================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.(Check one)
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of March 1,
2006 was 27,078,830.
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FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended January 31, 2006
TABLE OF CONTENTS
Part I - Financial Information Page No.
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Item 1. Financial Statements:
Consolidated Balance Sheets at January 31, 2006 (unaudited)
and July 31, 2005 (audited) 3
Consolidated Income Statements for the three and six months
ended January 31, 2006 and 2005 (unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended January 31, 2006 and 2005
(unaudited) 5
Consolidated Statements of Cash Flows for the six months
ended January 31, 2006 and 2005 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
Part II - Other Information
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24-25
Item 6. Exhibits 25
Signatures 26
2
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
===========================================================================================
January 31, 2006* July 31, 2005
===========================================================================================
ASSETS
Finance receivables $1,810,406 $1,666,079
Allowance for credit losses (24,116) (24,225)
-------------------------------------------------------------------------------------------
Finance receivables - net 1,786,290 1,641,854
Cash 7,869 8,456
Other assets 10,080 11,535
-------------------------------------------------------------------------------------------
TOTAL ASSETS $1,804,239 $1,661,845
===========================================================================================
LIABILITIES
Debt:
Long-term ($6,700 at January 31, 2006 and
$6,300 at July 31, 2005 due to related parties) $1,040,800 $ 979,700
Short-term 328,500 280,000
Accrued interest, taxes and other liabilities 68,474 60,031
-------------------------------------------------------------------------------------------
Total liabilities 1,437,774 1,319,731
-------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value, authorized 5,000 shares -- --
Common stock - $.50 par value, authorized 100,000 shares,
shares issued and outstanding (net of 1,696 treasury
shares): 26,542 at January 31, 2006 and 26,231 at
July 31, 2005 13,271 13,116
Additional paid-in capital 116,647 109,226
Retained earnings 236,183 219,772
Accumulated other comprehensive income 364 --
-------------------------------------------------------------------------------------------
Total stockholders' equity 366,465 342,114
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,804,239 $1,661,845
===========================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
3
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS *
(In thousands, except per share amounts)
==============================================================================================
Three Months Ended Six Months Ended
January 31, January 31,
-----------------------------------------
2006 2005 2006 2005
==============================================================================================
Finance income $39,438 $31,064 $75,991 $60,956
Interest expense 16,045 10,458 30,291 19,754
----------------------------------------------------------------------------------------------
Net finance income before provision for credit
losses on finance receivables 23,393 20,606 45,700 41,202
Provision for credit losses on finance receivables -- 300 -- 1,250
----------------------------------------------------------------------------------------------
Net finance income 23,393 20,306 45,700 39,952
Salaries and other expenses 5,761 5,201 11,259 10,882
----------------------------------------------------------------------------------------------
Income before provision for income taxes 17,632 15,105 34,441 29,070
Provision for income taxes 6,904 5,867 13,468 11,272
----------------------------------------------------------------------------------------------
NET INCOME $10,728 $ 9,238 $20,973 $17,798
==============================================================================================
EARNINGS PER COMMON SHARE:
Diluted $ 0.41 $ 0.35 $ 0.80 $ 0.68
==============================================================================================
Basic $ 0.42 $ 0.36 $ 0.81 $ 0.70
==============================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
4
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY *
(In thousands)
=====================================================================================================
Accumulated
Common Stock Additional Other
----------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Total
=====================================================================================================
BALANCE - JULY 31, 2004 25,903 $12,951 $101,920 $189,019 $ -- $303,890
Net income -- -- -- 17,798 -- 17,798
Repurchases of common stock
(retired) (30) (15) (369) (388) -- (772)
Employee stock plans:
Shares issued 256 128 3,346 (43) -- 3,431
Compensation recognized -- -- 1,343 -- -- 1,343
Tax benefits -- -- 596 -- -- 596
Common stock cash dividends -- -- -- (1,741) -- (1,741)
-----------------------------------------------------------------------------------------------------
BALANCE - JANUARY 31, 2005 26,129 $13,064 $106,836 $204,645 $ -- $324,545
=====================================================================================================
=====================================================================================================
Accumulated
Common Stock Additional Other
----------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Total
=====================================================================================================
BALANCE - JULY 31, 2005 26,231 $13,116 $109,226 $219,772 $ -- $342,114
Net income -- -- -- 20,973 -- 20,973
Unrealized gain on cash
flow hedge, net of tax -- -- -- -- 364 364
--------
Comprehensive income 21,337
--------
Employee stock plans:
Shares issued 315 157 3,793 (52) -- 3,898
Compensation recognized -- -- 2,647 -- -- 2,647
Excess tax benefits -- -- 981 -- -- 981
Common stock cash dividends -- -- -- (4,403) -- (4,403)
Cash paid for fractional
shares (4) (2) -- (107) -- (109)
-----------------------------------------------------------------------------------------------------
BALANCE - JANUARY 31, 2006 26,542 $13,271 $116,647 $236,183 $364 $366,465
=====================================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
5
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS *
(In thousands)
==============================================================================================
Six Months Ended January 31, 2006 2005
==============================================================================================
Cash flows from operating activities:
Net income $ 20,973 $ 17,798
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred origination costs and fees 7,402 7,887
Stock-based compensation 2,647 1,343
Provision for credit losses on finance receivables -- 1,250
Depreciation and amortization 436 395
Decrease in other assets 1,619 8,240
Increase (decrease) in accrued interest, taxes and other
liabilities 8,288 (3,543)
Tax benefits from stock plans -- 596
Excess tax benefits from stock-based awards (981) --
----------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,384 33,966
----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Finance receivables originated (647,885) (492,777)
Finance receivables collected 496,047 410,588
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Net cash used in investing activities (151,838) (82,189)
----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Asset securitization borrowings 100,000 39,000
Bank borrowings, net (decrease) increase (29,000) 22,500
Commercial paper, net increase 22,000 6,400
Proceeds from term notes 50,000 --
Repayment of term notes (32,500) (20,000)
Proceeds from stock option exercises 3,898 2,709
Excess tax benefits from stock-based awards 981 --
Common stock cash dividends (4,403) (1,741)
Cash paid for fractional shares of common stock (109) --
Repurchases of common stock -- (50)
----------------------------------------------------------------------------------------------
Net cash provided by financing activities 110,867 48,818
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NET (DECREASE) INCREASE IN CASH (587) 595
Cash - beginning of period 8,456 6,981
----------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 7,869 $ 7,576
==============================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
6
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Financial Federal Corporation and subsidiaries (the "Company") provide
collateralized lending, financing and leasing services nationwide to
middle-market businesses in the general construction, road and infrastructure
construction and repair, road transportation and waste disposal industries. We
lend against, finance and lease a wide range of new and used revenue-producing,
essential-use equipment including cranes, earthmovers, personnel lifts,
trailers and trucks.
Basis of Presentation
We prepared the accompanying unaudited Consolidated Financial Statements
according to the Securities and Exchange Commission's rules and regulations.
These rules and regulations permit condensing or omitting certain information
and note disclosures normally included in financial statements prepared
according to accounting principles generally accepted in the United States of
America (GAAP). The July 31, 2005 Consolidated Balance Sheet was derived from
audited financial statements but does not include all disclosures required by
GAAP. However, we believe the disclosures are sufficient to make the information
presented not misleading. These Consolidated Financial Statements and
accompanying notes should be read with the Consolidated Financial Statements and
accompanying notes included in our Annual Report on Form 10-K for the fiscal
year ended July 31, 2005.
We believe the Consolidated Financial Statements include all adjustments
(consisting of only normal recurring items) necessary to present fairly our
financial position and results of operations for the periods presented. The
results of operations for the three and six months ended January 31, 2006 may
not be indicative of full year results.
On January 31, 2006, we split our common stock 3-for-2 in the form of a
stock dividend. Stockholders received one share for every two shares owned. The
Board of Directors declared the stock split December 15, 2005 and the record
date was January 5, 2006. We paid $109 in lieu of issuing fractional shares. All
share and per share amounts (including stock options, restricted stock and stock
units but excluding treasury stock) in the Consolidated Financial Statements and
accompanying notes were restated to reflect the split. We did not split treasury
stock.
Use of Estimates
GAAP requires us to make significant estimates and assumptions affecting
amounts reported in the Consolidated Financial Statements and accompanying notes
for the allowance for credit losses, non-performing assets, residual values and
stock-based compensation. Actual results could differ significantly from these
estimates.
Stock-Based Compensation Expense
On August 1, 2005, we started recording compensation expense for stock
options as required by Statement of Financial Accounting Standards ("SFAS") No.
