-----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, SVF0/EsO76aUFupACRJEIj8UdCj6mBpNd1jypIre9z+U+XLcfJvLthjDuKQjc14p 1zPMJZ5kSLxwtY9LX3qoEQ== 0000854711-98-000027.txt : 19981029 0000854711-98-000027.hdr.sgml : 19981029 ACCESSION NUMBER: 0000854711-98-000027 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981028 SROS: NYSE 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: 001-14237 FILM NUMBER: 98731715 BUSINESS ADDRESS: STREET 1: 733 THIRD AVENUE STREET 2: 7TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 212-599-8000 MAIL ADDRESS: STREET 1: 733 THIRD AVENUE STREET 2: 7TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 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, 1998 Commission file number 1-12006 FINANCIAL FEDERAL CORPORATION (Exact name of Registrant as specified in its charter) Nevada 88-0244792 (State of incorporation) (I.R.S. Employer Identification No.) 733 Third Avenue, New York, New York 10017 (Address of principal executive offices) 400 Park Avenue, New York, New York 10022 (Former address of principal executive offices) Registrant's telephone number, including area code: (212) 599-8000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered - ------------------------------- ------------------------------------ Common Stock, $.50 par value New York Stock Exchange, Inc. 4.5% Convertible Subordinated Notes due 2005 New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock of the Registrant held by non- affiliates of the Registrant on October 1, 1998 was $223,043,366.81. The aggregate market value was computed by reference to the closing price of the Common Stock on the New York Stock Exchange on the prior day (which was $21.9375 per share). For the purposes of this response, executive officers and directors are deemed to be the affiliates of the Registrant and the holding by non-affiliates was computed as 10,167,219 shares. The number of shares of Registrant's Common Stock outstanding as of October 1, 1998 was 14,857,053 shares. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's proxy statement for its Annual Meeting of Stockholders, to be held December 8, 1998, which will be filed pursuant to Regulation 14A within 120 days of the close of Registrant's fiscal year, is incorporated by reference in answer to Part III of this report. In addition, page 1 and pages 9 through 26 of Registrant's 1998 Annual Report to Stockholders is incorporated by reference in answer to Items 6, 7, 7A and 8 of Part II. Page 1 PART I Item 1. BUSINESS The Company, incorporated under the laws of Nevada in 1989, is a nationwide independent financial services company with over $766 million of assets. The Company finances industrial, commercial and professional equipment through installment sales and leasing programs for manufacturers, dealers and operators of such equipment. The Company also makes capital loans to its customers, secured by the same types of equipment and other collateral. The Company provides its services primarily to middle-market businesses, generally with annual revenues of up to $20 million, that are located throughout the nation and represent diverse industries, such as general construction, road and infrastructure construction and repair, manufacturing, trucking, and waste disposal. The Company focuses on financing a wide range of revenue-producing equipment of major manufacturers that is movable, has an economic life longer than the term of the financing, is not subject to rapid technological obsolescence, has applications in various industries and has a relatively broad resale market. Sample types of equipment financed by the Company include air compressors, bulldozers, buses, compactors, crawler cranes, earth-movers, excavators, generators, hydraulic truck cranes, loaders, machine tools, motor graders, pavers, personnel and material lifts, recycling equipment, resurfacers, rough terrain cranes, sanitation trucks, scrapers, trucks, truck tractors and trailers. In substantially all cases, the Company's finance receivables are secured by a first lien on such equipment collateral. Currently, the Company generates profits to the extent that its income from finance receivables exceeds its cost of borrowed funds, operating and administrative expenses and provision for possible losses. In addition, the Company may generate profits from investing in operating leases, portfolios of loans and/or leases or from acquiring full or partial ownership interests of private or public companies in the finance, leasing and/or lending businesses. Marketing The Company markets its services through marketing personnel based in 25 domestic locations, including 5 full service operations centers. At July 31, 1998, forty-eight (48) full-time new business marketing representatives directly report to such operations centers. The Company originates finance receivables through its relationships with dealers and, to a lesser extent, manufacturers (sometimes collectively called "vendors"). The Company also directly markets its finance and leasing services to equipment operators for the acquisition or use of equipment and for capital loans. The Company believes that its share of the U.S. market for equipment finance and leasing receivables is less than one percent (1%); therefore, management believes there is substantial opportunity for growth. The Company intends to achieve such growth through the expansion of the Company's marketing efforts into new geographic areas and further penetration in its existing areas by employing additional marketing personnel and opening new full service operations centers. The Company's marketing personnel are salaried rather than commission-based and the majority participate in the Stock Option Plan. Thus, the Company believes that its marketing personnel have a close community of interest with the Company and its stockholders. The Company's marketing activities are relationship and service oriented. The Company focuses on providing prompt, responsive and customized service to its customers and business prospects. The Company has a team of dedicated and seasoned marketing and managerial personnel who solicit new business from the vendors and operators of equipment. The Company's marketing and managerial personnel have, on average, more than 15 years of specialized expertise in the industries they serve, which generally enables them to understand customers' businesses and be responsive to customers' needs. Management believes that the experience, knowledge and relationships of its executives and marketing personnel, related to its customer and prospect base, equipment values, resale markets, and local economic and industry conditions, enable the Company to compete effectively on the basis of prompt, responsive and customized service. The Company's customer services include making prompt credit decisions, arranging financing structures which meet customers' needs and the Company's underwriting criteria, providing direct contact between customers and Company executives with decision-making authority and providing prompt and knowledgeable responses to customers' inquiries and to temporary business problems which customers may encounter in the ordinary course of their business. The Company obtains business in several ways. Dealers and, to a lesser extent, manufacturers of equipment may refer their customers (operators of equipment) to the Company, or such customers may directly approach the Company to finance equipment purchases. The Company also purchases installment sales contracts, leases and personal property security agreements from vendors who extend credit to purchasers of their equipment. The Company also makes direct loans to equipment operators collateralized by equipment pursuant to personal property security agreements. In addition, the Company purchases equipment from vendors and, simultaneously, leases it to equipment operators, generally under noncancelable leases. 2 The vendors with whom the Company seeks to establish these relationships tend to be mid-sized, since the larger vendors typically generate a volume of business which is greater than the Company can presently service with its existing financial resources. The Company is not obligated to purchase any finance receivables from vendors nor are vendors obligated to sell any finance receivables to the Company. The Company's vendor relationships generally are nonexclusive. The Company presently has relationships with more than 100 vendors and is not dependent on any single vendor. In all vendor generated business, the Company independently approves the credit of the prospective obligor or lessee. In order to expand its customer base and broaden its marketing coverage geographically, the Company from time to time has purchased portfolios of finance receivables from financial institutions, vendors and others generally in the range of $1.0 million to $5.0 million. These portfolios have included finance receivables secured by a broader range of equipment than that typically financed by the Company. Originating, Structuring and Underwriting of Finance Receivables The Company originates finance receivables generally ranging in amount from $50,000 to $1.0 million per transaction. Individual transactions originated by the Company averaged $168,000 in fiscal 1998, $144,000 in fiscal 1997 and $140,000 in fiscal 1996. The Company has developed and implemented credit underwriting policies and procedures that are designed to achieve attractive yields while minimizing delinquencies and credit losses. Unlike many of its competitors, the Company does not use credit scoring models but instead relies upon the experience of its credit officers to assess the creditworthiness of the obligors and collateral values and accordingly structure transactions to provide an appropriate risk adjusted return to the Company. Each credit submission, regardless of size, requires the approval of at least two credit officers. The Company attempts to structure financings to meet the financial needs of its customers. Structuring includes determination of: whether the financing will be an installment sale, lease or secured loan; term and payment schedule; whether the financing provided will be funded immediately or held available (possibly subject to conditions) for future use; finance or interest rate and other fees and charges; the primary collateral, and additional equipment collateral, if any, to be pledged, and the necessity of additional credit support which may include, among other things, accounts receivable, inventory, real property, certificates of deposit and/or commercial paper, payment guarantees and full or partial recourse to the selling vendor, if any. A portion of the Company's business is providing capital loans secured by equipment collateral. Customers seek capital loans for numerous reasons, including consolidation of obligations, working capital needs, reduction of monthly debt service costs, enhancement of bonding capacity (generally in the case of road contractors), and acquisition of additional equipment or other assets. The Company may obtain, as additional collateral, a lien on the customer's accounts receivable, inventory and real property. The Company's capital loans are generally four to five years in term, and generally provide for prepayment premiums. When a vendor seeks to sell a finance receivable to the Company or an operator seeks to obtain financing from the Company, an application for credit (including cash flow and background information) is submitted to the Company with respect to the obligor and any guarantors thereof along with a description of collateral to be pledged or leased and its present or proposed use. The Company's personnel analyze the credit application, investigate the credit of the obligor and any guarantors thereof, and evaluate the primary collateral to be pledged. The extent of such analysis depends upon, among other things, the dollar amount of the proposed transaction, the obligor's and any guarantors' financial strength, financial trade and industry references, and the obligor's payment history. The Company may also obtain reports from independent credit reporting agencies and conduct lien, litigation and tax searches. Unlike many of its competitors, the Company does not use credit scoring models. The creditworthiness of obligors and guarantors is evaluated on a case-by-case basis by the Company's credit personnel and management. The primary pledged collateral and any additional collateral are evaluated as to present and possible future resale value. If the Company approves the credit application on terms acceptable to the vendor and/or the obligor, and provided the intended purchaser/lessee acquires the equipment, then the Company either purchases an installment sales contract or lease from the vendor or enters into a direct finance or lease transaction with the obligor. Funding occurs upon the receipt by the Company of all required documentation in form and substance satisfactory to the Company and its legal department. Under the Company's documentation, the obligor/lessee is responsible for all applicable sales, use and property taxes. The Company maintains an operating environment which permits flexibility to its managers in structuring financing transactions subject to the Company's credit policy and procedures manual. The Company has established credit policies and procedures which are periodically reviewed and updated, which set forth detailed guidelines for credit review and approval, including maximum credit concentrations with any one obligor which are based on the Company's capital resources and other considerations. Each credit submission, regardless of size, requires the approval of at least two credit officers. The Company's 3 credit policy provides several designations of credit officer authority levels. A credit officer's authority level is based, among other things, on his/her credit experience, managerial position and tenure with the Company. The dollar amount that a credit officer can approve for a particular transaction is based upon the credit officer's authority level, collateral coverage relative to the Company's potential lending exposure, and the extent of recourse, if any, the Company may have to financially responsible vendors. Credit officers only have authority to approve credits up to their prescribed maximum level, and only then if certain criteria have been met. Notwithstanding the foregoing, it is current policy that any single obligor concentration in excess of $1.5 million requires the approval of two senior credit officers, and in excess of $3.0 million, three senior credit officers. In addition, any single obligor concentration above $2.0 million requires the approval of the Company's Chairman or President. In addition to the obligor's/lessee's obligation to pay, on occasion vendors provide the Company with full or partial recourse which, among other things, may obligate the vendor to pay the Company upon an obligor's default or a breach of warranty with respect to the assignment of the finance receivable to the Company by the vendor. The Company may also withhold an agreed upon amount from the vendor/obligor or lessee as security or obtain cash collateral from an obligated party as security. In purchasing a portfolio of finance receivables, the Company reviews and analyzes the terms of the finance receivables to be purchased, the credit of the related obligors, the documentation relating to such finance receivables and the value of the related pledged collateral, the payment history of the obligors/lessees and the implicit yield to be earned by the Company. Collection and Servicing Customer payments of finance receivables are remitted to, and processed in a central location. Collection efforts in connection with delinquent accounts, however, are handled by the collection personnel and managers in each operations center in conjunction with senior management and, if necessary, the Company's legal department. All past due accounts are reviewed by senior management at least monthly, and all accounts which are past due more than 60 days are continually reviewed by the Company's in-house legal staff. The decision to repossess collateral is made by the Company's senior management in conjunction with its legal staff. The Company determines, on a case-by-case basis, whether or not to use an outside source to repossess an item of collateral. The sale or other disposition of repossessed collateral is determined by the Company's senior management and legal staff in accordance with applicable law. Competition The Company's business is highly competitive. The Company competes with banks, manufacturer-owned and independent finance and leasing companies, as well as other financial institutions. Some of those competitors may be better positioned than the Company to market their services and financing programs to vendors and operators of equipment because of their ability to offer additional services and products, and more favorable rates and terms. Many of these competitors have longer operating histories and possess greater financial and other resources than the Company. In addition, some of these competitors have sources of funds available at a lower cost than those available to the Company, thereby enabling them to provide financing at rates lower than the Company may be willing to provide. The Company typically does not compete primarily on the basis of rate. The Company competes by emphasizing a high level of equipment and financial expertise, customer service, flexibility in structuring financing transactions, management involvement in customer relationships and by attracting and retaining the services of a team of dedicated and talented managerial, marketing and administrative personnel. The present strategy used by the Company to attract and retain such personnel is to offer a competitive salary, an equity interest in the Company through participation in the Stock Option Plan, and enhanced career opportunities. As of July 31, 1998, approximately 70% of the Company's directors, officers and employees with at least one year of service participate in the Stock Option Plan and/or own stock in the Company. Employees At July 31, 1998, the Company had 162 employees. All of the Company's employees and officers are salaried. The Company provides its employees with group health and life insurance benefits and a qualified 401(k) plan. The Company does not match employee contributions to the 401(k) plan. The Company does not have any collective bargaining, employment, pension, incentive compensation arrangements or non-solicitation agreements with any of its employees other than the Stock Option Plan (which contains non-disclosure and non-solicitation provisions) and deferred compensation agreements. Employees who have participated in the Stock Option Plan have, among other things, agreed not to solicit customers of the Company for a period of time following termination of their employment. The Company considers its relations with its employees to be satisfactory. 