of a business determination which is subject to reversal at the sole election of the Company) is unavailable for payment of dividends to the Company or any other Restricted Subsidiary; (h) earnings resulting from any reappraisal, revaluation or write-up of assets except to the extent that such reappraisal, revaluation or write-up has been approved by the independent public accountants then reporting on the Company's annual financial statements described in 5.22(b); (i) any gain arising from the acquisition of any Securities of the Company or any Restricted Subsidiary; and (j) any reversal of allowances for possible losses in excess of actual recovery, except to the extent that provision for such losses shall have been made from income arising during the applicable period or periods being tested under 5.11. "D&P" shall mean Duff & Phelps Credit Rating Co. "Default" shall mean any event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, constitute an Event of Default as defined in 6.1. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" is defined in 6.1. "Finance Business" shall mean the business of lending, consulting, guaranteeing obligations of others, financing and leasing property, the acquisition and ownership of receivables arising therefrom and the transaction of such other business as may be reasonably incidental thereto including, without limitation, the sale of repossessed collateral or property previously subject to lease. "Financial Federal" shall mean Financial Federal Corporation, a Nevada corporation. "Fitch" shall mean Fitch Investors Service, L.P. "Guaranties" by any Person shall mean all obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect, guaranteeing any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (ii) to advance or supply funds (x) for the purchase or payment of such Indebtedness or obligation, or (y) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, or (iii) to lease property or to purchase Securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Agreement, a Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money, but not more than the portion thereof which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend, but not more than the portion thereof which has been guaranteed. "Indebtedness" of any Person shall mean and include all obligations of such Person (other than Non-Recourse Debt) which in accordance with generally accepted accounting principles shall be classified upon a balance sheet of such Person as liabilities of such Person, and in any event shall include all (i) obligations of such Person for borrowed money or which has been incurred in connection with the acquisition of property or assets, (ii) obligations secured by any lien or other charge upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (iii) obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of property, (iv) all Guaranties of such Person, and (v) Capitalized Rentals under any Capitalized Lease. For the purpose of computing the "Indebtedness" of any Person, there shall be excluded any particular Indebtedness to the extent that, upon or prior to the maturity thereof, there shall have been deposited with the proper depository in trust the necessary funds (or evidences of such Indebtedness, if permitted by the instrument creating such Indebtedness) for the payment, redemption or satisfaction of such Indebtedness; and thereafter such funds and evidences of Indebtedness so deposited shall not be included in any computation of the assets of such Person. "Intangible Assets" shall mean, as of the date of any determination thereof, the total amount of goodwill, patents, trade names, trade marks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "intangible assets" in accordance with generally accepted accounting principles. "Institutional Investor" shall mean (a) any original purchaser of a Note, (b) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes then outstanding, and (c) any holder which is a bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "Make-Whole Premium" is defined in 2.2. "Minority Interests" shall mean any shares of stock of any class of a Restricted Subsidiary (other than directors' qualifying shares as required by law) that are not owned by the Company and/or one or more of its Restricted Subsidiaries. Minority Interests shall be valued by valuing Minority Interests constituting preferred stock at the voluntary or involuntary liquidating value of such preferred stock, whichever is greater, and by valuing Minority Interests constituting common stock at the book value of capital and surplus applicable thereto adjusted, if necessary, to reflect any changes from the book value of such common stock required by the foregoing method of valuing Minority Interests in preferred stock. "Moody's" shall mean Moody's Investors Service, Inc. "Non-Recourse Debt" shall mean Indebtedness of the Company or of a Restricted Subsidiary incurred in connection with the acquisition of property which, in turn, is subject to a lease or security agreement under which a Person other than a Restricted Subsidiary is the lessee or debtor, to the extent that (a) such lease or security agreement provides for rentals or other payments sufficient to pay the entire principal of and interest on such Indebtedness on or before the date or dates for payment thereof, and (b) such Indebtedness does not constitute a general obligation of the Company or any Restricted Subsidiary but is repayable solely out of the rentals or other sums payable under the lease or security agreement and/or the property subject thereto. "Note Register" is defined in 9.1. "Notes" is defined in 1.1. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof. "Priority Obligations" shall mean at any date the sum at such date of the unpaid principal amount of (i) all Senior Debt of the Company secured by liens permitted by 5.10(i) and (ii) all Senior Debt and all Guaranties of Restricted Subsidiaries other than Indebtedness to the Company or a Wholly- owned Restricted Subsidiary. "Purchasers" is defined in 1.1. "Qualified Rating Agency" shall mean D&P, Fitch, Moody's, S&P or another nationally recognized credit rating agency of similar standing if none of the aforementioned rating agencies are in the business of rating the investment or indebtedness, as the case may be, in question. "Receivables Securitization Transaction" shall mean any transaction pursuant to which (i) accounts receivable are sold or transferred, and (ii) the seller (a) retains an interest in the accounts receivable sold or transferred or (b) assumes any credit liability in connection with such sale or transfer. "Reinvestment Rate" is defined in 2.2. "Rentals" shall mean and include all fixed rents (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Company or a Restricted Subsidiary, as lessee or sublessee under a lease of real or personal property, but shall be exclusive of any amounts required to be paid by the Company or a Restricted Subsidiary (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Fixed rents under any so-called "percentage leases" shall be computed solely on the basis of the minimum rents, if any, required to be paid by the lessee regardless of sales volume or gross revenues. "Restricted Payments" is defined in 5.11. "Restricted Subsidiary" shall mean any Subsidiary (i) which is organized under the laws of the United States or any State, territory or possession thereof, or Canada or any Province thereof; (ii) which conducts substantially all of its business and has substantially all of its assets within the United States, territories or possessions thereof and Canada; (iii) of which more than 80% (by number of votes) of the Voting Stock is owned by the Company and/or one or more Restricted Subsidiaries; and (iii) which has been designated by the Board of Directors of the Company to be included in the definition of Restricted Subsidiary for all purposes of this Agreement. "S&P" shall mean Standard & Poor's Rating Group, a division of McGraw Hill, Inc. "Security" shall have the same meaning as in Section 2(1)of the Securities Act of 1933, as amended. "Senior Debt" shall mean all Indebtedness of the Company for borrowed money or incurred in connection with the acquisition of assets which is not expressed to be subordinate or junior to any other Indebtedness of the Company and all Indebtedness of Restricted Subsidiaries for borrowed money or incurred in connection with the acquisition of assets. "Senior Guaranties" shall mean all Guaranties of the Company which are not expressed to be subordinated or junior to any other Indebtedness of the Company and all Guaranties of Restricted Subsidiaries. "Senior Obligations" shall mean the sum of (i) the aggregate unpaid principal amount of Senior Debt, (ii) the aggregate outstanding contingent liability with respect to Senior Guaranties, (iii) the aggregate amount of Capitalized Rentals and (iv) recourse obligations of the Company under Receivables Securitization Transactions. "Series A Notes" is defined in 1.1. "Series B Notes" is defined in 1.1. "Statistical Release" is defined in 2.2. "Subordinated Debt" shall mean all unsecured Indebtedness of the Company for borrowed money which shall contain or have applicable thereto subordination provisions substantially identical in effect to those contained in Exhibit E hereof or such other provisions as may be approved in writing by the holders of not less than 66-2/3% in aggregate principal amount of the outstanding Notes (exclusive of any Notes held by a Restricted Subsidiary or Affiliate). "Subordinated Guaranties" shall mean all Guaranties of the Company which shall contain or have applicable thereto subordination provisions substantially identical in effect to those contained in Exhibit E hereof or such other provisions as may be approved in writing by the holders of not less than 66 2/3% in aggregate principal amount of the outstanding Notes (exclusive of Notes held by a Restricted Subsidiary or Affiliate). "Subordinated Obligations" shall mean the sum of (i) the aggregate unpaid principal amount of Subordinated Debt, and (ii) the aggregate outstanding contingent liability with respect to Subordinated Guaranties of the Company. The term "subsidiary" shall mean, as to any particular parent corporation, any corporation of which more than 50% (by number of votes) of the Voting Stock shall be owned by such parent corporation and/or one or more corporations which are themselves subsidiaries of such parent corporation. The term "Subsidiary" shall mean a subsidiary of the Company. "Total Debt" shall mean the sum of Senior Obligations and Subordinated Obligations. "Unrestricted Subsidiary" shall mean any Subsidiary which is not a Restricted Subsidiary. "Voting Stock" shall mean Securities of any class or classes the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). "Weighted Average Life to Maturity" is defined in 2.2. "Wholly-owned" when used in connection with any Subsidiary shall mean a Subsidiary of which all of the issued and outstanding shares of stock (except shares required as directors' qualifying shares) and all Indebtedness for borrowed money shall be owned by the Company and/or one or more of its Wholly- owned Subsidiaries. Section 8.2. Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with generally accepted accounting principles in effect at the time of calculation, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. Section 8.3. Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. Section 9. Miscellaneous. Section 9.1. Registered Notes. The Company shall cause to be kept at its office specified in the penultimate sentence of 9.6 or at such other address as may be designated in the future pursuant to the penultimate sentence of 9.6, a register for the registration and transfer of the Notes (hereinafter called the "Note Register"), and the Company will register or transfer or cause to be registered or transferred, as hereinafter provided and under such reasonable regulations as it may prescribe, any Note issued pursuant to this Agreement. At any time and from time to time the registered holder of any Note which has been duly registered as hereinabove provided may transfer such Note upon surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing. Notwithstanding anything contained herein to the contrary, in no event shall the holder of a Note transfer such Note to a Competitor. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement. Payment of or on account of the principal, premium, if any, and interest on any registered Note shall be made to or upon the written order of such registered holder. Section 9.2. Exchange of Notes. At any time and from time to time, upon not less than ten days' notice to that effect given by the holder of any Note initially delivered or of any Note substituted therefor pursuant to 9.1, this 9.2 or 9.3, and, upon surrender of such Note at its office, the Company will deliver in exchange therefor, without expense to the holder, except as set forth below, Notes of the same Series and for the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered, in the denomination of U.S.$100,000 or any amount in excess thereof as such holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered or, if such surrender is prior to the payment of any interest thereon, then dated as of the date of issue, payable to such Person or Persons, or registered assigns, as may be designated by such holder, and otherwise of the same form and tenor as the Notes so surrendered for exchange. The Company may require the payment of a sum sufficient to cover any stamp tax or governmental charge imposed upon such exchange or transfer. Section 9.3. Loss, Theft, etc. of Notes. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of any Note, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation upon surrender and cancellation of the Note, the Company will make and deliver without expense to the holder thereof (other than the expense of the above-referenced bond of indemnity), a new Note, of the same Series and of like tenor, in lieu of such lost, stolen, destroyed or mutilated Note. If the Purchaser or any subsequent institutional holder is the owner of any such lost, stolen or destroyed Note, then the affidavit of an authorized officer of such owner, setting forth the fact of loss, theft or destruction and of its ownership of the Note at the time of such loss, theft or destruction shall be accepted as satisfactory evidence thereof and no further indemnity shall be required as a condition to the execution and delivery of a new Note other than the written agreement of such owner to indemnify the Company. Section 9.4. Expenses, Stamp Tax Indemnity. Whether or not the transactions herein contemplated shall be consummated, the Company agrees to pay directly all of your out-of-pocket expenses in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby, including but not limited to the charges and disbursements of Chapman and Cutler, your special counsel, duplicating and printing costs and charges for shipping the Notes, adequately insured to you at your home office or at such other place as you may designate, and all such expenses relating to any amendment, waivers or consents pursuant to the provisions hereof, whether or not any such amendment, waiver or consent shall become effective, including, without limitation, any amendments, waivers or consents resulting from any work-out, restructuring or similar proceedings relating to the performance by the Company of its obligations under this Agreement and the Notes. The Company also agrees that it will pay and save the Purchasers harmless against any and all liability with respect to stamp and other taxes, if any, which may be payable or which may be determined to be payable in connection with the execution and delivery of this Agreement or the Notes on the Closing Date, whether or not any Notes are then outstanding. The Company agrees to protect and indemnify you against any liability for any and all brokerage fees and commissions payable or claimed to be payable to any Person engaged by any Person other than you in connection with the transactions contemplated by this Agreement. Without limiting the foregoing, the Company agrees to pay the cost of obtaining a private placement number for each Series of the Notes and authorizes the submission of such information as may be required by Standard & Poor's CUSIP Service Bureau for the purpose of obtaining such numbers. Section 9.5. Powers and Rights Not Waived; Remedies Cumulative. No delay or failure on the part of the holder of any Note in the exercise of any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of the same preclude any other or further exercise thereof, or the exercise of any other power or right, and the rights and remedies of the holder of any Note are cumulative to and are not exclusive of any rights or remedies any such holder would otherwise have, and no waiver or consent, given or extended pursuant to 7 hereof, shall extend to or affect any obligation or right not expressly waived or consented to. Section 9.6. Notices. All communications provided for hereunder shall be in writing and, if to you, delivered or mailed by registered or certified mail or by overnight air courier, in each case prepaid and addressed to you at your address appearing on Schedule I to this Agreement or such other address as you or the subsequent holder of any Note initially issued to you may designate to the Company in writing, and if to the Company, delivered or mailed by registered or certified mail or by overnight air courier, in each case prepaid and addressed to the Company at 1300 Post Oak Boulevard, Suite 1300, Houston, Texas 77056, Attention: President, or to such other address as the Company may in writing designate to you or to a subsequent holder of the Notes initially issued to you. Holders of the Notes are requested to send copies of any written communications delivered or mailed to the Company as contemplated herein to Financial Federal Credit Inc., 400 Park Avenue, New York, New York 10022, Attention: General Counsel, or to such other address as the Company may in writing designate to you or to a subsequent holder of the Notes initially issued to you. Failure to send such a copy shall in no way alter the effectiveness of any communication delivered or mailed to the Company as hereinabove provided or give rise to any liability on the part of the holder giving or mailing such communication. Section 9.7. Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and shall be binding upon, and inure to the benefit of, you and your successors and assigns, including each successive holder or holders of any Notes. Section 9.8. Survival of Covenants and Representations. All covenants, representations and warranties made by the Company herein and in any certificates delivered pursuant hereto, whether or not in connection with the Closing Date, shall survive the closing and the delivery of this Agreement and the Notes; provided, however, unless otherwise specified herein or therein, all such representations and warranties are deemed to be made on and as of the date made and shall not be deemed to have been made on and as of any subsequent date. Section 9.9. Severability. Should any part of this Agreement for any reason be declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in force and effect as if this Agreement had been executed with the invalid portion thereof eliminated and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any such part, parts, or portion which may, for any reason, be hereafter declared invalid. Section 9.10. Governing Law. This Agreement and the Notes issued and sold hereunder shall be governed by and construed in accordance with New York law. Section 9.11. Captions. The descriptive headings of the various Sections or parts of this Agreement are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. Section 9.12. Payments Due on Non-Business Days. If any payment due on, or with respect to, any Note shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due. The execution hereof by you shall constitute a contract between us for the uses and purposes hereinabove set forth, and this Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. Financial Federal Credit Inc. By Its By Its Accepted as of July 1, 1997. 43 EX-11.1 3 Exhibit 11.1 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
For Year Ended July 31, ------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Primary - ------------------------------------------- Net earnings for primary per share amounts $12,909,000 $9,610,000 $7,209,000 =========== ========== ========== Weighted average number of common shares outstanding 14,786,520 12,926,337 12,299,529 Add - common equivalent shares (determined using the "treasury stock" method) 1,367,232 1,298,655 1,134,654 ---------- ---------- ---------- Weighted average number of shares used in calculation of primary net earnings per common share 16,153,752 14,224,992 13,434,183 ========== ========== ========== Primary net earnings per common share $0.80 $0.68 $0.54 ===== ===== ===== Fully Diluted - ------------------------------------------- Net earnings for fully diluted per share amounts $12,909,000 $9,610,000 $7,209,000 =========== ========== ========== Weighted average number of shares used in calculation of fully diluted net earnings per common share 16,357,347 14,262,807 13,455,086 ========== ========== ========== Fully diluted net earnings per common share $0.79 $0.67 $0.54 ===== ===== =====