123(R), "Share-Based Payment, revised 2004" ("SFAS No. 123R") and according to
the provisions of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 107 using SFAS No. 123R's modified prospective method. This method
requires us to record compensation expense for options unvested at August 1,
2005 and for options subsequently granted or modified. Prior periods will not be
restated. Compensation expense is based on the grant date fair values of options
calculated with the Black-Scholes option-pricing model and is recognized over
the options' vesting periods.
Before August 1, 2005, we applied Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations to account for our stock options. We did not record compensation
expense for stock options under APB No. 25.
7
Compensation expense for options unvested at August 1, 2005 is based on
the grant date fair values of the options calculated under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") and will be
recognized using the graded-vesting (accelerated) attribution method (the method
used for SFAS No. 123 pro forma disclosure). Compensation expense for options
granted after July 31, 2005 will be recognized using the straight-line
attribution method. Compensation expense is only recorded for options expected
to vest. Therefore, we are required to estimate option forfeitures and to
periodically review our estimate based on actual forfeitures and revise it
cumulatively as necessary.
For the three and six months ended January 31, 2006, salaries and other
expenses include $200 and $400, respectively, of compensation expense for
options recognized under SFAS No. 123R resulting in tax benefits of $30 and $60,
respectively. Compensation expense for options capitalized under SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" ("SFAS No. 91") and included
in finance receivables was $300 and $600 for the three and six months ended
January 31, 2006, respectively. Compensation expense recorded for options
reduced basic and diluted earnings per share for the six months ended January
31, 2006 by $0.02 and $0.01, respectively, but did not reduce basic or diluted
earnings per share for the three months ended January 31, 2006. The tax benefits
only applied to compensation expense from non-qualified options. Tax benefits
can only be recorded on compensation expense from incentive stock options when
employees sell shares acquired on exercise of incentive stock options within one
year of the exercise.
Compensation expense for shares of restricted stock and stock units is
based on the market value of our common stock when awarded and is recognized
over the vesting period using the straight-line method or the graded-vesting
method for awards with a performance condition. SFAS No. 123R did not change how
we determine or recognize expense for these awards. Salaries and other expenses
include compensation expense recorded for shares of restricted stock and stock
units of $440 and $380 for the three months ended January 31, 2006 and 2005,
respectively, resulting in tax benefits of $170 and $140, respectively, and $940
and $750 for the six months ended January 31, 2006 and 2005, respectively,
resulting in tax benefits of $360 and $280, respectively. Compensation expense
for shares of restricted stock and stock units capitalized under SFAS No. 91 and
included in finance receivables was $340 and $300 for the three months ended
January 31, 2006 and 2005, respectively, and was $720 and $600 for the six
months ended January 31, 2006 and 2005, respectively.
The effect on net income and earnings per share had we recorded
compensation expense for options in fiscal 2005 under SFAS No. 123 follow:
=================================================================================
Three Months Ended Six Months Ended
January 31, 2005 January 31, 2005
=================================================================================
Net income, as reported $9,238 $17,798
Add: Compensation expense recorded for
stock awards (after-tax) 414 821
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards (after-tax) (868) (1,807)
---------------------------------------------------------------------------------
Pro forma net income $8,784 $16,812
=================================================================================
Diluted earnings per common share:
As reported $ 0.35 $ 0.68
Pro forma 0.34 0.65
=================================================================================
Basic earnings per common share:
As reported $ 0.36 $ 0.70
Pro forma 0.34 0.66
=================================================================================
8
NOTE 2 - FINANCE RECEIVABLES
Finance receivables comprise installment sale agreements and secured loans
(including line of credit arrangements), collectively referred to as loans, with
fixed or floating (indexed to the prime rate) interest rates, and direct
financing leases as follows:
======================================================================
January 31, 2006 July 31, 2005
======================================================================
Loans:
Fixed rate $1,522,122 $1,386,094
Floating rate 115,324 104,999
----------------------------------------------------------------------
Total loans 1,637,446 1,491,093
Direct financing leases * 172,960 174,986
----------------------------------------------------------------------
Finance receivables $1,810,406 $1,666,079
======================================================================
* includes residual values of $38,000 at January 31, 2006 and $37,400
at July 31, 2005
The allowance for credit losses activity is summarized below:
=============================================================================
Three Months Ended Six Months Ended
January 31, January 31,
----------------------------------------
2006 2005 2006 2005
=============================================================================
Allowance - beginning of period $24,188 $24,245 $24,225 $24,081
Provision -- 300 -- 1,250
Write-downs (1,003) (1,552) (1,855) (3,084)
Recoveries 931 1,257 1,746 2,003
-----------------------------------------------------------------------------
Allowance - end of period $24,116 $24,250 $24,116 $24,250
=============================================================================
Percentage of finance receivables 1.33% 1.58% 1.33% 1.58%
=============================================================================
Net charge-offs * $ 72 $ 295 $ 109 $ 1,081
=============================================================================
Loss ratio ** 0.02% 0.08% 0.01% 0.14%
=============================================================================
* write-downs less recoveries
** net charge-offs over average finance receivables, annualized
Non-performing assets comprise finance receivables classified as
non-accrual (income recognition has been suspended and the receivables are
considered impaired) and assets received to satisfy finance receivables
(repossessed equipment, included in other assets) as follows:
==========================================================================
January 31, 2006 July 31, 2005
==========================================================================
Finance receivables classified as
non-accrual $11,626 $23,656
Assets received to satisfy finance
receivables 653 1,674
--------------------------------------------------------------------------
Non-performing assets $12,279 $25,330
==========================================================================
The allowance for credit losses included $400 at January 31, 2006 and $800
at July 31, 2005 specifically allocated to $1,700 and $6,700, respectively, of
impaired finance receivables.
We also provide commitments to extend credit. These commitments contain
off-balance sheet risk and are subject to the same credit policies and
procedures as finance receivables. At January 31, 2006 and July 31, 2005, the
unused portion of these commitments was $27,600 and $15,100, respectively.
9
NOTE 3 - DEBT
Debt is summarized below:
=========================================================================
January 31, 2006 July 31, 2005
=========================================================================
Fixed rate term notes:
5.00% due 2010 - 2011 $ 250,000 $ 200,000
5.92% - 6.80% due 2006 - 2008 71,250 78,750
6.98% due 2006 -- 25,000
-------------------------------------------------------------------------
Total fixed rate term notes 321,250 303,750
Fixed rate term notes swapped to
floating rates due 2008 - 2010 143,250 143,250
Floating rate term note due 2007 10,000 10,000
2.0% convertible debentures due 2034 175,000 175,000
-------------------------------------------------------------------------
Total term debt 649,500 632,000
Asset securitization financings 425,000 325,000
Bank borrowings 184,000 213,000
Commercial paper 116,000 94,000
-------------------------------------------------------------------------
Total principal 1,374,500 1,264,000
Fair value adjustment of hedged debt (5,200) (4,300)
-------------------------------------------------------------------------
Total debt $1,369,300 $1,259,700
=========================================================================
Term Notes
In May 2005, we issued $250,000 of five-year, 5.0% fixed rate term notes.
We received $200,000 in May 2005 and $50,000 in August 2005. Interest is payable
semi-annually. The notes are due at maturity in May and August 2010. Prepayment
of the notes is subject to a premium based on a yield maintenance formula.
Convertible Debentures
The convertible debentures were originally convertible into 5,954,000
shares of common stock at the conversion price of $29.40 per share resulting in
an initial conversion rate of 34.0167 shares per $1 (one thousand) of principal.
In December 2004, we irrevocably elected (under the existing terms of the
debentures and without modifying the debentures) to pay the value of converted
debentures, not exceeding the principal amount, in cash. This eliminated the
5,954,000 shares of common stock originally issuable upon conversion. We will
pay any value over principal with shares of common stock. The number of shares
needed to deliver the value of the debentures over their principal amount would
equal the amount the price of our common stock on the conversion date exceeds
the conversion price divided by the price of our common stock on the conversion
date and multiplied by the number of convertible shares. Through January 31,
2006, no event allowing for the debentures to be converted has occurred.
The conversion rate increases when we pay cash dividends. At January 31,
2006, the conversion rate was 34.50, the conversion price was $28.99 and we
would have to deliver the value of 6,038,000 shares upon conversion of all the
debentures. Future cash dividends will cause further adjustments.
Asset Securitization Financings
In August 2005, our asset securitization facility was increased $100,000
to $425,000 and we borrowed the additional amount. The facility provides for
committed revolving financing for one year. If the facility is not renewed
before its current April 28, 2006 expiration, we can convert borrowings
outstanding into term debt. Finance receivables include $481,000 and $381,000 of
securitized receivables at January 31, 2006 and July 31, 2005, respectively. At
January 31, 2006, we could securitize an additional $239,000 of finance
receivables. Borrowings are limited to 94% of securitized receivables.
