-----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, JhnK6mHhXEbAKlqf5sfKPFbIZrW4MPKCNg/JqhGv0GKy20YkwOXADZP2HUeJ1BDD OgBYx2N30b4pw/+Dj6+D8w== 0000854711-99-000015.txt : 19991029 0000854711-99-000015.hdr.sgml : 19991029 ACCESSION NUMBER: 0000854711-99-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991028 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: 99736286 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, 1999 Commission file number 1-12006 FINANCIAL FEDERAL CORPORATION (Exact name of Registrant as specified in its charter) Nevada 88-0244792 (State of incorporation) (I.R.S. Employer Identification No.) 733 Third Avenue, New York, New York 10017 (Address of principal executive offices) Registrant's telephone number, including area code: (212) 599-8000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered - ------------------------------- ------------------------------------ Common Stock, $.50 par value New York Stock Exchange, Inc. 4.5% Convertible Subordinated Notes due 2005 New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock of the Registrant held by non- affiliates of the Registrant on October 1, 1999 was $216,444,412.50. The aggregate market value was computed by reference to the closing price of the Common Stock on the New York Stock Exchange on the prior day (which was $18.75 per share). For the purposes of this response, executive officers and directors are deemed to be the affiliates of the Registrant and the holding by non-affiliates was computed as 11,543,702 shares. The number of shares of Registrant's Common Stock outstanding as of October 1, 1999 was 14,861,989 shares. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's proxy statement for its Annual Meeting of Stockholders, to be held on December 14, 1999, which will be filed pursuant to Regulation 14A within 120 days of the close of Registrant's fiscal year, is incorporated by reference in answer to Part III of this report. In addition, page 1 and pages 9 through 26 of Registrant's Annual Report to Stockholders for the fiscal year ended July 31, 1999 is incorporated by reference in answer to Items 6, 7, 7A and 8 of Part II. Page 1 PART I Item 1. BUSINESS -------- The Company, incorporated under the laws of Nevada in 1989, is a nationwide independent financial services company with over $942 million of assets. The Company finances industrial, commercial and professional equipment through installment sales and leasing programs for manufacturers, dealers and end users of such equipment. The Company also makes capital loans to equipment users, secured by the same types of equipment and other collateral. The Company provides its services primarily to middle-market businesses, generally with annual revenues of up to $25 million, that are located throughout the nation and represent diverse industries, such as general construction, road and infrastructure construction and repair, manufacturing, trucking, and waste disposal. The Company focuses on financing a wide range of revenue-producing equipment of major manufacturers that is movable, has an economic life longer than the term of the financing, is not subject to rapid technological obsolescence, has applications in various industries and has a relatively broad resale market. Sample types of equipment financed by the Company include air compressors, bulldozers, buses, compactors, crawler cranes, earth-movers, excavators, generators, hydraulic truck cranes, loaders, machine tools, motor graders, pavers, personnel and material lifts, recycling equipment, resurfacers, rough terrain cranes, sanitation trucks, scrapers, trucks, truck tractors and trailers. In substantially all cases, the Company's finance receivables are secured by a first lien on such equipment collateral. Currently, the Company generates profits to the extent that its income from finance receivables exceeds its cost of borrowed funds, operating and administrative expenses and provision for possible losses. In addition, the Company may generate profits from investing in operating leases, portfolios of loans and/or leases or from acquiring full or partial ownership interests of private or public companies in the finance, leasing and/or lending businesses. Marketing - --------- The Company markets its finance and leasing services through marketing personnel based in more than twenty domestic locations, including five full service operations centers. At July 31, 1999, forty-five full-time new business marketing representatives directly report to such operations centers. The Company originates finance receivables through its relationships with equipment dealers and, to a lesser extent, manufacturers ("vendors"). The Company also directly markets its services to equipment users for the acquisition or use of equipment and for capital loans. The Company believes that its share of the U.S. market for equipment finance and leasing receivables is less than one percent (1%); therefore, management believes there is substantial opportunity for growth. The Company intends to achieve such growth by expanding its marketing efforts into new geographic areas, further penetrating existing markets, employing additional marketing personnel and possibly opening new full service operations centers. The Company's marketing personnel are salaried rather than commission-based and the majority participate in the Company's stock option plans. Thus, the Company believes that its marketing personnel have a close community of interest with the Company and its other stockholders. The Company may also expand the types of equipment collateral it finances and leases. The Company's marketing activities are relationship and service oriented. The Company focuses on providing prompt, responsive and customized service to its customers and business prospects. The Company has a team of dedicated and seasoned marketing and managerial personnel who solicit business from vendors and end users of equipment. The Company's marketing and managerial personnel have, on average, more than 15 years of specialized expertise in the industries they serve. Management believes that the experience, knowledge and relationships of its executives and marketing personnel, related to the Company's customer and prospect base, equipment values, resale markets, and local economic and industry conditions, enable the Company to compete effectively on the basis of prompt, responsive and customized service. The Company's customer services include making prompt credit decisions, arranging financing structures meeting customers' needs and the Company's underwriting criteria, providing direct contact between customers and Company executives with decision-making authority and providing prompt and knowledgeable responses to customers' inquiries and temporary business problems encountered in the ordinary course of their business. The Company obtains business in several ways. Dealers and, to a lesser extent, manufacturers of equipment refer their customers (equipment users) to the Company, or such customers directly approach the Company to finance equipment purchases. The Company also purchases installment sale contracts, leases and personal property security agreements from vendors who extend credit to purchasers of their equipment and the Company makes capital loans to equipment users. Customers seek capital loans to consolidate debt, provide working capital, reduce monthly debt service, enhance bonding capacity (generally in the case of road contractors) and acquire additional equipment or other assets. In addition, the Company leases equipment to end users, generally under noncancelable leases. 2 The Company has relationships with vendors that generally are mid-sized, since larger vendors typically generate a volume of business greater than the Company can presently service. The Company is not obligated to purchase any finance receivables from vendors nor are vendors obligated to sell any finance receivables to the Company. The Company's vendor relationships generally are nonexclusive. The Company presently has more than 100 vendor relationships and is not dependent on any single vendor. In all vendor generated business, the Company independently approves the credit of the prospective obligor. In order to expand its customer base and broaden its marketing coverage geographically, the Company has purchased portfolios of finance receivables from financial institutions, vendors and others generally in the range of $1.0 million to $5.0 million. These portfolios included finance receivables secured by a broader range of equipment than that typically financed by the Company. Originating, Structuring and Underwriting of Finance Receivables - ---------------------------------------------------------------- The Company originates finance receivables generally ranging from $50,000 to $1.0 million with fixed or variable interest rates and terms of two to five years. The Company's finance receivables generally provide for monthly payments and may include prepayment premium provisions. The average transaction size of finance receivables originated by the Company was $166,000 in fiscal 1999, $168,000 in fiscal 1998 and $144,000 in fiscal 1997. The Company's underwriting policies and procedures are designed to maximize yields and minimize delinquencies and credit losses. Unlike many of its competitors, the Company does not use credit scoring models but instead relies upon the experience of its credit officers and management to assess the creditworthiness of obligors and collateral values. Each credit submission, regardless of size, requires the approval of at least two credit officers. The Company attempts to structure transactions to meet the financial needs of its customers. Transactions may be structured as installment sales, leases or secured loans. Structuring includes arranging terms and repayment schedule, determining rate and other fees and charges, identifying the primary and any additional equipment collateral to be pledged, and evaluating the need for additional credit support such as liens on accounts receivable, inventory and/or real property, certificates of deposit, commercial paper, payment guarantees, delayed funding and full or partial recourse to the selling vendor. A vendor seeking to sell a finance receivable to the Company or an equipment user seeking to obtain financing from the Company must submit a credit application. The credit application includes financial and other information of the obligor and any guarantors and a description of the collateral to be pledged or leased and its present or proposed use. The Company's credit personnel analyze the credit application, investigate the credit of the obligor and any guarantors, evaluate the primary collateral to be pledged, investigate financial, trade and industry references and review the obligor's payment history. The Company may also obtain reports from independent credit reporting agencies and conduct lien, UCC, litigation, judgement and tax searches. If the credit application is approved on terms acceptable to the vendor and/or the equipment user, the Company either purchases an installment sale contract or lease from the vendor or enters into a direct finance or lease transaction with the obligor. The Company funds the transaction upon receiving all required documentation in form and substance satisfactory to the Company and its legal department. Under the Company's documentation, the obligor is responsible for all applicable sales, use and property taxes. The Company's operating environment permits its managers flexibility in structuring transactions subject to the Company's credit policy and procedures. The Company has established specific guidelines for credit review and approval, including maximum credit concentrations with any one obligor based on the Company's capital resources and other considerations. The Company's credit policy establishes several credit officer authority levels. A credit officer's authority level is based on their credit experience, managerial position and tenure with the Company. The maximum amount a credit officer can approve is based on the credit officer's authority level, collateral coverage relative to the Company's potential lending exposure and the extent of any recourse the Company may have to vendors. Under the Company's current credit policy, any single obligor concentration in excess of $1.5 million requires the approval of two senior credit officers, and in excess of $3.0 million, three senior credit officers. In addition, any single obligor concentration above $2.0 million requires the approval of the Company's Chairman or President. The Company may obtain full or partial recourse on finance receivables assigned to the Company by vendors obligating them to pay the Company in the event of an obligor's default or a breach of warranty. The Company may also withhold an agreed upon amount from a vendor or obligor or obtain cash collateral as security. 3 The procedures used by the Company in purchasing a portfolio of finance receivables include reviewing and analyzing the terms of the finance receivables to be purchased, the credit of the related obligors, the documentation relating to such finance receivables, the value of the related pledged collateral, the payment history of the obligors and the implicit yield to be earned by the Company. Collection and Servicing - ------------------------ Customer payments of finance receivables are remitted to lock boxes or the Company's operating headquarters in Houston, TX. Collection efforts for delinquent accounts are performed by collection personnel and managers in the respective operations centers in conjunction with senior management and, if necessary, the Company's legal department. Senior management reviews all past due accounts at least monthly and the Company's in-house legal staff continually monitors all accounts past due more than 60 days. Decisions regarding collateral repossession, use of an outside source to do so and the sale or other disposition of repossessed collateral are made by the Company's senior management and legal staff in accordance with applicable law. Competition - ----------- The Company's business is highly competitive. The Company competes with banks, manufacturer-owned and independent finance and leasing companies, and other financial institutions. Some of the Company's competitors may be better positioned than the Company to market their services and financing programs to vendors and end users of equipment because of their ability to offer additional services and products and more favorable rates and terms. Many of these competitors have longer operating histories, possess greater financial and other resources and have a lower cost of funds than the Company, enabling them to provide financing at rates lower than the Company may be willing to provide. The Company typically does not compete solely on the basis of rate. The Company competes by emphasizing a high level of equipment and financial expertise, customer service, flexibility in structuring financing transactions, management involvement in customer relationships and by attracting and retaining the services of dedicated and talented managerial, marketing and administrative personnel. The Company's present strategy for attracting and retaining such personnel is to offer a competitive salary, an equity interest in the Company through participation in its stock option plans, and enhanced career opportunities. At July 31, 1999, more than 60% of the Company's directors, officers and other employees with at least one year of service participate in the Company's stock option plans and/or own stock in the Company. Employees - --------- At July 31, 1999, the Company had 173 employees. All of the Company's employees and officers are salaried. The Company provides its employees with group health and life insurance benefits and a qualified 401(k) plan. The Company does not match employee contributions to the 401(k) plan. The Company does not have any collective bargaining, employment, pension or incentive compensation arrangements with any of its employees other than deferred compensation agreements and stock option agreements containing, without limitation, non-disclosure and non-solicitation provisions. The Company considers its relations with its employees to be satisfactory. Regulation - ---------- The Company's commercial financing, lending and leasing activities are generally not subject to regulation, except that certain states may regulate motor vehicle transactions, impose licensing, documentation and lien perfection requirements, and/or restrict the amount of interest or finance rates and other amounts the Company may charge. The Company's failure to comply with such regulations, requirements or restrictions could result in loss of principal and interest or finance charges, penalties and imposition of restrictions on future business activities. Executive Officers - ------------------ Clarence Y. Palitz, Jr., 68, has served as Chairman of the Board of the Company since August 1996, as Chief Executive Officer of the Company since its inception in 1989 and as President of the Company from its inception in 1989 to September 1998. From 1963 to 1988, Mr. Palitz served as President and a Director of Commercial Alliance Corporation ("CAC"), which he founded with his brother, Bernard G. Palitz, in 1963. Since October 1988, he has been a director of City and Suburban Financial Corp., a privately owned savings and loan holding company located in Westchester County, New York. Paul R. Sinsheimer, 52, has served as President of the Company since September 1998, as Executive Vice President of the Company from its inception in 1989 to September 1998 and as a Director of the Company since its inception in 1989. From 1970 to 1989, Mr. Sinsheimer was employed by CAC, where he served successively as Credit Manager, Collections Manager, Operations Manager, Houston Branch Manager, Division Manager and, from 1988, Executive Vice President. 