44 EX-13.1 4 FINANCIAL FEDERAL CORPORATION [embossed logo] 19 ANNUAL REPORT 97 [front cover] CORPORATE PROFILE - ----------------- Financial Federal Corporation is an independent financial services company specializing in financing mid and large ticket industrial, commercial and professional equipment through installment sales and leasing programs for manufacturers, dealers and users of such equipment nationwide. The Company has an executive office located in New York, NY, five full-service offices located in Houston, TX; Westmont, IL; Teaneck, NJ; Charlotte, NC; and Mesa, AZ and 18 marketing locations throughout the country. [inside front cover] FISCAL YEAR IN REVIEW --------------------- JULY 1997 THE COMPANY SPLIT ITS COMMON STOCK THROUGH A THREE-FOR-TWO STOCK DIVIDEND FOR THE SECOND TIME IN EIGHTEEN MONTHS. A $50 MILLION PRIVATE PLACEMENT RAISED TOTAL INSTITUTIONAL TERM DEBT OUTSTANDING TO OVER $100 MILLION, REPRESENTING 24% OF TOTAL DEBT OUTSTANDING AT YEAR END. ANNUAL REVENUES EXCEEDED $50 MILLION AND QUARTERLY REVENUES EXCEEDED $15 MILLION. MAY 1997 NET EARNINGS SURPASSED $10 MILLION, SUBSEQUENTLY INCREASING TO $12.9 MILLION FOR THE YEAR, A 34% INCREASE OVER LAST YEAR. MARCH 1997 STOCKHOLDERS' EQUITY REACHED $100 MILLION, ENDING THE YEAR AT $105.6 MILLION. YEAR END LEVERAGE WAS 4 TO 1, A LOW LEVEL FOR A FINANCE COMPANY. DECEMBER 1996 FINANCE RECEIVABLES OUTSTANDING SURPASSED $500 MILLION APPROXIMATELY ONE MONTH PRIOR TO THE COMPANY'S EIGHTH ANNIVERSARY. GROWTH IN FINANCE RECEIVABLES WAS GENERATED INTERNALLY. NOVEMBER 1996 THE COMPANY OPENED A NEW FULL SERVICE OFFICE IN ARIZONA TO SERVICE THE WESTERN UNITED STATES. AT YEAR END, FINANCE RECEIVABLES IN THIS REGION INCREASED APPROXIMATELY 40% FROM THE TIME THE OFFICE WAS OPENED. SEPTEMBER 1996 THE COMPANY'S INVESTMENT GRADE DEALER COMMERCIAL PAPER PROGRAM WAS INCREASED AGAIN TO $250 MILLION FROM $200 MILLION. THE PROGRAM BEGAN IN MAY 1996 WITH AN INITIAL SIZE OF $100 MILLION. [logo] FINANCIAL HIGHLIGHTS ------------------------------------- (in thousands, except per share data)
For Years Ended July 31, 1997 1996 1995 1994 1993 - -------------------------- -------- -------- -------- -------- -------- Finance Receivables, net $571,060 $429,698 $339,299 $268,642 $206,145 Total Assets 574,764 433,087 342,936 271,987 209,609 Total Senior Debt 439,361 310,830 249,270 184,848 134,628 Stockholders' Equity 105,604 94,191 58,075 50,523 41,727 Revenues 55,305 43,523 34,951 25,866 22,911 Net Earnings 12,909 9,610 7,209 5,944 4,968 Earnings Per Common Share, Primary 0.80 0.68 0.54 0.46 0.39 Earnings Per Common Share, Fully Diluted 0.79 0.67 0.54 0.46 0.38
[the following three bar graphs were represented to the right of the above table] NET EARNINGS - ------------- (IN MILLIONS) FINANCE RECEIVABLES - ------------- (IN MILLIONS) REVENUES - ------------- (IN MILLIONS) 1 DEAR SHAREHOLDER: ----------------- Fiscal 1997 was the Company's best year ever and represented its 8th consecutive year of record earnings since the Company started business in 1989 with $12 million of equity. Net earnings for this year were $12.9 million. Over the last five years, net earnings have grown at a compound annual rate of 27%. One of management's objectives over the next several years is, at a minimum, to achieve, on average, a compound annual earnings growth rate in the 20% per annum range. FISCAL 1997 ACCOMPLISHMENTS/EVENTS: * Net earnings of $12.9 million. * Earnings per share of $.80 - fully diluted $.79. * Tangible net worth in excess of $105 million. * Finance receivables in excess of $580 million. * Continued geographic expansion with the opening of our 5th full service office in Mesa, Arizona. * Continued decrease in funding costs expressed as a premium over LIBOR and US Treasuries. * A 3 for 2 stock dividend, which was paid in July 1997, increased outstanding shares to over 14.7 million. * Institutional term debt increased to $105 million. * The Dealer Commercial Paper program increased to $250 million. * Minimal net credit losses. Loss reserve now in excess of $10.3 million. * Per share price of the Company's common stock reached an all-time high. * A stock repurchase program was commenced and 186,450 shares were bought back at an average cost of $8.74 per share (as adjusted to reflect the 3 for 2 stock dividend paid in July 1997). Financial Federal's outstanding financial and operating results were achieved despite competitive pressures which have intensified in our primary markets. Notwithstanding such pressures, the Company's interest spread, which is the difference between the net receivable portfolio yield and the Company's total direct cost for borrowings, was a strong 4.7%. With a strong and healthy national economic climate, we believe that fiscal 1998 could be another record year which should provide the platform for the Company to grow its net receivables to over $1 billion over the next several years. Our five full-service offices in Houston, TX; Westmont, IL; Teaneck, NJ; Charlotte, NC; and Mesa, AZ provide a broad geographic base for future growth, and we have the management and infrastructure in place to support such growth. The Company has sufficient financial capacity to increase its portfolio of loans, financings and leases, as well as to purchase portfolios of receivables when such opportunities arise, without having to acquire additional equity. We are very proud of the quality and consistency of Financial Federal's earnings. Unlike many other financial service and leasing companies, we have not to date engaged in securitizing or selling any of our receivables; our earnings were generated entirely from our owned portfolio and have not been enhanced by gain-on-sale accounting. If we were to securitize or sell a 2 portion of our receivables portfolio, we could, under present accounting rules, elect to immediately recognize a substantial portion of the net book gain derived from such sales into net profit. The basic difference between accruing revenue over the full term of a receivable, as we do today, or recognizing an instant gain upon the sale of such receivable, is primarily one -------------------------------------------------------------------- Our customers are the cornerstone and fiber of the country's domestic economy...All of us at Financial Federal are proud to be part of the "American dream". -------------------------------------------------------------------- of profit timing. Over the contractual life of a receivable under either method, providing the Company's funding costs are identical, the Company generally earns the equivalent amount of income. Currently, the projected all- in cost of securitizing a portion of the Company's finance receivables appears to be slightly higher than the cost of internally funding such receivables. Management believes that the potential quantifiable risk of loss, whether its receivables are securitized or held in portfolio to maturity, is basically the same. However, we do regularly reevaluate such costs, risks and other important considerations relating to securitization and we may in the future determine that it is in the best interest of the Company and its shareholders to take advantage of a securitization conduit or without recourse sale/participation of receivables. Administrative and operating expenses were contained during the past fiscal year, and we believe our operating expense ratio of 1.6% is one of the best in our industry. The Company's Hilton Head, South Carolina office was consolidated with the Company's regional office in Charlotte, North Carolina. This consolidation created efficiencies and cost savings. Almost concurrently, we opened a new full service office in Mesa, AZ, near Phoenix, to expand our service in the Southwest region. Financial Federal plays an important and consistent role in providing the financial building blocks necessary for its middle-market customers to create and maintain viable, profitable and expanding businesses. Our customers are the cornerstone and fiber of the country's domestic economy. They create and maintain our country's infrastructure, transport our goods and products, preserve our environment and manufacture our tools of production. They employ hundreds of thousands of workers, providing the economy with the necessary ingredients to continue its present healthy growth and to keep the United States a world economic leader. All of us at Financial Federal are proud to be part of the "American dream". On behalf of the Company's Board of Directors, I want to thank all of our major constituencies for their support since our inception in 1989: our customers, shareholders, creditors and, last but most importantly, our loyal employees, who serve to make Financial Federal the best in its field. /s/ Clarence Y. Palitz, Jr. Clarence Y. Palitz, Jr. President and Chief Executive Officer October 1, 1997 3 OUR BUSINESS ------------ FINANCIAL FEDERAL CORPORATION is one of the larger independent finance and leasing companies in the United States. Since its founding in 1989, the Company has recorded consecutive quarterly increases in profitability and finance receivables outstanding. The price per share of Financial Federal's common stock today is more than four times that of its initial public offering price in May 1992 and, today, our market capitalization is well over one quarter billion dollars. -------------------------------------------------------------------- Providing superior customer service is what has permitted us to compete and grow in a very competitive industry. -------------------------------------------------------------------- The Company concentrates its operations on the financing and leasing of revenue-producing equipment nationwide. Such equipment represents important "tools of production" to our middle market customers. By focusing on "hard collateral" equipment --which can be described generally as long-lasting, readily moveable and not subject to rapid technological obsolescence, such as construction equipment and cranes, over-the-road transportation equipment such as trucks, trailers and buses, machine tools, waste services equipment and others -- we have been able to enjoy minimal net credit losses since the inception of the Company. Throughout the United States, Financial Federal employs 130 people full- time and has five full-service operation centers in Houston, TX; Westmont, IL; Teaneck, NJ; Charlotte, NC; and Mesa, AZ, and 18 marketing locations. New business is developed by our dedicated marketing and management team on a nationwide basis through the direct solicitation of equipment manufacturers, dealers and end-users. Today we have over 6,000 active accounts which represent almost 3,000 customers. Our customers are generally smaller to mid-sized businesses with fewer than 500 employees. Such customers and prospects are the productive core of the American economy and, according to government statistics, generate roughly 40% of our gross domestic product; since 1990, these businesses have created almost eight million new jobs. Providing superior customer service is what has permitted us to compete and grow in a very competitive industry. Controlling expenses is a difficult task for any service-oriented business to achieve. The Company consistently strives to appropriately manage all of its operating and administrative costs, while maintaining our commitment to customer service. We believe our expense ratios are among the best in the industry. 