4 Regulation The Company's commercial finance activities are generally not subject to regulation, except that certain states may regulate motor vehicle transactions, impose licensing requirements, and/or restrict the amount of interest or finance rates and other amounts that the Company may charge its customers. Failure to comply with such regulations can result in loss of principal and interest or finance charges, penalties and imposition of restrictions on future business activities. Executive Officers Clarence Y. Palitz, Jr., 67, has served as Chairman of the Board of the Company since July 1996, as Chief Executive Officer of the Company since its inception in 1989 and as President of the Company from its inception in 1989 to September 1998. From 1963 to 1988, Mr. Palitz served as President and a Director of Commercial Alliance Corporation ("CAC"), which he founded with his brother, Bernard G. Palitz, in 1963. Since October 1988, he has been a director of City and Suburban Financial Corp., a privately owned savings and loan holding company located in Westchester County, New York. Paul R. Sinsheimer, 51, has served as President of the Company since September 1998, as Executive Vice President of the Company from its inception in 1989 to September 1998 and as a Director of the Company since its inception in 1989. From 1970 to 1989, Mr. Sinsheimer was employed by CAC, where he served successively as Credit Manager, Collections Manager, Operations Manager, Houston Branch Manager, Division Manager and, from 1988, Executive Vice President. Michael C. Palitz, 40, has served as a Director of the Company since July 1996, as Executive Vice President of the Company since July 1995, as Senior Vice President of the Company from February 1992 to July 1995 and as a Vice President of the Company from its inception in 1989 to February 1992. He has also served as Chief Financial Officer, Treasurer and Assistant Secretary of the Company since its inception in 1989. From 1985 to 1989, Mr. Palitz was an Assistant Vice President of Bankers Trust Company and, from 1980 to 1983, he was an Assistant Secretary of Chemical Bank. William M. Gallagher, 49, has served as a Senior Vice President of the Company since 1990 and served as a Vice President of the Company from its inception in 1989 to 1990. From 1973 to 1989, Mr. Gallagher was employed by CAC, where he served successively as Collections Manager, Accounting Manager, Operations Manager of the Chicago and Houston regions and, from 1988, Vice President and Houston Branch Manager. Troy H. Geisser, 37, has served as a Senior Vice President and Secretary of the Company since February 1996. From 1990 to 1996, Mr. Geisser held several positions, including Vice President and Branch Manager. From 1986 to 1990, Mr. Geisser held several positions including Division Counsel for the Northern Division of Orix Credit Alliance, Inc. (the successor to CAC). John V. Golio, 37, has served as a Senior Vice President of the Company since 1997 and served as a Vice President of a subsidiary of the Company since joining the Company in January 1996. Before joining the Company, Mr. Golio was employed by CAC in various capacities, including branch operations manager. Daniel J. McDonough, 36, has served as a Senior Vice President of the Company since 1997. Mr. McDonough held several positions, including Vice President of a subsidiary of the Company, Branch Manager and Operations Manager since joining the Company in 1989. Before joining the Company, Mr. McDonough was employed by CAC in various capacities, including regional credit manager. Richard W. Radom, 50, has served as Senior Vice President of the Company since 1990 and served as a Vice President of the Company from 1989 to 1990. From 1973 to 1989, Mr. Radom was employed by CAC, where he served, from 1986, as Senior Vice President. Item 2. PROPERTIES The Company's executive offices are located at 733 Third Avenue, New York, New York and consist of approximately 5,000 square feet of space. As of July 31, 1998, the Company had five full service operations centers (where credit analysis and approval, collection and marketing functions are performed) in Houston, Texas; Westmont (Chicago), Illinois; Teaneck (New York metropolitan area), New Jersey; Charlotte, North Carolina and Mesa (Phoenix), Arizona, which generally consist of approximately 2,000 to 7,000 square feet of space (except for the Houston office, the operating headquarters, which consists of approximately 12,500 square feet) and are occupied pursuant to leases which expire on various dates through 2004. Management believes that the Company's 5 existing facilities are suitable and adequate for their present and proposed uses and that suitable and adequate facilities will be available on reasonable terms for any additional offices which the Company may open. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which any of its property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1998. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange under the symbol "FIF". Trading commenced on the New York Stock Exchange on June 22, 1998; prior to that date, the Company's common stock was traded on the American Stock Exchange. The quarterly high and low closing sales prices per share of the common stock as reported by the New York Stock Exchange and the American Stock Exchange, adjusted for the July 1997 three-for-two stock split, follow: Price Range --------------------- High Low ------ ------ Fiscal year 1998 - ------------------------------------- First Quarter ended October 31, 1997 $19.81 $14.00 Second Quarter ended January 31, 1998 $23.63 $18.00 Third Quarter ended April 30, 1998 $26.00 $20.38 Fourth Quarter ended July 31, 1998 $28.50 $23.00 Fiscal year 1997 - ------------------------------------- First Quarter ended October 31, 1996 $10.58 $ 8.50 Second Quarter ended January 31, 1997 $11.83 $ 9.25 Third Quarter ended April 30, 1997 $13.00 $10.42 Fourth Quarter ended July 31, 1997 $15.58 $11.42 The Company presently has no intention of paying cash dividends on the common stock in the foreseeable future. The payment of cash dividends, if any, will depend upon the Company's earnings, financial condition, capital requirements, cash flow and long range plans and such other factors as the Board of Directors of the Company may deem relevant. Number of Record Holders The number of record holders of the Company's Common Stock as of October 1, 1998 was 73. Included in this number are several nominees which hold the Company's common stock on behalf of numerous other persons and institutions; these other persons and institutions are not included in the above number as their shares are held in "Street Name." Item 6. SELECTED FINANCIAL DATA Reference is made to information under the heading "Financial Highlights" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1998, which information is incorporated herein by reference. The Company has not paid any cash dividends on its Common Stock. 6 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to information under the heading "Management's Discussion and Analysis of Operations and Financial Condition" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1998, which information is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to information under the heading "Management's Discussion and Analysis of Operations and Financial Condition" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1998, which information is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to information under the headings "Consolidated Balance Sheet," "Consolidated Statement of Stockholders' Equity," "Consolidated Statement of Operations," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1998, which information is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 8, 1998, except as to biographical information on Executive Officers which is contained in Item I of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 8, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 8, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 8, 1998. 7 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Page The following financial statements are filed herewith and incorporated herein by reference from pages 15 through 26 of the Registrant's Annual Report to Stockholders for the fiscal year ended July 31, 1998, as provided in Item 8 hereof: - Consolidated Balance Sheet as at July 31, 1998 and 1997. - Consolidated Statement of Stockholders' Equity for the fiscal years ended July 31, 1998, 1997 and 1996. - Consolidated Statement of Operations for the fiscal years ended July 31, 1998, 1997 and 1996. - Consolidated Statement of Cash Flows for the fiscal years ended July 31, 1998, 1997 and 1996. - Notes to Consolidated Financial Statements. - Independent Auditors' Report. 2. Financial Statement Schedules The following financial statement schedules are filed herewith: - Independent Auditors' Report on Financial Statement Schedules. 12 - Schedule I - Condensed Financial Information of Registrant. 13 All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or notes thereto. 3. Exhibits 17 Exhibit No. Description of Exhibit 3.1 (a) Articles of Incorporation of the Registrant 3.2 (a) By-laws of the Registrant 3.3 (a) Form of Restated and Amended By-laws of the Registrant 4.1 (a) Form of Variable Rate Subordinated Debentures Due September 1, 2000 (a "Debenture") issued by Registrant 4.6 (f) Form of Note Agreement dated as of April 15, 1996 issued by Financial Federal Credit Inc. ("Credit") to certain institutional noteholders 4.7 (j) Form of Note Agreement dated as of July 1, 1997 issued by Credit to certain institutional note holders 4.8 (k) Indenture dated January 14, 1998 for Credit's Rule 144A Medium Term Note Program 4.9 (l) Indenture, dated as of April 15, 1998, between Registrant and First National Bank of Chicago for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 4.10 (l) Registration Rights Agreement, dated as of April 24, 1998, between Registrant and BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation, Piper Jaffray Inc., CIBC Oppenheimer Corporation, Friedman, Billings, Ramsey & Co., Inc., Schroder & Co. Inc., and Wheat, First Securities, Inc. for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 4.11 (l) Specimen 4.5% Convertible Subordinated Note Due 2005 4.12 (l) Specimen Common Stock Certificate 10.2 (a) Form of Warrant to purchase Common Stock, as amended, issued by the Registrant to stockholders in connection with its initial capitalization 10.3 (a) Form of Warrant to purchase Common Stock issued by the Registrant to certain of its officers 10.8 (a) Form of Commercial Paper Note issued by the Registrant 10.9 (a) Form of Commercial Paper Note issued by Credit 10.10 (a) Stock Option Plan of the Registrant and forms of related stock option agreements 10.11 (b) Deferred Compensation Agreement dated June 1, 1992 between Credit and Clarence Y. Palitz, Jr. 10.12 (b) Deferred Compensation Agreement dated June 1, 1992 between Credit and Bernard G. Palitz 10.13 (c) Deferred Compensation Agreement dated January 1, 1993 between Credit and Clarence Y. Palitz, Jr. 10.14 (c) Deferred Compensation Agreement dated January 1, 1993 between Credit and Bernard G. Palitz. 10.15 (d) Deferred Compensation Agreement dated January 1, 1994 between Credit and Clarence Y. Palitz, Jr. 8 10.16 (d) Deferred Compensation Agreement dated January 1, 1994 between Credit and Bernard G. Palitz. 10.17 (e) Deferred Compensation Agreement dated January 1, 1995 between Credit and Bernard G. Palitz. 10.18 (e) Deferred Compensation Agreement dated January 1, 1995 between Credit and Clarence Y. Palitz, Jr. 10.19 (e) Deferred Compensation Agreement dated February 1, 1995 between Credit and Paul Sinsheimer 10.20 (g) Deferred Compensation Agreement dated January 1, 1996 between Credit and Clarence Y. Palitz, Jr. 10.21 (h) Form of Commercial Paper Dealer Agreement of Credit 10.22 (h) Form of Deferred Compensation Agreement with certain officers as filed under the Top Hat Plan with the Department of Labor 10.23 (i) Deferred Compensation Agreement dated December 30, 1996 between the Registrant and Clarence Y. Palitz, Jr. 10.24 (k) Deferred Compensation Agreement dated January 2, 1998 between the Registrant and Clarence Y. Palitz, Jr. 12.1 Computation Of Debt-To-Equity Ratio 13.1 1998 Annual Report to Stockholders (except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Stockholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K) 22.1 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors 27 Financial Data Schedule (EDGAR version only) - --------------- (a) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-46662). (b) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1992. (c) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1993. (d) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1994. (e) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1995. (f) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-2 (Registration No. 333-3320). (g) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1996. (h) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1996. (i) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1997. (j) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1997. (k) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1998. (l) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-56651). (b) Reports on Form 8-K There were no reports on Form 8-K filed during the last quarter of the fiscal year ended July 31, 1998. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FINANCIAL FEDERAL CORPORATION (Registrant) By: /s/ Clarence Y. Palitz, Jr. --------------------------------- Chairman of the Board and Chief Executive Officer October 28, 1998 ---------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Clarence Y. Palitz, Jr. October 27, 1998 ------------------------------------------------- ---------------- Chairman of the Board and Chief Executive Officer Date /s/ Lawrence B. Fisher October 27, 1998 ------------------------------------------------- ---------------- Director Date /s/ William C. MacMillen, Jr. October 28, 1998 ------------------------------------------------- ---------------- Director Date /s/ Bernard G. Palitz October 27, 1998 ------------------------------------------------- ---------------- Director Date /s/ Paul R. Sinsheimer October 27, 1998 ------------------------------------------------- ---------------- President, Chief Operating Officer and Director Date /s/ Michael C. Palitz October 27, 1998 ------------------------------------------------- ---------------- Executive Vice President, Treasurer, Chief Date Financial Officer and Director /s/ David H. Hamm October 27, 1998 ------------------------------------------------- ---------------- Controller, Assistant Treasurer and Principal Date Accounting Officer 10 INDEX TO FORM 10-K SCHEDULES Independent Auditors' Report Schedule I - Condensed Financial Information of Registrant Schedules other than the schedule referred to above have been omitted as the conditions requiring their filing are not present or the information has been presented elsewhere in the consolidated financial statements. 11 Independent Auditors' Report ---------------------------- Financial Federal Corporation In connection with our audits of the consolidated financial statements included in Financial Federal Corporation's annual report to stockholders and incorporated by reference in this Form 10-K, we have also audited the schedule listed in the accompanying index. Our audits of the consolidated financial statements were made for the purpose of forming an opinion on those statements taken as a whole. The schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements. /s/ Eisner & Lubin LLP ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York September 3, 1998 12 Schedule I FINANCIAL FEDERAL CORPORATION CONDENSED BALANCE SHEET (In Thousands)
July 31, ----------------------- 1998 1997 -------- -------- ASSETS Cash $ 160 $ 117 Due from subsidiaries: Advances 122,882 18,650 Subordinated notes receivable 50,000 50,000 Investment in subsidiaries - at equity 60,945 46,039 Other assets 4,979 473 -------- -------- TOTAL $238,966 $115,279 ======== ======== LIABILITIES Senior debt $ 9,881 $ 4,901 Accrued interest, taxes and other liabilities 3,566 2,484 Subordinated debt 102,290 2,290 -------- -------- Total liabilities 115,737 9,675 -------- -------- STOCKHOLDERS' EQUITY Common stock 7,421 7,382 Additional paid-in capital 57,869 57,315 Warrants 29 29 Retained earnings 57,970 40,878 -------- -------- Total stockholders' equity 123,229 105,604 -------- -------- TOTAL $238,966 $115,279 ======== ======== The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof.
