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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 2002
Commission file number 1-12006
FINANCIAL FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0244792
(State of incorporation) (I.R.S. Employer Identification Number)
733 Third Avenue, New York, NY 10017
(Address of principal executive offices)
(Zip code)
(212) 599-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
At March 4, 2002, 16,712,663 shares of Registrant's common stock, $.50 par
value, were outstanding.
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FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended January 31, 2002
TABLE OF CONTENTS
Part I - Financial Information Page No.
-------------------------------------------------------------------- --------
Item 1 Financial Statements
Consolidated Balance Sheets at January 31, 2002 (unaudited)
and July 31, 2001 (audited) 3
Consolidated Statements of Income and Retained Earnings
for the three and six months ended January 31, 2002 and
2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended January 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Operations and
Financial Condition 7-9
Part II - Other Information
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Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
2
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
January 31, July 31,
2002 * 2001
---------- ----------
ASSETS
Finance receivables $1,384,285 $1,321,226
Allowance for possible losses (23,023) (21,938)
---------- ----------
Finance receivables - net 1,361,262 1,299,288
Cash 7,120 10,251
Other assets 3,824 4,124
---------- ----------
TOTAL ASSETS $1,372,206 $1,313,663
========== ==========
LIABILITIES
Senior debt:
Long-term $641,674 $703,584
Short-term 326,990 228,014
Subordinated debt 93,485 93,485
Accrued interest, taxes and other liabilities 54,052 53,082
Deferred income taxes 29,887 29,087
---------- ----------
Total liabilities 1,146,088 1,107,252
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value, authorized 5,000,000 shares, none issued
Common stock - $.50 par value, authorized 100,000,000 shares; shares
issued and outstanding (net of 136,961 treasury shares): 16,700,112
at January 31, 2002 and 16,540,329 at July 31, 2001 8,350 8,270
Additional paid-in capital 64,494 62,921
Retained earnings 153,274 135,220
---------- ----------
Total stockholders' equity 226,118 206,411
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,372,206 $1,313,663
========== ==========
* Unaudited
The notes to consolidated financial statements are made a part hereof.
3
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS *
(Dollars in Thousands, Except Per Share Amounts)
Three months ended Six months ended
January 31, Janaury 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Finance income $34,589 $34,760 $69,222 $67,853
Interest expense 12,477 16,970 26,633 33,095
-------- -------- -------- --------
Net finance income before provision for possible
losses on finance receivables 22,112 17,790 42,589 34,758
Provision for possible losses on finance receivables 1,600 1,100 2,625 2,250
-------- -------- -------- --------
Net finance income 20,512 16,690 39,964 32,508
Salaries and other expenses 5,302 4,044 10,195 7,964
-------- -------- -------- --------
Earnings before income taxes 15,210 12,646 29,769 24,544
Provision for income taxes 5,988 4,916 11,715 9,542
-------- -------- -------- --------
NET EARNINGS 9,222 7,730 18,054 15,002
Retained earnings - beginning of period 144,052 113,402 135,220 106,130
Acquisition of treasury shares -- (2,526) -- (2,526)
-------- -------- -------- --------
RETAINED EARNINGS - END OF PERIOD $153,274 $118,606 $153,274 $118,606
======== ======== ======== ========
EARNINGS PER COMMON SHARE:
Diluted $0.50 $0.43 $0.98 $0.84
===== ===== ===== =====
Basic $0.56 $0.49 $1.09 $0.98
===== ===== ===== =====
* Unaudited
The notes to consolidated financial statements are made a part hereof.