4 The Company is also focused on managing its funding costs. Any small improvement can have a visible impact on earnings. Our $250 million investment grade commercial paper program has been very well received in the market and, through that program, we have been able to lower our overall short-term borrowing costs. We believe Financial Federal is the smallest independent financial services company to actively market its investment grade commercial paper. Three dealers currently place the Company's commercial paper: BankAmerica Robertson Stephens, ABN AMRO Chicago Corporation and Chase Securities Inc. In addition, we have successfully placed new issues of senior term debt with a highly regarded group of institutional lenders at a cost of .75% over comparable term Treasuries. The Company enjoys strong support from its bank lenders. Today, we have over $400 million of committed, unsecured senior credit facilities from 19 major domestic and foreign banks. -------------------------------------------------------------------- We believe we afford our customers a higher level of service and responsiveness than our competitors. -------------------------------------------------------------------- 5 What makes Financial Federal unique is the breadth, talent, experience and dedication of our management and marketing group. All of our senior managers and most senior marketing representatives have 15 or more years of proven success in our business, and particularly in the specific markets we serve. Most middle market customers and equipment vendors consider direct access to very experienced and knowledgeable senior managers an important factor when selecting a funding source. We consider the high level of senior management involvement one of the important elements that has permitted Financial Federal to maintain stable profit margins and increased profitability. -------------------------------------------------------------------- What makes Financial Federal unique is the breadth, talent, experience and dedication of our management and marketing group. -------------------------------------------------------------------- Our loyal customers are a very important asset. In today's competitive environment, they generally have numerous sources of financing available. When they choose Financial Federal, we believe they do so because we afford them a higher level of service and responsiveness than our competitors. MARKET CAPITALIZATION --------------------- (in millions) July 31, - ------------------------------ 1995 1996 1997 - -------- -------- -------- $97.3 $129.5 $223.3 [represented as a bar graph] LOAN LOSS RATIOS ------------------------------------------ July 31, ---------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Net Credit Losses 0.31% 0.13% 0.08% 0.03% 0.05% Allowance for Losses 1.91% 1.90% 1.85% 1.83% 1.77% [represented as a dual bar graph] EXPENSES AS A PERCENTAGE OF AVERAGE RECEIVABLES ------------------------ For Years Ended July 31, - ---------------------------------------------------- 1993 1994 1995 1996 1997 - -------- -------- -------- -------- -------- 2.75% 2.11% 1.86% 1.83% 1.60% [represented as a line graph] DEBT 1997 - --------------------------- Commercial paper 55% Senior term notes 24% Bank borrowings 18% Other 3% [represented as a pie chart] 6 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 lend primarily to middle market businesses throughout the United States. The Company's business activities can be regulated by state usury, lending and lien perfection rules and laws. Certain states also require the Company to obtain licenses in order to engage in certain types of business activities. The Company's leasing activities are substantially identical 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 1997 to Fiscal 1996 -- Finance income increased 27% to $55.3 million in fiscal 1997 from $43.5 million in fiscal 1996. The increase was primarily the result of the $119 million, or 31%, increase in the amount of average finance receivables outstanding from $388 million in 1996 to $507 million in 1997, partially offset by reduced weighted average finance rates charged by the Company on new finance receivables and the year to year decline in average market interest rates. Finance receivables booked in 1997 increased 30% to $459 million from $354 million in 1996 primarily as a result of the expansion of the Company's marketing efforts into new geographic areas and further penetration in its existing areas. In November 1996, the Company opened a new full service office in Mesa, Arizona. Interest expense, incurred on borrowings used to fund finance receivables, increased 22% to $23.4 million in 1997 from $19.3 million in 1996. The overall increase was mainly due to the 29% increase in average borrowings during 1997 from 1996, partially offset by decreases in costs of funds and average market interest rates. Finance income before provision for possible losses on finance receivables increased by 31% to $31.9 million in 1997 from $24.3 million in 1996. Finance income before provision for possible losses, expressed as a percentage of average finance receivables outstanding, was 6.3% in 1997 and in 1996. The provision for possible losses on finance receivables increased by 48% to $2.5 million in 1997 from $1.7 million in 1996. The increase was primarily due to the increase in finance receivables. See Note B(4) of Notes to Consolidated Financial Statements for the summary of activity in the allowance for possible losses. Salaries and other expenses increased 17% to $8.4 million in 1997 from $7.1 million in 1996. The increase was primarily due to increased marketing costs and other costs associated with the growth in finance receivables and salary increases, partially offset by the reduction in overhead costs that resulted from the merging of the Company's Hilton Head, SC office into the Company's Charlotte, NC office in November 1996. The provision for income taxes increased to $8.1 million in 1997 from $5.8 million in 1996 primarily due to the increase in earnings before income taxes. 7 Net earnings increased by 34% to $12.9 million in 1997 from $9.6 million in 1996. Primary earnings per share increased by 18% to $0.80 per share in 1997 from $0.68 per share in 1996 and fully diluted earnings per share increased by 18% to $0.79 per share in 1997 from $0.67 per share in 1996. The increases in earnings per share were lower than the increase in net earnings primarily due to the sale of 1.7 million shares of the Company's common stock in a public offering in May 1996. Comparison of Fiscal 1996 to Fiscal 1995 -- Finance income increased 25% to $43.5 million in fiscal 1996 from $35.0 million in fiscal 1995. The increase was primarily attributable to the 24% increase in average finance receivables outstanding to $388.0 million in 1996 from $312.3 million in 1995. The growth in finance receivables was due to new financings which totaled $354.2 million in 1996, an increase of 38% over 1995. New financings increased as a result of the hiring of additional marketing personnel in 1996 and favorable economic conditions. Interest expense, which is incurred on borrowings used primarily to fund finance receivables, increased 19% to $19.3 million in 1996 from $16.3 million in 1995. The overall increase was mainly due to the 27% increase in average borrowings during 1996 from 1995, offset by decreases in costs of funds and, to a lesser extent, average market interest rates. Finance income before provision for possible losses on finance receivables increased by 30% to $24.3 million in 1996 from $18.7 million in 1995. As a percentage of average finance receivables outstanding, finance income before provision for possible losses increased to 6.3% in 1996 from 6.0% in 1995. The increase was primarily due to the interest savings of approximately $750,000 from the replacement of the $15.0 million senior subordinated note, bearing a 12.27% interest rate, on September 1, 1995 with borrowings bearing lower interest rates and the interest savings of approximately $350,000 on the debt repaid from the net proceeds of the Company's 1.7 million share public offering of its common stock in May 1996. The provision for possible losses on finance receivables, which increases the allowance, increased 18% to $1.7 million in 1996 from $1.5 million in 1995. 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 23% to $7.1 million in 1996 from $5.8 million in 1995. The increase was primarily due to the hiring of additional marketing and other personnel and salary increases. The provision for income taxes increased to $5.8 million in 1996 from $4.4 million in 1995 due to the increase in earnings before income taxes. Net earnings increased by 33% to $9.6 million in 1996 from $7.2 million in 1995. Primary earnings per share increased by 26% to $0.68 per share in 1996 from $0.54 per share in 1995 and fully diluted earnings per share increased by 24% to $0.67 per share in 1996 from $0.54 per share in 1995. The increase in earnings per share was lower than the increase in net earnings primarily due to the effect of the sale of 1.7 million shares of the Company's common stock in a public offering in May 1996. RECEIVABLE PORTFOLIO AND ASSET QUALITY Finance receivables outstanding increased by $143.7 million, or 33%, to $581.4 million at July 31, 1997 from $437.7 at July 31, 1996. The increase was primarily due to the amount of finance receivables originated exceeding 8 amounts collected. At July 31, 1997, Financial Federal Credit Inc. ("Credit", a wholly-owned subsidiary) had $579.9 million, or 99.7%, of total finance receivables and First Federal Commercial Inc. ("Commercial," a wholly-owned subsidiary) had the balance of finance receivables. The allowance for possible losses, which increased to $10.3 million at July 31, 1997 from $8.0 million at July 31, 1996, was 1.77% of finance receivables at July 31, 1997 as compared to 1.83% at July 31, 1996. The allowance is periodically reviewed by the Company's management and is based on management's current assessment of the risks inherent in the Company's finance receivables from national and regional economic conditions, industry conditions, concentrations, the financial condition of counterparties and other factors. Future additions to the allowance may be necessary based on changes in these factors. The equipment collateral securing the Company's finance receivables generally possess certain characteristics that serve to mitigate potential credit losses. Such characteristics include an economic life exceeding the term of the receivable, low rates of technological obsolescence, applications in various industries, easy accessibility and transporting and a broad resale market. These characteristics, combined with management's experience and expertise with the equipment collateral, have minimized the Company's net credit losses. Net credit losses incurred on the Company's finance receivables, defined as write-downs of receivables less subsequent recoveries, increased to $230,000 in 1997 from $97,000 in 1996. 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 0.05% in 1997, 0.03% in 1996, 0.08% in 1995, 0.13% in 1994 and 0.31% in 1993. Management does not currently expect this trend to continue. 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. Finance receivables that the Company has suspended income recognition on decreased to $5.6 million, or 1.0% of total finance receivables, at July 31, 1997, from $5.9 million, or 1.3% of total finance receivables, at July 31, 1996. 