13 FINANCIAL FEDERAL CORPORATION CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (In Thousands)
Year Ended July 31, ----------------------------------- 1998 1997 1996 ------- ------- ------- Equity in earnings of subsidiaries before income taxes $24,907 $18,661 $14,205 Interest charges to subsidiaries 7,236 5,060 4,007 ------- ------- ------- Total 32,143 23,721 18,212 ------- ------- ------- Expenses: Interest expense 2,033 590 972 Other expenses (net) 2,285 2,144 1,811 ------- ------- ------- Total 4,318 2,734 2,783 ------- ------- ------- Earnings before income taxes 27,825 20,987 15,429 Provision for income taxes 10,793 8,078 5,819 ------- ------- ------- NET EARNINGS 17,032 12,909 9,610 Retirement of treasury stock (463) (840) Three-for-two stock split (2,461) (1,372) Retained earnings - August 1 40,878 30,893 23,495 ------- ------- ------- RETAINED EARNINGS - JULY 31 $57,910 $40,878 $30,893 ======= ======= ======= The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof.
14 FINANCIAL FEDERAL CORPORATION CONDENSED STATEMENT OF CASH FLOWS (In Thousands)
Year Ended July 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- Net cash provided by operating activities $ 1,157 $ 1,922 $ 1,330 -------- -------- -------- Cash flows from investing activities: Collections from (advances to) subsidiaries-net (104,232) 8,976 (8,301) Subordinated notes receivable-subsidiary (advances) (5,000) (20,000) Dividends received from subsidiary 250 200 500 -------- -------- -------- Net cash provided by (used in) investing activities (103,982) 4,176 (27,801) -------- -------- -------- Cash flows from financing activities: Commercial paper: Proceeds 103,935 66,207 76,869 Repayments (98,955) (66,272) (76,509) Proceeds from convertible subordinated notes 100,000 Repayment of note payable - bank (500) Repurchases of subordinated debt (4,667) Proceeds from sale of common stock, net 26,340 Proceeds from exercise of stock options 519 61 166 Acquisition of treasury stock (1,630) Deferred debt issuance costs (2,687) Tax benefit relating to stock options 56 64 -------- -------- -------- Net cash provided by (used in) financing activities 102,868 (6,237) 26,366 -------- -------- -------- NET INCREASE (DECREASE) IN CASH 43 (139) (105) Cash - August 1 117 256 361 -------- -------- -------- CASH - JULY 31 $ 160 $ 117 $ 256 ======== ======== ========
Non-cash financing activities: In 1997, the Company retired 124 common shares held as treasury stock resulting in decreases of common stock, additional paid-in capital and retained earnings of $62, $1,105 and $463, respectively. Additionally, the Company authorized a three-for-two stock split effected in the form of a stock dividend. In 1996, the Company retired 96 common shares held as treasury stock resulting in decreases of common stock, additional paid-in capital and retained earnings of $48, $552 and $840, respectively. Additionally, the Company authorized a three-for-two stock split effected in the form of a stock dividend. The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof. 15 Schedule I FINANCIAL FEDERAL CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (In Thousands) 1. Basis of Presentation: - ------------------------- In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the Condensed Financial Statements of the Registrant do not include all of the information and notes included in the consolidated financial statements and the notes thereto. 2. Due from Subsidiaries: - ------------------------- Advances to subsidiaries includes a $97,813 note with interest receivable semi-annually at 6.75%. The note has a maturity date of May 1, 2005, but is callable at any time. Other amounts advanced bore interest at weighted average rates of 6.8% and 5.9% at July 31, 1998 and 1997, respectively. Subordinated notes receivable are summarized as follows: Maturity Interest rate Amount -------------- ------------- ------- August 1, 2008 8.35% $25,000 August 1, 2008 7.85 5,000 August 1, 2008 7.70 5,000 August 1, 2008 6.90 5,000 August 1, 2008 7.50 10,000 ------- Total $50,000 ======= The notes and interest thereon are subordinated to the subsidiary's borrowings from banks, institutional and other investors, commercial paper investors and other debt designated by the subsidiary's Board of Directors. Interest is receivable quarterly. Other assets include $2,186 and $422 of accrued interest receivable from subsidiaries at July 31, 1998 and 1997, respectively. 16 EXHIBIT INDEX Exhibit No. Description of Exhibit Page No. - ----------- ---------------------- -------- 3.1 Articles of Incorporation of the Registrant * 3.2 By-laws of the Registrant * 3.3 Form of Restated and Amended By-laws of the Registrant * 4.1 Form of Variable Rate Subordinated Debentures Due September 1, 2000 (a "Debenture") issued by Registrant * 4.6 Form of Note Agreement, dated as of April 15, 1996, issued by Financial Federal Credit Inc. ("Credit") to certain institutional note holders * 4.7 Form of Note Agreement dated as of July 1, 1997 issued by Credit to certain institutional note holders * 4.8 Indenture dated January 14, 1998 for Credit's Rule 144A Medium Term Note Program * 4.9 Indenture, dated as of April 15, 1998, between Registrant and First National Bank of Chicago for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 * 4.10 Registration Rights Agreement, dated as of April 24, 1998, between Registrant and BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation, Piper Jaffray Inc., CIBC Oppenheimer Corporation, Friedman, Billings, Ramsey & Co., Inc., Schroder & Co. Inc., and Wheat, First Securities, Inc. for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 * 4.11 Specimen 4.5% Convertible Subordinated Note Due 2005 * 4.12 Specimen Common Stock Certificate * 10.2 Form of Warrant to purchase Common Stock, as amended, issued by the Registrant to stockholders in connection with its initial capitalization * 10.3 Form of Warrant to purchase Common Stock issued by the Registrant to certain of its officers * 10.8 Form of Commercial Paper Note issued by the Registrant * 10.9 Form of Commercial Paper Note issued by Credit * 10.10 Stock Option Plan of the Registrant and forms of related stock option agreements * 10.11 Deferred Compensation Agreement dated June 1, 1992 between Credit and Clarence Y. Palitz, Jr. * 10.12 Deferred Compensation Agreement dated June 1, 1992 between Credit and Bernard G. Palitz * 10.13 Deferred Compensation Agreement dated January 1, 1993 between Credit and Clarence Y. Palitz, Jr. * 10.14 Deferred Compensation Agreement dated January 1, 1993 between Credit and Bernard G. Palitz. * 10.15 Deferred Compensation Agreement dated January 1, 1994 between Credit and Clarence Y. Palitz, Jr. * 10.16 Deferred Compensation Agreement dated January 1, 1994 between Credit and Bernard G. Palitz. * 10.17 Deferred Compensation Agreement dated January 1, 1995 between Credit and Bernard G. Palitz. * 10.18 Deferred Compensation Agreement dated January 1, 1995 between Credit and Clarence Y. Palitz, Jr. * 10.19 Deferred Compensation Agreement dated February 1, 1995 between Credit and Paul Sinsheimer * 10.20 Deferred Compensation Agreement dated January 1, 1996 between Credit and Clarence Y. Palitz, Jr. * 10.21 Commercial Paper Dealer Agreement, dated April 23, 1996, between Credit and BA Securities, Inc. * 10.22 Form of Deferred Compensation Agreement with certain officers as filed under the Top Hat Plan with the Department of Labor * 10.23 Deferred Compensation Agreement dated December 30, 1996 between the Registrant and Clarence Y. Palitz, Jr. * 10.24 Deferred Compensation Agreement dated January 2, 1998 between the Registrant and Clarence Y. Palitz, Jr. * 12.1 Computation of Debt-To-Equity Ratio 18 13.1 1998 Annual Report to Stockholders (except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Stockholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K) 22.1 Subsidiaries of the Registrant 19 23.1 Consent of Independent Auditors 20 27 Financial Data Schedule (EDGAR version only) ____________ *Previously filed with the Securities and Exchange Commission as an exhibit. 17 EX-12.1 2 Exhibit 12.1 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF DEBT-TO-EQUITY RATIO (Dollars in Thousands) July 31, ------------------------ 1998 1997 -------- -------- Total debt $602,822 $441,651 Stockholders' equity $123,229 $105,604 Debt-to-equity ratio 4.9 4.2 18 EX-13.1 3 Exhibit 13.1 ================================================================================ Financial Federal Corporation [PHOTO OMITTED] "A Nationwide Equipment Finance & Leasing Company" [LOGO] 1998 Annual Report ================================================================================ - -------------------------------------------------------------------------------- Corporate Profile - -------------------------------------------------------------------------------- FINANCIAL FEDERAL CORPORATION IS A NATIONWIDE INDEPENDENT FINANCIAL SERVICES COMPANY SPECIALIZING IN FINANCING INDUSTRIAL, COMMERCIAL AND PROFESSIONAL EQUIPMENT THROUGH INSTALLMENT SALES AND LEASING PROGRAMS FOR MANUFACTURERS, DEALERS AND OPERATORS OF SUCH EQUIPMENT. IN ADDITION TO ITS NEW YORK OFFICE, THE COMPANY HAS FIVE FULL- SERVICE OPERATIONS CENTERS IN TEXAS, ILLINOIS, NEW JERSEY, NORTH CAROLINA AND ARIZONA AND ADDITIONAL MARKETING LOCATIONS THROUGHOUT THE COUNTRY. (www.financialfederal.com) - -------------------------------------------------------------------------------- Financial Highlights - --------------------------------------------------------------------------------
For years ended July 31, (in thousands, except per share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Finance Receivables, net $759,097 $571,060 $429,698 $339,299 $268,642 Total Assets 766,108 574,764 433,087 342,936 271,987 Total Senior Debt 500,532 439,361 310,830 249,270 184,848 Stockholders' Equity 123,229 105,604 94,191 58,075 50,523 Revenues 72,722 55,305 43,523 34,951 25,866 Net Earnings 17,032 12,909 9,610 7,209 5,944 Earnings Per Common Share, Diluted 1.03 0.80 0.68 0.54 0.46 Earnings Per Common Share, Basic 1.15 0.87 0.74 0.59 0.54
[the following three bar graphs were represented below the above table] REVENUES - ------------- (in millions) NET EARNINGS - ------------- (in millions) FINANCE RECEIVABLES - ------------- (in millions) 1 - -------------------------------------------------------------------------------- Dear Shareholder: - -------------------------------------------------------------------------------- It is with great pride that we inform you that fiscal 1998 represented the Company's ninth consecutive year of record earnings and receivables growth. Net earnings were $17 million, a 32% increase over the previous year. Finance receivables outstanding increased 33% and reached an all-time high of $772 million at July 31, 1998. Earnings per share increased to $1.03, a 29% increase over last year. Other significant achievements during the year included: o Listing the Company's Common Stock (ticker symbol "FIF") on the New York Stock Exchange. o Issuing $100 million, 4 1/2%, 7-year subordinated notes convertible into Common Stock at $30.15625 per share. The notes are callable in 2001 and are listed on the New York Stock Exchange. o Increasing the Company's investment grade Commercial Paper program from $250 million to $350 million. o Increasing fixed rate senior term debt to $170 million, thus match-funding a larger portion of the Company's fixed rate receivables portfolio. [The following table was depicted as a pie chart in the printed material.] DEBT 1998 --------- Commercial Paper 28.2% Senior Term Notes 51.7% Subordinated Debt 16.9% Bank Borrowings 0.5% Other 2.7% ================================================================================ "We believe Financial Federal's listing on the New York Stock Exchange will create better visibility for the Company and its securities, thus enhancing shareholder value." 2 The Company's major competitors include the country's largest finance and leasing companies. In addition, we compete, nationwide and locally, with national and regional banks, insurance companies and investment banks. Despite an increasingly competitive environment, Financial Federal has substantially increased its receivables, posted impressive compounded earnings gains, continued to attract exceptionally talented and experienced personnel, increased its loss reserves, maintained what may be the lowest net loss percentage in the industry and continued to have one of the highest returns on average earning assets without utilizing gain-on-sale accounting. LOAN LOSS DATA (in millions) 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Allowance for Losses $5.2 $6.4 $8.0 $10.3 $13.3 Net Credit Losses 0.3 0.2 0.1 0.2 0.1 [represented as a dual bar graph] ================================================================================ 3 - -------------------------------------------------------------------------------- Steady Growth - -------------------------------------------------------------------------------- During the fiscal year, we have all read a great deal about loan "churning." Borrowers are actively refinancing debt at lower cost coupled with more liberal terms. Such refinancing has become particularly troublesome for some consumer finance companies who have front-end loaded reported income without fully providing for the impact of increased prepayments. Financial Federal exclusively services businesses, not consumers, and thus it incorporates in most of its contracts prepayment premium provisions. Therefore, if a receivable is paid off before its stated maturity, the Company can generally protect a good portion of its anticipated profit. Some of the many reasons for the Company's continuous record of double-digit, profitable growth are outlined below. o SUSTAINED AND STEADY GROWTH. Experience has taught our management that unbridled growth for growth's sake will inevitably lead to severe, if not fatal, financial and control trauma. Financial Federal believes in sustained, steady growth that focuses on cash earnings. ================================================================================ "The Company possesses the financial strength to substantially expand its receivables portfolio." 