Bank Borrowings
We have $450,000 of committed unsecured revolving credit facilities with
several banks expiring as follows; $232,500 in one year and $217,500 between
January and December 2010.
10
Other
Our major operating subsidiary's debt agreements have restrictive
covenants including limits on its indebtedness, encumbrances, investments,
dividends and other distributions to us, sales of assets, mergers and other
business combinations, capital expenditures, interest coverage and net worth.
None of the agreements have a material adverse change clause. All of our debt is
senior.
Long-term debt comprised the following:
=========================================================================
January 31, 2006 July 31, 2005
=========================================================================
Term notes $ 434,300 $410,200
Asset securitization financings 214,000 162,000
Convertible debentures 175,000 175,000
Bank borrowings and commercial paper
supported by bank credit facilities
expiring after one year 217,500 182,500
Bank borrowings refinanced with term
notes -- 50,000
-------------------------------------------------------------------------
Total long-term debt $1,040,800 $979,700
=========================================================================
NOTE 4 - DERIVATIVES
In January 2006, we entered into a $100,000 interest rate lock expiring in
March 2006. We designated the rate lock as a cash flow hedge of an anticipated
issuance of five-year fixed rate term notes hedging the risk of adverse interest
rate changes, on the interest payments of the notes, through the date the
interest rate is set on the note issuance. The fair value of the rate lock at
January 31, 2006 was an asset of $600. This unrealized cash flow hedge gain is
included net of tax in stockholders' equity as accumulated other comprehensive
income.
When the rate lock is terminated, the effective portion of the gain or
loss will be deferred as accumulated other comprehensive income and will be
recognized as an adjustment to interest expense over the five-year term of the
notes issued. Any ineffective portion of the gain or loss will be recognized
currently in interest expense.
We terminated the lock early in February 2006 when the interest rate was
set on the note issuance. We realized a $970 gain and determined $10 of the gain
related to the ineffective portion of the hedge.
At January 31, 2006 and July 31, 2005, the notional amount of fixed to
floating rate interest rate swaps was $143,250. We designated the swaps as fair
value hedges of fixed rate term notes. The swaps expire on the notes' maturity
dates. We receive fixed amounts equal to the fixed rates of the hedged notes,
and we pay amounts equal to floating rates indexed to six-month LIBOR on the
swaps' notional amounts. We record the differences between these amounts as
adjustments to interest expense. We receive a weighted average fixed rate of
4.88% and the weighted average floating pay rate was 6.03% at January 31, 2006
and 5.02% at July 31, 2005. The fair value of the swaps was a liability of
$5,200 at January 31, 2006 and $4,300 at July 31, 2005.
NOTE 5 - STOCKHOLDERS' EQUITY
In December 2005, we raised our quarterly dividend to $0.10 per share from
$0.067 per share. At January 31, 2006, $18,300 was available for future
repurchases under our repurchase program.
NOTE 6 - STOCK PLANS
Our 1998 Stock Option/Restricted Stock Plan (the "1998 Plan") was approved
by stockholders in December 1998 and was amended in fiscal 2002 to include
restricted stock grants and in December 2005 to adjust it (according to its
original terms) for the January 2006 stock split. The plan provides for
3,750,000 incentive or non-qualified stock options or shares of restricted stock
to be granted to officers, other employees and directors. The 1998 Plan expires
in September 2008. The exercise price of incentive stock options may not be less
than the fair market value of our common stock when granted and the term of
incentive stock options is limited to ten years.
11
Options granted through the first half of fiscal 2005 typically were
incentive stock options with a six-year term vesting 25% after two, three, four
and five years. In the second half of fiscal 2005, we granted 143,000
non-qualified options with a four-year term vesting 33 1/3% on July 31, 2005,
2006 and 2007. These changes reduced the fair value calculated for these
options and the after-tax expense to be recorded under SFAS No. 123R. At
January 31, 2006, 768,000 shares of common stock were available for future
grants of stock options and shares of restricted stock under the 1998 Plan.
The Management Incentive Plan ("MIP") for our Chief Executive Officer
("CEO") was approved by stockholders in fiscal 2002 and was amended in December
2005 to adjust it (according to its original terms) for the January 2006 stock
split. Under the MIP, the CEO can be awarded shares of restricted stock and a
cash or stock bonus if predetermined performance goals are achieved. The MIP
provides for 750,000 shares of restricted stock to be awarded with a 150,000
annual limit. In November 2005, we awarded 41,000 shares of restricted stock to
the CEO under the MIP as a bonus for fiscal 2006 subject to certain performance
conditions. Any shares received will vest annually over their four-year term.
In September 2005, the CEO received 27,000 shares of restricted stock under the
MIP as a bonus for fiscal 2005. The shares vest annually over their four-year
term. At January 31, 2006, 495,000 shares of restricted stock were available
for future awards and 159,000 shares of the CEO's restricted stock were
unvested and are scheduled to vest over approximately four years.
We established a Supplemental Retirement Benefit ("SERP") for our CEO in
fiscal 2002 and amended it in December 2005 to adjust it (according to its
original terms) for the January 2006 stock split and in March 2006 (amended
terms described below). We granted 150,000 stock units (representing an
equivalent number of shares of common stock) vesting annually over eight
years. Subject to forfeiture, the CEO will receive shares of common stock
equal to the number of stock units vested when the CEO retires. At January 31,
2006, 75,000 units were unvested. The grant-date fair value of these units was
$22.43.
The restricted stock agreements and the SERP provide for all unvested
shares to vest immediately when certain events occur including the sale of the
Company, the officer's death or disability and qualifying employment
terminations. Unvested shares are also subject to forfeiture. Employees
receive dividends on unvested shares of restricted stock and the CEO will
receive dividend equivalent payments on the stock units under the SERP (as
amended and effective in March 2006). The restricted stock agreements and the
SERP (as amended) also allow employees to pay income taxes required to be
withheld upon vesting by surrendering a portion of the shares vested.
Stock options, shares of restricted stock and stock units are the only
incentive compensation we provide (other than a cash bonus for the CEO) and we
believe these awards further align employees' objectives with those of our
stockholders. We issue new shares when options are exercised or shares of
restricted stock are granted and we do not have a policy to repurchase shares.
Stock option activity and related information for the six months ended
January 31, 2006 is summarized below (options and intrinsic value in thousands):
=========================================================================
Weighted-Average
--------------------
Exercise Term Intrinsic
Options Price (in years) Value*
=========================================================================
Outstanding - August 1, 2005 1,806 $19.09
Granted 8 25.44
Exercised (247) 15.81
Canceled and expired (3)
---------------------------------------
Outstanding - January 31, 2006 1,564 $19.63 3.00 $16,000
=========================================================================
Exercisable - January 31, 2006 421 $17.66 2.25 $ 5,100
=========================================================================
* number of options multiplied by the difference between the $29.83
closing price of our common stock on January 31, 2006 and the
weighted-average exercise price
The fair value of the 8,000 non-qualified options granted in the six
months ended January 31, 2006 was $5.11. The intrinsic value (options
exercised multiplied by the difference between the closing prices of our
common stock on the exercise dates and the exercise prices) of options
exercised in the six months ended January 31, 2006 was $3,100 or $12.57 per
option.
12
Restricted stock activity under the 1998 Plan and the MIP and related
information for the six months ended January 31, 2006 are summarized below
(shares in thousands):
=====================================================================
Weighted-Average
Shares Grant-Date Fair Value
=====================================================================
Unvested - August 1, 2005 585 $19.53
Granted 68 26.26
Vested (3) 24.67
Forfeited --
---------------------------------------------------------------------
Unvested - January 31, 2006 650 $20.21
=====================================================================
The intrinsic value of the 3,000 shares of restricted stock that vested in
the six months ended January 31, 2006 was $77 or $25.63 per share (the closing
price of our common stock on the vesting date).