4 Michael C. Palitz, 41, has served as a Director of the Company since July 1996, as an Executive Vice President of the Company since July 1995, as a Senior Vice President of the Company from February 1992 to July 1995 and as a Vice President of the Company from its inception in 1989 to February 1992. He has also served as Chief Financial Officer, Treasurer and an Assistant Secretary of the Company since its inception in 1989. From 1985 to 1989, Mr. Palitz was an Assistant Vice President of Bankers Trust Company and, from 1980 to 1983, he was an Assistant Secretary of Chemical Bank. William M. Gallagher, 50, has served as a Senior Vice President of the Company since 1990 and served as a Vice President of the Company from its inception in 1989 to 1990. From 1973 to 1989, Mr. Gallagher was employed by CAC, where he served successively as Collections Manager, Accounting Manager, Operations Manager of the Chicago and Houston regions and, from 1988, a Vice President and Houston Branch Manager. Troy H. Geisser, 38, has served as a Senior Vice President and Secretary of the Company since February 1996. From 1990 to 1996, Mr. Geisser held several positions, including Vice President and Branch Manager. From 1986 to 1990, Mr. Geisser was employed by CAC and its successor, where he held several positions including Northern Division Counsel. John V. Golio, 38, has served as a Senior Vice President of the Company since 1997 and as a Vice President of a subsidiary of the Company since joining the Company in January 1996. Before joining the Company, Mr. Golio was employed by CAC and its successor in various capacities, including branch operations manager. Jeanne McDonald, 47, has served as a Senior Vice President of the Company since 1998, a Vice President of the Company from 1992 to 1998, an Assistant Vice President of the Company from 1990 to 1992 and an Assistant Treasurer of the Company from 1989 to 1990. From 1977 to 1989, Ms. McDonald was employed by CAC in various capacities, including Assistant Treasurer. Daniel J. McDonough, 37, has served as a Senior Vice President of the Company since 1997. Mr. McDonough held several positions, including Vice President of a subsidiary of the Company, Branch Manager and Operations Manager since joining the Company in 1989. Before joining the Company, Mr. McDonough was employed by CAC in various capacities, including regional credit manager. Richard W. Radom, 51, has served as a Senior Vice President of the Company since 1990 and as a Vice President of the Company from 1989 to 1990. From 1973 to 1989, Mr. Radom was employed by CAC, where he served, from 1986, as a Senior Vice President. David H. Hamm, CPA, 35, has served as Controller and an Assistant Treasurer of the Company since joining the Company in 1996. From 1985 to 1996, Mr. Hamm was employed in the public accounting profession, including eight years with Eisner & Lubin LLP (the Company's independent auditors) where he was the audit manager of the Company's engagement from 1992 to 1996. Item 2. PROPERTIES ---------- The Company's executive offices are located at 733 Third Avenue, New York, New York and consist of approximately 5,000 square feet of space. At July 31, 1999, the Company had five full service operations centers (where credit analysis and approval, collection and marketing functions are performed) in Houston, Texas; Westmont (Chicago), Illinois; Teaneck (New York metropolitan area), New Jersey; Charlotte, North Carolina and Phoenix, Arizona, consisting of approximately 2,000 to 8,500 square feet of space (except the Houston office, the Company's operating headquarters, consists of approximately 12,500 square feet of space) and are occupied pursuant to office leases terminating on various dates through 2004 (as subject to the Company's lease termination rights). Management believes that the Company's existing facilities are suitable and adequate for their present and proposed uses and that suitable and adequate facilities should be available on reasonable terms for any additional offices the Company may need to open. Item 3. LEGAL PROCEEDINGS ----------------- There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which any of its property is subject. 5 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1999. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------- The Company's common stock is traded on the New York Stock Exchange under the symbol "FIF." Trading commenced on the New York Stock Exchange on June 22, 1998; prior to that date, the Company's common stock was traded on the American Stock Exchange. The quarterly high and low closing sales prices per share of the common stock as reported by the New York Stock Exchange and the American Stock Exchange follow: Price Range ----------------- High Low ------ ------ Fiscal year 1999 - ---------------- First Quarter ended October 31, 1998 $25.00 $17.38 Second Quarter ended January 31, 1999 $26.81 $23.19 Third Quarter ended April 30, 1999 $23.06 $16.13 Fourth Quarter ended July 31, 1999 $24.13 $18.94 Fiscal year 1998 - ---------------- First Quarter ended October 31, 1997 $19.81 $14.00 Second Quarter ended January 31, 1998 $23.63 $18.00 Third Quarter ended April 30, 1998 $26.00 $20.38 Fourth Quarter ended July 31, 1998 $28.50 $23.00 The Company presently has no intention of paying cash dividends on the common stock in the foreseeable future. The payment of cash dividends, if any, will depend upon the Company's earnings, financial condition, capital requirements, cash flow and long range plans and such other factors as the Board of Directors of the Company may deem relevant. Number of Record Holders - ------------------------ There were 76 holders of record of the Company's common stock at October 1, 1999. This number included several nominees that hold the Company's common stock on behalf of numerous other persons and institutions; these other persons and institutions are not included in the above number as their shares are held in "Street Name." Item 6. SELECTED FINANCIAL DATA ----------------------- Refer to information under the heading "Financial Highlights" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1999, which information is incorporated herein by reference. The Company has not paid any cash dividends on its Common Stock. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ----------------------------------------------------------------- Refer to information under the heading "Management's Discussion and Analysis of Operations and Financial Condition" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1999, which information is incorporated herein by reference. 6 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Refer to information under the heading "Management's Discussion and Analysis of Operations and Financial Condition" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1999, which information is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Refer to information under the headings "Consolidated Balance Sheet," "Consolidated Statement of Stockholders' Equity," "Consolidated Statement of Operations," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" contained in the Company's Annual Report to Stockholders for the fiscal year ended July 31, 1999, which information is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE --------------------------------------------------------------- None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information required by Item 10 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 14, 1999, except as to biographical information on Executive Officers which is contained in Item 1 of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION ---------------------- The information required by Item 11 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 14, 1999. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information required by Item 12 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 14, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information required by Item 13 is incorporated by reference from the information in the Registrant's proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held December 14, 1999. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (a) 1. Financial Statements Page -------------------- ---- The following financial statements are filed herewith and incorporated herein by reference from pages 15 through 26 of the Registrant's Annual Report to Stockholders for the fiscal year ended July 31, 1999, as provided in Item 8 hereof: 7 - Consolidated Balance Sheet as at July 31, 1999 and 1998. - Consolidated Statement of Stockholders' Equity for the fiscal years ended July 31, 1999, 1998 and 1997. - Consolidated Statement of Operations for the fiscal years ended July 31, 1999, 1998 and 1997. - Consolidated Statement of Cash Flows for the fiscal years ended July 31, 1999, 1998 and 1997. - Notes to Consolidated Financial Statements. - Independent Auditors' Report. 2. Financial Statement Schedules ----------------------------- The following financial statement schedules are filed herewith: - Independent Auditors' Report on Financial Statement Schedules. 12 - Schedule I - Condensed Financial Information of Registrant. 13-16 All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or notes thereto. 3. Exhibits 17 -------- Exhibit No. Description of Exhibit - --------- ---------------------- 3.1 (a) Articles of Incorporation of the Registrant 3.2 (a) By-laws of the Registrant 3.3 (a) Form of Restated and Amended By-laws of the Registrant 3.4 (n) Certificate of Amendment of Articles of Incorporation dated December 9, 1998 3.5 (n) Restated By-laws of the Registrant as amended through December 30, 1998 4.1 (a) Form of Variable Rate Subordinated Debentures Due September 1, 2000 (a "Debenture") issued by Registrant 4.6 (f) Form of Note Agreement dated as of April 15, 1996 issued by Financial Federal Credit Inc. ("Credit") to certain institutional note holders 4.7 (j) Form of Note Agreement dated as of July 1, 1997 issued by Credit to certain institutional note holders 4.8 (k) Indenture dated January 14, 1998 for Credit's Rule 144A Medium Term Note Program 4.9 (l) Indenture, dated as of April 15, 1998, between Registrant and First National Bank of Chicago for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 4.10 (l) Registration Rights Agreement, dated as of April 24, 1998, between Registrant and BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation, Piper Jaffray Inc., CIBC Oppenheimer Corporation, Friedman, Billings, Ramsey & Co., Inc., Schroder & Co. Inc., and Wheat, First Securities, Inc. for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 4.11 (l) Specimen 4.5% Convertible Subordinated Note Due 2005 4.12 (l) Specimen Common Stock Certificate 10.2 (a) Form of Warrant to purchase Common Stock, as amended, issued by the Registrant to stockholders in connection with its initial capitalization 10.3 (a) Form of Warrant to purchase Common Stock issued by the Registrant to certain of its officers 10.8 (a) Form of Commercial Paper Note issued by the Registrant 10.9 (a) Form of Commercial Paper Note issued by Credit 10.10 (a) Stock Option Plan of the Registrant and forms of related stock option agreements 10.11 (b) Deferred Compensation Agreement dated June 1, 1992 between Credit and Clarence Y. Palitz, Jr. 10.12 (b) Deferred Compensation Agreement dated June 1, 1992 between Credit and Bernard G. Palitz 10.13 (c) Deferred Compensation Agreement dated January 1, 1993 between Credit and Clarence Y. Palitz, Jr. 10.14 (c) Deferred Compensation Agreement dated January 1, 1993 between Credit and Bernard G. Palitz. 10.15 (d) Deferred Compensation Agreement dated January 1, 1994 between Credit and Clarence Y. Palitz, Jr. 10.16 (d) Deferred Compensation Agreement dated January 1, 1994 between Credit and Bernard G. Palitz. 10.17 (e) Deferred Compensation Agreement dated January 1, 1995 between Credit and Bernard G. Palitz. 10.18 (e) Deferred Compensation Agreement dated January 1, 1995 between Credit and Clarence Y. Palitz, Jr. 10.19 (e) Deferred Compensation Agreement dated February 1, 1995 between Credit and Paul Sinsheimer 10.20 (g) Deferred Compensation Agreement dated January 1, 1996 between Credit and Clarence Y. Palitz, Jr. 10.21 (h) Form of Commercial Paper Dealer Agreement of Credit 8 10.22 (h) Form of Deferred Compensation Agreement with certain officers as filed under the Top Hat Plan with the Department of Labor 10.23 (i) Deferred Compensation Agreement dated December 30, 1996 between the Registrant and Clarence Y. Palitz, Jr. 10.24 (k) Deferred Compensation Agreement dated January 2, 1998 between the Registrant and Clarence Y. Palitz, Jr. 10.25 (m) 1998 Stock Option Plan of the Registrant 12.1 Computation of Debt-To-Equity Ratio 13.1 1999 Annual Report to Stockholders (except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Stockholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K) 22.1 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors 27 Financial Data Schedule (EDGAR version only) - --------- (a) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-46662). (b) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1992. (c) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1993. (d) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1994. (e) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1995. (f) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-2 (Registration No. 333-3320). (g) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1996. (h) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1996. (i) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1997. (j) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1997. (k) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1998. (l) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-56651). (m) Previously filed with the Securities and Exchange Commission as an exhibit to the Company's Notice of Meeting and Proxy Statement for the fiscal year ended July 31, 1998. (n) Previously filed with the Securities and Exchange Commission as an exhibit to one of the Company's Forms 10-Q for the fiscal year ended July 31, 1999. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the last quarter of the fiscal year ended July 31, 1999. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FINANCIAL FEDERAL CORPORATION ----------------------------- (Registrant) By: /s/ Clarence Y. Palitz, Jr. ---------------------------------- Chairman of the Board and Chief Executive Officer October 27, 1999 ------------------------ Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Clarence Y. Palitz, Jr. October 27, 1999 - --------------------------------------------------- ---------------- Chairman of the Board and Chief Executive Officer Date /s/ Lawrence B. Fisher October 27, 1999 - --------------------------------------------------- ---------------- Director Date /s/ William C. MacMillen, Jr. October 27, 1999 - --------------------------------------------------- ---------------- Director Date /s/ Bernard G. Palitz October 27, 1999 - --------------------------------------------------- ---------------- Director Date /s/ H. E. Timanus, Jr. October 27, 1999 - --------------------------------------------------- ---------------- Director Date /s/ Paul R. Sinsheimer October 27, 1999 - --------------------------------------------------- ---------------- President, Chief Operating Officer and Director Date /s/ Michael C. Palitz October 27, 1999 - --------------------------------------------------- ---------------- Executive Vice President, Treasurer, Chief Date Financial Officer and Director /s/ David H. Hamm October 27, 1999 - --------------------------------------------------- ---------------- Controller, Assistant Treasurer and Principal Date Accounting Officer 10 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 2, 1999 12 Schedule I FINANCIAL FEDERAL CORPORATION CONDENSED BALANCE SHEET (In Thousands)
July 31, ----------------------- 1999 1998 -------- -------- ASSETS Cash $ 125 $ 160 Due from subsidiaries: Advances 124,144 122,882 Subordinated notes receivable 50,000 50,000 Investment in subsidiaries - at equity 80,275 60,945 Other assets 4,393 4,979 -------- -------- TOTAL $258,937 $238,966 ======== ======== LIABILITIES Senior debt $ 12,278 $ 9,881 Accrued interest, taxes and other liabilities 3,887 3,566 Subordinated debt 97,790 102,290 -------- -------- Total liabilities 113,955 115,737 -------- -------- STOCKHOLDERS' EQUITY Common stock 7,430 7,421 Additional paid-in capital 58,115 57,869 Warrants 29 29 Retained earnings 79,408 57,970 -------- -------- Total stockholders' equity 144,982 123,229 -------- -------- TOTAL $258,937 $238,966 ======== ======== The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof.