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-15%, waste disposal-14% and cranes-12%. The major geographic concentrations are: southwest-25%, northeast-25% and southeast-24%. LIQUIDITY AND CAPITAL RESOURCES The Company is dependent upon the continued availability of funds primarily to originate or acquire finance receivables and to purchase portfolios of finance receivables. The Company may obtain required funds from a variety of sources, including internal generation, direct issuance of and dealer placed commercial paper, borrowings under revolving credit facilities, sales of common and preferred equity and placements of term debt. Management believes that the Company has available sufficient liquidity to support its operations. The Company has obtained the majority of its borrowings through Credit, 98.4% at July 31, 1997, and has obtained the balance of its borrowings through Financial Federal Corporation ("Financial", the parent company), 1.6% at July 31, 1997. 9 The Company has received investment grade credit ratings on its commercial paper and senior debt. Credit's commercial paper is rated "F-2" by Fitch Investors Services Inc. and Financial's and Credit's commercial paper is rated "D-2" by Duff & Phelps Credit Rating Co. Credit's ability to meet senior obligations is rated BBB by Fitch Investors Services Inc. These credit ratings provide the Company with greater access to capital markets. The Company's total debt outstanding increased $123.9 million to $441.7 million at July 31, 1997 from $317.8 million at July 31, 1996. The Company also increased its stockholders' equity by $11.4 million to $105.6 million at July 31, 1997 from $94.2 million at July 31, 1996 and its net deferred income tax liability by $2.3 million to $11.3 million at July 31, 1997 from $8.9 million at July 31, 1996. These increases, together with increases in the Company's accrued expenses and other liabilities, were used primarily to fund the increase in finance receivables. During fiscal 1997, the Company improved its liquidity as follows: * In September 1996, Credit increased the size of its dealer commercial paper program from $200.0 million to $250.0 million. At July 31, 1997, $244.6 million of commercial paper was outstanding. * In July 1997, Credit issued $50.0 million of fixed rate senior term notes with maturities of three years and three and one half years. * During the year, the Company increased its total committed unsecured revolving credit facilities by $17.5 million to $395.0 million at July 31, 1997 and increased the amount of such facilities with original terms of two or more years by $55.0 million to $320.0 million at July 31, 1997. In July 1997, the Company declared and paid a three-for-two stock split effected in the form of a stock dividend. In August 1996, the Company announced a $2.5 million common stock repurchase program which was increased to $4.1 million in May 1997. During fiscal 1997 (prior to the three-for-two stock split), the Company repurchased 124,300 shares of its common stock for $1,630,000. Shares repurchased are retired. This program has not and is not expected to impact significantly the Company's earnings per share. The sources of the Company's borrowings are described below: Financial and Credit are each direct issuers of investment grade commercial paper. Credit also issues investment grade commercial paper through a $250.0 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, 1997 generally ranged from 5.7% to 6.1%. The Company has not obtained commitments from any purchaser of its commercial paper for additional or future purchases. The Company's policy is to maintain unused committed revolving credit facilities from banks in an amount greater than commercial paper outstanding. At July 31, 1997, Credit had $75.0 million of committed unsecured revolving credit facilities with an original term of one year or less with eight banks under which $30.0 million of aggregate borrowings were outstanding. At July 31, 1997, Credit also had $310.0 million of committed unsecured revolving credit facilities with original terms ranging from two to five years with seventeen banks under which $50.1 million of aggregate borrowings were outstanding, and Financial had a $10.0 million committed 10 unsecured revolving credit facility with an original term of five years with a bank under which no borrowings were outstanding. At July 31, 1997, all 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 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 is as follows: (dollars in millions) 1997 1996 1995 - ------------------------------------------------------------------- Maximum amount outstanding during the year $374.7 $270.2 $169.3 Average amount outstanding during the year 316.6 216.2 113.2 Weighted average interest rate: During the year 5.9% 6.2% 6.4% End of the year 6.0% 5.9% 6.6% At July 31, 1997, the Company reported $320.0 million of commercial paper and bank borrowings as long-term senior debt in the consolidated financial statements based on the amount of long-term revolving credit facilities expiring after one year. In July 1997, Credit issued $50.0 million of senior term notes to institutional investors. These notes are due as follows: $25.0 million on July 14, 2000 and $25.0 million on December 14, 2000. Interest is payable semi-annually at fixed annual rates of 7.40% and 7.45%, respectively. Prepayments of the notes are subject to a premium based on a yield maintenance formula. At July 31, 1997, the Company also had $55.0 million of senior term notes due on September 1, 2001. In July 1997, the Company issued $9.7 million of variable rate senior term notes to certain executive officers and their affiliates. These notes mature in September 1998 subject to extension. In July 1996, Financial called the $7.0 million of variable rate subordinated debentures at face value offering holders the option to receive amended debentures. As a result, $4.7 million of these debentures were repaid and $2.3 million of amended debentures were issued on September 1, 1996. The amended debentures are due on March 1, 2003, bear interest, payable semi- annually, at an annual rate of 8.0%, and contain a penalty for prepayments made prior to September 1, 1999. The senior term notes and the revolving credit facilities contain certain restrictive covenants including limitations on: indebtedness, encumbrances, investments, dividends and other distributions from Credit to Financial, sales of assets, mergers and other business combinations, capital expenditures and the minimum adjusted net worth of Credit. Under the most restrictive of the above dividend payment covenants, $34.8 million of the Company's equity was free from dividend restrictions at July 31, 1997. INTEREST RATES AND SENSITIVITY The net yield of the Company's finance receivables, the cost of the Company's borrowed funds and the resulting net interest spread were as follows: 1997 1996 1995 - ------------------------------------------------------ Average yield of finance receivables 10.9% 11.2% 11.2% Weighted average cost of borrowed funds 6.2% 6.6% 6.9% ---------------------- Net interest spread 4.7% 4.6% 4.3% ====================== 11 The Company's finance receivables comprise fixed rate and variable rate transactions. At July 31, 1997, $465.3 million, or 80%, of finance receivables provide for interest at fixed rates and $116.0 million, or 20%, of finance receivables provide for interest at variable rates indexed to the prime rate, as defined. 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. Finance receivables generally have original maturities ranging from two to five years and provide for monthly installments. The Company experiences some prepayments of its finance receivables which shorten the scheduled maturities. At July 31, 1997, $157.2 million of fixed rate finance receivables are scheduled to mature within one year. The total of fixed rate term debt of $107.3 million, stockholders' equity of $105.6 million and net deferred income tax liability of $11.3 million was $224.2 million at July 31, 1997. The Company's other debt at July 31, 1997, primarily commercial paper and bank borrowings, reprices frequently. At July 31, 1997, total commercial paper and bank borrowings outstanding of $324.7 million mature or reprice as follows: $262.0 million, or 81%, within one month, $38.2 million, or 12%, within the following two months and the remainder, $24.5 million, or 7%, within the following six months. Due to the excess of the Company's fixed rate finance receivables over the total of its fixed rate term debt, stockholders' equity and net deferred income tax liability, the Company's net interest spread could be affected by fluctuations in market interest rates. The Company does not seek to match the maturities of its debt to its finance receivables. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This standard replaces the current presentation of primary and fully diluted earnings per share with basic and diluted earnings per share effective in the Company's fiscal quarter ending January 31, 1998. Under SFAS 128, the Company's basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period (common stock equivalents are excluded) and the Company's diluted earnings per share is calculated similar to primary earnings per share. See Note A(6) of Notes to Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS The above discussions contain forward-looking statements that involve certain risks and uncertainties. The Company's actual results could differ materially from those anticipated by such forward-looking statements due to the impact of many factors outside the Company's control including economic, geographic and industry conditions, fluctuations in market interest rates, prepayments, competitive conditions and changes in existing laws or regulations. 12 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
July 31, ----------------------------- 1997 1996 ------------ ------------ ASSETS Cash $ 2,532,000 $ 2,426,000 ------------ ------------ Finance receivables 581,363,000 437,706,000 Less allowance for possible losses (10,303,000) (8,008,000) ------------ ------------ Finance receivables - net 571,060,000 429,698,000 ------------ ------------ Other assets 1,172,000 963,000 ------------ ------------ TOTAL ASSETS $574,764,000 $433,087,000 ============ ============ LIABILITIES Senior debt: Short-term $ 4,681,000 $ 830,000 Long-term ($16,986,000 in 1997 and $9,376,000 in 1996 due to related parties) 434,680,000 310,000,000 Accrued interest, taxes and other liabilities 16,224,000 12,160,000 Subordinated debentures ($2,181,000 in 1997 and $3,178,000 in 1996 due to related parties) 2,290,000 6,957,000 Deferred income taxes 11,285,000 8,949,000 ------------ ------------ Total liabilities 469,160,000 338,896,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock - $1 par value, authorized 500,000 shares, none issued Common stock - $.50 par value, authorized shares: 25,000,000, issued shares: 14,764,000 in 1997 and 9,960,000 in 1996 7,382,000 4,980,000 Additional paid-in capital 57,315,000 58,289,000 Warrants - issued and outstanding 1,607,000 in 1997 and 1996 29,000 29,000 Retained earnings 40,878,000 30,893,000 ------------ ------------ Total stockholders' equity 105,604,000 94,191,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $574,764,000 $433,087,000 ============ ============ The notes to consolidated financial statements are made a part hereof.