Future compensation expense (before deferral under SFAS No. 91) for
unvested awards outstanding and expected to vest at January 31, 2006 and the
weighted-average period the expense will be recognized over follow:
========================================================================
Expense Weighted-Average Years
========================================================================
Restricted stock $10,500 4.5
Stock options 2,000 1.9
Stock units 1,700 3.9
---------------------------------------------
Total $14,200 4.0
========================================================================
NOTE 7 - EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") was calculated as follows (in thousands,
except per share amounts):
==========================================================================
Three Months Ended Six Months Ended
January 31, January 31,
---------------------------------------
2006 2005 2006 2005
==========================================================================
Net income $10,728 $9,238 $20,973 $17,798
==========================================================================
Weighted average common shares
outstanding (used for basic EPS) 25,799 25,467 25,760 25,404
Effect of dilutive securities:
Stock options 391 436 347 417
Restricted stock/stock units 254 221 225 195
--------------------------------------------------------------------------
Adjusted weighted average common
shares outstanding (used for
diluted EPS) 26,444 26,124 26,332 26,016
==========================================================================
Earnings per common share:
Diluted $ 0.41 $ 0.35 $ 0.80 $ 0.68
Basic 0.42 0.36 0.81 0.70
==========================================================================
The convertible debentures will not lower diluted EPS until the quarterly
average price of our common stock exceeds the adjusted conversion price of
$28.99. In fiscal periods when the average price of our common stock exceeds
$28.99, the number of shares of common stock needed to deliver the value of the
debentures above their principal amount based on the average stock price would
be included as shares outstanding in calculating diluted EPS. The number of
shares to be included would equal the amount of the average stock price above
the $28.99 conversion price divided by the average stock price and multiplied by
the 6,038,000 convertible shares (referred to as the treasury stock method). The
average price of our common stock was $28.30 and $27.00 for the three and six
months ended January 31, 2006, respectively.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Financial Federal Corporation is an independent financial services company
operating through three wholly owned subsidiaries. We do not have any
unconsolidated subsidiaries, partnerships or joint ventures. We also do not have
any off-balance sheet assets or liabilities (other than commitments to extend
credit), goodwill, other intangible assets or pension obligations, and we are
not involved in income tax shelters. We have one fully consolidated special
purpose entity we established for our on-balance-sheet asset securitization
facility.
We have one line of business; lending money in the form of installment
sale agreements, secured loans and leases (collectively referred to as "finance
receivables") to small and medium sized businesses for their equipment financing
needs. We earn revenue solely from interest and other fees and amounts earned on
our finance receivables. We need to borrow most of the money we lend; therefore
liquidity is important. We borrow from banks and insurance companies and issue
commercial paper to money market funds and other investors. At January 31, 2006,
approximately 75% of our finance receivables were funded with debt.
We earn interest income on our finance receivables and incur interest
expense on our debt. We focus on (i) maximizing the difference between the rates
we earn on our receivables and the rates we incur on our debt ("net interest
spread") (ii) maintaining the credit quality of our receivables and (iii)
managing our interest rate risk. Interest rates on our finance receivables are
94% fixed and 6% floating, and interest rates on our debt are 36% fixed and 64%
floating. Therefore, changes in market interest rates affect our profitability
significantly. The credit quality of our finance receivables can also affect our
profitability significantly. Credit quality can affect revenue, provisions for
credit losses and operating expenses through reclassifying receivables to or
from non-accrual status, incurring charge-offs and incurring costs associated
with non-performing assets. We use various strategies to manage our interest
rate risk and credit risk.
Our main areas of focus are asset quality, liquidity and interest rate
risk. We discuss each in detail in separate sections of this discussion. These
areas are integral to our long-term profitability. Our key operating statistics
are net charge-offs and loss ratio, non-performing assets, delinquencies,
receivables growth, leverage, available liquidity, net interest margin and net
interest spread, and expense and efficiency ratios.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting principles generally accepted in the United States require
judgments, assumptions and estimates that affect the amounts reported in the
Consolidated Financial Statements and accompanying notes. Note 1 to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended July 31, 2005 describes the significant accounting policies
and methods we use to prepare the Consolidated Financial Statements. Accounting
policies involving significant judgment, assumptions and estimates are
considered critical accounting policies and are described below.
The allowance for credit losses on finance receivables is our estimate of
losses inherent in our finance receivables at the balance sheet date. The
allowance is difficult to determine and requires a significant degree of
judgment. The allowance is based on total finance receivables, charge-off
experience, non-accrual and delinquent finance receivables and our current
assessment of the risks inherent in our finance receivables from national and
regional economic conditions, industry conditions, concentrations, the financial
condition of counterparties (includes the customer, equipment vendors,
manufacturers and the customer's owners or affiliates), collateral values and
other factors. We may need to change the allowance level significantly if
unexpected changes in these factors occur. Increases in the allowance would
reduce net income through higher provisions for credit losses. The allowance was
$24.1 million (1.33% of finance receivables) at January 31, 2006 including $0.4
million specifically allocated to impaired receivables.
The allowance includes amounts specifically allocated to impaired
receivables and a general amount providing for losses inherent in the remainder
of finance receivables. In evaluating the fair value of impaired receivables, we
may record a write-down or establish a specific allowance based on the
probability of loss. We record write-downs based on the fair value of the
collateral. We establish specific allowances when collecting all amounts due is
not fully supported solely by the value of the primary collateral depending on
the level and type of other items supporting collectibility. To determine the
general allowance each quarter we first analyze charge-offs for the prior two
years (comparable with the average life of our receivables) to develop
14
percentage loss ranges to apply to receivables according to their assigned risk
profile. Risk profiles are assigned to receivables based on industry and past
due status. We then adjust the calculated range of losses for expected
recoveries and we may also adjust the range for differences between current and
historical loss trends and other factors. Although our method is designed to
calculate probable losses, because significant estimates are used, the adjusted
calculated range of losses may differ significantly from actual losses.
We record impaired finance receivables at their current estimated fair
value (if less than their carrying amount). We record assets received to satisfy
receivables at their current estimated fair value less selling costs (if less
than their carrying amount). We estimate these values based on our evaluation of
the expected cash flows and market value and condition of the collateral or
assets. We evaluate market value by analyzing recent sales of similar equipment
and used equipment publications, using our market knowledge and making inquiries
of equipment vendors. Unexpected adverse changes in or incorrect conclusions on
expected cash flows, market value or condition of collateral or assets, or time
needed to sell equipment would require us to record a write-down. This would
lower net income. Impaired finance receivables and assets received to satisfy
receivables totaled $12.3 million (0.7% of finance receivables) at January 31,
2006.
We record residual values on direct financing leases 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) our projection of
the equipment's fair value at the end of the lease. We may not fully realize
recorded residual values because of unexpected adverse changes in equipment
values. This would lower net income. Residual values were $38.0 million (2.1% of
finance receivables) at January 31, 2006. Historically, we have realized the
recorded residual value on disposition.
We record compensation expense for stock options under SFAS No. 123R using
the Black-Scholes option pricing model. This model requires estimates of
expected volatility of the price of our common stock, the expected life of
options and the expected dividend rate. Estimating volatility, expected life and
dividend rate requires significant judgment and our estimates were based on
historical experience. Also, SFAS No. 123R requires us to estimate stock options
expected to vest (also based on historical experience). If actual results differ
significantly from these estimates, compensation expense for options and our
results of operations could be impacted materially.
RESULTS OF OPERATIONS
Comparison of three months ended January 31, 2006 to three months ended January
31, 2005
======================================================================
Three Months Ended
January 31,
($ in millions, except ------------------
per share amounts) 2006 2005 $ Change % Change
======================================================================
Finance income $39.4 $31.1 $ 8.3 27%
Interest expense 16.0 10.5 5.5 53
Net finance income before
provision for credit losses 23.4 20.6 2.8 14
Provision for credit losses -- 0.3 (0.3) (100)
Salaries and other expenses 5.8 5.2 0.6 11
Provision for income taxes 6.9 5.9 1.0 18
Net income 10.7 9.2 1.5 16
Diluted earnings per share 0.41 0.35 0.06 17
Basic earnings per share 0.42 0.36 0.06 17
======================================================================
Net income increased by 16% to $10.7 million in the second quarter of
fiscal 2006 from $9.2 million in the second quarter of fiscal 2005. The increase
resulted from receivables growth, the higher net yield on finance receivables
and strong asset quality, partially offset by the effects of significantly
higher short-term market interest rates.
Finance income increased by 27% to $39.4 million in the second quarter of
fiscal 2006 from $31.1 million in the second quarter of fiscal 2005. The
increase resulted from the 18% increase in average finance receivables ($269.0
million) to $1.78 billion in the second quarter of fiscal 2006 from $1.51
billion in the second quarter of fiscal 2005 and, to a lesser extent, the higher
net yield on finance receivables. Higher market interest rates, lower
non-accrual receivables and an increase in non-interest finance income raised
the net yield on finance receivables to 8.78% in the second quarter of fiscal
2006 from 8.14% in the second quarter of fiscal 2005.