13 Schedule I FINANCIAL FEDERAL CORPORATION CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (In Thousands)
Year Ended July 31, ----------------------------------- 1999 1998 1997 ------- ------- ------- Equity in earnings of subsidiaries before income taxes $31,772 $24,907 $18,661 Gain on debt retirement 685 Interest charges to subsidiaries 12,116 7,236 5,060 ------- ------- ------- Total 44,573 32,143 23,721 ------- ------- ------- Expenses: Interest expense 5,438 2,033 590 Other expenses 2,306 2,285 2,144 ------- ------- ------- Total 7,744 4,318 2,734 ------- ------- ------- Earnings before income taxes 36,829 27,825 20,987 Provision for income taxes 14,231 10,793 8,078 ------- ------- ------- NET EARNINGS 22,598 17,032 12,909 Repurchases of common stock (1,100) (463) Three-for-two stock split (2,461) Retained earnings - August 1, 57,910 40,878 30,893 ------- ------- ------- RETAINED EARNINGS - JULY 31, $79,408 $57,910 $40,878 ======= ======= ======= The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof.
14 Schedule I FINANCIAL FEDERAL CORPORATION CONDENSED STATEMENT OF CASH FLOWS (In Thousands)
Year Ended July 31, ---------------------------------- 1999 1998 1997 -------- -------- -------- Net cash provided by operating activities $ 3,503 $ 1,157 $ 1,922 -------- -------- -------- Cash flows from investing activities: Collections from (advances to) subsidiaries-net (1,262) (104,232) 8,976 Subordinated notes receivable-subsidiary (advances) (5,000) Dividends received from subsidiary 250 200 -------- -------- -------- Net cash provided by (used in) investing activities (1,262) (103,982) 4,176 -------- -------- -------- Cash flows from financing activities: Commercial paper: Proceeds 104,899 103,935 66,207 Repayments (102,502) (98,955) (66,272) Proceeds from convertible subordinated notes (3,815) 100,000 Repurchases of subordinated debt (4,667) Repurchases of common stock (1,721) (1,630) Deferred debt issuance costs (2,687) Proceeds from exercise of stock options 854 519 61 Tax benefit relating to stock options 9 56 64 -------- -------- -------- Net cash provided by (used in) financing activities (2,276) 102,868 (6,237) -------- -------- -------- NET INCREASE (DECREASE) IN CASH (35) 43 (139) Cash - August 1, 160 117 256 -------- -------- -------- CASH - JULY 31, $ 125 $ 160 $ 117 ======== ======== ======== Non-cash financing activities: In 1997, the Company retired 124 common shares held as treasury stock resulting in decreases of common stock, additional paid-in capital and retained earnings of $62, $1,105 and $463, respectively. Additionally, the Company authorized a three-for-two stock split effected in the form of a stock dividend. The notes hereto, the consolidated financial statements and the notes thereto are made a part hereof.
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 6.3% and 6.8% at July 31, 1999 and 1998, respectively. Subordinated notes receivable are summarized as follows: Maturity Interest rate Amount -------------- ------------- ------- August 1, 2008 8.35% $25,000 August 1, 2008 7.85 5,000 August 1, 2008 7.70 5,000 August 1, 2008 6.90 5,000 August 1, 2008 7.50 10,000 ------- Total $50,000 ======= The subordinated notes and interest thereon are subordinated to the subsidiary's borrowings from banks, institutional and other investors, commercial paper investors and other debt designated by the subsidiary's Board of Directors. Interest is receivable quarterly. Other assets include $2,129 and $2,186 of accrued interest receivable from subsidiaries at July 31, 1999 and 1998, respectively. 16 EXHIBIT INDEX Exhibit No. Description of Exhibit Page No. - ----------- ---------------------- -------- 3.1 Articles of Incorporation of the Registrant * 3.2 By-laws of the Registrant * 3.3 Form of Restated and Amended By-laws of the Registrant * 3.4 Certificate of Amendment of Articles of Incorporation dated December 9, 1998 * 3.5 Restated By-laws of the Registrant as amended through December 30, 1998 * 4.1 Form of Variable Rate Subordinated Debentures Due September 1, 2000 (a "Debenture") issued by Registrant * 4.6 Form of Note Agreement, dated as of April 15, 1996, issued by Financial Federal Credit Inc. ("Credit") to certain institutional note holders * 4.7 Form of Note Agreement dated as of July 1, 1997 issued by Credit to certain institutional note holders * 4.8 Indenture dated January 14, 1998 for Credit's Rule 144A Medium Term Note Program * 4.9 Indenture, dated as of April 15, 1998, between Registrant and First National Bank of Chicago for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 * 4.10 Registration Rights Agreement, dated as of April 24, 1998, between Registrant and BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation, Piper Jaffray Inc., CIBC Oppenheimer Corporation, Friedman, Billings, Ramsey & Co., Inc., Schroder & Co. Inc., and Wheat, First Securities, Inc. for Registrant's $100 million 4.5% Convertible Subordinated Notes due 2005 * 4.11 Specimen 4.5% Convertible Subordinated Note Due 2005 * 4.12 Specimen Common Stock Certificate * 10.2 Form of Warrant to purchase Common Stock, as amended, issued by the Registrant to stockholders in connection with its initial capitalization * 10.3 Form of Warrant to purchase Common Stock issued by the Registrant to certain of its officers * 10.8 Form of Commercial Paper Note issued by the Registrant * 10.9 Form of Commercial Paper Note issued by Credit * 10.10 Stock Option Plan of the Registrant and forms of related stock option agreements * 10.11 Deferred Compensation Agreement dated June 1, 1992 between Credit and Clarence Y. Palitz, Jr. * 10.12 Deferred Compensation Agreement dated June 1, 1992 between Credit and Bernard G. Palitz * 10.13 Deferred Compensation Agreement dated January 1, 1993 between Credit and Clarence Y. Palitz, Jr. * 10.14 Deferred Compensation Agreement dated January 1, 1993 between Credit and Bernard G. Palitz. * 10.15 Deferred Compensation Agreement dated January 1, 1994 between Credit and Clarence Y. Palitz, Jr. * 10.16 Deferred Compensation Agreement dated January 1, 1994 between Credit and Bernard G. Palitz. * 10.17 Deferred Compensation Agreement dated January 1, 1995 between Credit and Bernard G. Palitz. * 10.18 Deferred Compensation Agreement dated January 1, 1995 between Credit and Clarence Y. Palitz, Jr. * 10.19 Deferred Compensation Agreement dated February 1, 1995 between Credit and Paul Sinsheimer * 10.20 Deferred Compensation Agreement dated January 1, 1996 between Credit and Clarence Y. Palitz, Jr. * 10.21 Commercial Paper Dealer Agreement, dated April 23, 1996, between Credit and BA Securities, Inc. * 10.22 Form of Deferred Compensation Agreement with certain officers as filed under the Top Hat Plan with the Department of Labor * 10.23 Deferred Compensation Agreement dated December 30, 1996 between the Registrant and Clarence Y. Palitz, Jr. * 10.24 Deferred Compensation Agreement dated January 2, 1998 between the Registrant and Clarence Y. Palitz, Jr. * 10.25 1998 Stock Option Plan of the Registrant * 12.1 Computation of Debt-To-Equity Ratio 18 13.1 1999 Annual Report to Stockholders (except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Stockholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K) 22.1 Subsidiaries of the Registrant 19 23.1 Consent of Independent Auditors 20 27 Financial Data Schedule (EDGAR version only) ____________ *Previously filed with the Securities and Exchange Commission as an exhibit. 17 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, --------------------- 1999 1998 -------- -------- Total debt $745,442 $602,822 Stockholders' equity $144,982 $123,229 Debt-to-equity ratio 5.1 4.9 === === 18 EX-13.1 3 [LOGO] Financial Federal Corporation 10 Years of Equipment Financing & Leasing 1999 annual report Corporate Profile [PHOTO OMITTED] 1989 Financial Federal Corporation is a nationwide, independent financial services company specializing in financing industrial, commercial and professional equipment through installment sales and leasing programs for manufacturers, dealers and users of such equipment. In addition to its New York office, the Company has five full-service operations centers in Texas, Illinois, New Jersey, North Carolina and Arizona, and additional marketing locations throughout the country. Additional information regarding the Company is accessible via the Company's website at www.financialfederal.com. [PHOTO OMITTED] 1990 Financial Highlights (In Thousands, Except Per Share Data)
For Years Ended July 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Finance Receivables--Net $932,525 $759,097 $571,060 $429,698 $339,299 Total Assets 942,185 766,108 574,764 433,087 342,936 Total Senior Debt 647,652 500,532 439,361 310,830 249,270 Stockholders' Equity 144,982 123,229 105,604 94,191 58,075 Revenues 89,118 72,722 55,305 43,523 34,951 Net Earnings 22,598 17,032 12,909 9,610 7,209 Earnings Per Common Share--Diluted 1.30 1.03 0.80 0.68 0.54 For Years Ended July 31, 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------ Finance Receivables--Net $268,642 $206,145 $171,817 $155,255 $109,214 Total Assets 271,987 209,609 175,112 158,506 112,029 Total Senior Debt 184,848 134,628 107,884 115,488 72,395 Stockholders' Equity 50,523 41,727 36,426 15,038 13,457 Revenues 25,866 22,911 21,913 17,156 9,569 Net Earnings 5,944 4,968 3,760 1,581 1,016 Earnings Per Common Share--Diluted 0.46 0.39 0.44 0.22 0.16
[the following three bar graphs were represented below the above table] Revenues (in millions) Net Earnings (in millions) Finance Receivables (in millions) 1 Growth [PHOTO OMITTED] 1991 Ten years ago we commenced operations with one $10.0 million senior bank credit facility. We currently have a $350.0 million investment grade commercial paper program, $480.0 million of senior credit facilities and term loans with 20 banks, $205.0 million of long-term senior debt with numerous institutional investors and $95.5 million of publicly traded convertible subordinated notes. [PHOTO OMITTED] 1992 [PHOTO OMITTED] 1993 2 Dear Fellow Shareholder: - ------------------------ We are pleased to report that the Company's uninterrupted record of receivables and earnings growth continued in the 1999 fiscal year. * Net earnings: $22.6 million, a 33% increase * Diluted earnings per share: $1.30, a 26% increase * Finance receivables outstanding at year-end: $948 million, a 23% increase * Net credit losses maintained at minimal levels--0.03% of average finance receivables outstanding When we started Financial Federal Corporation in March 1989, our vision was to build the finest, not necessarily the largest, commercial equipment finance and leasing company in the United States. The Company's blueprint for accomplishing this goal was clear and simple. The business plan which has guided Financial Federal during its first 10 years, and which we believe will serve us well in the future, is to-- * Consistently and profitably increase the receivables portfolio without sacrificing creditworthiness * Focus on long-term earnings growth * Maximize return on assets and stockholders' equity The basic methodology used by the Company to achieve these goals has been to focus on-- * Providing meaningful, prompt and customized service to its customers * Aligning employees' interests with those of shareholders through employee participation in the Company's Stock Option Plan 3 Return on Equity: 16.9% ----------------------- * Attracting and retaining the highest quality managerial and marketing executives * Financing and leasing of "hard collateral" equipment * Conservative accounting practices The primary industries to which the Company markets its services are heavy construction, waste services, over-the-road transportation and machine tools. These businesses represent the heart and soul of middle market and small business enterprises in the United States. In general, such businesses * are private entities personally managed by their owners * have fewer than 50 employees * are local or regional, not national, in scope * have annual sales between $1 million and $25 million The U.S. economy continued its remarkable expansion during the Company's fiscal year. Industrywide, credit losses for the past several years have been at historically low levels. Unfortunately, we cannot predict with any degree of certainty when the next economic recession will occur. However, we believe that the Company's greatest opportunities for growth, which could include accretive acquisitions of companies and/or portfolios of receivables, Equipment [GRAPHIC OMITTED] [The following table was depicted as a pie chart in the printed material.] Construction Related 44% Over-the-Road Transportation 21% Manufacturing 16% Waste Services 13% Other 6% 4 Value [PHOTO OMITTED] 1994 Ten years ago we commenced operations with $12.0 million of equity contributed by five stockholders. With our $18.8 million IPO in June 1992, our $26.3 million secondary offering in May 1996 and ten years of record earnings, our equity has grown to $145.0 million and our stockholders number approximately 4,000. [PHOTO OMITTED] 1995 [PHOTO OMITTED] 1996 5 [PHOTO OMITTED] 1997 Service Ten years ago we commenced operations with one full service operations center in Houston, TX and two marketing representatives. We currently have five full service operations centers and a team of 50 marketing executives strategically located across the country serving approximately 5,000 customer and dealer relationships. [PHOTO OMITTED] 1998 [PHOTO OMITTED] 1999 6 Return on Assets: 2.6% ---------------------- may occur when and as the economy slows, since the history of our industry has proven time and again that a significant portion of the competition elects to reduce their presence in the industry in times of economic slowdown. We believe the Company's financial strength and superior track record have inspired the confidence of the banking and investment community. Thus, Financial Federal is well positioned to take advantage of any such opportunities that may arise. For the time being, however, competition remains robust. In addition to competition from traditional commercial equipment finance and leasing companies, and manufacturers' captive finance companies, some banks and other specialty