10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended April 30, 2000 Commission file number 1-12006 FINANCIAL FEDERAL CORPORATION (Exact name of registrant as specified in its charter) Nevada 88-0244792 (State of incorporation) (I.R.S. Employer Identification Number) 733 Third Avenue, New York, NY 10017 (Address of principal executive offices) (Zip code) (212) 599-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At June 1, 2000, 14,933,741 shares of Registrant's common stock, $.50 par value, were outstanding. FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES Quarterly Report on Form 10-Q for the quarter ended April 30, 2000 TABLE OF CONTENTS Part I - Financial Information Page No. ------------------------------------------------------------------- -------- Item 1 Financial Statements: Consolidated Balance Sheet at April 30, 2000 (unaudited) and July 31, 1999 (audited) 3 Consolidated Statement of Operations and Retained Earnings for the three and nine months ended April 30, 2000 and 1999 (unaudited) 4 Consolidated Statement of Cash Flows for the nine months ended April 30, 2000 and 1999 (unaudited) 5 Notes to Consolidated Financial Statements 6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II - Other Information --------------------------- Item 6 Exhibits and Reports on Form 8-K 9 Signatures 10 2 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
April 30, July 31, 2000 * 1999 ---------- -------- ASSETS Finance receivables $1,077,297 $948,727 Allowance for possible losses (18,084) (16,202) ---------- -------- Finance receivables - net 1,059,213 932,525 Cash 5,486 5,544 Other assets 3,555 4,116 ---------- -------- TOTAL ASSETS $1,068,254 $942,185 ========== ======== LIABILITIES Senior debt: Long-term ($33,012 at April 30, 2000 and $38,879 at July 31, 1999 due to related parties) $515,547 $540,662 Short-term 230,071 106,990 Subordinated debt ($4,681 at April 30, 2000 and July 31, 1999 due to related parties) 93,490 97,790 Accrued interest, taxes and other liabilities 38,086 29,500 Deferred income taxes 25,861 22,261 ---------- -------- Total liabilities 903,055 797,203 ---------- -------- STOCKHOLDERS' EQUITY Preferred stock - $1 par value, authorized 5,000,000 shares, none issued Common stock - $.50 par value, authorized 100,000,000 shares; shares issued: 14,920,014 at April 30, 2000 and 14,860,207 at July 31, 1999 7,460 7,430 Additional paid-in capital 58,477 58,115 Warrants - issued and outstanding 1,606,500 29 29 Retained earnings 99,233 79,408 ---------- -------- Total stockholders' equity 165,199 144,982 ---------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,068,254 $942,185 ========== ======== * Unaudited The notes to consolidated financial statements are made a part hereof.
3 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS * (Dollars in Thousands, Except Per Share Amounts)
Three months ended Nine months ended April 30, April 30, ----------------- ------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Finance income $28,194 $22,279 $80,281 $64,903 Interest expense 13,027 9,489 37,211 28,568 ------- ------- ------- ------- Finance income before provision for possible losses on finance receivables 15,167 12,790 43,070 36,335 Provision for possible losses on finance receivables 975 800 2,200 2,250 ------- ------- ------- ------- Net finance income 14,192 11,990 40,870 34,085 Gain on debt retirement 379 498 764 685 Salaries and other expenses (3,405) (2,847) (9,279) (7,845) ------- ------- ------- ------- Earnings before income taxes 11,166 9,641 32,355 26,925 Provision for income taxes 4,328 3,743 12,530 10,420 ------- ------- ------- ------- NET EARNINGS 6,838 5,898 19,825 16,505 Retained earnings - beginning of period 92,395 68,517 79,408 57,910 Repurchases of common stock (1,100) (1,100) ------- ------- ------- ------- RETAINED EARNINGS - END OF PERIOD $99,233 $73,315 $99,233 $73,315 ======= ======= ======= ======= EARNINGS PER COMMON SHARE: Diluted $0.39 $0.34 $1.13 $0.95 ===== ===== ===== ===== Basic $0.46 $0.40 $1.33 $1.11 ===== ===== ===== ===== * Unaudited The notes to consolidated financial statements are made a part hereof.