13 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock - $.50 Par Value ----------------------------------------- Additional Number of Paid-in Retained Treasury Shares Par Value Capital Warrants Earnings Stock ----------- ----------- ------------ ---------- ------------ ------------ Balance at August 1, 1994 5,532,000 $2,766,000 $32,882,000 $29,000 $16,286,000 $(1,440,000) Exercise of stock options 48,000 24,000 282,000 Tax benefit relating to stock options 37,000 Net earnings 7,209,000 ----------- ----------- ------------ ---------- ------------ ------------ Balance at July 31, 1995 5,580,000 2,790,000 33,201,000 29,000 23,495,000 (1,440,000) Retirement of treasury stock (96,000) (48,000) (552,000) (840,000) 1,440,000 Exercise of stock options 31,000 16,000 150,000 Three-for-two stock split 2,745,000 1,372,000 (1,372,000) Sale of common stock 1,700,000 850,000 25,490,000 Net earnings 9,610,000 ----------- ----------- ------------ ---------- ------------ ------------ Balance at July 31, 1996 9,960,000 4,980,000 58,289,000 29,000 30,893,000 -- Acquisitions of teasury stock (1,630,000) Retirement of treasury stock (124,000) (62,000) (1,105,000) (463,000) 1,630,000 Exercise of stock options 7,000 3,000 58,000 Three-for-two stock split 4,921,000 2,461,000 (2,461,000) Tax benefit relating to stock options 73,000 Net earnings 12,909,000 ----------- ----------- ------------ ---------- ------------ ------------ BALANCE AT JULY 31, 1997 14,764,000 $7,382,000 $57,315,000 $29,000 $40,878,000 $ -- =========== =========== ============ ========== ============ ============ The notes to consolidated financial statements are made a part hereof.
14 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended July 31, --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Finance income: Loan obligations $38,374,000 $29,533,000 $24,654,000 Lease obligations 16,931,000 13,990,000 10,297,000 ----------- ----------- ----------- Total finance income 55,305,000 43,523,000 34,951,000 Interest expense 23,437,000 19,271,000 16,253,000 ----------- ----------- ----------- Finance income before provision for possible losses on finance receivables 31,868,000 24,252,000 18,698,000 Provision for possible losses on finance receivables 2,525,000 1,710,000 1,450,000 ----------- ----------- ----------- Net finance income 29,343,000 22,542,000 17,248,000 Miscellaneous income 130,000 Salaries and other expenses (8,356,000) (7,113,000) (5,806,000) ----------- ----------- ----------- Earnings before income taxes 20,987,000 15,429,000 11,572,000 Provision for income taxes 8,078,000 5,819,000 4,363,000 ----------- ----------- ----------- NET EARNINGS $12,909,000 $ 9,610,000 $ 7,209,000 =========== =========== =========== Earnings per common share: Primary $0.80 $0.68 $0.54 =========== =========== =========== Fully diluted $0.79 $0.67 $0.54 =========== =========== =========== Average number of shares used: Primary 16,153,752 14,224,992 13,434,183 =========== =========== =========== Fully diluted 16,357,347 14,262,807 13,455,086 =========== =========== =========== The notes to consolidated financial statements are made a part hereof.
15 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended July 31, ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net earnings $ 12,909,000 $ 9,610,000 $ 7,209,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 232,000 206,000 156,000 Provision for possible losses on finance receivables 2,525,000 1,710,000 1,450,000 Amortization of deferred origination costs 4,232,000 3,443,000 2,896,000 Deferred income taxes 2,336,000 2,662,000 1,238,000 Gain on repurchase of subordinated debentures (130,000) Decrease (increase) in other assets (253,000) (368,000) 79,000 Increase (decrease) in accrued interest, taxes and other liabilities 4,064,000 4,813,000 (1,538,000) ------------ ------------ ------------ Net cash provided by operating activities 26,045,000 22,076,000 11,360,000 ------------ ------------ ------------ Cash flows from investing activities: Finance receivables: Originated (464,283,000) (358,512,000) (261,135,000) Collected 316,164,000 262,960,000 186,132,000 Other (188,000) (254,000) (242,000) ------------ ------------ ------------ Net cash (used in) investing activities (148,307,000) (95,806,000) (75,245,000) ------------ ------------ ------------ Cash flows from financing activities: Commercial paper: Maturities 90 days or less (net) 32,908,000 167,750,000 (10,591,000) Maturities greater than 90 days: Proceeds 149,470,000 24,866,000 21,565,000 Repayments (127,747,000) (14,341,000) (20,997,000) Bank borrowings: Maturities 90 days or less (net) 9,220,000 (91,715,000) 74,445,000 Maturities greater than 90 days: Proceeds 5,000,000 35,000,000 Repayments (80,000,000) (35,000,000) Proceeds from senior term notes 50,000,000 55,000,000 Proceeds from variable rate senior term notes 9,680,000 Repayment of senior subordinated note (15,000,000) Repayments of subordinated debentures (4,667,000) (595,000) Proceeds from sale of common stock 26,340,000 Acquisitions of treasury stock (1,630,000) Proceeds from exercise of stock options 61,000 166,000 306,000 Tax benefit relating to stock options 73,000 37,000 ------------ ------------ ------------ Net cash provided by financing activities 122,368,000 73,066,000 64,170,000 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH 106,000 (664,000) 285,000 Cash - beginning of period 2,426,000 3,090,000 2,805,000 ------------ ------------ ------------ CASH - END OF PERIOD $ 2,532,000 $ 2,426,000 $ 3,090,000 ============ ============ ============ Supplemental disclosures of cash flow information: Interest paid $ 22,464,000 $ 18,163,000 $ 16,037,000 ============ ============ ============ Income taxes paid $ 5,710,000 $ 3,003,000 $ 3,807,000 ============ ============ ============ The notes to consolidated financial statements are made a part hereof.
16 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 throughout the United States primarily to middle-market commercial enterprises in diverse industries such as general construction, road and infrastructure construction and repair, manufacturing, trucking and waste disposal. The Company lends against, finances and leases a wide range of revenue-producing equipment such as cranes, earth movers, machine tools, personnel lifts, trailers and trucks. (3) Income Recognition - Finance receivables comprise loans and other financings and noncancelable leases. All leases are accounted for as direct financing leases, where total lease payments, plus residual values, less the cost of the leased equipment is recorded as unearned finance income. Residual values are recorded at the lowest of (i) any stated purchase option, (ii) the present value at the end of the initial lease term of rentals due under any renewal options or (iii) the estimated fair value of the equipment at the end of the lease. Finance income is recognized over the term of receivables using the interest method. Costs incurred to originate or acquire finance receivables are deferred and amortized 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 bank- ruptcy 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 cash collected on impaired receivables is 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 amounts written down 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 Share - Earnings per common share is calculated by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents comprise dilutive stock options and warrants that are assumed to be exercised for the calculation. 17 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This standard replaces the current presentation of primary and fully diluted earnings per share, which both include the effects of common stock equivalents, with basic and diluted earnings per share effective in the Company's fiscal quarter ending January 31, 1998. Under SFAS 128, basic earnings per share, calculated by dividing net income by the weighted average number of common shares outstanding during the period, would be $0.87, $0.74 and $0.59 per share in 1997, 1996 and 1995, respectively. Diluted earnings per share would be the same as primary earnings per share for each of the three years. (7) Use of Estimates - The consolidated financial statements and the notes thereto were prepared in accordance with generally accepted accounting principles which requires estimates and assumptions to be made by management that affect the amounts reported therein. Actual results could differ from those estimates. NOTE B: FINANCE RECEIVABLES (1) Finance receivables comprise installment sales and secured loans (including line of credit arrangements), collectively referred to as loans, which provide for interest at fixed rates or variable rates generally indexed to the prime rate (as defined) and investments in direct financing leases, as follows: July 31, --------------------------- 1997 1996 Loans: ------------ ------------ Fixed rate $291,221,000 $190,851,000 Variable rate 103,590,000 100,053,000 ------------ ------------ Total 394,811,000 290,904,000 Direct financing leases 186,552,000 146,802,000 ------------ ------------ Finance receivables $581,363,000 $437,706,000 ============ ============ The approximate weighted average interest rates were 10.7% and 11.1% on fixed rate loans at July 31, 1997 and 1996, respectively, and 2.6% and 2.8% over the prime rate on variable rate loans at July 31, 1997 and 1996, respectively. (2) The investment in direct financing leases comprises the following: July 31, --------------------------- 1997 1996 ------------ ------------ Minimum lease payments receivable $193,201,000 $154,003,000 Residual values 30,047,000 22,526,000 Unearned finance income (36,696,000) (29,727,000) ------------ ------------ Investment in direct financing leases $186,552,000 $146,802,000 ============ ============ (3) Finance receivables generally provide for monthly installments of equal or varying amounts over periods ranging from two to five