finance companies have attempted to markedly increase their share of the market in recent years. Financial Federal continues to differentiate itself from the competition by providing a superior level of customer service, which we believe is proven in the Company's track record to date. We invite you to review the 10-year statistical information contained in this Report. The record shows that your Company has consistently achieved substantial increases in both finance receivables outstanding and earnings, with solid asset quality reflected in low net losses. According to a rating agency, Financial Federal today ranks at or near the top among its major competitors Geographic Diversity [GRAPHIC OMITTED] [The following table was depicted as a pie chart in the printed material.] Southeast 26% Northeast 23% Southwest 21% West 14% Central 14% Northwest 2% 7 Leverage: 5.1 to 1 ------------------ in most, if not all, of the key performance and asset quality measures, and it is the Company's goal to continue its record performance for the foreseeable future. The Company is most fortunate to have the services and good counsel of Tim Timanus, Chairman and CEO of Heritage Bank, who was elected to the Company's Board of Directors in May 1999. He brings a special insight to our Board, having experienced both good and bad economic times in the Texas banking environment. Mr. Timanus' decades-long experience in building a substantial banking organization through both internal growth and strategic acquisitions will be a most valuable asset to the Company as it meets the challenges of the years to come. The Company's achievements during its first 10 years would not have been possible without the support we have received from our employees, our customers, the banking and investment community, and our fellow shareholders. Management will strive to earn their continued support as Financial Federal embarks on its next decade. /s/ Paul R. Sinsheimer /s/ Michael C. Palitz Paul R. Sinsheimer Michael C. Palitz President and Executive Vice President and Chief Operating Officer Chief Financial Officer 8 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition Results of Operations General--The Company derives profits to the extent that income earned on its finance receivables exceeds its cost of borrowed funds, operating and administrative expenses, and provision for possible losses. The Company borrows funds in the wholesale markets to provide lending, financing and leasing services to primarily middle-market businesses nationwide. State usury, lending and lien perfection rules and laws can regulate the Company's business activities. Certain states also require the Company to obtain licenses in order to engage in certain business activities. The Company's leasing activities are similar in business terms to its lending and financing activities, differing only in legal and tax treatment. A transaction is characterized and documented as a lease based on management's evaluations of the customer's credit and the equipment collateral, the customer's preference and other factors. The types of equipment that the Company lends against, finances and leases, and the ongoing operational treatment of a transaction, are generally the same, regardless of the documentation used. The Company accounts for all transactions as financing arrangements. Comparison of Fiscal 1999 to Fiscal 1998--Finance income increased 23% to $89.1 million in fiscal 1999 from $72.7 million in fiscal 1998. The increase was primarily the result of the $180 million, or 27%, increase in the amount of average finance receivables outstanding from $668 million in 1998 to $849 million in 1999, partially offset by decreases in finance rates charged by the Company on new finance receivables in response to the declining interest rate environment and competitive factors. Finance receivables booked increased 10% to $690 million in 1999 from $629 million in 1998 as increased competitive pressures on finance rates and terms affected the level of originations. Interest expense, incurred on borrowings used to fund finance receivables, increased 20% to $39.2 million in 1999 from $32.6 million in 1998. The increase was primarily due to the 29% increase in average debt outstanding during 1999 from 1998, partially offset by the decrease in the Company's cost of funds resulting from (i) the approximate 8% decrease in average interest rates charged on the Company's commercial paper and bank borrowings during 1999 from 1998 and (ii) the issuance of the Company's 4.5% convertible subordinated notes in April 1998. Finance income before provision for possible losses on finance receivables increased by 24% to $49.9 million in 1999 from $40.2 million in 1998. Finance income before provision for possible losses, expressed as a percentage of average finance receivables outstanding, decreased slightly to 5.9% in 1999 from 6.0% in 1998. The provision for possible losses on finance receivables decreased by 2% to $3.1 million in 1999 from $3.2 million in 1998. The provision for possible losses is determined by the amount required to increase the allowance for possible losses to a level considered appropriate by management. See Note B (4) of Notes to Consolidated Financial Statements for the summary of activity in the allowance for possible losses. In 1999, the Company repurchased $4.5 million face amount of its convertible subordinated notes for $3.8 million. Salaries and other expenses increased 16% to $10.7 million in 1999 from $9.2 million in 1998. The increase was primarily due to increased marketing costs and other costs associated with the growth in finance receivables and salary increases. The provision for income taxes increased to $14.2 million in 1999 from $10.8 million in 1998 primarily due to the increase in earnings before income taxes. Net earnings increased by 33% to $22.6 million in 1999 from $17.0 million in 1998. Diluted earnings per share increased by 26% to $1.30 per share in 1999 from $1.03 per share in 1998 and basic earnings per share increased by 32% to $1.52 per share in 1999 from $1.15 per share in 1998. The increase in diluted earnings per share was lower than the increase in net earnings primarily due to the effect of the convertible subordinated notes issued in April 1998. Comparison of Fiscal 1998 to Fiscal 1997--Finance income increased 31% to $72.7 million in fiscal 1998 from $55.3 million in fiscal 1997. The increase was primarily the result of the $161 million, or 32%, increase in the amount of average finance receivables outstanding from $507 million in 1997 to $668 million in 1998, partially offset by lower weighted average finance rates charged by the Company on new finance receivables. Finance receivables booked increased 36% to $629 million in 1998 from $464 million in 1997, primarily due to the expansion of the Company's marketing efforts into new geographic areas (primarily in the West) and further penetration in its existing areas (primarily in the Southeast) and an increase in the number of marketing personnel of approximately 20%. Interest expense, incurred on borrowings used to fund finance receivables, increased 39% to $32.6 million in 1998 from $23.4 million in 1997. The increase was primarily due to the 37% increase in average debt outstanding during 1998 9 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition (continued) from 1997, and, to a lesser extent, slight increases in average market interest rates, and in the Company's cost of funds due to the issuance of additional term debt. Finance income before provision for possible losses on finance receivables increased by 26% to $40.2 million in 1998 from $31.9 million in 1997. Finance income before provision for possible losses, expressed as a percentage of average finance receivables outstanding, decreased to 6.0% in 1998 from 6.3% in 1997, primarily due to the Company's higher debt-to-equity ratio, 4.9 at July 31, 1998 compared to 4.2 at July 31, 1997 and, to a lesser extent, the slight increase in the Company's cost of borrowed funds. The provision for possible losses on finance receivables increased by 25% to $3.2 million in 1998 from $2.5 million in 1997. The increase was primarily due to the increase in finance receivables. See Note B (4) of Notes to Consolidated Financial Statements for the summary of activity in the allowance for possible losses. Salaries and other expenses increased 10% to $9.2 million in 1998 from $8.4 million in 1997. The increase was primarily due to increased marketing costs and other costs associated with the growth in finance receivables and salary increases. The provision for income taxes increased to $10.8 million in 1998 from $8.1 million in 1997 primarily due to the increase in earnings before income taxes. Net earnings increased by 32% to $17.0 million in 1998 from $12.9 million in 1997. Diluted earnings per share increased by 29% to $1.03 per share in 1998 from $0.80 per share in 1997 and basic earnings per share increased by 32% to $1.15 per share in 1998 from $0.87 per share in 1997. The increase in diluted earnings per share was lower than the increase in net earnings primarily due to the 87% increase in the average price of the Company's common stock in 1998 over 1997. Receivable Portfolio and Asset Quality Finance receivables outstanding increased by $176.3 million, or 23%, to $948.7 million at July 31, 1999 from $772.4 at July 31, 1998 as the amount of finance receivables originated exceeded amounts collected. At July 31, 1999, Financial Federal Credit Inc. ("Credit," a wholly-owned subsidiary) had $940.6 million, or 99.1%, of total finance receivables and First Federal Commercial Inc. (a wholly-owned subsidiary) had the balance of finance receivables. The allowance for possible losses increased to $16.2 million at July 31, 1999 from $13.3 million at July 31, 1998, and was 1.71% of finance receivables at July 31, 1999 as compared to 1.73% at July 31, 1998. The allowance is periodically reviewed by the Company's management and is estimated based on management's current assessment of the risks inherent in the Company's finance receivables from national and regional economic conditions, industry conditions, concentrations, the financial condition of counterparties and other factors. Future additions to the allowance may be necessary based on changes in these factors. The equipment collateral securing the Company's finance receivables generally possesses certain characteristics that have served to mitigate potential credit losses. Such characteristics include an economic life longer than the term of the receivable, low levels of technological obsolescence, applications in various industries, ease of accessibility and transporting and a broad established resale market. These characteristics, combined with management's experience and expertise with the equipment collateral, have minimized the Company's net credit losses. Net credit losses (write-downs of receivables less subsequent recoveries) incurred on the Company's finance receivables were $228,000 in 1999 and $123,000 in 1998. Management believes that the Company's net credit losses have been historically low primarily due to favorable economic and industry conditions. Net credit losses, expressed as a percentage of average finance receivables outstanding, was 0.03% in 1999, 0.02% in 1998, 0.05% in 1997, 0.03% in 1996, 0.08% in 1995, 0.13% in 1994 and 0.31% in 1993. Management does not currently expect this trend of minimal net credit losses to continue. An economic downturn could cause an increase in the level of the Company's net credit losses. Future increases in the Company's net credit losses could have a negative impact on the Company's earnings through additional increases in the provision for possible losses. Nonperforming finance receivables were $8.8 million, or 0.9% of total finance receivables, at July 31, 1999, as compared to $6.5 million, or 0.8% of total finance receivables, at July 31, 1998. The level of nonperforming finance receivables has also been historically low, primarily due to favorable economic and industry conditions. Adverse changes in these conditions could result in an increase in the level of nonperforming finance receivables. Such an increase could have a negative impact on the Company's earnings through decreased revenue. 