4 - -------------------------------------------------------------------------------- FIF Listed - -------------------------------------------------------------------------------- NYSE THE NEW YORK STOCK EXCHANGE o PRUDENT ACCOUNTING PRACTICES. Gain-on-sale or "soft" accounting methods permit financial companies to front-end income, which effectively mortgages their future profits. Thus, in order for such companies to maintain continued earnings growth, they must generate an ever-increasing amount of business regardless of prevailing economic or competitive conditions. Financial Federal believes in controlled systematic arithmetic expansion rather than out-of-control geometric growth, coupled with sound and conservative accounting practices. o UNEARNED INTEREST INCOME. Financial Federal's receivables portfolio, virtually all of which was originated by the Company, is directly held on balance sheet. Therefore, the BORROWING BASE (in millions) 1996 1997 1998 -------- -------- -------- $110.1 $119.2 $241.6 [represented as a bar graph] ================================================================================ 5 - -------------------------------------------------------------------------------- Our Business - -------------------------------------------------------------------------------- Company has deferred income, in the range of $150 million which equals twice the Company's fiscal 1998 revenues. o LOW LEVERAGE. Many financial companies, upon close scrutiny, through securitization and other off balance sheet arrangements, are leveraged in excess of 20 times actual tangible net worth. If a financial company is excessively leveraged, when the economy softens and/or interest rates rise, it may become vulnerable to major earnings, funding, control and portfolio problems. Financial Federal's total debt to net worth leverage, as of July 31, 1998, was under 5 times which is well below industry average. The Company possesses the financial strength to substantially expand its receivables portfolio, both through internal generation and strategic acquisitions, without diluting shareholder value while still maintaining appropriate and acceptable debt to tangible net worth ratios. o SUPERIOR CUSTOMER SERVICE. To remain competitive and achieve our earnings targets, we strive to maintain a creditworthy receivables portfolio and offer our customers flexible, innovative and prompt service. ================================================================================ "In an increasingly competitive environment, Financial Federal has substantially increased its receivables and posted impressive compounded earnings gains." 6 [PHOTOS OMITTED] [The following table was depicted as a pie chart in the printed material.] EQUIPMENT --------- Construction Related 45% Trucking 20% Manufacturing 16% Waste Disposal 13% Other 6% 7 - -------------------------------------------------------------------------------- Our Future - -------------------------------------------------------------------------------- Many of the Company's customers and prospects are directly or indirectly engaged in road and infrastructure building and repair. Congress recently passed the Building Efficient Surface Transportation and Equity Act of 1998 ("BESTEA"), a $200+ billion highway program which is expected to be a major source of new business opportunities for the Company and its customers for years to come. During fiscal 1999, I will be looking to Paul R. Sinsheimer, Chief Operating Officer, and Michael C. Palitz, Chief Financial Officer, to assume more of my operational and administrative responsibilities. Thus, for the first time, I have asked them to join me in signing this letter to you and, by doing so, to commit themselves to continuing our Company's vision of measured and sustained earnings growth, coupled with the ever-present striving to be the best in our field. We thank all of you for your continued support as we address the many challenges that lie ahead. ================================================================================ October 1, 1998 /s/ Clarence Y. Palitz, Jr. /s/ Paul R. Sinsheimer /s/ Michael C. Palitz Clarence Y. Palitz, Jr. Paul R. Sinsheimer Michael C. Palitz Chairman and President and Chief Executive Vice President Chief Executive Officer Operating Officer and Chief Financial Officer 8 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition Results of Operations General--The Company derives profits to the extent that income earned on its finance receivables exceeds its cost of borrowed funds, operating and administrative expenses, and provision for possible losses. The Company borrows funds in the wholesale markets to provide lending, financing and leasing services to primarily middle-market businesses nationwide. The Company's business activities can be regulated by state usury, lending and lien perfection rules and laws. Certain states also require the Company to obtain licenses in order to engage in certain business activities. The Company's leasing activities are similar in business terms to its lending and financing activities, differing only in legal and tax treatment. A transaction is characterized and documented as a lease based on management's evaluations of the customer's credit and the equipment collateral, the customer's preference and other factors. The types of equipment that the Company lends against, finances and leases, and the ongoing operational treatment of a transaction, are generally the same, regardless of the documentation used. The Company accounts for all transactions as financing arrangements. Comparison of Fiscal 1998 to Fiscal 1997--Finance income increased 31% to $72.7 million in fiscal 1998 from $55.3 million in fiscal 1997. The increase was primarily the result of the $161 million, or 32%, increase in the amount of average finance receivables outstanding from $507 million in 1997 to $668 million in 1998, partially offset by lower weighted average finance rates charged by the Company on new finance receivables. Finance receivables booked increased 36% to $629 million in 1998 from $464 million in 1997, primarily due to the expansion of the Company's marketing efforts into new geographic areas (primarily in the West) and further penetration in its existing areas (primarily in the Southeast) and an increase in the number of marketing personnel of approximately 20%. Interest expense, incurred on borrowings used to fund finance receivables, increased 39% to $32.6 million in 1998 from $23.4 million in 1997. The increase was primarily due to the 37% increase in average debt outstanding during 1998 from 1997, and, to a lesser extent, slight increases in average market interest rates, and in the Company's cost of funds due to the issuance of additional term debt. Finance income before provision for possible losses on finance receivables increased by 26% to $40.2 million in 1998 from $31.9 million in 1997. Finance income before provision for possible losses, expressed as a percentage of average finance receivables outstanding, decreased to 6.0% in 1998 from 6.3% in 1997, primarily due to the Company's higher debt-to-equity ratio, 4.9 at July 31, 1998 compared to 4.2 at July 31, 1997 and, to a lesser extent, the slight increase in the Company's cost of borrowed funds. The provision for possible losses on finance receivables increased by 25% to $3.2 million in 1998 from $2.5 million in 1997. The increase was primarily due to the increase in finance receivables. See Note B(4) of Notes to Consolidated Financial Statements for the summary of activity in the allowance for possible losses. Salaries and other expenses increased 10% to $9.2 million in 1998 from $8.4 million in 1997. The increase was primarily due to increased marketing costs and other costs associated with the growth in finance receivables and salary increases. The provision for income taxes increased to $10.8 million in 1998 from $8.1 million in 1997 primarily due to the increase in earnings before income taxes. Net earnings increased by 32% to $17.0 million in 1998 from $12.9 million in 1997. Diluted earnings per share increased by 29% to $1.03 per share in 1998 from $0.80 per share in 1997 and basic earnings per share increased by 32% to $1.15 per share in 1998 from $0.87 per share in 1997. The increase in diluted earnings per share was lower than the increase in net earnings primarily due to the 87% increase in the average price of the Company's common stock in 1998 over 1997. Comparison of Fiscal 1997 to Fiscal 1996--Finance income increased 27% to $55.3 million in fiscal 1997 from $43.5 million in fiscal 1996. The increase was primarily the result of the $119 million, or 31%, increase in the amount of average finance receivables outstanding from $388 million in 1996 to $507 million in 1997, partially offset by reduced weighted average finance rates charged by the Company on new finance receivables and the year to year decline in average market interest rates. Finance receivables booked in 1997 increased 29% to $464 million from $359 million in 1996 primarily as a result of the expansion of the Company's marketing efforts into new geographic areas and further penetration in its existing areas. In November 1996, the Company opened a new full service office in Mesa, Arizona. ================================================================================ 9 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition (Continued) Interest expense, incurred on borrowings used to fund finance receivables, increased 22% to $23.4 million in 1997 from $19.3 million in 1996. The overall increase was mainly due to the 29% increase in average borrowings during 1997 from 1996, partially offset by decreases in costs of funds and average market interest rates. Finance income before provision for possible losses on finance receivables increased by 31% to $31.9 million in 1997 from $24.3 million in 1996. Finance income before provision for possible losses, expressed as a percentage of average finance receivables outstanding, was 6.3% in 1997 and in 1996. The provision for possible losses on finance receivables increased by 48% to $2.5 million in 1997 from $1.7 million in 1996. The increase was primarily due to the increase in finance receivables. See Note B(4) of Notes to Consolidated Financial Statements for the summary of activity in the allowance for possible losses. Salaries and other expenses increased 17% to $8.4 million in 1997 from $7.1 million in 1996. The increase was primarily due to increased marketing costs and other costs associated with the growth in finance receivables and salary increases, partially offset by the reduction in overhead costs that resulted from the merging of the Company's Hilton Head, SC office into the Company's Charlotte, NC office in November 1996. The provision for income taxes increased to $8.1 million in 1997 from $5.8 million in 1996 primarily due to the increase in earnings before income taxes. Net earnings increased by 34% to $12.9 million in 1997 from $9.6 million in 1996. Diluted earnings per share increased by 18% to $0.80 per share in 1997 from $0.68 per share in 1996 and basic earnings per share increased by 18% to $0.87 per share in 1997 from $0.74 per share in 1996. The increases in earnings per share were lower than the increase in net earnings primarily due to the sale of 1.7 million shares of the Company's common stock in a public offering in May 1996. Receivable Portfolio and Asset Quality Finance receivables outstanding increased by $191.0 million, or 33%, to $772.4 million at July 31, 1998 from $581.4 at July 31, 1997. The increase was due to the amount of finance receivables originated exceeding amounts collected. At July 31, 1998, Financial Federal Credit Inc. ("Credit," a wholly-owned subsidiary) had $762.4 million, or 98.7%, of total finance receivables and First Federal Commercial Inc. (a wholly-owned subsidiary) had the balance of finance receivables. The allowance for possible losses increased to $13.3 million at July 31, 1998 from $10.3 million at July 31, 1997, and was 1.73% of finance receivables at July 31, 1998 as compared to 1.77% at July 31, 1997. The allowance is periodically reviewed by the Company's management and is based on management's current assessment of the risks inherent in the Company's finance receivables from national and regional economic conditions, industry conditions, concentrations, the financial condition of counterparties and other factors. Future increases in the allowance level may be necessary based on changes in these factors. The equipment collateral securing the Company's finance receivables generally possess certain characteristics that have served to mitigate potential credit losses. Such characteristics include an economic life exceeding the term of the receivable, low levels of technological obsolescence, applications in various industries, ease of accessibility and transporting and a broad resale market. These characteristics, combined with management's experience and expertise with the equipment collateral, have minimized the Company's net credit losses. Net credit losses (write-downs of receivables less subsequent recoveries) incurred on the Company's finance receivables decreased to $123,000 in 1998 from $230,000 in 1997. Management believes that the Company's net credit losses have been historically low primarily due to favorable economic and industry conditions. Net credit losses, expressed as a percentage of average finance receivables outstanding, was 0.02% in 1998, 0.05% in 1997, 0.03% in 1996, 0.08% in 1995, 0.13% in 1994 and 0.31% in 1993. Management does not currently expect this trend to continue. An economic downturn could cause an increase in the Company's net credit losses. Future increases in the Company's net credit losses could have a negative impact on the Company's earnings through additional increases in the provision for possible losses. Non-performing finance receivables were $6.5 million, or 0.8% of total finance receivables, at July 31, 1998, as compared to $5.6 million, or 1.0% of total finance receivables, at July 31, 1997. The level of non-performing finance receivables is also historically low, again primarily due to favorable economic and industry conditions. Adverse changes in these conditions could result in an increase in the level of non-performing finance receivables. Such an increase could have a negative impact on the Company's earnings through decreased revenue. ================================================================================ 10 The Company's finance receivables reflect certain industry and geographic concentrations of credit risk. These concentrations arise from counterparties having similar economic characteristics that would cause their ability to meet their contractual obligations to the Company to be similarly affected by changes in economic or other conditions. The major industry concentrations are: trucking--18%, construction--17%, cranes --13% and waste disposal--12%. The major geographic concentrations are: Southeast--25%, Northeast--24% and Southwest--24%. Liquidity and Capital Resources The Company is dependent upon the continued availability of funds to originate or acquire finance receivables and to purchase portfolios of finance receivables. The Company may obtain required funds from a variety of sources, including internal generation, direct issuance of, and dealer placed, commercial paper, borrowings under revolving credit facilities, placements of term debt and sales of common and preferred equity. Management believes, but cannot assure, that the Company has available sufficient liquidity to support its future operations. The Company has obtained the majority of its senior borrowings through Credit and has obtained the balance of its borrowings through Financial Federal Corporation ("Financial," the parent company). The Company has received investment grade credit ratings on its commercial paper and senior debt. Credit's commercial paper is rated "F-2" by Fitch IBCA, Inc. and Financial's and Credit's commercial paper is rated "D-2" by Duff & Phelps Credit Rating Co. Credit's senior unsecured debt is rated "BBB" by Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co. These credit ratings provide the Company with greater access to capital markets. The Company's total debt outstanding increased by $161.2 million to $602.8 million at July 31, 1998 from $441.7 million at July 31, 1997. The Company also increased its stockholders' equity by $17.6 million to $123.2 million at July 31, 1998 from $105.6 million at July 31, 1997 and its net deferred income tax liability by $4.8 million to $16.1 million at July 31, 1998 from $11.3 million at July 31, 1997. These increases, together with increases in the Company's accrued expenses and other liabilities, were used primarily to fund the increase in finance receivables. During fiscal 1998, the Company improved its liquidity as follows: o In January 1998, Credit established a $100.0 million Medium Term Note program and issued $55.0 million of fixed rate notes thereunder with maturities at five, seven, and ten years. o In February 1998, Credit increased the size of its dealer commercial paper program from $250.0 million to $350.0 million. At July 31, 1998, $311.2 million of commercial paper was outstanding. o In April 1998, Financial sold $100.0 million of its convertible subordinated notes due in 2005. o During the year, the Company increased its total committed unsecured revolving credit facilities by $35.0 million to $430.0 million at July 31, 1998. The sources of the Company's borrowings are described below: Financial and Credit are each direct issuers of investment grade commercial paper. Credit also issues investment grade commercial paper through a $350.0 million program with recognized dealers. The Company's commercial paper is unsecured and matures within 270 days. Interest rates on commercial paper outstanding at July 31, 1998 generally ranged from 5.7% to 5.9%. The Company has not obtained commitments from any purchaser of its commercial paper for additional or future purchases. The Company's current policy is to maintain committed revolving credit facilities from banks so that the aggregate amount available thereunder exceeds commercial paper outstanding. At July 31, 1998, Credit had $337.5 million of committed unsecured revolving credit facilities with original terms ranging from two to five years with nineteen banks under which $3.4 million of aggregate borrowings were outstanding. At July 31, 1998, Credit also had $92.5 million of committed unsecured revolving credit facilities with an original term of one year or less with eight banks under which no borrowings were outstanding. At July 31, 1998, $292.5 million of the long-term revolving credit facilities expire after one year. Interest rates on borrowings under these facilities are based on either domestic money market rates or LIBOR. The Company generally incurs a fee on the unused portion of these facilities. The banks are not contractually obligated to renew these facilities. ================================================================================ 11 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition (Continued) Information about the combined amounts and interest rates of the Company's commercial paper and bank borrowings follows: (dollars in millions) 1998 1997 1996 ============================================================================= Maximum amount outstanding during the year $390.8 $374.7 $270.2 Average amount outstanding during the year 333.3 316.6 216.2 Weighted average interest rate: During the year 5.9% 5.9% 6.2% End of the year 5.8 6.0 5.9 ============================================================================= At July 31, 1998, the Company reported $292.5 million of commercial paper and bank borrowings as long-term senior debt on its Consolidated Balance Sheet based on the amount of long-term revolving credit facilities expiring after one year. In January 1998, the Company established a $100.0 million 144A Medium-Term Note Program, rated "BBB" by Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co., and issued $55.0 million of senior notes thereunder, with interest payable semi-annually, as follows (dollars in millions): Amount Term Maturity Rate ============================================================================== $30.0 5 years January 29, 2003 6.45% 20.0 7 years January 31, 2005 6.68 5.0 10 years January 29, 2008 6.80 ============================================================================== At July 31, 1998, the Company also had $115.0 million of senior term notes due as follows: $25.0 million on July 14, 2000, $25.0 million on December 14, 2000, $55.0 million on September 1, 2001 and $10.0 million on August 1, 2002. On April 29, 1998, the Company issued $100.0 million of 4.5% convertible subordinated notes due May 1, 2005. The notes are convertible into shares of the Company's common stock at any time before maturity at a conversion price of $30.15625 per share. The Company can call the notes beginning May 4, 2001 at a premium that decreases 25% annually from 2.57%. Interest on the notes is payable semi-annually. The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined. At July 31, 1998, Credit had $15.9 million of variable rate senior term notes outstanding with certain executive officers of the Company and their affiliates. These notes mature in September 1999, subject to extension. The revolving credit facilities, senior term notes and medium term notes contain certain restrictive covenants including limitations on: indebtedness, encumbrances, investments, dividends and other distributions from Credit to Financial, sales of assets, mergers and other business combinations, capital expenditures and the minimum adjusted net worth of Credit. Under the most restrictive of the above dividend payment covenants, $48.7 million of the Company's equity was free of dividend restrictions at July 31, 1998. Market Interest Rate Risk and Sensitivity The net yield of the Company's finance receivables, the cost of the Company's borrowed funds and the resulting net interest spread follow: Year Ended July 31, 1998 1997 1996 ============================================================================ Average yield of finance receivables 10.9% 10.9% 11.2% Weighted average cost of borrowed funds 6.3% 6.2% 6.6% - ---------------------------------------------------------------------------- Net interest spread 4.6% 4.7% 4.6% ============================================================================ The weighted average interest rate charged by the Company on its finance receivables was 10.2% at July 31, 1998. At July 31, 1997 and 1996, the weighted average rates were 10.7% and 11.1%, respectively. The decline is primarily due to lower retail market interest rates, competitive pressures and prepayments of older transactions. The decline in rates has been offset by prepayment premiums and increases in other non-interest revenue. If competitive pressures increase and/or market interest rates decline further, the Company may have to decrease the rates it charges on new transactions. Such a decrease could affect negatively the Company's earnings. Finance receivables generally have original maturities ranging from two to five years and provide for monthly installments. The Company experiences some prepayments on its finance receivables which shorten the scheduled maturities. ================================================================================ 12 The Company's finance receivables comprise fixed rate and variable rate transactions. At July 31, 1998, $651.2 million, or 84%, of finance receivables provide for interest at fixed rates and $121.2 million, or 16%, of finance receivables provide for interest at variable rates indexed to the prime rate. The percentage of finance receivables that provide for fixed interest rates has increased from 66% at July 31, 1995 primarily due to continued low market interest rates. At July 31, 1998, $216.8 million of fixed rate finance receivables are scheduled to mature within one year. The total of fixed rate term debt of $272.3 million, stockholders' equity of $123.2 million and net deferred income tax liability of $16.1 million was $411.6 million at July 31, 1998. The Company's other debt at July 31, 1998, primarily commercial paper and bank borrowings, reprices frequently. At July 31, 1998, total commercial paper and bank borrowings outstanding of $314.6 million mature or reprice as follows: $258.4 million, or 82%, within one month, $28.7 million, or 9%, within the following two months and the remainder, $27.5 million, or 9%, within the following six months. Total short-term and variable rate debt decreased by $3.8 million from July 31, 1997 to July 31, 1998. In addition, the percentage of total debt outstanding that was short-term or variable rate has decreased from 80% at July 31, 1996 to 55% at July 31, 1998, as the Company has focused on issuing fixed rate term debt to capitalize on low market interest rates. Due to the excess of the Company's fixed rate finance receivables over the total of its fixed rate term debt, stockholders' equity and net deferred income tax liability, the Company's net interest spread could be affected by fluctuations in market interest rates. The Company does not seek to match the maturities of its debt to its finance receivables. The Company is exposed to market risk from the effects that fluctuations in interest rates have on its finance receivables and debt and on its net interest spread. The Company continually monitors and manages its interest rate exposures through risk management procedures that include using derivative financial instruments when such is determined to be necessary. The Company has not, to date, made any significant use of derivatives. The Company has not been affected significantly by movements in interest rates over the last three fiscal years as evidenced by its stable net interest spread. The Company calculated that the effect of an assumed 100 basis point (1.0%) increase in the weighted average year end July 31, 1998 interest rates on its finance receivables and debt would be approximately a $700,000 reduction of annual net after-tax earnings. The Company assumed that the rate increase would occur at the beginning of the year. The 100 basis point increase is approximately a 17% increase over the Company's weighted average year end interest rate on short-term borrowings. The calculated reduction in net earnings assumes the occurrence of an adverse change in interest rates. Actual future changes in interest rates may differ materially and the effect on net earnings may also differ materially due to changes in the Company's finance receivables and debt repricing structures. New Accounting Standards The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This standard replaced the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share for all periods presented. Basic earnings per share is net earnings divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is the total of net earnings and the after-tax interest cost of dilutive convertible debt, divided by the total of the weighted average number of common shares and the effect of dilutive stock options, warrants and convertible securities, outstanding during the period. Year 2000 The Company has determined that its information technology systems are primarily Year 2000 compliant (non-information technology systems are not critical to the Company's operations). Therefore, any future costs the Company may incur relating to the Year 2000 issue are not expected to be significant. The Company has not, and does not expect to, incur any specific quantifiable costs that can be directly and solely related to the Year 2000 issue. All of the Company's proprietary software was programmed in such a manner that it was originally Year 2000 compliant. The Company is in the process of replacing its portfolio administration software system. The current and new systems were programmed in such a manner that they were both originally Year 2000 compliant. The Year 2000 issue did not affect the decision, nor timing, of the replacement. ================================================================================ 13 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition (Continued) In addition, the Company is nearing the end of an initiative to add, upgrade and replace its computer networks and its personal computers. The initiative was undertaken in response to the vast improvements in information technology and was not affected by the Year 2000 issue. The systems and hardware acquired under this initiative are required to be Year 2000 compliant. The Company has business relationships with thousands of equipment manufacturers, dealers and operators (obligors). The failure by any one or several of these third parties to be Year 2000 compliant is not expected to result in a material loss in the Company's revenue. The Company has relationships with four commercial paper dealers and approximately twenty banks to fund its daily operations. The failure by any one of these credit providers to be Year 2000 compliant is not expected to affect materially the Company's liquidity. Through direct communications with these credit providers and the review of their public statements, the Company has been assured that substantially all of its credit providers expect to be Year 2000 compliant. In addition, all banks are required to be Year 2000 compliant by the Office of the Controller of the Currency. Neither the Company, nor anyone else, can predict, or envision, the potential direct and residual effects of technology's inability to properly recognize the Year 2000. These possible effects include extended, nationwide interruptions in telecommunications services, utility services, public transportation, air travel and global banking and electronic payment systems. Based on the unknown effects of these potentially significant interruptions, the Company believes that it is impossible to assure full Year 2000 compliance even though the Company has taken appropriate measures to be compliant. In the event that the advent of the Year 2000 causes a material business interruption, the Company believes, but cannot assure, that, to the extent possible (except for the interruptions listed in the prior paragraph), any such interruption could be overcome manually. Forward-Looking Statements This Management's Discussion and Analysis of Operations and Financial Condition and other sections of this Annual Report contain forward-looking statements that involve risks, uncertainties and assumptions due to their subjective nature. Therefore, actual outcomes and results could differ materially from those anticipated by such forward-looking statements due to the impact of many factors beyond the Company's control, including economic, geographic and industry conditions, availability of funding sources, fluctuations in market interest rates, prepayments, competitive conditions, changes in existing laws or regulations and matters relating to the Year 2000 issue. ================================================================================ 14 Financial Federal Corporation and Subsidiaries Consolidated Balance Sheet