15
Interest expense (incurred on borrowings used to fund finance receivables)
increased by 53% to $16.0 million in the second quarter of fiscal 2006 from
$10.5 million in the second quarter of fiscal 2005. The increase resulted from
higher average short-term market interest rates and the 20% ($226.0 million)
increase in average debt. Increases in short-term market interest rates,
partially offset by the lower average rate on our fixed rate term debt and
better credit spreads, raised our weighted average cost of funds to 4.72% in the
second quarter of fiscal 2006 from 3.69% in the second quarter of fiscal 2005.
Net finance income before provision for credit losses on finance
receivables increased by 14% to $23.4 million in the second quarter of fiscal
2006 from $20.6 million in the second quarter of fiscal 2005. Net interest
margin (net finance income before provision for credit losses expressed as an
annual percentage of average finance receivables outstanding) decreased to 5.21%
in the second quarter of fiscal 2006 from 5.40% in the second quarter of fiscal
2005 because of the significant increase in short-term market interest rates.
We did not record a provision for credit losses on finance receivables in
the second quarter of fiscal 2006. The provision was $0.3 million in the second
quarter of fiscal 2005. The provision for credit losses is the amount needed to
change the allowance for credit losses to the estimated level of losses inherent
in finance receivables. Based on the low amount of net charge-offs and continued
strong asset quality, we did not need to increase the allowance. Net charge-offs
(write-downs of finance receivables less recoveries) decreased to less than $0.1
million in the second quarter of fiscal 2006 from $0.3 million in the second
quarter of fiscal 2005. The loss ratio (net charge-offs expressed as an annual
percentage of average finance receivables) decreased to 0.02% in the second
quarter of fiscal 2006 from 0.08% in the second quarter of fiscal 2005. Net
charge-offs decreased because of significantly fewer non-accrual receivables.
Salaries and other expenses increased by 11% to $5.8 million in the second
quarter of fiscal 2006 from $5.2 million in the second quarter of fiscal 2005.
The increase resulted from increased salary expense and to a lesser extent,
general increases in other operating expenses from strong receivables growth,
partially offset by cost savings created by significantly fewer non-performing
assets. Salary expense increased because we were required to start recording
compensation expense for stock options in fiscal 2006 and because salaries
increased. Salary expense includes $0.2 million of expense recorded for options
under SFAS No. 123R. The expense ratio (salaries and other expenses expressed
as an annual percentage of average finance receivables) improved to 1.28% in
the second quarter of fiscal 2006 from 1.36% in the second quarter of fiscal
2005 because the rate of receivables growth exceeded the increase in expenses.
The efficiency ratio (expense ratio expressed as a percentage of net interest
margin) improved to 24.6% in the second quarter of fiscal 2006 from 25.2% in
the second quarter of fiscal 2005 because the increase in net finance income
exceeded the increase in expenses.
Diluted earnings per share increased by 17% to $0.41 per share in the
second quarter of fiscal 2006 from $0.35 per share in the second quarter of
fiscal 2005, and basic earnings per share increased by 17% to $0.42 per share in
the second quarter of fiscal 2006 from $0.36 per share in the second quarter of
fiscal 2005.
In the second quarter of fiscal 2006, compensation expense recorded for
stock options under SFAS No. 123R reduced net income by $0.2 million but did not
reduce diluted or basic earnings per share.
Comparison of six months ended January 31, 2006 to six months ended January 31,
2005
======================================================================
Six Months Ended
January 31,
($ in millions, except ----------------
per share amounts) 2006 2005 $ Change % Change
======================================================================
Finance income $76.0 $61.0 $15.0 25%
Interest expense 30.3 19.8 10.5 53
Net finance income before
provision for credit losses 45.7 41.2 4.5 11
Provision for credit losses -- 1.3 (1.3) (100)
Salaries and other expenses 11.3 10.9 0.4 3
Provision for income taxes 13.4 11.2 2.2 19
Net income 21.0 17.8 3.2 18
Diluted earnings per share 0.80 0.68 0.12 18
Basic earnings per share 0.81 0.70 0.11 16
======================================================================
Net income increased by 18% to $21.0 million in the first half of fiscal
2006 from $17.8 million in the first half of fiscal 2005. The increase resulted
from receivables growth, the higher net yield on finance receivables and strong
asset quality, partially offset by the effects of significantly higher
short-term market interest rates.
16
Finance income increased by 25% to $76.0 million in the first half of
fiscal 2006 from $61.0 million in the first half of fiscal 2005. The increase
resulted from the 17% increase in average finance receivables ($248.0 million)
to $1.74 billion in the first half of fiscal 2006 from $1.49 billion in the
first half of fiscal 2005 and, to a lesser extent, the higher net yield on
finance receivables. Higher market interest rates, lower non-accrual receivables
and an increase in non-interest finance income raised the net yield on finance
receivables to 8.65% in the first half of fiscal 2006 from 8.09% in the first
half of fiscal 2005.
Interest expense increased by 53% to $30.3 million in the first half of
fiscal 2006 from $19.8 million in the first half of fiscal 2005. The increase
resulted from higher average short-term market interest rates and the 18%
($204.0 million) increase in average debt. Increases in short-term market
interest rates, partially offset by the lower average rate on our fixed rate
term debt, raised our weighted average cost of funds to 4.56% in the first half
of fiscal 2006 from 3.52% in the first half of fiscal 2005.
Net finance income before provision for credit losses on finance
receivables increased by 11% to $45.7 million in the first half of fiscal 2006
from $41.2 million in the first half of fiscal 2005. Net interest margin
decreased to 5.20% in the first half of fiscal 2006 from 5.49% in the first half
of fiscal 2005. Net interest margin decreased because of the significant
increase in short-term market interest rates.
We did not record a provision for credit losses on finance receivables in
the first half of fiscal 2006 because of low net charge-offs and continued
strong asset quality. The provision was $1.3 million in the first half of fiscal
2005. Net charge-offs decreased to $0.1 million in the first half of fiscal 2006
from $1.1 million in the first half of fiscal 2005. The loss ratio decreased to
0.01% in the first half of fiscal 2006 from 0.14% in the first half of fiscal
2005. Net charge-offs decreased because of significantly fewer non-accrual
receivables.
Salaries and other expenses increased by 3% to $11.3 million in the first
half of fiscal 2006 from $10.9 million in the first half of fiscal 2005. The
increase resulted from increased salary expense and to a lesser extent, general
increases in other operating expenses from strong receivables growth, partially
offset by cost savings created by significantly fewer non-performing assets.
Salary expense increased because we were required to start recording
compensation expense for stock options in fiscal 2006 and because salaries
increased. Salary expense includes $0.4 million of expense recorded for options
under SFAS No. 123R. The expense ratio improved to 1.28% in the first half of
fiscal 2006 from 1.44% in the first half of fiscal 2005 because the rate of
receivables growth exceeded the increase in expenses. The efficiency ratio
improved to 24.6% in the first half of fiscal 2006 from 26.4% in the first half
of fiscal 2005 because the increase in net finance income exceeded the increase
in expenses.
Diluted earnings per share increased by 18% to $0.80 per share in the
first half of fiscal 2006 from $0.68 per share in the first half of fiscal 2005,
and basic earnings per share increased by 16% to $0.81 per share in the first
half of fiscal 2006 from $0.70 per share in the first half of fiscal 2005.
In the first half of fiscal 2006, compensation expense recorded for stock
options under SFAS No. 123R reduced net income by $0.4 million, reduced diluted
earnings per share by $0.01 and reduced basic earnings per share by $0.02.
FINANCE RECEIVABLES AND ASSET QUALITY
We discuss trends and characteristics of our finance receivables and our
approach to managing credit risk in this section. The key aspect is asset
quality. Asset quality statistics measure our underwriting standards, skills and
policies and procedures and can indicate the direction and levels of future
charge-offs and non-performing assets.
===============================================================================
January 31, July 31,
($ in millions) 2006* 2005* $ Change % Change
===============================================================================
Finance receivables $1,810.4 $1,666.1 $144.3 9%
Allowance for credit losses 24.1 24.2 (0.1) --
Net charge-offs 0.1 0.3 (0.2) (60)
Non-performing assets 12.3 25.3 (13.0) (52)
Delinquent finance receivables 9.1 10.2 (1.1) (11)
As a percentage of receivables:
-------------------------------
Allowance for credit losses 1.33% 1.45%
Net charge-offs (annualized) 0.01 0.03
Non-performing assets 0.68 1.52
Delinquent finance receivables 0.50 0.61
===============================================================================
* as of and for the six months ended
17
Finance receivables grew 9% ($144 million) during the first half of fiscal
2006 to $1.81 billion at January 31, 2006 from $1.67 billion at July 31, 2005.