10 The Company's finance receivables reflect certain industry and geographic concentrations of credit risk. These concentrations arise from counterparties having similar economic characteristics that would cause their ability to meet their contractual obligations to the Company to be similarly affected by changes in economic or other conditions. The major industry concentrations are: trucking--19%, construction--17%, waste disposal--12% and cranes--12%. The major regional geographic concentrations are: Southeast--26%, Northeast--23% and Southwest--21%. Liquidity and Capital Resources The Company is dependent upon the continued availability of funds to originate or acquire finance receivables and to purchase portfolios of finance receivables. The Company may obtain required funds from a variety of sources, including internal generation, dealer placed and directly issued commercial paper, borrowings under committed unsecured revolving credit facilities, private and public issuances of term debt and sales of common and preferred equity. Management believes, but cannot assure, that the Company has available sufficient liquidity to support its future operations (see the following Year 2000 disclosure). The Company has obtained the majority of its senior borrowings through Credit and has obtained the balance of its borrowings through Financial Federal Corporation ("Financial," the parent company). The Company has received investment grade credit ratings on its commercial paper and notes issued under its Medium-Term Note Program. Credit's commercial paper is rated "F-2" by Fitch IBCA, Inc. and Financial's and Credit's commercial paper is rated "D-2" by Duff & Phelps Credit Rating Co. Notes issued under Credit's Medium-Term Note Program are rated "BBB" by Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co. These credit ratings provide the Company with greater access to capital markets. The Company's total debt increased $142.6 million to $745.4 million at July 31, 1999 from $602.8 million at July 31, 1998. The Company's stockholders' equity increased by $21.8 million to $145.0 million at July 31, 1999 from $123.2 million at July 31, 1998 and its net deferred income tax liability increased by $6.1 million to $22.3 million at July 31, 1999 from $16.1 million at July 31, 1998. These increases, combined with increases in the Company's accrued expenses and other liabilities, were used primarily to fund the increase in finance receivables. During fiscal 1999, the Company increased its senior term debt by $115.0 million. The Company issued $70.0 million of senior term loans with original maturities of three and four years with six banks and issued $45.0 million of senior term notes under its 144A Medium-Term Note Program with an original maturity of four years. The Company's $100.0 million Medium-Term Note Program was fully funded at July 31, 1999. Financial and Credit each directly issue investment grade commercial paper. Credit also issues investment grade commercial paper through a $350.0 million program with recognized dealers. The Company's commercial paper is unsecured and matures within 270 days. Interest rates on commercial paper outstanding at July 31, 1999 generally ranged from 5.1% to 5.6%. The Company has not obtained commitments from any purchaser of its commercial paper for additional or future purchases. The Company's current policy is to maintain committed revolving credit facilities from banks so that the aggregate amount available thereunder exceeds commercial paper outstanding. At July 31, 1999, Credit had $307.5 million of committed unsecured revolving credit facilities with original terms ranging from two to five years with sixteen banks under which $66.0 million was outstanding. At July 31, 1999, Credit also had $92.5 million of committed unsecured revolving credit facilities with an original term of one year or less with six banks under which no borrowings were outstanding. At July 31, 1999, $267.5 million of the long-term revolving credit facilities expire after one year. Interest rates on borrowings under these facilities are based on either domestic money market rates or LIBOR. The Company generally incurs a fee on the unused portion of these facilities. The banks are not contractually obligated to renew these facilities. Information about the combined amounts and interest rates of the Company's commercial paper and bank borrowings follows: (dollars in millions) 1999 1998 1997 ============================================================================= Maximum amount outstanding during the year $370.9 $390.8 $374.7 Average amount outstanding during the year 340.6 333.3 316.6 Weighted average interest rate: During the year 5.4% 5.9% 5.9% End of the year 5.4 5.8 6.0 ============================================================================== 11 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition (continued) At July 31, 1999, the Company reported $267.5 million of commercial paper and bank borrowings as long-term senior debt on its Consolidated Balance Sheet based on the amount of long-term revolving credit facilities expiring after one year. The Company's revolving credit facilities and senior term notes contain certain restrictive covenants including limitations on: indebtedness, encumbrances, investments, dividends and other distributions from Credit to Financial, sales of assets, mergers and other business combinations, capital expenditures and the minimum adjusted net worth of Credit. In August 1998, the Company expanded its common stock repurchase program established in August 1996 to include the repurchase of its convertible subordinated notes. The Company also increased the size of the program by $10.0 million. During 1999, the Company repurchased 99,200 shares of its common stock for $1.7 million and $4.5 million face amount of its convertible subordinated notes for $3.8 million. At July 31, 1999, $7.0 million remained available for future repurchases of common stock and convertible subordinated notes. Market Interest Rate Risk and Sensitivity The Company's earnings are sensitive to fluctuations in market interest rates. Generally, based on the Company's current mix of fixed rate and variable rate finance receivables and debt, increases in interest rates could have a negative impact on earnings and decreases in rates could have a positive impact on earnings. This is primarily due to the Company having more variable rate or short-term debt than fixed rate term debt and more fixed rate finance receivables than variable rate finance receivables. Therefore, when market interest rates rise, the Company's borrowing costs could increase more than the yield on its finance receivables. Conversely, when market interest rates decline, the Company's borrowing costs could decrease more than the yield on its finance receivables. These broad statements do not take into account the effects that market interest rate fluctuations could have on the economy and on the level of competition. The net yield of the Company's finance receivables less the weighted average cost of the Company's borrowed funds represents the Company's net interest spread, a key measure of a finance company's profitability. The Company's net interest spread for the last five fiscal years follows: Year Ended July 31, 1999 1998 1997 1996 1995 =============================================================================== Net yield of finance receivables 10.5% 10.9% 10.9% 11.2% 11.2% Weighted average cost of borrowed funds 5.9% 6.3% 6.2% 6.6% 6.9% - ------------------------------------------------------------------------------- Net interest spread 4.6% 4.6% 4.7% 4.6% 4.3% =============================================================================== Market interest rates over the past five fiscal years have not fluctuated widely and the Company's net interest spread has been stable during this period. It is not known whether this narrow range of interest rates will continue, especially since the Federal Reserve has recently twice raised the Federal Funds rate by 25 basis points. Therefore, management cannot assure that the Company's net interest spread will remain within its recent range. The Company continually monitors and manages its exposure to market interest rate fluctuations through risk management procedures that include using certain derivative financial instruments such as interest rate swaps and changing the proportion of its term versus short-term debt. The Company uses derivative financial instruments to hedge its exposure to interest rate risk on certain debt obligations. The Company does not use derivatives for speculation and the Company does not trade in derivatives. During 1999, the Company entered into interest rate swap agreements with a notional amount of $25.0 million and a term of two years. These swap agreements allowed the Company to effectively convert variable rate term debt into fixed rate term debt. The Company also entered into treasury lock agreements in 1999 with a notional amount of $50.0 million in anticipation of issuing term debt. Treasury locks effectively allow a debt issuer to "lock-in" current interest rates prior to the actual issuance of debt to hedge against future increases in interest rates. The Company may enter into additional interest rate swaps and treasury locks and other derivative financial instruments in the future to stabilize its net interest spread. During the last three fiscal years the Company has increased significantly its fixed rate term debt as a percentage of its total debt, from 17% at July 31, 1996 to 47% at July 31, 1999. The Company's focus has been to issue fixed rate term debt to capitalize on low market interest rates and to protect its net interest spread against future increases in market interest rates. 12 The Company's other debt, comprising commercial paper, bank borrowings and variable rate term loans, reprices frequently, as follows: $335.1 million, or 85%, within one month, $18.9 million, or 5%, within the following two months and the remainder, $38.7 million, or 10%, within the following six months. The Company's finance receivables generally have original maturities ranging from two to five years and provide for monthly installments. The Company experiences some prepayments on its finance receivables, which shorten the scheduled maturities. Finance receivables comprise fixed rate and variable rate transactions. At July 31, 1999, $819.1 million, or 86%, of finance receivables provide for interest at fixed rates and $129.6 million, or 14%, of finance receivables provide for interest at variable rates indexed to the prime rate. The percentage of finance receivables that provide for fixed interest rates has increased from 66% at July 31, 1995 primarily due to continued low market interest rates. At July 31, 1999, $294.9 million of fixed rate finance receivables are scheduled to mature within one year and the weighted average remaining term of fixed rate finance receivables was 3.4 years. The total of fixed rate term debt of $352.8 million, stockholders' equity of $145.0 million and net deferred income tax liability of $22.3 million was $520.0 million at July 31, 1999. Due to the excess of the Company's fixed rate finance receivables over this amount, the Company's net interest spread could be affected by fluctuations in market interest rates. The Company does not seek to match the maturities of its debt to its finance receivables. The Company periodically calculates the effect on net earnings of a hypothetical, immediate 100 basis point (1.0%) increase in market interest rates. At July 31, 1999, such a hypothetical increase in market interest rates would reduce annual net earnings by approximately $800,000 and would reduce the Company's net interest spread by approximately 30 basis points (0.3%). The 100 basis point increase represents an 18% increase over the weighted average interest rate on the Company's short-term and variable rate borrowings at July 31, 1999. The calculated reduction in net earnings assumes the occurrence of an adverse change in market interest rates. Actual future changes in interest rates may differ materially and its effect on net earnings may also differ materially due to changes in the Company's finance receivable and debt repricing structures. The calculation also does not take into account the complexities that would be involved in an actual 100 basis point increase in market interest rates. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. This statement, as deferred, is effective for fiscal years beginning after June 15, 2000. The Company has not yet determined the impact SFAS 133 will have on its earnings or financial position. Year 2000 The Company has determined that its information technology systems are primarily Year 2000 compliant (non-information technology systems are not critical to the Company's operations). Therefore, any future costs the Company may incur relating to the Year 2000 issue are not expected to be significant. The Company has not, and does not expect to, incur any specific quantifiable costs that can be directly and solely related to the Year 2000 issue. However, if any of the Company's information technology systems do not function properly as a result of the turn of the century, the Company believes the total cost to repair/replace such system(s) would not exceed $500,000. All of the Company's proprietary software was programmed in such a manner that it was originally Year 2000 compliant. The Company is in the process of replacing its portfolio administration software system. The existing and new systems were programmed in such a manner that each one was originally Year 2000 compliant. The Year 2000 issue did not affect the decision, or timing, of the replacement. In addition, the Company has completed an initiative to add, upgrade and replace its computer networks and its personal computers. The initiative was undertaken in response to the vast improvements in information technology and was not affected by the Year 2000 issue. The systems and hardware acquired under this initiative are Year 2000 compliant. 13 Financial Federal Corporation and Subsidiaries Management's Discussion and Analysis of Operations and Financial Condition (continued) The Company has business relationships with thousands of equipment manufacturers, dealers and end-users (customers). The failure by any one or several of these third parties to be Year 2000 compliant is not expected to result in a material loss in the Company's revenue or to adversely affect the Company's cash flows. The Company has relationships with four commercial paper dealers and approximately twenty banks to access the financial markets for its daily funding requirements. The failure by any one of these credit providers to be Year 2000 compliant is not expected to affect materially the Company's liquidity. However, a significant disruption in financial markets caused by the Year 2000 issue, impairing the Company's ability to obtain required funds over a period of time, could have a material adverse effect on the Company's operations. Through direct communications with its credit providers and the review of their public statements, the Company has been assured that substantially all of its credit providers either already are or expect to be Year 2000 compliant. In addition, a joint release issued on September 16, 1999 by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, Board of Governors of the Federal Reserve System and National Credit Union Administration stated that 99.7% of banks and other insured financial institutions already have the highest rating for Year 2000 readiness. Neither the Company, nor anyone else, can predict, or envision, the potential direct and residual effects of technology's inability to properly recognize the year 2000. These possible effects include extended, nationwide interruptions in telecommunications services, utility services, public transportation, air travel and global banking and electronic payment systems. Based on the unknown effects of these potentially significant interruptions, the Company believes that it is impossible to assure full Year 2000 compliance even though the Company has taken appropriate measures to be compliant. In the event that the turn of the century causes a material business interruption, the Company believes, but cannot assure, that, to the extent possible (except for the interruptions listed in the prior paragraph), any such interruption could be overcome through manual processes. The Company is in the process of establishing procedures to ensure that adequate resources will be in place and that required information will be available to enable the Company to operate in a manual environment. Forward-Looking Statements This Management's Discussion and Analysis of Operations and Financial Condition and other sections of this Annual Report contain forward-looking statements that involve risks, uncertainties and assumptions due to their subjective nature. Therefore, actual outcomes and results could differ materially from those anticipated by such forward-looking statements due to the impact of many factors beyond the Company's control, including economic, geographic and industry conditions, availability of funding sources, market risk from fluctuations in interest rates, prepayments, competitive conditions, changes in existing laws or regulations and matters relating to the Year 2000 issue. 14 Financial Federal Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in Thousands)