July 31, (dollars in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------- ASSETS Finance receivables $772,427 $581,363 Allowance for possible losses (13,330) (10,303) - ----------------------------------------------------------------------------------------------------- Finance receivables--net 759,097 571,060 Cash 2,756 2,532 Other assets 4,255 1,172 - ----------------------------------------------------------------------------------------------------- TOTAL ASSETS $766,108 $574,764 ===================================================================================================== LIABILITIES Senior debt: Long-term ($36,209 at July 31, 1998 and $16,986 at July 31, 1997 due to related parties) $478,388 $434,680 Short-term 22,144 4,681 Subordinated debt ($4,681 at July 31, 1998 and $2,181 at July 31, 1997 due to related parties) 102,290 2,290 Accrued interest, taxes and other liabilities 23,940 16,224 Deferred income taxes 16,117 11,285 - ----------------------------------------------------------------------------------------------------- Total liabilities 642,879 469,160 - ----------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock--$1 par value, authorized 500,000 shares, none issued Common stock--$.50 par value, authorized 25,000,000 shares; shares issued: 14,842,544 in 1998 and 14,763,713 in 1997 7,421 7,382 Additional paid-in capital 57,869 57,315 Warrants--issued and outstanding 1,607,000 in 1998 and 1997 29 29 Retained earnings 57,910 40,878 - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 123,229 105,604 - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $766,108 $574,764 =====================================================================================================
The notes to consolidated financial statements are made a part hereof. ================================================================================ 15 Financial Federal Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity
Common Stock--$.50 Par Value ----------------------------- Number Additional of Paid-in Retained Treasury (dollars and share amounts in thousands) Shares Par Value Capital Warrants Earnings Stock ====================================================================================================== Balance at August 1, 1995 5,580 $2,790 $33,201 $29 $23,495 $(1,440) Retirement of treasury stock (96) (48) (552) (840) 1,440 Exercise of stock options 31 16 150 Three-for-two stock split 2,745 1,372 (1,372) Sale of common stock 1,700 850 25,490 Net earnings 9,610 - ------------------------------------------------------------------------------------------------------ Balance at July 31, 1996 9,960 4,980 58,289 29 30,893 -- Acquisitions of treasury stock (1,630) Retirement of treasury stock (124) (62) (1,105) (463) 1,630 Exercise of stock options 7 3 58 Three-for-two stock split 4,921 2,461 (2,461) Tax benefit relating to stock options 73 Net earnings 12,909 - ------------------------------------------------------------------------------------------------------ Balance at July 31, 1997 14,764 7,382 57,315 29 40,878 -- Exercise of stock options 79 39 480 Tax benefit relating to stock options 74 Net earnings 17,032 - ------------------------------------------------------------------------------------------------------ BALANCE AT JULY 31, 1998 14,843 $7,421 $57,869 $29 $57,910 $ -- ======================================================================================================
The notes to consolidated financial statements are made a part hereof. ================================================================================ 16 Financial Federal Corporation and Subsidiaries Consolidated Statement of Operations
Year Ended July 31, (dollars in thousands, except per share amounts) 1998 1997 1996 ===================================================================================================== Finance income: Loan obligations $50,180 $38,374 $29,533 Lease obligations 22,542 16,931 13,990 - ----------------------------------------------------------------------------------------------------- Total finance income 72,722 55,305 43,523 Interest expense 32,552 23,437 19,271 - ----------------------------------------------------------------------------------------------------- Finance income before provision for possible losses on finance receivables 40,170 31,868 24,252 Provision for possible losses on finance receivables 3,150 2,525 1,710 - ----------------------------------------------------------------------------------------------------- Net finance income 37,020 29,343 22,542 Salaries and other expenses 9,195 8,356 7,113 - ----------------------------------------------------------------------------------------------------- Earnings before income taxes 27,825 20,987 15,429 Provision for income taxes 10,793 8,078 5,819 - ----------------------------------------------------------------------------------------------------- NET EARNINGS $17,032 $12,909 $ 9,610 ===================================================================================================== EARNINGS PER COMMON SHARE: DILUTED $ 1.03 $ 0.80 $ 0.68 ===================================================================================================== BASIC $ 1.15 $ 0.87 $ 0.74 =====================================================================================================
The notes to consolidated financial statements are made a part hereof. ================================================================================ 17 Financial Federal Corporation and Subsidiaries Consolidated Statement of Cash Flows
Year Ended July 31, (dollars in thousands) 1998 1997 1996 ===================================================================================================== Cash flows from operating activities: Net earnings $ 17,032 $ 12,909 $ 9,610 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for possible losses on finance receivables 3,150 2,525 1,710 Depreciation and amortization 5,203 4,464 3,649 Deferred income taxes 4,832 2,336 2,662 Increase in other assets (243) (253) (368) Increase in accrued interest, taxes and other liabilities 7,716 4,064 4,813 - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 37,690 26,045 22,076 - ----------------------------------------------------------------------------------------------------- Cash flows from investing activities: Finance receivables: Originated (628,631) (464,283) (358,512) Collected 432,512 316,164 262,960 Other (424) (188) (254) - ----------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (196,543) (148,307) (95,806) - ----------------------------------------------------------------------------------------------------- Cash flows from financing activities: Commercial paper: Maturities 90 days or less (net) 59,626 32,908 167,750 Maturities greater than 90 days: Proceeds 120,687 149,470 24,866 Repayments (113,690) (127,747) (14,341) Bank borrowings--net proceeds (repayments) (76,660) 14,220 (91,715) Proceeds from convertible subordinated notes 100,000 Proceeds from senior term notes 65,000 50,000 55,000 Repayments of senior term notes (80,000) Proceeds from variable rate senior term notes 6,208 9,680 Repayments of subordinated debt (4,667) (15,000) Deferred debt issuance costs (2,687) Proceeds from sale of common stock 26,340 Acquisitions of treasury stock (1,630) Proceeds from exercise of stock options 519 61 166 Tax benefit relating to stock options 74 73 - ----------------------------------------------------------------------------------------------------- Net cash provided by financing activities 159,077 122,368 73,066 - ----------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH 224 106 (664) Cash--beginning of period 2,532 2,426 3,090 - ----------------------------------------------------------------------------------------------------- CASH--END OF PERIOD $ 2,756 $ 2,532 $ 2,426 ===================================================================================================== Supplemental disclosures of cash flow information: Interest paid $ 30,329 $ 22,464 $ 18,163 ===================================================================================================== Income taxes paid $ 7,345 $ 5,710 $ 3,003 =====================================================================================================
The notes to consolidated financial statements are made a part hereof. ================================================================================ 18 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In thousands, except per share amounts) NOTE A: Summary of Significant Accounting Policies (1) Principles of Consolidation--The consolidated financial statements include the accounts of Financial Federal Corporation ("Financial") and its subsidiaries, Financial Federal Credit Inc. ("Credit"), First Federal Commercial Inc. and Financial Federal Commercial Inc. (collectively the "Company"). Intercompany accounts and transactions have been eliminated. (2) Business--The Company provides collateralized lending, financing and leasing services nationwide to primarily middle-market commercial enterprises representing diverse industries such as general construction, road and infrastructure construction and repair, manufacturing, trucking and waste disposal. The Company lends against, finances and leases a wide range of revenue-producing equipment such as cranes, earth movers, machine tools, personnel lifts, trailers and trucks. (3) Income Recognition--Finance receivables comprise loans and other financings and noncancelable leases. All leases are accounted for as direct financing leases, where total lease payments, plus residual values, less the cost of the leased equipment is recorded as unearned finance income. Residual values are recorded at the lowest of (i) any stated purchase option, (ii) the present value at the end of the initial lease term of rentals due under any renewal options or (iii) the estimated fair value of the equipment at the end of the lease. Finance income is recognized over the term of receivables using the interest method. Income recognition is suspended on finance receivables that are considered impaired (full collection of principal and interest being doubtful) by management. This typically occurs when (i) a contractual payment is more than 120 days past due, (ii) the counterparty becomes the subject of a bankruptcy proceeding or (iii) the underlying collateral is being liquidated. Impaired receivables are written down to the underlying collateral's currently estimated net liquidation value (if less than the recorded amount). Income recognition may be resumed when management believes full collection is probable. Any collections on impaired receivables are applied to the recorded investment. (4) Allowance for Possible Losses--A general provision for possible losses on finance receivables is charged against income in an amount to increase the allowance for possible losses to a level that management considers appropriate. Write-downs of impaired receivables are charged to the allowance for possible losses and subsequent recoveries of write-downs are credited to the allowance. Management periodically reviews the allowance giving consideration to present and anticipated national and regional economic conditions, industry conditions, the status of the finance receivables, and other factors. (5) Income Taxes--Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the financial statement and tax return bases of assets and liabilities using enacted tax rates. Deferred tax expense represents the net change in deferred tax assets and liabilities during the year. (6) Earnings Per Common Share--The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This standard replaced the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share for all periods presented. Basic earnings per share is net earnings divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is the total of net earnings and the after-tax interest cost of dilutive convertible debt, divided by the total of the weighted average number of common shares and the effect of dilutive stock options, warrants and convertible securities, outstanding during the period. (7) Use of Estimates--The consolidated financial statements and the notes thereto were prepared in accordance with generally accepted accounting principles which requires estimates and assumptions to be made by management that affect the amounts reported therein. Actual results could differ from those estimates. ================================================================================ 19 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In thousands, except per share amounts) (Continued) NOTE B: Finance Receivables (1) Finance receivables comprise installment sales and secured loans (including line of credit arrangements), collectively referred to as loans, which provide for interest at fixed