Finance receivables comprise installment sale agreements and secured loans
(collectively referred to as loans) and direct financing leases. At January 31,
2006, loans were 90% ($1.64 billion) of finance receivables and leases were 10%
($173 million).
Finance receivables originated in the second quarter of fiscal 2006 and
2005 were $325 million and $275 million, respectively, and finance receivables
originated in the first half of fiscal 2006 and 2005 were $648 million and $493
million, respectively. Originations increased because of greater demand for
equipment financing. Finance receivables collected in the second quarter of
fiscal 2006 and 2005 were $253 million and $226 million, respectively, and
finance receivables collected in the first half of fiscal 2006 and 2005 were
$496 million and $411 million, respectively. Collections increased because of
higher average receivables and increased prepayments in the first quarter of
fiscal 2006.
Our primary focus is the credit quality of our receivables. We manage our
credit risk by using disciplined and proven underwriting policies and
procedures, by monitoring our receivables closely and by handling non-performing
accounts effectively. Our underwriting policies and procedures require a first
lien on equipment financed. We focus on financing equipment with an economic
life longer than the term financed, historically low levels of technological
obsolescence, use in more than one type of business, ease of access and
transporting, and broad, established resale markets. Securing our receivables
with this equipment can mitigate potential charge-offs. We may also obtain
additional equipment or other collateral, third-party guarantees, advance
payments or hold back a portion of the amount financed. We do not finance or
lease aircraft or railcars, computer related equipment, telecommunications
equipment or equipment located outside the United States, and we do not lend to
consumers.
Our underwriting policies limit our credit exposure with any single
customer. At January 31, 2006, this limit was $32.0 million. Our ten largest
customers accounted for $87.0 million (4.8%) of total finance receivables at
January 31, 2006.
The allowance for credit losses was $24.1 million at January 31, 2006 and
$24.2 million at July 31, 2005. The allowance level declined to 1.33% of finance
receivables at January 31, 2006 from 1.45% at July 31, 2005 because of lower
credit losses and continued strong asset quality. We determine the allowance
quarterly based on an analysis of historical losses and the past due status of
receivables at the end of the quarter as adjusted for expected recoveries and
any differences between current and historical loss trends and other factors.
The allowance level may continue to decline if our asset quality statistics
remain favorable.
Net charge-offs of finance receivables (write-downs less recoveries)
decreased to $0.1 million in the first half of fiscal 2006 from $0.3 million in
the last six months of fiscal 2005 (the prior six month period) and the loss
ratio decreased to 0.01% from 0.03%. Net charge-offs were $72,000 in the second
quarter of fiscal 2006 compared to $37,000 in the first quarter of fiscal 2006
and the loss ratios were 0.02% and 0.01%, respectively. Net charge-offs are at
these low levels because of low non-performing assets.
The net investments in non-accrual (impaired) finance receivables,
repossessed equipment (assets received to satisfy receivables), total
non-performing assets and delinquent finance receivables (transactions with more
than a nominal portion of a contractual payment 60 or more days past due) follow
($ in millions):
========================================================================
January 31, July 31, January 31,
2006 2005 2005
========================================================================
Non-accrual finance receivables * $11.6 $23.6 $26.4
Repossessed equipment 0.7 1.7 1.4
------------------------------------------------------------------------
Total non-performing assets $12.3 $25.3 $27.8
========================================================================
Delinquent finance receivables $ 9.1 $10.2 $12.8
========================================================================
Percentage of non-accrual
receivables not delinquent 60% 65% 70%
========================================================================
* before specifically allocated allowance of $0.4 million at January 31,
2006, $0.8 million at July 31, 2005 and $0.5 million at January 31,
2005
Our asset quality statistics stayed at favorable levels during the
quarter. Net charge-offs, non-accrual receivables, repossessed equipment and
delinquencies were far below expected levels. Therefore, we do not expect
further improvement in these measures and reasonable increases would not
necessarily indicate the start of a negative trend. Non-accrual receivables
18
decreased because we removed the non-accrual classification from several large
receivables we no longer considered impaired. We believe we will collect the
full amount of principal and interest due on these receivables based on payment
performance and collateral coverage.
Although we expect our asset quality statistics to remain favorable, the
high price of oil and higher market interest rates could adversely affect our
statistics. Gasoline and interest are significant costs for most of our
customers and higher than normal increases in these costs could impact their
operating cash flows and their ability to remit payments significantly.
Increases in these costs can also affect the economy adversely. In addition,
several customers owe us over $5.0 million. If any of these receivables become
delinquent, impaired or repossessed, our asset quality statistics could worsen
even though the overall trend may remain positive.
LIQUIDITY AND CAPITAL RESOURCES
We describe our needs for substantial amounts of capital (debt and
equity), our approach to managing liquidity and our current funding sources in
this section. Key indicators are leverage, available liquidity and credit
ratings. Our credit ratings were affirmed in August 2005, our leverage is low
for a financial company, we have ample liquidity available and the maturities of
our debt are staggered and exceed the maturities of our finance receivables.
Liquidity and access to capital are vital to our operations and growth. We
need continued availability of funds to originate or acquire finance
receivables, to purchase portfolios of finance receivables and to repay debt. To
ensure we have enough liquidity, we project our financing needs based on
estimated receivables growth and maturing debt, we monitor capital markets
closely and we diversify our funding sources. Funding sources available to us
include operating cash flow, private and public issuances of term debt, conduit
and term securitizations of finance receivables, committed unsecured revolving
credit facilities, dealer placed and direct issued commercial paper and sales of
common and preferred equity. We believe our liquidity sources are diversified
and we are not dependent on any funding source or any credit provider.
At January 31, 2006, we had $150.0 million available to borrow under our
bank credit facilities (net of commercial paper outstanding). Our asset
securitization facility can be increased by $225.0 million and we can issue more
term debt. We believe, but cannot assure, sufficient liquidity is available to
support our future operations and growth.
Our term debt is rated 'BBB+' by Fitch Ratings, Inc. ("Fitch", a
Nationally Recognized Statistical Ratings Organization) and commercial paper
issued by our major operating subsidiary ($102.5 million at January 31, 2006) is
rated 'F2' by Fitch. In August 2005, Fitch affirmed its investment grade ratings
on our debt and maintained its stable outlook. Our access to capital markets and
our credit spreads are partly dependent on these investment grade credit
ratings.
Our major operating subsidiary's debt agreements have restrictive
covenants including limits on its indebtedness, encumbrances, investments,
dividends and other distributions to us, sales of assets, mergers and other
business combinations, capital expenditures, interest coverage and net worth.
None of the agreements have a material adverse change clause.
Total debt increased by 9% ($109.6 million) to $1.37 billion at January
31, 2006 from $1.26 billion at July 31, 2005 and stockholders' equity increased
by 7% ($24.4 million) to $366.5 million at January 31, 2006 from $342.1 million
at July 31, 2005. Leverage (debt-to-equity ratio) remained at a low 3.7 allowing
for substantial asset growth. Historically, our leverage has not exceeded 5.5.
Debt comprised the following ($ in millions):
===================================================================================
January 31, 2006 July 31, 2005
------------------- --------------------
Amount Percent Amount Percent
===================================================================================
Term notes $ 474.5 35% $ 457.0 36%
Asset securitization financings 425.0 31 325.0 26
Convertible debentures 175.0 13 175.0 14
Borrowings under bank credit
facilities 184.0 13 213.0 17
Commercial paper 116.0 8 94.0 7
-----------------------------------------------------------------------------------
Total principal 1,374.5 100% 1,264.0 100%
Fair value adjustment of hedged debt (5.2) (4.3)
-----------------------------------------------------------------------------------
Total debt $1,369.3 $1,259.7
===================================================================================
19
Term Notes
In August 2005, we received $50 million of five-year, 5.0% fixed rate term
notes issued in May 2005. Interest is payable semi-annually. The notes are due
at maturity in August 2010. We also repaid $32.5 million of term notes at
maturity in the first half of fiscal 2006.
Asset Securitization Financings
Our asset securitization facility was increased by $100.0 million to
$425.0 million in August 2005. We used the proceeds to repay borrowings under
bank credit facilities. We established the facility in July 2001. The facility
expires in April 2006 subject to renewal. The facility limits borrowings to a
minimum level of securitized receivables. If borrowings exceed the minimum
level, we must repay the excess or securitize more receivables. We can
securitize more receivables during the term of the facility. On expiration and
nonrenewal of the facility, we must repay borrowings outstanding or convert them
into term debt. The term debt would be repaid monthly based on the amount of
securitized receivables. Based on the contractual payments of the $481.0 million
of securitized receivables at January 31, 2006, the term debt would be fully
repaid by August 2008.