July 31, 1999 1998 ========================================================================================= ASSETS Finance receivables $948,727 $772,427 Allowance for possible losses (16,202) (13,330) - ----------------------------------------------------------------------------------------- Finance receivables--net 932,525 759,097 Cash 5,544 2,756 Other assets 4,116 4,255 - ----------------------------------------------------------------------------------------- TOTAL ASSETS $942,185 $766,108 ========================================================================================= LIABILITIES Senior debt: Long-term ($38,879 at July 31, 1999 and $36,209 at July 31, 1998 due to related parties) $540,662 $478,388 Short-term 106,990 22,144 Subordinated debt ($4,681 at July 31, 1999 and 1998 due to related parties) 97,790 102,290 Accrued interest, taxes and other liabilities 29,500 23,940 Deferred income taxes 22,261 16,117 - ----------------------------------------------------------------------------------------- Total liabilities 797,203 642,879 - ----------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock--$1 par value, authorized 5,000,000 shares in 1999 and 500,000 shares in 1998, none issued Common stock--$.50 par value, authorized 100,000,000 shares in 1999 and 25,000,000 shares in 1998, shares issued: 14,860,207 in 1999 and 14,842,544 in 1998 7,430 7,421 Additional paid-in capital 58,115 57,869 Warrants--issued and outstanding 1,607,000 in 1999 and 1998 29 29 Retained earnings 79,408 57,910 - ----------------------------------------------------------------------------------------- Total stockholders' equity 144,982 123,229 - ----------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $942,185 $766,108 =========================================================================================
The notes to consolidated financial statements are made a part hereof. 15 Financial Federal Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity (Dollars and Share Amounts in Thousands)
Common Stock--$.50 Par Value ------------------------------- Number Additional of Paid-In Retained Treasury Shares Par Value Capital Warrants Earnings Stock ============================================================================================================ Balance at August 1, 1996 9,960 $4,980 $58,289 $29 $30,893 -- Acquisitions of treasury stock $(1,630) Retirement of treasury stock (124) (62) (1,105) (463) 1,630 Exercise of stock options 7 3 58 Three-for-two stock split 4,921 2,461 (2,461) Tax benefit relating to stock options 73 Net earnings 12,909 - ------------------------------------------------------------------------------------------------------------ Balance at July 31, 1997 14,764 7,382 57,315 29 40,878 -- Exercise of stock options 79 39 480 Tax benefit relating to stock options 74 Net earnings 17,032 - ------------------------------------------------------------------------------------------------------------ Balance at July 31, 1998 14,843 7,421 57,869 29 57,910 -- Repurchases of common stock (99) (49) (572) (1,100) Exercise of stock options 116 58 796 Tax benefit relating to stock options 22 Net earnings 22,598 - ------------------------------------------------------------------------------------------------------------ BALANCE AT JULY 31, 1999 14,860 $7,430 $58,115 $29 $79,408 $ -- ============================================================================================================
The notes to consolidated financial statements are made a part hereof. 16 Financial Federal Corporation and Subsidiaries Consolidated Statement of Operations (Dollars in Thousands, Except Per Share Amounts)
Year Ended July 31, 1999 1998 1997 ========================================================================================== Finance income: Loan obligations $ 59,705 $50,180 $38,374 Lease obligations 29,413 22,542 16,931 - ------------------------------------------------------------------------------------------ Total finance income 89,118 72,722 55,305 Interest expense 39,169 32,552 23,437 - ------------------------------------------------------------------------------------------ Finance income before provision for possible losses on finance receivables 49,949 40,170 31,868 Provision for possible losses on finance receivables 3,100 3,150 2,525 - ------------------------------------------------------------------------------------------ Net finance income 46,849 37,020 29,343 Gain on debt retirement 685 Salaries and other expenses (10,705) (9,195) (8,356) - ------------------------------------------------------------------------------------------ Earnings before income taxes 36,829 27,825 20,987 Provision for income taxes 14,231 10,793 8,078 - ------------------------------------------------------------------------------------------ NET EARNINGS $ 22,598 $17,032 $12,909 ========================================================================================== EARNINGS PER COMMON SHARE: Diluted $ 1.30 $ 1.03 $ 0.80 ========================================================================================== Basic $ 1.52 $ 1.15 $ 0.87 ==========================================================================================
The notes to consolidated financial statements are made a part hereof. 17 Financial Federal Corporation and Subsidiaries Consolidated Statement of Cash Flows (Dollars in Thousands)
Year Ended July 31, 1999 1998 1997 ======================================================================================================= Cash flows from operating activities: Net earnings $ 22,598 $ 17,032 $ 12,909 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for possible losses on finance receivables 3,100 3,150 2,525 Depreciation and amortization 6,140 5,203 4,464 Deferred income taxes 6,144 4,832 2,336 Gain on debt retirement (685) Decrease (increase) in other assets 187 (243) (253) Increase in accrued interest, taxes and other liabilities 5,560 7,716 4,064 - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 43,044 37,690 26,045 - ------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Finance receivables: Originated (689,718) (628,631) (464,283) Collected 507,364 432,512 316,164 Other (362) (424) (188) - ------------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (182,716) (196,543) (148,307) - ------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Commercial paper: Maturities 90 days or less (net) (29,949) 59,626 32,908 Maturities greater than 90 days: Proceeds 96,360 120,687 149,470 Repayments (94,135) (113,690) (127,747) Bank borrowings--net proceeds (repayments) 62,570 (76,660) 14,220 Proceeds from (repurchases of) convertible subordinated notes (3,815) 100,000 Proceeds from senior term notes 115,000 65,000 50,000 Variable rate senior term notes--net proceeds (repayments) (2,726) 6,208 9,680 Repayments of subordinated debt (4,667) Deferred debt issuance costs (2,687) Repurchases of common stock (1,721) (1,630) Proceeds from exercise of stock options 854 519 61 Tax benefit relating to stock options 22 74 73 - ------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 142,460 159,077 122,368 - ------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH 2,788 224 106 Cash--beginning of year 2,756 2,532 2,426 - ------------------------------------------------------------------------------------------------------- CASH--END OF YEAR $ 5,544 $ 2,756 $ 2,532 ======================================================================================================= Supplemental disclosures of cash flow information: Interest paid $ 38,519 $ 30,329 $ 22,464 ======================================================================================================= Income taxes paid $ 6,660 $ 7,345 $ 5,710 =======================================================================================================
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. Finance receivables comprise loans and other financings and noncancelable leases. All leases are accounted for as direct financing leases, where total lease payments, plus residual values, less the cost of the leased equipment is recorded as unearned finance income. Residual values are recorded at the lowest of (i) any stated purchase option, (ii) the present value at the end of the initial lease term of rentals due under any renewal options or (iii) the estimated fair value of the equipment at the end of the lease. (3) Income Recognition--Finance income is recognized over the term of receivables using the interest method. Income recognition is suspended on finance receivables that are considered impaired (full collection of principal and interest being doubtful) by management. This typically occurs when (i) a contractual payment is more than 120 days past due, (ii) the counterparty becomes the subject of a bankruptcy proceeding or (iii) the underlying collateral is being liquidated. Impaired receivables are written down to the underlying collateral's currently estimated net liquidation value (if less than the recorded amount). Income recognition may be resumed when management believes full collection is probable. Any collections on impaired receivables are applied to the recorded investment. (4) Allowance for Possible Losses--A general provision for possible losses on finance receivables is charged against income in an amount to increase the allowance for possible losses to a level that management considers appropriate. Write-downs of impaired receivables are charged to the allowance for possible losses and subsequent recoveries of write-downs are credited to the allowance. Management periodically reviews the allowance giving consideration to present and anticipated national and regional economic conditions, industry conditions, the status of the finance receivables, and other factors. (5) Income Taxes--Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the financial statement and tax return bases of assets and liabilities using enacted tax rates. Deferred tax expense represents the net change in deferred tax assets and liabilities during the year. (6) Earnings Per Common Share--Basic earnings per share is net earnings divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is the total of net earnings and the after-tax interest cost of dilutive convertible debt, divided by the total of the weighted average number of common shares and the effect of dilutive stock options, warrants and convertible securities outstanding during the period. (7) Derivative Financial Instruments--Derivative financial instruments are used by the Company to hedge its exposure to the effects of fluctuations in market interest rates on its debt. The Company does not use derivatives for speculation and the Company does not trade in derivatives. Derivatives used include interest rate swaps and treasury locks. The net interest differentials on interest rate swaps are recorded as an adjustment to interest expense as incurred. The cash settlements on treasury locks are deferred and amortized over the term of the underlying hedged debt obligations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. This statement, as deferred, is effective for fiscal years beginning after June 15, 2000. The Company has not yet determined the impact SFAS 133 will have on its earnings or financial position. (8) Use of Estimates--The consolidated financial statements and the notes thereto were prepared in accordance with generally accepted accounting principles 19 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In Thousands, Except Per Share Amounts) (continued) which requires estimates and assumptions to be made by management that affect the amounts reported therein. Actual results could differ from those estimates. NOTE B: Finance Receivables (1) Finance receivables comprise installment sale agreements and secured loans (including line of credit arrangements), collectively referred to as loans, which provide for interest at fixed rates, or variable rates generally indexed to the prime rate (as defined) and investments in direct financing leases, as follows: July 31, 1999 1998 ================================================================================ Loans: Fixed rate $513,447 $399,912 Variable rate 117,362 111,132 - -------------------------------------------------------------------------------- Total 630,809 511,044 Direct financing leases 317,918 261,383 - -------------------------------------------------------------------------------- Finance receivables $948,727 $772,427 ================================================================================ The approximate weighted average interest rates were 9.8% and 10.2% on fixed rate loans at July 31, 1999 and 1998, respectively, and 1.8% and 2.0% over the prime rate on variable rate loans at July 31, 1999 and 1998, respectively. (2) The investment in direct financing leases