years. Annual contractual maturities of finance receivables at July 31, 1997 are as follows: Direct Fixed Variable Financing Rate Loans Rate Loans Leases ------------ ------------ ------------ 1998 $105,719,000 $ 46,898,000 $ 66,815,000 1999 85,801,000 26,454,000 56,405,000 2000 59,758,000 18,109,000 40,470,000 2001 29,149,000 7,413,000 21,788,000 2002 8,118,000 3,097,000 7,023,000 Thereafter 2,676,000 1,619,000 700,000 ------------ ------------ ------------ Total $291,221,000 $103,590,000 $193,201,000 ============ ============ ============ (4) The activity of the allowance for possible losses is summarized as follows: Year Ended July 31, ------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Balance - August 1 $8,008,000 $6,395,000 $5,191,000 Provision 2,525,000 1,710,000 1,450,000 Write-downs (1,168,000) (1,004,000) (914,000) Recoveries 938,000 907,000 668,000 ----------- ---------- ---------- Balance - July 31 $10,303,000 $8,008,000 $6,395,000 =========== ========== ========== 18 (5) Income recognition has been suspended on finance receivables with a recorded investment of $5,626,000 (includes $3,979,000 of impaired loans) at July 31, 1997 and $5,894,000 (includes $4,489,000 of impaired loans) at July 31, 1996. The average recorded investment in impaired loans was $3,915,000 in 1997 and $3,185,000 in 1996. Impaired loans exclude direct financing leases. (6) The Company is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments are commitments to extend credit to customers. 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, 1997 and 1996, the unused portion of these commitments was $5,805,000 and $7,075,000, respectively. NOTE C: DEBT Debt is summarized as follows: July 31, --------------------------- 1997 1996 ------------ ------------ Senior debt: Commercial paper $244,591,000 $189,960,000 Bank borrowings 80,090,000 65,870,000 Term notes: 7.40% due 2000 25,000,000 7.45% due 2001 25,000,000 6.76% due 2002 55,000,000 55,000,000 Variable rate term notes 9,680,000 ------------ ------------ Total senior debt 439,361,000 310,830,000 Subordinated debentures 2,290,000 6,957,000 ------------ ------------ Total debt $441,651,000 $317,787,000 ============ ============ (1) The Company issues commercial paper with a maximum term of 270 days. The weighted average interest rates on commercial paper outstanding at July 31, 1997 and 1996 were 5.8% and 5.7%, respectively. Commercial paper transactions with officers and other related parties are summarized as follows: 1997 1996 1995 ----------- ----------- ----------- Year ended July 31: Issued $31,409,000 $34,778,000 $55,270,000 Matured 33,479,000 32,218,000 65,596,000 Interest expense 721,000 497,000 730,000 At July 31: Outstanding 7,306,000 9,376,000 Accrued interest 91,000 99,000 (2) At July 31, 1997, the Company had $395,000,000 of committed unsecured revolving credit facilities with various banks expiring as follows: $75,000,000 within one year and $320,000,000 on various dates from December 1998 through November 2001. These facilities contain certain restrictive covenants including limitations on indebtedness, encumbrances, dividends to Financial from Credit, capital expenditures and minimum net worth. The Company generally incurs a fee on the unused portion of these facilities. Outstanding borrowings of $80,090,000 at July 31, 1997 generally mature between 1 and 90 days and bear interest based on domestic money market rates or LIBOR, at the Company's option. The weighted average interest rates on bank borrowings were 6.3% and 6.1% at July 31, 1997 and 1996, respectively. (3) The senior term notes are Credit's obligations. Interest is payable semi-annually. Prepayments of the notes are subject to a premium based on yield maintenance formulas. The notes contain certain restrictive covenants including limitations on indebtedness, encumbrances, dividends to Financial and minimum net worth. (4) The variable rate senior term notes are payable to certain executive officers and their affiliates. The notes bear interest at variable rates 19 indexed to LIBOR or domestic money market rates and mature in September 1998 subject to extension. (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, $4,667,000 of these debentures were repaid ($997,000 to related parties) and $2,290,000 of amended debentures were issued ($2,181,000 to related parties) on September 1, 1996. The amended debentures mature March 1, 2003, bear interest, payable semi-annually, at the fixed annual rate of 8.0%, contain a penalty for prepayments made prior to September 1, 1999 and are subordinated to senior debt and other debt designated by the Board of Directors and to certain other liabilities as provided for in the debentures. In 1995, Financial repurchased a debenture with a face amount of $725,000 from a non-related party for $595,000. (6) Under the most restrictive of the above dividend payment covenants, $34,826,000 of the Company's equity was free from dividend restrictions at July 31, 1997. (7) At July 31, 1997, 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: $154,680,000 in 1999, $130,000,000 in 2000, $45,000,000 in 2001, $105,000,000 in 2002 and $2,290,000 in 2003. NOTE D: STOCKHOLDERS' EQUITY (1) In July 1997, the Board of Directors authorized a three-for-two stock split effected in the form of a stock dividend, payable on July 30, 1997. In December 1995, the Board of Directors authorized a three-for-two stock split effected in the form of a stock dividend, payable in January 1996. Prior period average shares outstanding, share equivalents and per share amounts have been restated to reflect the stock splits. Shares sold or acquired prior to the stock splits have not been restated. (2) In August 1996, the Company established a program to repurchase its common stock. Total repurchases are limited to $4,130,000 under the program as increased in May 1997. In 1997 (prior to the three-for-two stock split), 124,300 shares were repurchased for $1,630,000. Shares repurchased are retired. (3) In December 1995, the Company's stockholders approved (i) an increase in the number of authorized shares of common stock from 10,000,000 to 25,000,000 and (ii) an amendment to the Company's stock option plan to increase the number of shares of common stock available in the plan from 1,125,000 to 2,250,000. (4) In May 1996, the Company sold 1,700,000 shares of its common stock in a public offering. Net proceeds of $26,340,000 were used to repay bank borrowings. (5) Warrants: In 1989, the Company issued warrants to purchase 1,125,000 shares of common stock at $2.83 per share to its original stockholders. The warrants were purchased for $.0022 each and expire February 1, 2001. In 1991, the Company issued warrants to purchase 481,500 shares of common stock at $2.72 per share to certain officers. The warrants were purchased for $.0555 each and expire August 31, 2001. NOTE E: STOCK OPTIONS: The Company's stock option plan was adopted in September 1989 (as amended) and expires in September 1999 subject to earlier termination by the Board of 20 Directors. Under the plan, the Company may grant non-qualified and incentive stock options to officers, directors and employees for the purchase of 2,250,000 shares of common stock. The exercise price of each option granted may not be less than the fair market value of the common stock on the grant date and the maximum term of an option is ten years. Options outstanding at July 31, 1997 were granted with a six year term and vest (become exercisable) in four equal cumulative annual installments commencing with the second anniversary of the grant date, except for 112,500 options that were granted to certain executive officers in 1996 with an eight year term and vest in eight varying annual cumulative installments. At July 31, 1997, 1,170,754 shares of common stock were available for future grants of options. Stock option activity and related information is summarized as follows: Number of Weighted Average Options Exercise Price --------- ---------------- Outstanding at August 1, 1994 473,512 $ 5.23 Granted 2,700 6.78 Exercised (108,450) 2.85 Canceled (13,275) 6.69 ------- Outstanding at July 31, 1995 354,487 5.92 Granted 258,225 9.05 Exercised (50,513) 3.35 Canceled (47,588) 6.64 ------- Outstanding at July 31, 1996 514,611 7.68 Granted 131,925 11.17 Exercised (9,537) 6.39 Canceled (45,302) 8.10 ------- Outstanding at July 31, 1997 591,697 8.45 ======= Exercisable at July 31: 1995 66,937 $4.33 1996 97,480 6.78 1997 149,534 6.68 The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation," and therefore 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, no compensation expense is recognized 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, 1997 ranged from $6.22 to $11.17. Additional information of these options, by price range, is summarized as follows: Price Range ------------------- Under $8 Over $8 -------- ------- Outstanding: Number 336,397 255,300 Weighted average exercise price $6.83 $10.58 Weighted average remaining contractual life (in years) 3.8 5.1 Exercisable: Number 149,534 -- Weighted average exercise price $6.68 Pro forma amounts of net earnings and earnings per share, determined as if compensation expense attributable to stock options had been recognized under SFAS 123 using the fair value method, are as follows: Year Ended July 31, ------------------------ 1997 1996 ----------- ---------- Net earnings $12,720,000 $9,473,000 Earnings per share: Primary $0.79 $0.67 Fully diluted $0.78 $0.67 The pro forma effect on net earnings in 1997 and 1996 may not be representative of the effect in future years since compensation expense attributable to stock options under SFAS 123 is measured over an option's vesting period and only applies to options granted by the Company after August 1, 1995. 