The unsecured debt agreements of our major operating subsidiary allow 40%
of its finance receivables to be securitized ($720.0 million at January 31,
2006). Therefore, we could securitize an additional $239.0 million of finance
receivables at January 31, 2006. Borrowings are limited to 94% of securitized
receivables.
Convertible Debentures
The convertible debentures were convertible into 6.0 million shares (as
adjusted) of common stock at the adjusted conversion price of $28.99 per share
resulting in an adjusted conversion rate of 34.50 shares for each $1,000 of
principal. In December 2004, we irrevocably elected to pay the value of
converted debentures, not exceeding the principal amount, in cash. We will pay
any value over principal with shares of common stock. This eliminated the 6.0
million shares of common stock issuable upon conversion. Through January 31,
2006, no event allowing for the debentures to be converted has occurred.
Bank Credit Facilities
We have $450.0 million of committed unsecured revolving credit facilities
from nine banks (a $55.0 million increase from July 31, 2005). This includes
$232.5 million of facilities with original terms ranging from three to five
years and $217.5 million of facilities with an original term of one year. These
facilities are a dependable, low-cost source of funds and support our commercial
paper program. We can borrow the full amount under each facility. These
facilities may be renewed before they expire.
Commercial Paper
We issue commercial paper direct and through a $350.0 million program.
Commercial paper matures between 1 and 270 days. As a condition of our credit
rating, our unused committed revolving bank credit facilities must exceed
commercial paper outstanding. Therefore, at January 31, 2006, the combined
amount of commercial paper and bank borrowings was limited to $450.0 million
($300.0 million was outstanding at January 31, 2006).
Stockholders' Equity
In the first half of fiscal 2006, we paid $4.4 million of quarterly cash
dividends and we received $4.9 million from the exercise of stock options and
tax benefits from stock awards.
MARKET INTEREST RATE RISK AND SENSITIVITY
We discuss how changes in market interest rates affect our profitability
and our approach to managing interest rate risk in this section. Higher
short-term market interest rates increased interest expense in the first half of
fiscal 2006 significantly and reduced our net interest spread (the net yield of
finance receivables less the weighted average cost of borrowed funds), an
integral part of a finance company's profitability. We explain the reasons
below.
Our net interest spread is sensitive to changes in short-term and
long-term market interest rates (includes LIBOR, rates on U.S. Treasury
securities, money market rates, swap rates and the prime rate). Increases in
short-term rates reduce our net interest spread (this is occurring currently)
and decreases in short-term rates increase our net interest spread because
floating rate debt (includes short-term debt) exceeds floating rate finance
receivables significantly. Since 64% of our debt is floating rate compared to
20
floating rate finance receivables of only 6%, our cost of funds changes faster
than the yield on our receivables. Our net interest spread is also affected when
short-term and long-term rates do not similarly change. Long-term rates normally
exceed short-term rates. When the differences between long and short-term rates
narrow (resulting in a "flattening yield curve") or when short-term rates exceed
long-term rates (an "inverted yield curve"), our net interest spread should
decrease and when the yield curve widens our net interest spread should increase
because the rates we charge our customers are partially determined by long-term
market interest rates and rates on our floating rate debt are largely determined
by short-term market interest rates. Potential mitigating factors are (i) the
rates we charge are also determined by the prime rate and equipment financing
demand and (ii) issuing long-term fixed rate debt. Our net interest spread is
calculated below:
===============================================================================
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------
2006 2005 2006 2005
===============================================================================
Net yield of finance receivables 8.78% 8.14% 8.65% 8.09%
Weighted average cost of borrowed funds 4.72 3.69 4.56 3.52
-------------------------------------------------------------------------------
Net interest spread 4.06% 4.45% 4.09% 4.57%
===============================================================================
From the end of fiscal 2004, short-term market interest rates rose 3.5%
(350 basis points) and the yield curve flattened significantly. These trends may
continue. Rising short-term market interest rates and a flat or inverted yield
curve cause our cost of funds to increase faster and by a greater amount than
the yield on our receivables reducing our net interest spread.
Our earnings are subject to the risk of rising short-term interest rates
and a flat or inverted yield curve at January 31, 2006 because floating rate
debt exceeded floating rate receivables by $763.0 million (see the table below).
The terms and prepayment experience of our fixed rate receivables mitigate this
risk. Finance receivables are collected monthly over short periods of two to
five years that have been accelerated by prepayments. At January 31, 2006,
$627.0 million (37%) of fixed rate finance receivables are scheduled to be
collected in one year and the weighted average remaining life of fixed rate
finance receivables is approximately twenty months. We do not match the
maturities of our debt to our finance receivables.
==================================================================================
Fixed Rate Floating Rate
------------------ ----------------
($ in millions) Amount Percent Amount Percent Total
==================================================================================
Finance receivables $1,695.1 94% $115.3 6% $1,810.4
==================================================================================
Debt (principal) $ 496.2 36% $878.3 64% $1,374.5
Stockholders' equity 366.5 100 -- -- 366.5
----------------------------------------------------------------------------------
Total debt and equity $ 862.7 50% $878.3 50% $1,741.0
==================================================================================
Floating rate debt (asset securitization financings, floating rate swaps
of fixed rate notes, bank borrowings, commercial paper and floating rate term
note) at January 31, 2006 reprices (interest rate changes) as follows: $681.3
million (77%) within one month, $163.3 million (19%) in two to three months and
$33.7 million (4%) in four to six months. The repricing periods of floating rate
debt follow (in millions):
==================================================================
Balance Repricing Frequency
==================================================================
Asset securitization financings $425.0 generally daily
Floating rate swaps of fixed
rate notes 143.3 semi-annually
Bank borrowings 184.0 generally daily
Commercial paper 116.0 1 to 100 days
(25 day average)
Floating rate term note 10.0 monthly
==================================================================
We quantify interest rate risk by calculating the effect on net income of
a hypothetical, immediate 100 basis point (1.0%) rise in market interest rates.
At January 31, 2006, this hypothetical adverse change in rates would reduce
quarterly net income by approximately $0.6 million based on scheduled repricings
of floating rate debt, fixed rate debt maturing within a year and the expected
effects on the yield of new receivables. We believe this is acceptable
considering the lower cost of floating rate debt. Actual future changes in
market interest rates and the effect on net income may differ materially from
this amount. In addition, other factors that may accompany an actual immediate
100 basis point increase in market interest rates were not considered in the
calculation.
21
We monitor and manage our exposure to changes in market interest rates
through risk management procedures that include using certain derivative
financial instruments and changing the proportion of our fixed and floating rate
debt. We may use derivatives to hedge our exposure to interest rate risk on
existing and forecast debt. We do not speculate with or trade derivatives.
In January 2006, we entered into a $100.0 million interest rate lock
expiring in March 2006. We designated the rate lock as a cash flow hedge of an
anticipated issuance of five-year fixed rate term notes hedging the risk of
adverse interest rate changes, on the interest payments of the notes, through
the date the interest rate is set on the note issuance. The fair value of the
rate lock at January 31, 2006 was an asset of $0.6 million. This unrealized cash
flow hedge gain is included net of tax in stockholders' equity as accumulated
other comprehensive income.
We terminated the lock early in February 2006 when the interest rate was
set on the note issuance. We realized a $1.0 million gain and determined
$10,000 of the gain related to the ineffective portion of the hedge.
At January 31, 2006, the notional amount of floating rate swaps of fixed
rate notes was $143.3 million. We receive fixed amounts equal to the fixed rates
of the hedged notes and pay amounts equal to floating rates indexed to six-month
LIBOR (4.81% at January 31, 2006) on the swaps notional amounts. The swaps
increased interest expense by $0.4 million in the second quarter of fiscal 2006
and by $0.5 million in the first half of fiscal 2006. The weighted average pay
rate of 6.03% at January 31, 2006 exceeded the 4.88% weighted average receive
rate by 115 basis points (1.15%). The weighted average remaining term of the
swaps at January 31, 2006 is 2.5 years.
NEW ACCOUNTING STANDARDS
On August 1, 2005, we started recording compensation expense for stock
options as required by Statement of Financial Accounting Standards ("SFAS") No.
123(R), "Share-Based Payment, revised 2004" ("SFAS No. 123R") and according to
the provisions of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 107 using SFAS No. 123R's modified prospective method. This method
requires us to record compensation expense for options unvested at August 1,
2005 and for options subsequently granted or modified. Prior periods will not be
restated. Compensation expense is based on the grant date fair value of options
calculated with the Black-Scholes option-pricing model and is recognized over
the options' vesting periods. Before August 1, 2005, we applied Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations to account for our stock options. Under
APB No. 25, we did not record compensation expense for our stock options.