comprises the following: July 31, 1999 1998 ================================================================================ Minimum lease payments receivable $324,731 $270,727 Residual values 54,099 42,727 Unearned finance income (60,912) (52,071) - -------------------------------------------------------------------------------- Investment in direct financing leases $317,918 $261,383 ================================================================================ (3) Finance receivables generally provide for monthly installments of equal or varying amounts for terms of two to five years. Annual contractual maturities of finance receivables at July 31, 1999 are as follows: Direct Fixed Variable Financing Rate Loans Rate Loans Leases ================================================================================ 2000 $184,906 $ 49,067 $112,316 2001 147,465 29,536 91,681 2002 100,569 22,652 64,808 2003 52,328 10,457 37,440 2004 17,381 2,886 13,644 Thereafter 10,798 2,764 4,842 - -------------------------------------------------------------------------------- Total $513,447 $117,362 $324,731 ================================================================================ (4) The activity of the allowance for possible losses is summarized as follows: Year Ended July 31, 1999 1998 1997 ================================================================================ Balance--August 1 $13,330 $10,303 $ 8,008 Provision 3,100 3,150 2,525 Write-downs (1,125) (1,210) (1,168) Recoveries 897 1,087 938 - -------------------------------------------------------------------------------- Balance--July 31 $16,202 $13,330 $10,303 ================================================================================ (5) Income recognition has been suspended on finance receivables with a recorded investment of $8,787 (includes $4,806 of impaired loans) at July 31, 1999 and $6,489 (includes $3,709 of impaired loans) at July 31, 1998. The average recorded investment in impaired loans was $4,515 in 1999 and $3,336 in 1998. Impaired loans exclude direct financing leases. (6) The Company also provides commitments to extend credit. These commitments contain off-balance sheet risk. The Company uses the same credit policies and procedures in making these commitments as it does for finance receivables, as the credit risks are substantially the same. At July 31, 1999 and 1998, the unused portion of these commitments was $7,142 and $10,147, respectively. 20 NOTE C: Debt Debt is summarized as follows: July 31, 1999 1998 ================================================================================ Senior debt: Fixed rate term notes: 5.52%-5.90% due 2002-2003 $ 40,000 6.29%-6.80% due 2002-2008 120,000 $120,000 7.27%-7.45% due 2000-2003 95,000 50,000 - -------------------------------------------------------------------------------- Total fixed rate term notes 255,000 170,000 Variable rate term notes due 2001-2002 43,162 15,888 - -------------------------------------------------------------------------------- Total term notes 298,162 185,888 Commercial paper 283,490 311,214 Bank borrowings 66,000 3,430 - -------------------------------------------------------------------------------- Total senior debt 647,652 500,532 - -------------------------------------------------------------------------------- Subordinated debt: 4.5% convertible subordinated notes due 2005 95,500 100,000 8.0% subordinated debentures due 2003 2,290 2,290 - -------------------------------------------------------------------------------- Total subordinated debt 97,790 102,290 - -------------------------------------------------------------------------------- Total debt $745,442 $602,822 ================================================================================ (1) The senior term notes were issued by Credit. Interest on fixed rate notes is generally payable semiannually. Interest on variable rate notes is indexed to LIBOR or domestic money market rates. Prepayments of the notes are generally subject to a premium based on yield maintenance formulas. The notes contain certain restrictive covenants including limitations on indebtedness, encumbrances, dividends to Financial, minimum net worth and sales of assets. Certain executive officers of the Company and their affiliates hold $13,162 of the variable rate notes. These notes mature in September 2000, subject to extension. (2) The Company issues commercial paper with a maximum term of 270 days. The weighted average interest rates on commercial paper outstanding at July 31, 1999 and 1998 were 5.3% and 5.8%, respectively. Commercial paper transactions with officers and other related parties are summarized as follows: 1999 1998 1997 ================================================================================ Year ended July 31: Issued $99,765 $47,226 $31,409 Matured 94,369 34,211 33,479 Interest expense 1,276 654 721 At July 31: Outstanding 25,717 20,321 7,306 Accrued interest 234 234 91 ================================================================================ (3) At July 31, 1999, Credit had $400,000 of committed unsecured revolving credit facilities with various banks expiring as follows: $132,500 within one year and $267,500 on various dates from November 2000 through July 2003. These facilities contain certain restrictive covenants including limitations on indebtedness, encumbrances, dividends to Financial, capital expenditures and minimum net worth. Credit generally incurs a fee on the unused portion of these facilities. Borrowings under these credit facilities, $66,000 at July 31, 1999, generally mature between 1 and 90 days and bear interest based on domestic money market rates or LIBOR, at Credit's option. The weighted average interest rates on borrowings outstanding at July 31, 1999 and 1998 were 5.6% and 6.2%, respectively. (4) In April 1998, Financial sold $100,000 of its convertible subordinated notes due May 1, 2005. The notes are convertible into shares of the Company's common stock, at any time prior to maturity, at a conversion price of $30.15625 per share. Financial can call the notes beginning May 4, 2001 at a premium that decreases 25% annually from 2.57%. Interest on the notes is payable semiannually. The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined. In 1999, Financial repurchased $4,500 face amount of these notes for $3,815. (5) In July 1996, Financial called its variable rate subordinated debentures at face value offering holders the option to receive amended debentures. As a result, $4,667 of these debentures were repaid ($997 to related parties) and $2,290 of amended debentures were issued ($2,181 to related parties) on September 1, 1996. The amended debentures mature March 1, 2003 with interest payable 21 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In Thousands, Except Per Share Amounts) (continued) semiannually. The debentures are subordinated to senior debt and other debt designated by the Board of Directors and to certain other liabilities as provided for in the debentures. (6) At July 31, 1999, long-term senior debt (includes commercial paper and bank borrowings supported by credit facilities expiring after one year) and subordinated debt are due as follows: $165,662 in 2001, $235,000 in 2002, $117,290 in 2003, $115,500 in 2005 and $5,000 in 2008. NOTE D: Derivative Financial Instruments During 1999, the Company entered into interest rate swaps and treasury lock agreements with other financial institutions as a hedge against increases in market interest rates on issued term debt in the case of swaps and planned issues of term debt in the case of treasury locks. The interest rate swaps allowed the Company to issue variable rate term debt and effectively convert the debt into fixed rate term debt at rates that were lower than those otherwise obtainable on direct fixed rate term debt. The Company used treasury locks to effectively "lock-in" the then current base rates for term debt planned to be issued generally within six months. At July 31, 1999, the Company had variable to fixed rate swaps in place with a notional amount of $25,000, weighted average receive and pay rates of 5.5% and 5.2%, respectively and a weighted average remaining term of 1.4 years. There were no open treasury locks at July 31, 1999. The use of derivatives increased interest expense by $73 in 1999. The derivatives used by the Company involve credit risk from the remote possibility of nonperformance of the major financial institutions that issued them. The Company's actual credit risk is not considered to be significant. NOTE E: Stockholders' Equity (1) In July 1997, the Board of Directors authorized a three-for-two stock split effected in the form of a stock dividend, payable on July 30, 1997. Prior period average shares outstanding, share equivalents and per share amounts have been restated to reflect the stock split. Shares sold or acquired prior to the stock split have not been restated. (2) The Company established a common stock repurchase program in August 1996 and expanded the program in August 1998 to include repurchases of its convertible subordinated notes. Through July 31, 1999, 223 shares of common stock and $4,500 face amount of convertible subordinated notes have been repurchased. At July 31, 1999, $6,964 was available under the program for future repurchases. (3) In December 1998, the Company's stockholders approved (i) an increase in the number of authorized shares of common stock from 25,000 to 100,000 and (ii) an increase in the number of authorized shares of preferred stock from 500 to 5,000. Warrants: In 1989, the Company issued warrants to purchase 1,125 shares of common stock at $2.83 per share to its original stockholders. The warrants were purchased for $0.0022 each and expire February 1, 2001. In 1991, the Company issued warrants to purchase 482 shares of common stock at $2.72 per share to certain officers. The warrants were purchased for $0.0555 each and expire August 31, 2001. NOTE F: Stock Options In December 1998, the Company's stockholders approved a new stock option plan (the "1998 Plan") that was adopted by the Board of Directors of the Company in September 1998. The 1998 Plan provides for a total of 2,500 incentive or nonqualified stock options to be granted to officers, other employees and directors of the Company and terminates in September 2008. The Company's old stock option plan will terminate in September 1999. Under both plans, the exercise price of each option granted may not be less than the fair market value of the common stock on the grant date and the maximum term of an option is ten years. 22 Options outstanding at July 31, 1999 were generally granted with a six or ten year term and generally vest (become exercisable) ratably over periods of four to seven years. Shares of common stock available for future grants of options at July 31, 1999 were 2,500 under the 1998 Plan and 765 under the old plan. Stock option activity and related information is summarized as follows: Number of Weighted Average Options Exercise Price ================================================================================ Outstanding at August 1, 1996 515 $ 7.68 Granted 132 11.17 Exercised (10) 6.39 Canceled (45) 8.10 - --------------------------------------------------------- Outstanding at July 31, 1997 592 8.45 Granted 220 22.14 Exercised (79) 6.58 Canceled (7) 8.97 - --------------------------------------------------------- Outstanding at July 31, 1998 726 12.80 Granted 200 18.63 Exercised (116) 7.31 Canceled (8) 18.68 - --------------------------------------------------------- Outstanding at July 31, 1999 802 15.00 ========================================================= Exercisable at July 31: 1999 167 $ 8.19 1998 162 7.27 1997 149 6.68 ================================================================================ The Company adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation," and continues to apply Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock options. Under APB 25, compensation expense is not recorded when the exercise price of stock options is at least equal to the market price of the stock on the grant date. The exercise prices of options outstanding at July 31, 1999 ranged from $6.22 to $23.06. Additional information by price range follows: Price Range Over $18 $8-$12 Below $8 ================================================================================ Outstanding: Number 415 224 163 Weighted average exercise price $20.44 $10.61 $7.13 Weighted average remaining contractual life (in years) 7.3 3.2 2.6 Exercisable: Number -- 68 99 Weighted average exercise price -- $10.42 $6.65 ================================================================================ Pro forma amounts of net earnings and earnings per share, determined as if compensation expense attributable to stock options had been recognized using the fair value method under SFAS 123, follow: Year Ended July 31, 1999 1998 1997 ================================================================================ Net earnings $21,706 $16,593 $12,720 Earnings per share: Diluted $ 1.26 $ 1.01 $ 0.79 Basic $ 1.46 $ 1.12 $ 0.86 ================================================================================ The pro forma effect on net earnings in 1999, 1998 and 1997 may not be representative of the effect in future years as compensation expense attributable to stock options under SFAS 123 is measured over an option's vesting period and only applies to options granted by the Company after August 1, 1995. The Company estimated the weighted average grant date fair values per option for stock options granted using the Black-Scholes option-pricing model based on the following assumptions: Year Ended July 31, 1999 1998 1997 ================================================================================ Weighted average grant date fair value $7.08 $7.65 $3.78 Assumptions: Weighted average risk-free interest rate 4.6% 5.7% 6.7% Expected stock price volatility rate 29% 28% 27% Weighted average expected life of options granted (in years) 6.0 4.7 4.3 ================================================================================ 23 Financial Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (In Thousands, Except Per Share