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS * (Dollars in Thousands)
Nine Months Ended April 30, 2000 1999 --------------------------------------------------------------------------- -------- -------- Cash flows from operating activities: Net earnings $19,825 $16,505 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for possible losses on finance receivables 2,200 2,250 Depreciation and amortization 5,434 4,451 Deferred income taxes 3,600 3,056 Gain on debt retirement (764) (685) Decrease in other assets 692 304 Increase (decrease) in accrued interest, taxes and other liabilities 8,586 (4,704) -------- -------- Net cash provided by operating activities 39,573 21,177 -------- -------- Cash flows from investing activities: Finance receivables: Originated (522,394) (488,910) Collected 388,310 360,579 Other (369) (290) -------- -------- Net cash (used in) investing activities (134,453) (128,621) -------- -------- Cash flows from financing activities: Commercial paper: Maturities 90 days or less (net) 71,912 38,945 Maturities greater than 90 days: Proceeds 64,840 66,270 Repayments (71,501) (75,867) Bank borrowings - net proceeds (repayments) (37,670) 15,425 Proceeds from senior term notes 50,000 Proceeds from term loans - banks 15,000 70,000 Repurchases of convertible subordinated notes (3,536) (3,815) Variable rate senior term notes - net proceeds (repayments) 5,385 (2,897) Repurchases of common stock (1,721) Proceeds from exercise of stock options 392 625 Tax benefit from stock options 22 -------- -------- Net cash provided by financing activities 94,822 106,987 -------- -------- NET (DECREASE) IN CASH (58) (457) Cash - beginning of period 5,544 2,756 -------- -------- CASH - END OF PERIOD $5,486 $2,299 ======== ======== Supplemental disclosures of cash flow information: Interest paid $33,661 $26,614 ======== ======== Income taxes paid $7,386 $4,804 ======== ======== * Unaudited The notes to consolidated financial statements are made a part hereof.
5 FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION ------------------------------ In the opinion of the management of Financial Federal Corporation and Subsidiaries (the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position at April 30, 2000 and the results of operations and cash flows of the Company for the three and nine month periods ended April 30, 2000 and 1999. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the Company's Annual Report on Form 10-K for the year ended July 31, 1999. The consolidated results of operations for the three and nine month periods ended April 30, 2000 and 1999 are not necessarily indicative of the results for the respective full years. NOTE 2 - EARNINGS PER COMMON SHARE ---------------------------------- Earnings per common share was calculated as follows (in thousands, except per share amounts):
Three months ended Nine months ended April 30, April 30, ----------------- ------------------- 2000 1999 2000 1999 ------ ------ ------- ------- Net earnings (used for basic earnings per share) $6,838 $5,898 $19,825 $16,505 Effect of convertible securities 716 748 2,227 2,313 ------ ------ ------- ------- Adjusted net earnings (used for diluted earnings per share) $7,554 $6,646 $22,052 $18,818 ====== ====== ======= ======= Weighted average common shares outstanding (used for basic earnings per share) 14,911 14,873 14,879 14,865 Effect of dilutive securities: Convertible subordinated notes 3,040 3,222 3,118 3,261 Warrants 1,356 1,371 1,374 1,399 Stock options 157 258 216 320 ------ ------ ------- ------- Adjusted weighted average common shares and assumed conversions (used for diluted earnings per share) 19,464 19,724 19,587 19,845 ====== ====== ======= ======= Net earnings per common share - Diluted $0.39 $0.34 $1.13 $0.95 ===== ===== ===== ===== Net earnings per common share - Basic $0.46 $0.40 $1.33 $1.11 ===== ===== ===== =====
NOTE 3 - SENIOR DEBT -------------------- At April 30, 2000, the Company had $442.0 million of committed unsecured revolving credit facilities with various banks including $197.0 million that expire after April 30, 2001 and $245.0 million that expire on or before April 30, 2001. Long-term senior debt of $515.5 million at April 30, 2000 comprised $15.0 million of borrowings under credit facilities that expire after April 30, 2001, $13.3 million of borrowings under credit facilities that expire on or before April 30, 2001, $168.7 million of commercial paper supported by credit facilities that expire after April 30, 2001 and $318.5 million of term notes payable. In September 1999, the Company issued $50.0 million of 7.57% fixed rate senior term notes that mature in September 2002. NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS ----------------------------------------- At April 30, 2000, the Company had variable to fixed interest rate swaps with a total notional amount of $25.0 million, weighted average receive and pay rates of 6.6% and 5.2%, respectively, and a weighted average remaining term of eight months. 