4
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS *
(Dollars in Thousands)
Six Months Ended January 31, 2002 2001
---------------------------------------------------------------------------- -------- --------
Cash flows from operating activities:
Net earnings $18,054 $15,002
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for possible losses on finance receivables 2,625 2,250
Depreciation and amortization 6,313 4,176
Deferred income taxes 800 2,400
Decrease in other assets 296 60
Increase (decrease) in accrued interest, taxes and other liabilities 970 (11,437)
-------- --------
Net cash provided by operating activities 29,058 12,451
-------- --------
Cash flows from investing activities:
Finance receivables:
Originated (396,776) (343,777)
Collected 326,348 241,705
Other (201) (208)
-------- --------
Net cash used in investing activities (70,629) (102,280)
-------- --------
Cash flows from financing activities:
Commercial paper:
Maturities 90 days or less (net) 3,713 (232,216)
Maturities greater than 90 days:
Proceeds 17,799 108,430
Repayments (38,526) (82,195)
Bank borrowings - net proceeds 3,740 267,110
Proceeds from asset securitization financing 100,000 --
Proceeds from senior term notes 5,000 63,000
Repayments of senior term notes (55,000) (35,000)
Variable rate senior notes - net proceeds (repayments) 340 (425)
Proceeds from exercise of stock options 1,262 219
Proceeds from exercise of warrants -- 1,114
Other 112 47
-------- --------
Net cash provided by financing activities 38,440 90,084
-------- --------
NET (DECREASE) INCREASE IN CASH (3,131) 255
Cash - beginning of period 10,251 6,068
-------- --------
CASH - END OF PERIOD $7,120 $6,323
======== ========
Supplemental disclosures of cash flow information:
Interest paid $28,570 $30,973
======== ========
Income taxes paid $11,711 $9,510
======== ========
* Unaudited
The notes to consolidated financial statements are made a part hereof.
5
FINANCIAL FEDERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the management of Financial Federal Corporation and
Subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position at January
31, 2002 and the results of operations and cash flows of the Company for the
three and six month periods ended January 31, 2002 and 2001. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and note disclosures included in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2001.
The consolidated results of operations for the three and six month periods
ended January 31, 2002 and 2001 are not necessarily indicative of the results
for the respective full years.
NOTE 2 - DESCRIPTION OF BUSINESS
The Company is an independent financial services company providing
collateralized lending, financing and leasing services nationwide to primarily
middle-market commercial enterprises in the general construction, road and
infrastructure construction and repair, manufacturing, road transportation and
waste disposal industries. 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.
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share was calculated as follows (in thousands, except per
share amounts):
Three months ended Six months ended
January 31, January 31,
----------------- -------------------
2002 2001 2002 2001
------ ------ ------- -------
Net earnings (used for basic earnings per share) $9,222 $7,730 $18,054 $15,002
Effect of convertible securities 725 722 1,458 1,452
------ ------ ------- -------
Adjusted net earnings (used for diluted earnings
per share) $9,947 $8,452 $19,512 $16,454
====== ====== ======= =======
Weighted average common shares outstanding
(used for basic earnings per share) 16,601 15,656 16,579 15,309
Effect of dilutive securities:
Convertible notes 3,024 3,024 3,024 3,024
Stock options and restricted stock 413 301 385 255
Warrants -- 760 -- 1,076
------ ------ ------- -------
Adjusted weighted average common shares and
assumed conversions (used for diluted
earnings per share) 20,038 19,741 19,988 19,664
====== ====== ======= =======
Net earnings per common share - Diluted $0.50 $0.43 $0.98 $0.84
===== ===== ===== =====
Net earnings per common share - Basic $0.56 $0.49 $1.09 $0.98
===== ===== ===== =====
NOTE 4 - SENIOR DEBT
At January 31, 2002, the Company had $400.0 million of committed unsecured
revolving credit facilities with various banks including $195.0 million that
expire after January 31, 2003 and $205.0 million that expire before January
31, 2003. Long-term senior debt of $641.7 million at January 31, 2002
comprised $315.0 million of term notes payable, $84.8 million of borrowings
under credit facilities that expire after January 31, 2003, $63.0 million of
borrowings under credit facilities that expire before January 31, 2003 and
$47.2 million of commercial paper that were supported by credit facilities
6
that expire after January 31, 2003 and $131.7 million of the asset
securitization financings.
In December 2001, the Company completed its second asset securitization
financing transaction obtaining proceeds of $100.0 million. At January 31,
2002, the Company had $225.0 million of asset securitization financings
accounted for as secured borrowings in the accompanying Consolidated Balance
Sheet. The terms of both of the Company's securitizations provide for
committed revolving financing for a one year term that, if not renewed, can be
converted into term debt at the Company's option. At January 31, 2002,
finance receivables in the accompanying Consolidated Balance Sheet included
$254.7 million of securitized receivables.