21 The Company estimated the weighted average grant date fair values at $3.78 and $3.55 for stock options granted in 1997 and 1996, respectively, using the Black-Scholes option-pricing model based on the following assumptions: weighted average risk-free interest rates of 6.7% in 1997 and 6.0% in 1996; expected volatility rates of the price of the Company's common stock of 27%; and weighted average expected life of options granted of 4.3 years in 1997 and 6.2 years in 1996. NOTE F: INCOME TAXES (1) The provision for income taxes comprises the following: Year Ended July 31, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Currently payable: Federal $4,887,000 $2,773,000 $2,742,000 State and local 782,000 384,000 346,000 ---------- ---------- ---------- Total 5,669,000 3,157,000 3,088,000 Deferred 2,336,000 2,662,000 1,238,000 Tax benefit relating to stock options 73,000 37,000 ---------- ---------- ---------- Provision for income taxes $8,078,000 $5,819,000 $4,363,000 ========== ========== ========== (2) Income taxes computed at the statutory federal income tax rates are reconciled to the provision for income taxes as follows: Year Ended July 31, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Federal income tax at statutory rates $7,345,000 $5,313,000 $3,934,000 State and local taxes (net of federal income tax benefit) 733,000 506,000 429,000 ---------- ---------- ---------- Provision for income taxes $8,078,000 $5,819,000 $4,363,000 ========== ========== ========== (3) Deferred income taxes comprises the tax effect of the following temporary differences: July 31, ------------------------- 1997 1996 ----------- ----------- Deferred tax liabilities: Leasing transactions $14,193,000 $11,069,000 Deferred origination costs 2,218,000 1,902,000 ----------- ----------- Total 16,411,000 12,971,000 ----------- ----------- Deferred tax assets: Allowance for possible losses (3,993,000) (3,070,000) Other liabilities (1,133,000) (952,000) ----------- ----------- Total (5,126,000) (4,022,000) ----------- ----------- Deferred income taxes $11,285,000 $ 8,949,000 =========== =========== NOTE G: LEASE COMMITMENTS The Company occupies office space under leases expiring through 2004. At July 31, 1997, minimum future annual rentals due under these leases are $627,000 in 1998, $496,000 in 1999, $439,000 in 2000, $308,000 in 2001, $322,000 in 2002 and $242,000 thereafter. Office rent expense was $677,000 in 1997, $550,000 in 1996 and $473,000 in 1995. NOTE H: 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 requiring a first lien on equipment collateral on all transactions. The Company evaluates the equipment collateral on an ongoing basis and focuses on lending against, financing and leasing equipment collateral that has an economic life exceeding the term of the receivable, is not subject to rapid technological obsolescence, has applications in various industries, is easily 22 accessible and movable and has a broad resale market. The Company may also obtain third party guarantees and/or hold back a portion of the amount financed. Concentrations of credit risk arise when counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant concentration of credit risk with any one counterparty. The major concentrations of credit risk grouped by the industries and geographic regions of counterparties, expressed as a percentage of finance receivables, were as follows: July 31, --------------- 1997 1996 ------ ------ Industry: Trucking 19% 20% Construction 15 17 Waste disposal 14 13 Cranes 12 11 Geographic region: Southwest 25% 27% Northeast 25 21 Southeast 24 25 NOTE I: FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's financial instruments comprise cash, finance receivables (excluding leases), commitments to extend credit and debt. The following summarizes the methods used to estimate the fair value of these financial instruments. The carrying values of cash, commercial paper and bank borrowings approximate their fair values based on their short-term maturities. The carrying values of the senior term notes, the variable rate senior term notes and the subordinated debentures are estimated to approximate their fair values at July 31, 1997 and 1996 based on their future cash flows discounted at current rates for debt with similar terms and maturities. 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. Each transaction would be valued by a potential buyer based on its credit quality, collateral value, third party guarantee(s), payment history, interest rate, maturity, documentation and other legal matters, and many other considerations which would involve the buyer's subjective judgment. The value received in a fair market sale of each of these transactions would be based on the nature 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. 23 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, 1997 and 1996, and the related consolidated statements of stockholders' equity, operations and cash flows for each of the three years in the period ended July 31, 1997. 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, 1997 and 1996, and their consolidated operating results and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. /s/ Eisner & Lubin LLP ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York September 4, 1997 24 SELECTED QUARTERLY DATA ----------------------- The following table sets forth quarterly financial data for the years ended July 31, 1997 and 1996 adjusted for the July 1997 and January 1996 three-for-two stock splits.
Earnings per Share ------------------ Fully Revenues Net Earnings Primary Diluted ----------- ------------ ------- ------- Fiscal 1997, three months ended: October 31, 1996 $12,530,000 $2,972,000 $0.18 $0.18 January 31, 1997 13,356,000 3,134,000 0.19 0.19 April 30, 1997 13,999,000 3,287,000 0.20 0.20 July 31, 1997 15,420,000 3,516,000 0.22 0.22 Fiscal 1996, three months ended: October 31, 1995 $10,175,000 $2,124,000 $0.16 $0.16 January 31, 1996 10,741,000 2,317,000 0.17 0.17 April 30, 1996 10,905,000 2,439,000 0.18 0.18 July 31, 1996 11,702,000 2,730,000 0.17 0.17
STOCK PRICE HISTORY AND DIVIDEND POLICY --------------------------------------- The Company's common stock is traded on the American Stock Exchange under the symbol "FIF". The following table sets forth the quarterly high and low closing sales prices per share of the common stock as reported by the American Stock Exchange adjusted for the July 1997 and January 1996 three-for-two stock splits.
FISCAL 1997 FISCAL 1996 --------------- --------------- High Low High Low ------ ------ ------ ------ First Quarter ended October 31 $10.58 $ 8.50 $ 9.73 $ 7.83 Second Quarter ended January 31 $11.83 $ 9.25 $11.00 $ 9.28 Third Quarter ended April 30 $13.00 $10.42 $11.25 $10.09 Fourth Quarter ended July 31 $15.58 $11.42 $11.42 $ 8.42
The Company presently has no intention of paying cash dividends in the foreseeable future. 25 CORPORATE DIRECTORY ------------------- OFFICERS Chairman of the Board and President Clarence Y. Palitz, Jr. Executive Vice President and Treasurer Michael C. Palitz Executive Vice President Paul Sinsheimer Senior Vice President William M. Gallagher Senior Vice President & Secretary Troy H. Geisser Senior Vice President Richard W. Radom Vice President Julian C. Green, Jr. Vice President Jeanne McDonald Vice President Fred J. Palumbo Administrative Vice President Ted Wooldridge Controller and Assistant Treasurer David H. Hamm OFFICERS OF SUBSIDIARIES ONLY Senior Vice Presidents: John V. Golio Daniel J. McDonough Vice Presidents: Donald G. Pokorny Luther C. Whitlock Divisional Vice President: William J. Flaherty Regional Vice Presidents: Gary Barnes Johnie E. Christ Thomas Fahl James M. Keesee W. J. Mattocks Michael A. Nelson James R. Scappi Rodney Sepulvado Thomas L. Tornee Assistant Vice Presidents: Donald Hamann Gregory Lile James H. Mayes, Jr. Kevin McGinn Gary L. Pace Kimberly P. Walter Gerry H. Wilson Assistant Secretaries: Joan E. Bischer Donna L. Frate Robert Grawl, Jr. Chris Jones Thomas G. Kassakatis Gregory Treichler Assistant Controllers: Barbara Constantino E. Scott Megason 26 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 President Financial Federal Corporation Michael C. Palitz Executive Vice President and Treasurer Financial Federal Corporation Paul Sinsheimer Executive Vice President Financial Federal Corporation AUDITORS Eisner & Lubin LLP Certified Public Accountants 250 Park Avenue, New York, NY 10177 GENERAL COUNSEL Orrick, Herrington & Sutcliffe LLP 666 Fifth Avenue, New York, NY 10103 TRANSFER AGENT AND REGISTRAR The Bank of New York New York, NY LOCATIONS Headquarters: 400 Park Avenue, 8th Floor New York, NY 10022 (212) 888-3344 Full Service Offices: 1300 Post Oak Boulevard, Suite 1300 Houston, TX 77056 (713) 439-1177 601 Oakmont Lane, Suite 270 Westmont, IL 60559 (630) 986-3900 300 Frank W. Burr Boulevard Teaneck, NJ 07666 (201) 801-0300 201 McCullough Drive, Suite 320 Charlotte, NC 28262 (704) 549-1009 1855 W. Baseline Road, Suites 145 and 155 Mesa, AZ 85202 (602) 491-1300 CORPORATE INFORMATION The annual meeting of shareholders will be held at 270 Park Avenue, New York, NY on December 9, 1997 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 400 Park Avenue, 8th Floor New York, NY 10022 (212) 888-3344 [INSIDE BACK COVER] [logo] FINANCIAL FEDERAL CORPORATION 400 PARK AVENUE NEW YORK, NY 10022 [BACK COVER] EX-22.1 5 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, 1997 as defined by Rule 1-02(w) of Regulation S-X. 45 EX-23.1 6 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 4, 1997, 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 13 of this Form 10-K. /s/ Eisner & Lubin LLP CERTIFIED PUBLIC ACCOUNTANTS New York, New York October 22, 1997 46 EX-27 7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES AS AT JULY 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR JUL-31-1997 JUL-31-1997 2532 0 581363 10303 0 0 0 0 574764 0 441651 0 0 7382 98222 574764 0 55305 0 0 0 2525 23437 20987 8078 12909 0 0 0 12909 0.80 0.79 THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
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