Compensation expense for options unvested at August 1, 2005 is based on
the grant date fair values of options calculated under SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") and will be recognized using the
graded-vesting (accelerated) attribution method (the method used for SFAS No.
123 pro forma disclosure). Compensation expense for options granted after July
31, 2005 will be recognized using the straight-line attribution method.
Compensation expense is only recorded for options expected to vest. Therefore,
we are required to estimate option forfeitures and to periodically review our
estimate based on actual forfeitures and revise cumulatively as necessary.
For the three and six months ended January 31, 2006, salaries and other
expenses include $0.2 million and $0.4 million, respectively, of compensation
expense for options recognized under SFAS No. 123R resulting in tax benefits of
$30,000 and $60,000, respectively. Compensation expense for options capitalized
under SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS No.
91") and included in finance receivables was $0.3 million and $0.6 million for
the three and six months ended January 31, 2006, respectively. Compensation
expense recorded for options reduced basic and diluted earnings per share for
the six months ended January 31, 2006 by $0.02 and $0.01, respectively, but did
not reduce basic or diluted earnings per share for the three months ended
January 31, 2006. The tax benefits only applied to compensation expense from
non-qualified options. Tax benefits can only be recorded on compensation
expense from incentive stock options when employees sell shares acquired on
exercise of incentive stock options within one year of the exercise.
Compensation expense for shares of restricted stock and stock units is
based on the market value of our common stock when awarded and is recognized
over the vesting period using the straight-line method or the graded-vesting
method for awards with a performance condition. SFAS No. 123R did not change how
we determine or recognize expense for these awards. Salaries and other expenses
include compensation expense recorded for shares of restricted stock and stock
units of $0.4 million for the three months ended January 31, 2006 and 2005
resulting in tax benefits of $0.2 million and $0.1 million, respectively, and
22
include $0.9 million and $0.8 million for the six months ended January 31, 2006
and 2005, respectively, resulting in tax benefits of $0.3 million. Compensation
expense for shares of restricted stock and stock units capitalized under SFAS
No. 91 and included in finance receivables was $0.3 million for the three
months ended January 31, 2006 and 2005, and was $0.7 million and $0.6 million
for the six months ended January 31, 2006 and 2005, respectively.
FORWARD-LOOKING STATEMENTS
This report may include the words or phrases "can be," "expect,"
"anticipate," "may," "believe," "estimate," "intend," "could," "should,"
"would," "if" and similar words and phrases that are "forward-looking
statements" as defined in 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 we caution you
that any forward-looking information provided by us or on our behalf is not a
guarantee of future performance. Our actual results could differ materially from
those anticipated by forward-looking statements because of the following: (i)
our ability to obtain funding at acceptable terms (ii) changes in risks inherent
in finance receivables and the adequacy of our allowance for credit losses (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 personnel. Forward-looking statements apply only as of the date
made and we are not required to update forward-looking statements for subsequent
or unanticipated events or circumstances.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Market Interest Rate Risk and Sensitivity section in Item 2
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management (with our Chief Executive Officer's and Chief Financial
Officer's participation) evaluated our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934)
as of the end of the period covered by this report. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure information required
to be disclosed in reports we file or submit under the Securities Exchange Act
of 1934 is timely recorded, processed, summarized and reported.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting
during the second quarter of fiscal 2006 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not make any purchases or unregistered sales of our common stock
during the second quarter of fiscal 2006. On January 31, 2006, we split our
common stock 3-for-2 in the form of a stock dividend and we paid $0.1 million
in lieu of issuing fractional shares. We established our common stock
repurchase program in August 1996 and expanded it to include repurchases of
convertible debt. A total of $40.7 million was authorized for repurchases of
common stock and convertible debt, and through January 31, 2006, we repurchased
$15.2 million of common stock and $7.2 million of convertible debt.
23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on December 13, 2005, our
stockholders voted on the following matters:
The following nominees were elected to the Board of Directors:
============================================================
Number of Votes
---------------------------
Nominee For Withheld
============================================================
Lawrence B. Fisher 9,058,123 7,278,996
Michael C. Palitz 15,817,857 519,262
Thomas F. Robards 15,711,447 625,672
Paul R. Sinsheimer 15,909,103 428,016
Leopold Swergold 16,226,730 110,389
H. E. Timanus, Jr. 16,124,447 212,672
Michael J. Zimmerman 16,226,727 110,392
============================================================
The appointment of KPMG LLP as our independent registered public
accounting firm for our fiscal year ending July 31, 2006 was ratified by a vote
of 16,320,151 shares for, 16,559 shares against and 409 shares abstained. Share
amounts in this section were not adjusted for the January 31, 2006 3-for-2
stock split.
Item 5. OTHER INFORMATION
On March 6, 2006, the Executive Compensation and Stock Option Committee
of our Board of Directors approved an amendment and restatement of the June 4,
2002 Supplemental Retirement Benefit Agreement ("SERP") for our CEO (Exhibit
10.3). The SERP was amended and restated to (i) entitle the CEO to receive
cash dividend equivalents on the stock units in per unit amounts equal to
future per share amounts of cash dividends paid on our common stock and (ii)
allow the CEO to pay income taxes required to be withheld on settlement of
the vested stock units through share withholding. Also, the number of stock
units granted under the SERP was adjusted (pursuant to its original terms) to
150,000 from 100,000 as a result of the January 2006 3-for-2 stock split. The
original SERP did not provide for dividend equivalent payments because it was
adopted before we started paying dividends on our common stock.
On March 6, 2006, our Board of Directors approved an Excise Tax
Restoration Agreement (Exhibit 10.4) for the golden parachute excise tax for
our directors and named executive officers. Under the agreement, if the
golden parachute excise tax under Internal Revenue Code Sections 280G and
4999 is imposed on a director or named executive officer resulting from the
sale of the Company, the director or named executive officer will receive an
excise tax restoration payment in an amount covering the excise tax and taxes
on the restoration payment as determined by an independent registered public
accounting firm.
On March 6, 2006, our Board of Directors approved an Indemnification
Agreement (Exhibit 10.5) for our directors and named executive officers. Under
the agreement, we will generally indemnify and hold harmless the indemnitee
against certain expenses (including attorneys' fees), judgments, liabilities,
fines, penalties and settlement amounts incurred for the defense or settlement
of any claim, criminal, civil, administrative or investigative actions or
proceeding the indemnitee is subject to arising from the indemnitee's service
as a director or executive officer to the fullest extent permitted by Nevada
law and subject to limitations. The agreement (i) provides for indemnification
rights regarding third-party claims and proceedings brought by or in the right
of the Company (ii) provides for advancing expenses incurred by the indemnitee
for any covered proceeding (iii) establishes procedures and presumptions to
determine whether the indemnitee is entitled to indemnification and (iv) does
not exclude any other rights to indemnification or expense advances the
indemnitee may be entitled to, including any rights under our Articles of
Incorporation or By-Laws or Nevada law.
On March 6, 2006, we issued a press release (Exhibit 99.1) reporting our
results for the quarter ended January 31, 2006. Exhibit 99.1 shall not be
deemed "filed" for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or subject to the liabilities of that
section, nor shall it be deemed incorporated by reference in any filing under
the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference.
24
On March 6, 2006, we issued a press release (Exhibit 99.2) announcing our
Board of Directors declared a quarterly dividend of $0.10 per share on our
common stock. The dividend is payable on April 28, 2006 to stockholders of
record at the close of business on March 27, 2006. The dividend rate is
unchanged from the previous quarter (adjusting for the 3-for-2 stock split
effective January 31, 2006).
Item 6. EXHIBITS
Exhibit No. Description of Exhibit
--------------------------------------------------------------------------------
*10.1 Amended and Restated 1998 Stock Option/Restricted Stock Plan (as
amended and restated December 15, 2005)
*10.2 Amended and Restated 2001 Management Incentive Plan for the CEO
(as amended and restated March 6, 2006)
*10.3 Amended and Restated Supplemental Retirement Benefit dated
March 6, 2006 between the Registrant and its CEO (as amended and
restated March 6, 2006)
*10.4 Form of Excise Tax Restoration Agreement between the Registrant
and its directors and named executive officers dated March 6,
2006
*10.5 Form of Indemnity Agreement between the Registrant and its
directors and named executive officers dated March 6, 2006
*10.6 Restricted Stock Agreement dated February 22, 2006 between the
Registrant and its CEO
*10.7 Form of Restricted Stock Agreement between the Registrant and
certain senior officers
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
99.1 Press release dated March 6, 2006
99.2 Press release dated March 6, 2006
* management contract or compensatory plan
25
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 8, 2006
-------------
(Date)
26