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Comparison of three months ended January 31, 2002 to three months ended
January 31, 2001
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Finance income decreased by less than 1% to $34.6 million in the second
quarter of fiscal 2002 from $34.8 million in the second quarter of fiscal
2001. The decrease was primarily due to (i) lower rates obtained on new
finance receivables and decreases in rates on variable rate finance
receivables as a result of the sharp decline in market interest rates since
January 2001 and, to a lesser extent, (ii) an increase in non-performing
assets in the second quarter of fiscal 2002 from the second quarter of fiscal
2001, offset by the 12%, or $149 million, increase in average finance
receivables outstanding to $1.362 billion in the second quarter of fiscal 2002
from $1.214 billion in the second quarter of fiscal 2001. Finance receivables
booked in the second quarter of fiscal 2002 and fiscal 2001 were $215 million
and $171 million, respectively.
Interest expense, incurred on borrowings used to fund finance receivables,
decreased by 26% to $12.5 million in the second quarter of fiscal 2002 from
$17.0 million in the second quarter of fiscal 2001. The decrease was
primarily due to decreases in the cost of the Company's short-term and
variable rate debt as a result of significantly lower average market interest
rates in the second quarter of fiscal 2002 as compared to the second quarter
of fiscal 2001, partially offset by the 10% increase in average debt
outstanding in the second quarter of fiscal 2002 from the second quarter of
fiscal 2001.
Net finance income before provision for possible losses on finance receivables
increased by 24% to $22.1 million in the second quarter of fiscal 2002 from
$17.8 million in the second quarter of fiscal 2001. Net finance income before
provision for possible losses expressed as an annualized percentage of average
finance receivables outstanding ("net interest margin") increased to 6.4% in
the second quarter of fiscal 2002 from 5.8% in the second quarter of fiscal
2001. The increase was primarily due to the decline in market interest rates
since January 2001.
The provision for possible losses on finance receivables increased by 45% to
$1.6 million in the second quarter of fiscal 2002 from $1.1 million in the
second quarter of fiscal 2001. The provision for possible losses is
determined by the amount required to increase the allowance for possible
losses to a level that management considers appropriate. The allowance for
possible losses was $23.0 million, or 1.66% of finance receivables at January
31, 2002, compared to $21.9 million, or 1.66% of finance receivables, at July
31, 2001 and $20.5 million, or 1.66% of finance receivables, at January 31,
2001. The allowance is periodically reviewed by the Company's management and
is estimated based on total finance receivables, net credit losses incurred
and management's current assessments 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. An increase in the level of the allowance may be necessary
based on unexpected changes in these factors.
Net credit losses (write-downs of finance receivables less subsequent
recoveries) were $812,000 and $490,000 in the second quarter of fiscal 2002
and 2001, respectively. Net credit losses expressed as an annualized
percentage of average finance receivables outstanding ("loss ratio") were
0.24% and 0.16% in the second quarter of fiscal 2002 and 2001, respectively.
Non-performing assets (includes finance receivables classified as non-accrual
and assets received to satisfy finance receivables) were $46.3 million, or
3.3% of total finance receivables, at January 31, 2002, compared to $34.4
million, or 2.6% of total finance receivables, at July 31, 2001 and $23.7
7
million, or 1.9% of total finance receivables, at January 31, 2001.
Delinquent finance receivables (transactions with a contractual payment more
than 60 days past due) were $41.8 million, or 3.0% of total finance
receivables, at January 31, 2002, compared to $24.8 million, or 1.9% of total
finance receivables, at July 31, 2001 and $23.4 million, or 1.9% of total
finance receivables, at January 31, 2001. Although the Company's non-
performing assets, delinquent finance receivables and net credit losses have
increased, and could continue to increase, their current and expected levels
are below historical and current industry standards.
Salaries and other expenses increased by 31% to $5.3 million in the second
quarter of fiscal 2002 from $4.0 million in the second quarter of fiscal 2001.
The increase was primarily due to the increase in the number of marketing and
administrative employees, salary increases and additional costs incurred
relating to the increased number of problem accounts in the second quarter of
fiscal 2002 as compared to the second quarter of fiscal 2001.