6 NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS ----------------------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. This statement, as deferred by SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," issued in June 1999, is effective for fiscal years beginning after June 15, 2000. The Company has not yet determined the impact SFAS 133 will have on its earnings or financial position. PART I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Comparison of three months ended April 30, 2000 to three months ended April 30, 1999 --------------------------------------------------------------------------- Finance income increased by 27% to $28.2 million in the third quarter of fiscal 2000 from $22.3 million in the third quarter of fiscal 1999. The increase was primarily due to the 22%, or $181 million, increase in average finance receivables outstanding to $1.044 billion in the third quarter of fiscal 2000 from $863 million in the third quarter of fiscal 1999 and to a lesser extent, higher yields on new receivables and on variable rate receivables resulting from increases in market interest rates. Finance receivables booked in the third quarter of fiscal 2000 and fiscal 1999 were $186 million and $188 million, respectively. Interest expense, incurred on borrowings used to fund finance receivables, increased by 37% to $13.0 million in the third quarter of fiscal 2000 from $9.5 million in the third quarter of fiscal 1999. The increase was primarily due to the 21% increase in average debt outstanding in the third quarter of fiscal 2000 from the third quarter of fiscal 1999, higher rates incurred on short term and variable rate debt resulting from higher average market interest rates in the third quarter of fiscal 2000 from the third quarter of fiscal 1999 and recent issuances of additional term debt. Finance income before provision for possible losses on finance receivables increased by 19% to $15.2 million in the third quarter of fiscal 2000 from $12.8 million in the third quarter of fiscal 1999. Finance income before provision for possible losses, expressed as an annualized percentage of average finance receivables outstanding, decreased to 5.9% in the third quarter of fiscal 2000 from 6.1% in the third quarter of fiscal 1999 primarily due to the increase in market interest rates. The provision for possible losses on finance receivables increased by 22% to $975,000 in the third quarter of fiscal 2000 from $800,000 in the third quarter of fiscal 1999. The provision for possible losses is determined by the amount required to increase the allowance for possible losses to a level that management considers appropriate. The allowance for possible losses was $18.1 million, or 1.68% of finance receivables at April 30, 2000, as compared to $15.4 million, or 1.72% of finance receivables, at April 30, 1999. The allowance is periodically reviewed by the Company's management and is estimated based on total finance receivables, net credit losses incurred and management's current assessment of the risks inherent in the Company's finance receivables from national and regional economic conditions, industry conditions, concentrations, the financial condition of counterparties and other factors. Future additions to the allowance may be necessary based on changes in these factors. Non-performing finance receivables were $14.2 million, or 1.3% of total finance receivables, at April 30, 2000, compared to $8.9 million, or 1.0% of total finance receivables, at April 30, 1999. In the third quarter of fiscal 2000, the Company repurchased $2.0 million principal amount of its convertible subordinated notes for $1.6 million. 7 Salaries and other expenses increased by 20% to $3.4 million in the third quarter of fiscal 2000 from $2.8 million in the third quarter of fiscal 1999 primarily due to the increase in the number of employees, salary increases and the opening of a new full service operations center in Atlanta, Georgia in February 2000. Net earnings increased by 16% to $6.8 million in the third quarter of fiscal 2000 from $5.9 million in the third quarter of fiscal 1999. Diluted earnings per share increased by 15% to $0.39 per share in the third quarter of fiscal 2000 from $0.34 per share in the third quarter of fiscal 1999 and basic earnings per share increased by 15% to $0.46 per share in the third quarter of fiscal 2000 from $0.40 per share in the third quarter of fiscal 1999. Comparison of nine months ended April 30, 2000 to nine months ended April 30, 1999 ------------------------------------------------------------------------------ Finance income increased by 24% to $80.3 million in the first nine months of fiscal 2000 from $64.9 million in the first nine months of fiscal 1999. The increase was primarily due to the 21%, or $176 million, increase in average finance receivables outstanding to $1.001 billion in the first nine months of fiscal 2000 from $825 million in the first nine months of fiscal 1999 and to a lesser extent, higher yields on new receivables and on variable rate receivables resulting from increases in market interest rates. Finance receivables booked in the first nine months of fiscal 2000 increased by 7% to $522 million from $489 million in the first nine months of fiscal 1999. Interest expense, incurred on borrowings used to fund finance receivables, increased by 30% to $37.2 million in the first nine months of fiscal 2000 from $28.6 million in the first nine months of fiscal 1999. The increase was primarily due to the 22% increase in average debt outstanding in the first nine months of fiscal 2000 from the first nine months of fiscal 1999, higher rates incurred on short term and variable rate debt resulting from higher average market interest rates in the first nine months of fiscal 2000 from the first nine months of fiscal 1999 and recent issuances of additional term debt. Finance income before provision for possible losses on finance receivables increased by 19% to $43.1 million in the first nine months of fiscal 2000 from $36.3 million in the first nine months of fiscal 1999. Finance income before provision for possible losses, expressed as an annualized