Amounts) (continued) NOTE G: Earnings Per Common Share Earnings per common share was calculated as follows: Year Ended July 31, 1999 1998 1997 ================================================================================ Net earnings (used for basic earnings per share) $22,598 $17,032 $12,909 Effect of convertible securities 3,066 802 -- - -------------------------------------------------------------------------------- Adjusted net earnings (used for diluted earnings per share) $25,664 $17,834 $12,909 - -------------------------------------------------------------------------------- Weighted average common shares outstanding (used for basic earnings per share) 14,860 14,804 14,787 Effect of dilutive securities: Convertible subordinated notes 3,237 854 -- Warrants 1,400 1,392 1,208 Stock options 314 332 159 - -------------------------------------------------------------------------------- Adjusted weighted average common shares and assumed conversions (used for diluted earnings per share) 19,811 17,382 16,154 ================================================================================ Net earnings per common share: Diluted $ 1.30 $ 1.03 $ 0.80 ================================================================================ Basic $ 1.52 $ 1.15 $ 0.87 ================================================================================ NOTE H: Income Taxes (1) The provision for income taxes comprises the following: Year Ended July 31, 1999 1998 1997 ================================================================================ Currently payable: Federal $ 7,022 $ 5,087 $4,887 State and local 1,043 800 782 - -------------------------------------------------------------------------------- Total 8,065 5,887 5,669 Deferred 6,144 4,832 2,336 Tax benefit relating to stock options 22 74 73 - -------------------------------------------------------------------------------- Provision for income taxes $14,231 $10,793 $8,078 ================================================================================ (2) Income taxes computed at statutory federal income tax rates are reconciled to the provision for income taxes as follows: Year Ended July 31, 1999 1998 1997 ================================================================================ Federal income tax at statutory rates $12,890 $ 9,739 $7,345 State and local taxes (net of federal income tax benefit) 1,341 1,054 733 - -------------------------------------------------------------------------------- Provision for income taxes $14,231 $10,793 $8,078 ================================================================================ (3) Deferred income taxes comprises the tax effect of the following temporary differences: July 31, 1999 1998 ================================================================================ Deferred tax liabilities: Leasing transactions $26,785 $19,960 Finance income and other 3,410 2,695 - -------------------------------------------------------------------------------- Total 30,195 22,655 - -------------------------------------------------------------------------------- Deferred tax assets: Allowance for possible losses (6,274) (5,180) Other liabilities (1,660) (1,358) - -------------------------------------------------------------------------------- Total (7,934) (6,538) - -------------------------------------------------------------------------------- Deferred income taxes $22,261 $16,117 ================================================================================ NOTE I: Lease Commitments The Company occupies office space under leases expiring through 2004. At July 31, 1999, minimum future annual rentals due under these leases are $733 in 2000, $654 in 2001, $450 in 2002, $230 in 2003 and $17 in 2004. Office rent expense was $836 in 1999, $782 in 1998 and $677 in 1997. NOTE J: Concentration of Credit Risk The Company manages its exposure to the credit risk associated with its finance receivables through established credit policies and procedures, which include obtaining a first lien on equipment collateral on each transaction. The Company evaluates equipment collateral on an ongoing basis and focuses on lending against, financing and leasing equipment collateral that has an economic life exceeding the 24 term of the receivable, is not subject to rapid technological obsolescence, has applications in various industries, is easily accessible and movable and has a broad resale market. The Company may also obtain additional equipment or other collateral, third-party guarantees and/or hold back a portion of the amount financed. Concentrations of credit risk arise when counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant concentration of credit risk with any counterparty. The major concentrations of credit risk, grouped by the industries and geographic regions of counterparties, expressed as a percentage of finance receivables, follow: July 31, 1999 1998 ================================================================================ Industry: Trucking 19% 18% Construction 17 17 Waste disposal 12 12 Cranes 12 13 Geographic region: Southeast 26% 25% Northeast 23 24 Southwest 21 24 ================================================================================ NOTE K: Fair Values of Financial Instruments The Company's financial instruments comprise cash, finance receivables (excluding leases), commitments to extend credit, debt and interest rate swaps. The following methods were used to estimate the fair value of these financial instruments. The carrying values of cash, commercial paper and bank borrowings approximated their fair values based on their short-term maturities. The carrying values of senior term debt and subordinated debentures were estimated to approximate their fair values at July 31, 1999 and 1998 based on their future cash flows discounted at current rates for debt with similar terms and maturities. The fair value of the convertible subordinated notes was approximately $89,770 at July 31, 1999 based on their quoted market price. The fair value of the interest rate swaps was not material at July 31, 1999. It is not practicable for the Company to estimate the fair value of its finance receivables and commitments to extend credit. These financial instruments comprise a substantial number of transactions with commercial obligors in numerous industries, are secured by liens on various types of equipment and may be guaranteed by third parties. Any difference between the carrying value and the fair value of each transaction would be affected by a potential buyer's assessment of the transaction's credit quality, collateral value, third-party guarantee(s), payment history, yield, maturity, documentation and other legal matters, and many other subjective considerations of the buyer. In addition, the value received in a fair market sale of a transaction would be based on the terms of the sale, the documentation governing such sale, the Company's and the buyer's views of general economic conditions, industry dynamics, the Company's and the buyer's tax considerations, and numerous other factors. NOTE L: Selected Quarterly Data (Unaudited) Earnings Per Share ------------------- Revenues Net Earnings Diluted Basic ================================================================================ Fiscal 1999, three months ended: October 31, 1998 $21,116 $5,191 $0.30 $0.35 January 31, 1999 21,508 5,416 0.31 0.36 April 30, 1999 22,279 5,898 0.34 0.40 July 31, 1999 24,215 6,093 0.35 0.41 Fiscal 1998, three months ended: October 31, 1997 $16,369 $3,874 $0.24 $0.26 January 31, 1998 17,622 4,050 0.25 0.27 April 30, 1998 18,440 4,399 0.27 0.30 July 31, 1998 20,291 4,709 0.28 0.32 ================================================================================ 25 Independent Auditors' Report To the Board of Directors and Shareholders Financial Federal Corporation We have audited the accompanying consolidated balance sheets of Financial Federal Corporation and Subsidiaries as at July 31, 1999 and 1998, and the related consolidated statements of stockholders' equity, operations and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Financial Federal Corporation and Subsidiaries at July 31, 1999 and 1998, and their consolidated operating results and their cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. /s/ Eisner & Lupin LLP - ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York September 2, 1999 26 Financial Federal Corporation and Subsidiaries Stock Price History and Dividend Policy The Company's common stock is traded on the New York Stock Exchange under the symbol "FIF." Trading commenced on the New York Stock Exchange on June 22, 1998; prior to that date the Company's common stock was traded on the American Stock Exchange. The quarterly high and low closing sales prices per share of the common stock as reported by the New York Stock Exchange and the American Stock Exchange follow: Fiscal 1999 Fiscal 1998 ------------------------------------------- High Low High Low ================================================================================ First Quarter ended October 31 $25 $17.375 $19.8125 $14 Second Quarter ended January 31 $26.8125 $23.1875 $23.625 $18 Third Quarter ended April 30 $23.0625 $16.125 $26 $20.375 Fourth Quarter ended July 31 $24.125 $18.9375 $28.5 $23 ================================================================================ The Company presently has no intention of paying cash dividends in the foreseeable future. 27 Financial Federal Corporation and Subsidiaries Corporate Directory Officers Clarence Y. Palitz, Jr. Chairman of the Board and Chief Executive Officer Paul R. Sinsheimer President and Chief Operating Officer Michael C. Palitz Executive Vice President, Treasurer and Chief Financial Officer William M. Gallagher Senior Vice President Troy H. Geisser Senior Vice President and Secretary John V. Golio Senior Vice President Jeanne McDonald Senior Vice President Daniel J. McDonough Senior Vice President Richard W. Radom Senior Vice President Julian C. Green, Jr. Vice President Fred J. Palumbo Vice President Ted Wooldridge Administrative Vice President David H. Hamm Controller Officers of Subsidiaries Only Vice Presidents - ------------------- William J. Flaherty W. J. Mattocks James H. Mayes, Jr. Michael A. Nelson Donald G. Pokorny Rodney S. Sepulvado Luther C. Whitlock Administrative Vice Presidents - ------------------------------ Kevin McGinn Gary L. Pace Divisional Vice President - ------------------------- Dennis W. Shupe Regional Vice Presidents - ------------------------ Patrick Armbrister Gary Barnes Kenneth Blackman Linda Brown Johnie E. Christ M. R. Escamilla Thomas A. Fahl Gary S. Fisher Peter M. Hurstak Bruce James Howard L. Jester, Jr. James M. Keesee Laurence F. Kimmel Gregory D. Lile James R. Scappi Mark A. Scott William K. Toon Thomas L. Tornee Assistant Vice Presidents - ------------------------- Harry Cassady Barbara A. Constantino Donna L. Frate Robert Grawl, Jr. Donald L. Hamann Thomas G. Kassakatis Kimberly P. Walter Assistant Secretaries - --------------------- Scott W. Brandau Anthony Cornacchia Chris L. Jones Jeffrey P. Lanigan Christopher T. Messer Andrew G. Remias Geoffrey A. Sprigle Gregory R. Treichler Assistant Controllers - --------------------- Sheri A. Barajas Gigi A. Radley 28 Financial Federal Corporation and Subsidiaries Corporate Directory (continued) Directors Lawrence B. Fisher Partner Orrick, Herrington & Sutcliffe LLP Attorneys William C. MacMillen, Jr. President William C. MacMillen & Co., Inc. Investment Bankers Bernard G. Palitz President Gregory Capital Corporation Investments Clarence Y. Palitz, Jr. Chairman of the Board and Chief Executive Officer Financial Federal Corporation Michael C. Palitz Executive Vice President, Treasurer and Chief Financial Officer Financial Federal Corporation Paul R. Sinsheimer President and Chief Operating Officer Financial Federal Corporation H. E. "Tim" Timanus, Jr. Chairman and Chief Executive Officer Heritage Bank Locations Headquarters - ------------------ 733 Third Avenue New York, NY 10017 (212) 599-8000 Full Service Operations Centers - ------------------------------- 1300 Post Oak Boulevard Houston, TX 77056 (713) 439-1177 601 Oakmont Lane Westmont, IL 60559 (630) 986-3900 300 Frank W. Burr Boulevard Teaneck, NJ 07666 (201) 801-0300 201 McCullough Drive Charlotte, NC 28262 (704) 549-1009 9633 South 48th Street Phoenix, AZ 85044 (480) 785-4880 Website - ------------------------ www.financialfederal.com Securities Listings Common stock - ----------------------- New York Stock Exchange Symbol FIF Convertible subordinated notes - ------------------------------ New York Stock Exchange Auditors Eisner & Lubin LLP Certified Public Accountants 444 Madison Avenue New York, NY 10022 General Counsel Orrick, Herrington & Sutcliffe LLP 666 Fifth Avenue New York, NY 10103 Transfer Agents and Registrars Common stock - -------------------- The Bank of New York New York, NY Convertible subordinated notes - ------------------------------ Bank One, N.A. New York, NY Corporate Information The annual meeting of shareholders will be held at 270 Park Avenue, New York, NY on December 14, 1999 at 10 a.m. Eastern Time. For a copy of Form 10-K or other information about the Corporation contact: Investor Relations Financial Federal Corporation 733 Third Avenue New York, NY 10017 (212) 599-8000 Designed by Curran & Connors, Inc. / www.curran-connors.com 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, 1999 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 2, 1999, included in this Annual Report on Form 10-K. We also consent to the incorporation by reference in such Registration Statement of our report on the Financial Statement Schedules, which appears on Page 12 of this Form 10-K. /s/ Eisner & Lubin LLP -------------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York October 1, 1999 20 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, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR JUL-31-1999 JUL-31-1999 5544 0 948727 16202 0 0 0 0 942185 0 745442 0 0 7430 137552 942185 0 89118 0 0 0 3100 39169 36829 14231 22598 0 0 0 22598 1.52 1.30 THE FINANCIAL STATEMENTS INCLUDE AN UNCLASSIFIED BALANCE SHEET.
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