Net earnings increased by 19% to $9.2 million in the second quarter of fiscal
2002 from $7.7 million in the second quarter of fiscal 2001. Diluted earnings
per share increased by 16% to $0.50 per share in the second quarter of fiscal
2002 from $0.43 per share in the second quarter of fiscal 2001 and basic
earnings per share increased by 14% to $0.56 per share in the second quarter
of fiscal 2002 from $0.49 per share in the second quarter of fiscal 2001. The
increase in diluted earnings per share was lower than the increase in net
earnings primarily due to the effect that the convertible notes had on the
diluted earnings per share calculation and the 17% increase in the average
price of the Company's common stock in the second quarter of fiscal 2002 from
the second quarter of fiscal 2001. The increase in basic earnings per share
was lower than the increase in net earnings primarily due to the increase in
the number of outstanding shares of the Company's common stock resulting from
the exercise of the Company's 1.6 million warrants in the second quarter of
fiscal 2001.
Comparison of six months ended January 31, 2002 to six months ended January
31, 2001
------------------------------------------------------------------------------
Finance income increased by 2% to $69.2 million in the first half of fiscal
2002 from $67.9 million in the first half of fiscal 2001. The increase was
primarily due to the 13%, or $156 million, increase in average finance
receivables outstanding to $1.346 billion in the first half of fiscal 2002
from $1.190 billion in the first half of fiscal 2001 offset by (i) lower rates
obtained on new finance receivables and decreases in rates on variable rate
finance receivables as a result of the sharp decline in market interest rates
since January 2001 and, to a lesser extent, (ii) an increase in non-performing
assets in the first half of fiscal 2002 from the first half of fiscal 2001.
Finance receivables booked in the first half of fiscal 2002 and fiscal 2001
were $397 million and $344 million, respectively.
Interest expense, incurred on borrowings used to fund finance receivables,
decreased by 20% to $26.6 million in the first half of fiscal 2002 from $33.1
million in the first half of fiscal 2001. The decrease was primarily due to
decreases in the cost of the Company's short-term and variable rate debt as a
result of significantly lower average market interest rates in the first half
of fiscal 2002 as compared to the first half of fiscal 2001, partially offset
by the 12% increase in average debt outstanding in the first half of fiscal
2002 from the first half of fiscal 2001.
Net finance income before provision for possible losses on finance receivables
increased by 23% to $42.6 million in the first half of fiscal 2002 from $34.8
million in the first half of fiscal 2001. The net interest margin was 6.3% in
the first half of fiscal 2002 compared to 5.8% in the first half of fiscal
2001. The increase was primarily due to the decline in market interest rates
since January 2001.
The provision for possible losses on finance receivables increased by 17% to
$2.6 million in the first half of fiscal 2002 from $2.3 million in the first
half of fiscal 2001. Net credit losses were $1.5 million and $836,000 in the
first half of fiscal 2002 and 2001, respectively. The loss ratio was 0.23%
and 0.14% in the first half of fiscal 2002 and 2001, respectively.
Salaries and other expenses increased by 28% to $10.2 million in the first
half of fiscal 2002 from $8.0 million in the first half of fiscal 2001. The
increase was primarily due to the increase in the number of marketing and
administrative employees, salary increases and additional costs incurred
relating to the increased number of problem accounts in the first half of
fiscal 2002 as compared to the first half of fiscal 2001.
Net earnings increased by 20% to $18.1 million in the first half of fiscal
2002 from $15.0 million in the first half of fiscal 2001. Diluted earnings
per share increased by 17% to $0.98 per share in the first half of fiscal 2002
from $0.84 per share in the first half of fiscal 2001 and basic earnings per
share increased by 11% to $1.09 per share in the first half of fiscal 2002
from $0.98 per share in the first half of fiscal 2001. The increase in
diluted earnings per share was lower than the increase in net earnings
primarily due to the effect that the convertible notes had on the diluted
8
earnings per share calculation and the 21% increase in the average price of
the Company's common stock in the first half of fiscal 2002 from the first
half of fiscal 2001. The increase in basic earnings per share was lower than
the increase in net earnings primarily due to the increase in the number of
outstanding shares of the Company's common stock resulting from the exercise
of the Company's 1.6 million warrants in the second quarter of fiscal 2001.