percentage of average finance receivables outstanding, decreased to 5.7% in the first nine months of fiscal 2000 from 5.9% in the first nine months of fiscal 1999 primarily due to the increase in market interest rates. The provision for possible losses on finance receivables decreased by 2% to $2.2 million in the first nine months of fiscal 2000 from $2.3 million in the first nine months of fiscal 1999. The provision for possible losses is determined by the amount required to increase the allowance for possible losses to a level that management considers appropriate. The allowance for possible losses was $18.1 million, or 1.68% of finance receivables at April 30, 2000, as compared to $15.4 million, or 1.72% of finance receivables, at April 30, 1999. In the first nine months of fiscal 2000, the Company repurchased $4.3 million principal amount of its convertible subordinated notes for $3.5 million. Salaries and other expenses increased by 18% to $9.3 million in the first nine months of fiscal 2000 from $7.8 million in the first nine months of fiscal 1999 primarily due to the increase in the number of employees and salary increases. Net earnings increased by 20% to $19.8 million in the first nine months of fiscal 2000 from $16.5 million in the first nine months of fiscal 1999. Diluted earnings per share increased by 19% to $1.13 per share in the first nine months of fiscal 2000 from $0.95 per share in the first nine months of fiscal 1999 and basic earnings per share increased by 20% to $1.33 per share in the first nine months of fiscal 2000 from $1.11 per share in the first nine months of fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES The Company is dependent upon the continued availability of funds to originate or acquire finance receivables and to purchase portfolios of finance receivables. The Company may obtain required funds from a variety of sources, including internal generation, dealer placed and directly issued commercial paper, borrowings under committed unsecured revolving credit facilities, private and public issuances of term debt, securitizations and sales of common and preferred equity. Management believes, but cannot assure, that the Company has available sufficient liquidity to support its future operations. 8 The Company issues investment grade commercial paper directly and through a $350.0 million program with recognized dealers. Commercial paper outstanding at April 30, 2000 was $348.7 million. The Company's commercial paper is unsecured and matures within 270 days. Increases in commercial paper are generally offset by decreases in bank and other borrowings, and vice versa. The Company's current policy is to maintain committed revolving credit facilities from banks so that the aggregate amount available thereunder exceeds commercial paper outstanding. At April 30, 2000, the Company had $442.0 million of committed unsecured revolving credit facilities with various banks including $197.0 million that expire after one year and $245.0 million that expire within one year. At April 30, 2000, the Company had $15.0 million of borrowings outstanding under credit facilities expiring after one year and $13.3 million of borrowings outstanding under credit facilities expiring within one year. In March 2000, the Company was notified that the two rating agencies that rate the debt of Financial Federal Credit Inc. ("FFCI", the Company's major operating subsidiary), Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co., were merging, and that after the merger, the combined entity would only assign one series of ratings. In April 2000, Thomson Financial Bankwatch assigned FFCI investment grade ratings of "TBW-2" on its commercial paper and "BBB+" on its long term senior debt. At April 30, 2000, FFCI's commercial paper was also rated "F-2" by Fitch IBCA, Inc. and "D-2" by Duff & Phelps Credit Rating Co., its senior notes "BBB" by Fitch IBCA, Inc. and the notes issued under its Medium Term Note Program "BBB" by Duff & Phelps Credit Rating Co. In September 1999, the Company issued $50.0 million of senior term notes due in September 2002. YEAR 2000 As of the date of this filing, the Company has not experienced any business interruptions resulting from the Year 2000 issue. The Company will continue to monitor its information technology systems for possible future interruptions. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Operations and Financial Condition contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions due to their subjective nature. Therefore, actual outcomes and results could differ materially from those anticipated by such forward-looking statements due to the impact of many factors beyond the Company's control, including economic, geographic and industry conditions, availability of funding sources, market risk from fluctuations in interest rates, prepayments, competition and changes in laws or regulations. PART II Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 - Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K The Company did not file any Reports on Form 8-K during the quarter ended April 30, 2000. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FINANCIAL FEDERAL CORPORATION ----------------------------- (Registrant) By: /s/ Michael C. Palitz ---------------------------- Executive Vice President and Chief Financial Officer By: /s/ David H. Hamm ---------------------------- Controller and Assistant Treasurer June 12, 2000 (Date) 10 INDEX TO EXHIBITS ----------------- Exhibit No. Exhibits ----------- -------- 27 Financial Data Schedule (EDGAR version only)