rates, or variable rates generally indexed to the prime rate (as defined) and investments in direct financing leases, as follows: July 31, 1998 1997 ========================================================================== Loans: Fixed rate $399,912 $291,221 Variable rate 111,132 103,590 - -------------------------------------------------------------------------- Total 511,044 394,811 Direct financing leases 261,383 186,552 - -------------------------------------------------------------------------- Finance receivables $772,427 $581,363 ========================================================================== The approximate weighted average interest rates charged on fixed rate loans were 10.2% and 10.7% at July 31, 1998 and 1997, respectively, and 2.0% and 2.6% over the prime rate on variable rate loans at July 31, 1998 and 1997, respectively. (2) The investment in direct financing leases comprises the following: July 31, 1998 1997 =========================================================================== Minimum lease payments receivable $270,727 $193,201 Residual values 42,727 30,047 Unearned finance income (52,071) (36,696) - --------------------------------------------------------------------------- Investment in direct financing leases $261,383 $186,552 =========================================================================== (3) Finance receivables generally provide for monthly installments of equal or varying amounts for terms of two to five years. Annual contractual maturities of finance receivables at July 31, 1998 are as follows: Direct Fixed Variable Financing Rate Loans Rate Loans Leases ============================================================================= 1999 $139,995 $ 50,416 $ 91,452 2000 114,549 26,530 76,721 2001 81,305 18,560 56,749 2002 40,733 10,058 30,821 2003 17,490 3,982 11,663 Thereafter 5,840 1,586 3,321 - ----------------------------------------------------------------------------- Total $399,912 $111,132 $270,727 ============================================================================= (4) The activity of the allowance for possible losses is summarized as follows: Year Ended July 31, 1998 1997 1996 ============================================================================ Balance--August 1 $10,303 $ 8,008 $ 6,395 Provision 3,150 2,525 1,710 Write-downs (1,210) (1,168) (1,004) Recoveries 1,087 938 907 - ---------------------------------------------------------------------------- Balance--July 31 $13,330 $10,303 $ 8,008 ============================================================================ (5) Income recognition has been suspended on finance receivables with a recorded investment of $6,489 (includes $3,709 of impaired loans) at July 31, 1998 and $5,626 (includes $3,979 of impaired loans) at July 31, 1997. The average recorded investment in impaired loans was $3,336 in 1998 and $3,915 in 1997. Impaired loans exclude direct financing leases. (6) The Company grants to its customers commitments to extend credit. These commitments contain off-balance sheet risk. The Company uses the same credit policies and procedures in making these commitments as it does for finance receivables, as the credit risks are substantially the same. At July 31, 1998 and 1997, the unused portion of these commitments was $10,147 and $5,805, respectively. NOTE C: Debt Debt is summarized as follows: July 31, 1998 1997 ============================================================================== Senior debt: Fixed rate term notes: 7.40% due 2000 $ 25,000 $ 25,000 7.45% due 2001 25,000 25,000 6.76% due 2002 55,000 55,000 6.29% due 2003 10,000 6.45% due 2003* 30,000 6.68% due 2005* 20,000 6.80% due 2008* 5,000 - ------------------------------------------------------------------------------ Total fixed rate term notes 170,000 105,000 Commercial paper 311,214 244,591 Bank borrowings 3,430 80,090 Variable rate term notes 15,888 9,680 - ------------------------------------------------------------------------------ Total senior debt 500,532 439,361 Subordinated debt: 4.5% convertible notes due 2005 100,000 8.0% debentures due 2003 2,290 2,290 - ------------------------------------------------------------------------------ Total subordinated debt 102,290 2,290 - ------------------------------------------------------------------------------ Total debt $602,822 $441,651 ============================================================================== *issued under Medium Term Note Program ================================================================================ 20 (1) The senior fixed rate term notes are Credit's obligations. Interest on the notes is payable semi-annually. Prepayments of the notes are subject to a premium based on yield maintenance formulas. The notes contain certain restrictive covenants including limitations on indebtedness, encumbrances, dividends to Financial, minimum net worth, and sales of assets. The senior fixed rate term notes include $55,000 of notes issued under Credit's $100,000 144A Medium-Term Note Program established in January 1998. (2) The Company issues commercial paper with a maximum term of 270 days. The weighted average interest rates on commercial paper outstanding at July 31, 1998 and 1997 were 5.8%. Commercial paper transactions with officers and other related parties are summarized as follows: 1998 1997 1996 =============================================================================== Year ended July 31: Issued $47,226 $31,409 $34,778 Matured 34,211 33,479 32,218 Interest expense 654 721 497 At July 31: Outstanding 20,321 7,306 9,376 Accrued interest 234 91 99 =============================================================================== (3) At July 31, 1998, Credit had $430,000 of committed unsecured revolving credit facilities with various banks expiring as follows: $137,500 within one year and $292,500 on various dates from November 1999 through July 2003. These facilities contain certain restrictive covenants including limitations on indebtedness, encumbrances, dividends to Financial, capital expenditures and minimum net worth. Credit generally incurs a fee on the unused portion of these facilities. Outstanding borrowings under these credit facilities, $3,430 at July 31, 1998, generally mature between 1 and 90 days and bear interest based on domestic money market rates or LIBOR, at Credit's option. The weighted average interest rates on bank borrowings were 6.2% and 6.3% at July 31, 1998 and 1997, respectively. (4) The variable rate senior term notes are payable by Credit to certain executive officers of the Company and their affiliates. The notes bear interest at variable rates indexed to LIBOR or domestic money market rates, and mature in September 1999, subject to extension. (5) In April 1998, Financial sold $100,000 of its convertible subordinated notes due May 1, 2005. The notes are convertible into shares of the Company's common stock, at any time prior to maturity, at a conversion price of $30.15625 per share. Financial can call the notes beginning May 4, 2001 at a premium that decreases 25% annually from 2.57%. Interest on the notes is payable semi-annually. The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined. (6) In July 1996, Financial called its variable rate subordinated debentures at face value offering holders the option to receive amended debentures. As a result, $4,667 of these debentures were repaid ($997 to related parties) and $2,290 of amended debentures were issued ($2,181 to related parties) on September 1, 1996. The amended debentures mature March 1, 2003, bear interest, payable semi-annually, at an annual fixed rate of 8.0%, contain a prepayment penalty through August 31, 1999 and are subordinated to senior debt and other debt designated by the Board of Directors and to certain other liabilities as provided for in the debentures. (7) Under the most restrictive of the above dividend payment covenants, $48,699 of the Company's equity was free from dividend restrictions at July 31, 1998. (8) At July 31, 1998, long-term senior debt (includes commercial paper and bank borrowings supported by credit facilities expiring after one year) and subordinated debt are due as follows: $110,888 in 2000, $192,500 in 2001, $95,000 in 2002, $57,290 in 2003 and $125,000 thereafter. NOTE D: Stockholders' Equity (1) In July 1997, the Board of Directors authorized a three-for-two stock split effected in the form of a stock dividend, payable on July 30, 1997. In December 1995, the Board of Directors authorized a three-for-two stock split effected in the form of a stock dividend, payable in January 1996. Prior period average shares outstanding, share equivalents and per share amounts have been restated to reflect the stock splits. Shares sold or acquired prior to the stock splits have not been restated. ================================================================================ 21 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In thousands, except per share amounts) (Continued) (2) In August 1996, the Company established a program to repurchase up to $4,130 (as increased in May 1997) of its common stock. In 1997 (prior to the three-for-two stock split), 124 shares were repurchased for $1,630. No shares were repurchased in 1998. Shares repurchased are retired. In August 1998, the Company increased the amount available under the program by $10,000, and amended the program to provide for the repurchase of the Company's convertible subordinated notes. (3) In December 1995, the Company's stockholders approved (i) an increase in the number of authorized shares of common stock from 10,000 to 25,000 and (ii) an amendment to the Company's stock option plan to increase the number of shares of common stock available in the plan from 1,125 to 2,250. (4) In May 1996, the Company sold 1,700 shares of its common stock in a public offering. Net proceeds of $26,340 were used to repay bank borrowings. Warrants: In 1989, the Company issued warrants to purchase 1,125 shares of common stock at $2.83 per share to its original stockholders. The warrants were purchased for $.0022 each and expire February 1, 2001. In 1991, the Company issued warrants to purchase 482 shares of common stock at $2.72 per share to certain officers. The warrants were purchased for $.0555 each and expire August 31, 2001. NOTE E: Stock Options The Company's stock option plan was adopted in September 1989 (as amended) and expires in September 1999 subject to earlier termination by the Board of Directors. The Company may grant non-qualified and incentive stock options to officers, directors and employees for the purchase of 2,250 shares of common stock under the plan. The exercise price of each option granted may not be less than the fair market value of the common stock on the grant date and the maximum term of an option is ten years. Options outstanding at July 31, 1998 were granted with a six year term and vest (become exercisable) in four equal cumulative annual installments commencing with the second anniversary of the grant date, except for 113 options that were granted to certain executive officers in 1996 with an eight year term and vest in eight varying annual cumulative installments. At July 31, 1998, 957 shares of common stock were available for future grants of options. Stock option activity and related information follows: Weighted Number of Average Options Exercise Price ================================================================================ Outstanding at August 1, 1995 355 $ 5.92 Granted 258 9.05 Exercised (50) 3.35 Canceled (48) 6.64 - ----------------------------------------------------------- Outstanding at July 31, 1996 515 7.68 Granted 132 11.17 Exercised (10) 6.39 Canceled (45) 8.10 - ----------------------------------------------------------- Outstanding at July 31, 1997 592 8.45 Granted 220 22.14 Exercised (79) 6.58 Canceled (7) 8.97 - ----------------------------------------------------------- Outstanding at July 31, 1998 726 12.80 =========================================================== Exercisable at July 31: 1998 162 $ 7.27 1997 149 6.68 1996 97 6.78 ================================================================================ The Company adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation," and continues to apply Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock options. Under APB 25, compensation expense is not recorded when the exercise price of stock options is at least equal to the market price of the stock on the grant date. ================================================================================ 22 The exercise prices of options outstanding at July 31, 1998 ranged from $6.22 to $23.06. Additional information by price range follows: Price Range Over $22 $8-$12 Below $8 =============================================================================== Outstanding: Number 220 248 258 Weighted average exercise price $22.14 $10.58 $6.95 Weighted average remaining contractual life (in years) 5.6 4.2 3.2 Exercisable: Number -- 28 134 Weighted average exercise price $ 9.94 $6.72 =============================================================================== Pro forma amounts of net earnings and earnings per share, determined as if compensation expense attributable to stock options had been recognized using the fair value method under SFAS 123, follow: Year Ended July 31, 1998 1997 1996 ============================================================================= Net earnings $16,593 $12,720 $9,473 Earnings per share: Diluted $ 1.01 $ 0.79 $ 0.67 Basic $ 1.12 $ 0.86 $ 0.73 ============================================================================= The pro forma effect on net earnings in 1998, 1997 and 1996 may not be representative of the effect in future years since compensation expense attributable to stock options under SFAS 123 is measured over an option's vesting period and only applies to options granted by the Company after August 1, 1995. The Company estimated the weighted average grant date fair values per option for stock options granted using the Black-Scholes option-pricing model based on the following assumptions: Year Ended July 31, 1998 1997 1996 =============================================================================== Weighted average grant date fair value $7.65 $3.78 $3.55 Assumptions: Weighted average risk-free interest rate 5.7% 6.7% 6.0% Expected stock price volatility rate 28% 27% 27% Weighted average expected life of options granted (in years) 4.7 4.3 6.2 =============================================================================== NOTE F: Earnings Per Common Share Earnings per common