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 operating cash flow, dealer placed and directly issued commercial
paper, borrowings under committed unsecured revolving credit facilities,
private and public issuances of term debt, conduit and term securitizations of
its finance receivables and sales of common and preferred equity. Management
believes, but cannot assure, that the Company has available sufficient
liquidity to support its future operations.
The Company issues investment grade commercial paper directly and through a
$350.0 million program with recognized dealers. Commercial paper outstanding
at January 31, 2002 was $126.8 million. The Company's commercial paper is
unsecured and matures within 270 days. Increases in commercial paper are
generally offset by decreases in bank and other borrowings, and vice versa.
The Company's current policy is to maintain committed revolving credit
facilities from banks so that the aggregate amount available thereunder
exceeds commercial paper outstanding.
At January 31, 2002, the Company had $400.0 million of committed unsecured
revolving credit facilities with various banks including $195.0 million that
expire after one year and $205.0 million that expire within one year. At
January 31, 2002, the Company had $84.8 million of borrowings outstanding
under credit facilities expiring after one year and $63.0 million of
borrowings outstanding under credit facilities expiring within one year.
In December 2001, the Company completed its second asset securitization
financing transaction obtaining proceeds of $100.0 million. The Company used
the proceeds to repay borrowings under bank credit facilities. At January 31,
2002, the Company had $225.0 million of asset securitization financings
accounted for as secured borrowings in the accompanying Consolidated Balance
Sheet. The terms of both of the Company's securitizations provide for
committed revolving financing for a one year term that, if not renewed, can be
converted into term debt at the Company's option.
In September 2001, the Company repaid $55.0 million of term debt at maturity
with the proceeds from additional borrowings under bank credit facilities.
FORWARD-LOOKING STATEMENTS
Certain statements in this document may include the words or phrases "can be,"
"expects," "may affect," "may depend," "believe," "estimate," "intend,"
"could," and similar words and phrases that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements are subject to various known and unknown risks and uncertainties
and the Company cautions you that any forward-looking information provided by
or on its behalf is not a guarantee of future performance. The Company's
actual results could differ materially from those anticipated by such forward-
looking statements due to a number of factors, some of which are beyond the
Company's control, including, without limitation, (i) the ability to obtain
funding on acceptable terms, (ii) changes in the risks inherent in the
Company's receivables portfolio and the adequacy of the Company's reserves,
(iii) changes in market interest rates, (iv) changes in economic, financial,
and market conditions, (v) changes in competitive conditions and (vi) the loss
of key executives or other personnel. Forward-looking statements apply only
as of the date made and the Company is not required to update forward-looking
statements for subsequent or unanticipated events or circumstances.
9
PART II
Item 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on December 11, 2001, the
following matters were voted upon:
The following nominees were elected to the Board of Directors:
Number of Votes
Nominee For Withheld
------------------------- ---------- ---------
Lawrence B. Fisher 13,186,608 396,034
William C. MacMillen, Jr. 13,317,831 264,811
Michael C. Palitz 11,593,386 1,989,256
Thomas F. Robards 13,318,806 263,836
Paul R. Sinsheimer 11,799,051 1,783,591
H. E. Timanus, Jr. 13,318,806 263,836
Steven D. Weinroth 13,317,281 265,361
The appointment of Arthur Andersen LLP as the independent public accounting
firm to audit the Company's financial statements for the fiscal year ending
July 31, 2002 was ratified by a vote of 13,467,857 shares for, 110,725 shares
against and 4,060 shares abstained.
The Management Incentive Plan, adopted by the Board of Directors on February
27, 2001, was approved by a vote of 10,970,535 shares for, 2,592,313 shares
against and 19,794 shares abstained.
Item 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL FEDERAL CORPORATION
-----------------------------
(Registrant)
By: /s/ Steven F. Groth
-----------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ David H. Hamm
-----------------------------
Vice President and Controller
(Principal Accounting Officer)
March 13, 2002
-----------------
(Date)
9