share was calculated as follows: Year Ended July 31, 1998 1997 1996 ============================================================================= Net earnings (used for basic earnings per share) $17,032 $12,909 $9,610 Effect of convertible securities (see Note C(5)) 802 -- -- - ----------------------------------------------------------------------------- Adjusted net earnings (used for diluted earnings per share) $17,834 $12,909 $9,610 ============================================================================= Weighted average common shares outstanding (used for basic earnings per share) 14,804 14,787 12,926 Effect of dilutive securities: Warrants 1,392 1,208 1,148 Stock options 332 159 151 Convertible subordinated notes 854 -- -- - ----------------------------------------------------------------------------- Adjusted weighted average common shares and assumed conversions (used for diluted earnings per share) 17,382 16,154 14,225 ============================================================================= Net earnings per common share--Diluted $ 1.03 $ 0.80 $ 0.68 ============================================================================= Net earnings per common share--Basic $ 1.15 $ 0.87 $ 0.74 ============================================================================= NOTE G: Income Taxes (1) The provision for income taxes comprises the following: Year Ended July 31, 1998 1997 1996 ============================================================================= Currently payable: Federal $ 5,087 $ 4,887 $2,773 State and local 800 782 384 - ----------------------------------------------------------------------------- Total 5,887 5,669 3,157 Deferred 4,832 2,336 2,662 Tax benefit relating to stock options 74 73 - ----------------------------------------------------------------------------- Provision for income taxes $10,793 $ 8,078 $5,819 ============================================================================= ================================================================================ 23 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In thousands, except per share amounts) (Continued) (2) Income taxes computed at statutory federal income tax rates are reconciled to the provision for income taxes as follows: Year Ended July 31, 1998 1997 1996 ============================================================================== Federal income tax at statutory rates $ 9,739 $ 7,345 $ 5,313 State and local taxes (net of federal income tax benefit) 1,054 733 506 - ------------------------------------------------------------------------------ Provision for income taxes $10,793 $ 8,078 $ 5,819 ============================================================================== (3) Deferred income taxes comprises the tax effect of the following temporary differences: July 31, 1998 1997 ================================================================================ Deferred tax liabilities: Leasing transactions $19,960 $14,193 Deferred costs 2,695 2,218 - -------------------------------------------------------------------------------- Total 22,655 16,411 - -------------------------------------------------------------------------------- Deferred tax assets: Allowance for possible losses (5,180) (3,993) Other liabilities (1,358) (1,133) - -------------------------------------------------------------------------------- Total (6,538) (5,126) - -------------------------------------------------------------------------------- Deferred income taxes $16,117 $11,285 ================================================================================ NOTE H: Lease Commitments The Company occupies office space under leases expiring through 2004. At July 31, 1998, minimum future annual rentals due under these leases are $650 in 1999, $657 in 2000, $576 in 2001, $364 in 2002, $225 in 2003 and $17 in 2004. Office rent expense was $782 in 1998, $677 in 1997 and $550 in 1996. NOTE I: Concentration of Credit Risk The Company manages its exposure to the credit risk associated with its finance receivables through established credit policies and procedures which include obtaining a first lien on equipment collateral on each transaction. The Company evaluates the equipment collateral on an ongoing basis and focuses on lending against, financing and leasing equipment collateral that has an economic life exceeding the term of the receivable, is not subject to rapid technological obsolescence, has applications in various industries, is easily accessible and movable and has a broad resale market. The Company may also obtain additional equipment or other collateral, third party guarantees and/or hold back a portion of the amount financed. Concentrations of credit risk arise when counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant concentration of credit risk with any one counterparty. The major concentrations of credit risk, grouped by the industries and geographic regions of counterparties, expressed as a percentage of finance receivables, follow: July 31, 1998 1997 =========================================================================== Industry: Trucking 18% 19% Construction 17 15 Cranes 13 12 Waste disposal 12 14 Geographic region: Southeast 25% 24% Northeast 24 25 Southwest 24 25 =========================================================================== NOTE J: Fair Values of Financial Instruments The Company's financial instruments comprise cash, finance receivables (excluding leases), commitments to extend credit and debt. The following methods were used to estimate the fair value of these financial instruments. The carrying values of cash, commercial paper and bank borrowings approximated their fair values based on their short-term maturities. The carrying values of the fixed rate senior term notes, the variable rate senior term notes and the subordinated debentures were estimated to approximate their fair values at July 31, 1998 and 1997 based on their future cash flows discounted at current rates for debt with similar terms and maturities. ================================================================================ 24 The carrying value of the convertible subordinated notes were estimated to approximate their fair value at July 31, 1998 based on their quoted market price. It is not practicable for the Company to estimate the fair value of its finance receivables and commitments to extend credit. These financial instruments comprise a substantial number of transactions with commercial obligors in numerous industries, are secured by liens on various types of equipment and may be guaranteed by third parties. Any difference between the carrying value and the fair value of each transaction would be affected by a potential buyer's assessment of the transaction's credit quality, collateral value, third party guarantee(s), payment history, yield, maturity, documentation and other legal matters, and many other subjective considerations of the buyer. In addition, the value received in a fair market sale of a transaction would be based on the terms of the sale, the documentation governing such sale, the Company's and the buyer's views of general economic conditions, industry dynamics, the Company's and the buyer's tax considerations, and numerous other factors. NOTE K: Selected Quarterly Data (Unaudited) Earnings per Share Net --------------- Revenues Earnings Diluted Basic ================================================================================ Fiscal 1998, three months ended: October 31, 1997 $16,369 $3,874 $0.24 $0.26 January 31, 1998 17,622 4,050 0.25 0.27 April 30, 1998 18,440 4,399 0.27 0.30 July 31, 1998 20,291 4,709 0.28 0.32 Fiscal 1997, three months ended: October 31, 1996 $12,530 $2,972 $0.18 $0.20 January 31, 1997 13,356 3,134 0.19 0.21 April 30, 1997 13,999 3,287 0.20 0.22 July 31, 1997 15,420 3,516 0.22 0.24 ================================================================================ ================================================================================ 25 Independent Auditors' Report To the Board of Directors and Shareholders Financial Federal Corporation We have audited the accompanying consolidated balance sheets of Financial Federal Corporation and Subsidiaries as at July 31, 1998 and 1997, and the related consolidated statements of stockholders' equity, operations and cash flows for each of the three years in the period ended July 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Financial Federal Corporation and Subsidiaries at July 31, 1998 and 1997, and their consolidated operating results and their cash flows for each of the three years in the period ended July 31, 1998, in conformity with generally accepted accounting principles. /s/ Eisner & Lubin LLP - ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York September 3, 1998 ================================================================================ 26 Financial Federal Corporation and Subsidiaries Stock Price History and Dividend Policy The Company's common stock is traded on the New York Stock Exchange under the symbol "FIF." Trading commenced on the New York Stock Exchange on June 22, 1998; prior to that date the Company's common stock was traded on the American Stock Exchange. The quarterly high and low closing sales prices per share of the common stock as reported by the New York Stock Exchange and the American Stock Exchange, adjusted for the July 1997 three-for-two stock split, follow:
Fiscal 1998 Fiscal 1997 ------------------------------------------ High Low High Low - -------------------------------------------------------------------------------------- First Quarter ended October 31 $19.81 $14.00 $10.58 $ 8.50 Second Quarter ended January 31 $23.63 $18.00 $11.83 $ 9.25 Third Quarter ended April 30 $26.00 $20.38 $13.00 $10.42 Fourth Quarter ended July 31 $28.50 $23.00 $15.58 $11.42
The Company presently has no intention of paying cash dividends in the foreseeable future. ================================================================================ 27 Financial Federal Corporation and Subsidiaries Corporate Directory OFFICERS Clarence Y. Palitz, Jr. Chairman of the Board and Chief Executive Officer Paul R. Sinsheimer President and Chief Operating Officer Michael C. Palitz Executive Vice President, Treasurer and Chief Financial Officer William M. Gallagher Senior Vice President Troy H. Geisser Senior Vice President and Secretary John V. Golio Senior Vice President Daniel J. McDonough Senior Vice President Richard W. Radom Senior Vice President Julian C. Green, Jr. Vice President Jeanne McDonald Vice President Fred J. Palumbo Vice President Ted Wooldridge Administrative Vice President David H. Hamm Controller OFFICERS OF SUBSIDIARIES ONLY Vice Presidents: William J. Flaherty W. J. Mattocks Donald G. Pokorny Rodney Sepulvado Luther C. Whitlock Administrative Vice Presidents: Kevin McGinn Gary L. Pace Regional Vice Presidents: Jeff Anderson Gary Barnes Kenneth Blackman Johnie E. Christ Thomas A. Fahl Gary S. Fisher Frank J. Gullo Bruce James James M. Keesee Gregory D. Lile James H. Mayes, Jr. Michael A. Nelson James R. Scappi William K. Toon Thomas L. Tornee Assistant Vice Presidents: Joan E. Bischer Linda Brown Donna L. Frate Robert Grawl, Jr. Donald L. Hamann Mark A. Scott Kimberly P. Walter Assistant Treasurer: Barbara Constantino Assistant Secretaries: Anthony Cornacchia Chris L. Jones Thomas G. Kassakatis Jeffrey Lanigan Andrew Remias Gregory Treichler ================================================================================ 28 Corporate Directory (Continued) DIRECTORS Lawrence B. Fisher Partner Orrick, Herrington and Sutcliffe LLP Attorneys William C. MacMillen, Jr. President William C. MacMillen and Co., Inc. Investment Bankers Bernard G. Palitz President Gregory Capital Corporation Investments Clarence Y. Palitz, Jr. Chairman of the Board and Chief Executive Officer Financial Federal Corporation Michael C. Palitz Executive Vice President, Treasurer and Chief Financial Officer Financial Federal Corporation Paul R. Sinsheimer President and Chief Operating Officer Financial Federal Corporation AUDITORS Eisner and Lubin LLP Certified Public Accountants 444 Madison Avenue New York, NY 10022 GENERAL COUNSEL Orrick, Herrington and Sutcliffe LLP 666 Fifth Avenue New York, NY 10103 TRANSFER AGENTS AND REGISTRARS Common stock: The Bank of New York New York, NY Convertible subordinated notes: The First National Bank of Chicago New York, NY LOCATIONS Headquarters: 733 Third Avenue New York, NY 10017 (212) 599-8000 Full Service Operations Centers: 1300 Post Oak Boulevard Houston, TX 77056 (713) 439-1177 601 Oakmont Lane Westmont, IL 60559 (630) 986-3900 300 Frank W. Burr Boulevard Teaneck, NJ 07666 (201) 801-0300 201 McCullough Drive Charlotte, NC 28262 (704) 549-1009 1855 W. Baseline Road Mesa, AZ 85202 (602) 491-1300 Website: www.financialfederal.com SECURITIES LISTINGS: Common stock: New York Stock Exchange Symbol FIF Convertible subordinated notes: New York Stock Exchange CORPORATE INFORMATION The annual meeting of shareholders will be held at 270 Park Avenue, New York, NY on December 8, 1998 at 10 a.m. Eastern Time. For a copy of Form 10-K or other information about the Corporation contact: Investor Relations Financial Federal Corporation 733 Third Avenue, New York, NY 10017 (212) 599-8000 Designed by Curran & Connors, Inc. Financial Federal Corporation 733 Third Avenue New York, NY 10017 EX-22.1 4 Exhibit 22.1 SUBSIDIARIES OF REGISTRANT Name State of incorporation - ----------------------------- ---------------------- Financial Federal Credit Inc. Texas Names of other particular subsidiaries have been omitted since in the aggregate they do not constitute a significant subsidiary as of July 31, 1998 as defined by Rule 1-02(w) of Regulation S-X. 19 EX-23.1 5 Exhibit 23.1 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-73320) of Financial Federal Corporation of our report dated September 3, 1998, included in this Annual Report on Form 10-K. We also consent to the incorporation by reference in such Registration Statement of our report on the Financial Statement Schedules, which appears on Page 12 of this Form 10-K. /s/ Eisner & Lubin LLP ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York October 2, 1998 20 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES AT JULY 31, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR JUL-31-1998 JUL-31-1998 2756 0 772427 13330 0 0 0 0 766108 0 602822 0 0 7421 115808 766108 0 72722 0 0 0 3150 32552 27825 10793 17032 0 0 0 17032 1.15 1.03 THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
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