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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 October 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 001-14237
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 [X] Accelerated filer [ ] 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 on December 3,
2007 was 25,660,185.
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FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended October 31, 2007
TABLE OF CONTENTS
Part I - Financial Information Page No.
-------------------------------------------------------------------- --------
Item 1. Financial Statements:
Consolidated Balance Sheets at October 31, 2007 (unaudited)
and July 31, 2007 (audited) 3
Consolidated Income Statements for the three months ended
October 31, 2007 and 2006 (unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended October 31, 2007 and 2006
(unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended October 31, 2007 and 2006 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
Part II - Other Information
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 5. Other Information 24
Item 6. Exhibits 25
Signatures 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
============================================================================================
October 31, 2007* July 31, 2007
--------------------------------------------------------------------------------------------
ASSETS
Finance receivables $2,125,172 $2,128,353
Allowance for credit losses (24,020) (23,992)
--------------------------------------------------------------------------------------------
Finance receivables - net 2,101,152 2,104,361
Cash 7,821 5,861
Other assets 8,978 9,852
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TOTAL ASSETS $2,117,951 $2,120,074
============================================================================================
LIABILITIES
Debt:
Long-term ($6,200 at October 31, 2007 and $5,700
at July 31, 2007 owed to related parties) $1,338,400 $1,335,850
Short-term 320,300 324,750
Accrued interest, taxes and other liabilities 71,335 71,721
--------------------------------------------------------------------------------------------
Total liabilities 1,730,035 1,732,321
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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): 25,660 at October 31, 2007 and 25,760 at
July 31, 2007 12,830 12,880
Additional paid-in capital 130,854 129,167
Retained earnings 243,822 244,646
Accumulated other comprehensive income 410 1,060
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Total stockholders' equity 387,916 387,753
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,117,951 $2,120,074
============================================================================================
* 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 October 31, 2007 2006
--------------------------------------------------------------------------------------------
Finance income $ 49,596 $ 46,930
Interest expense 22,081 20,892
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Net finance income before provision for credit
losses on finance receivables 27,515 26,038
Provision for credit losses on finance receivables 400 --
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Net finance income 27,115 26,038
Salaries and other expenses 6,509 6,109
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Income before provision for income taxes 20,606 19,929
Provision for income taxes 7,940 7,699
--------------------------------------------------------------------------------------------
NET INCOME $ 12,666 $ 12,230
============================================================================================
EARNINGS PER COMMON SHARE:
Diluted $ 0.50 $ 0.46
============================================================================================
Basic $ 0.51 $ 0.47
============================================================================================
* 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, 2006 27,216 $13,608 $123,091 $253,128 $ 552 $390,379
Net income -- -- -- 12,230 -- 12,230
Reclassification adjustment
for realized gain included
in netincome, net of tax -- -- -- -- (30) (30)
-------
Comprehensive income 12,200
-------
Stock repurchased (retired) (3) (1) (65) (3) -- (69)
Stock plan activity:
Shares issued 54 27 934 -- -- 961
Shares canceled (6) (3) 3 -- -- --
Compensation recognized -- -- 1,663 -- -- 1,663
Excess tax benefits -- -- 126 -- -- 126
Common stock cash dividends -- -- -- (2,729) -- (2,729)
-------------------------------------------------------------------------------------------------------
BALANCE - OCTOBER 31, 2006 27,261 $13,631 $125,752 $262,626 $ 522 $402,531
=======================================================================================================
=======================================================================================================
Accumulated
Common Stock Additional Other
----------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Total
-------------------------------------------------------------------------------------------------------
BALANCE - JULY 31, 2007 25,760 $12,880 $129,167 $244,646 $1,060 $387,753
Net income -- -- -- 12,666 -- 12,666
Unrealized loss on cash flow
hedge, net of tax -- -- -- -- (588) (588)
Reclassification adjustment
for realized gain included
in netincome, net of tax -- -- -- -- (62) (62)
-------
Comprehensive income 12,016
-------
Stock repurchased (retired) (423) (212) (2,197) (9,602) -- (12,011)
Stock plan activity:
Shares issued 323 162 1,727 -- -- 1,889
Compensation recognized -- -- 1,914 -- -- 1,914
Excess tax benefits -- -- 243 -- -- 243
Common stock cash dividends -- -- -- (3,888) -- (3,888)
-------------------------------------------------------------------------------------------------------
BALANCE - OCTOBER 31, 2007 25,660 $12,830 $130,854 $243,822 $ 410 $387,916
=======================================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
5
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS *
(In thousands)
============================================================================================
Three Months Ended October 31, 2007 2006
--------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 12,666 $ 12,230
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred origination costs and fees 4,220 3,904
Stock-based compensation 1,191 928
Provision for credit losses on finance receivables 400 --
Depreciation and amortization 93 154
Decrease in other assets 679 3,558
Increase in accrued interest, taxes and other liabilities 409 19,578
Excess tax benefits from stock-based awards (243) (126)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,415 40,226
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Finance receivables originated (258,831) (320,262)
Finance receivables collected 258,143 263,078
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Net cash used in investing activities (688) (57,184)
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Bank borrowings, net increase (decrease) 477,242 (103,889)
Asset securitization repayments (229,500) --
Commercial paper, net (decrease) increase (219,492) 152,056
Repayments of term notes (31,250) (25,000)
Proceeds from stock option exercises 1,889 961
Excess tax benefits from stock-based awards 243 126
Common stock repurchased (12,011) (69)
Common stock cash dividends (3,888) (2,729)
--------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (16,767) 21,456
--------------------------------------------------------------------------------------------
NET INCREASE IN CASH 1,960 4,498
Cash - beginning of period 5,861 8,143
--------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 7,821 $ 12,641
============================================================================================
* 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 small and
medium sized businesses in the general construction, road and infrastructure
construction and repair, road transportation and refuse 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 and Principles of Consolidation
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, 2007 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, 2007.
In our opinion, 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 months ended October 31, 2007
may not be indicative of full year results.
Use of Estimates
GAAP requires us to make significant estimates and assumptions affecting
the amounts reported in the Consolidated Financial Statements and accompanying
notes for the allowance for credit losses, non-performing assets, residual
values, income taxes and stock-based compensation. Actual results could differ
from these estimates significantly.
New Accounting Standards
Financial Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - An Interpretation of FASB 109",
("FIN No. 48") became effective for us on August 1, 2007. FIN No. 48 requires us
to determine if any tax positions taken on our income tax returns lowering the
amount of tax currently due would more likely than not be allowed by a taxing
authority. If tax positions pass this more-likely-than-not test, the benefits
recorded from them are limited to the amount having a greater than 50% chance of
being realized upon being challenged by a taxing authority. For tax positions
failing the more-likely-than-not test, no income tax benefits can be recorded.
Applicable interest and penalties on any unrecognized tax benefits must be also
accrued.
Applying FIN No. 48 to account for uncertain tax positions was not
significantly different from how we previously accounted for uncertain tax
positions because our income taxes are straightforward. We have no foreign
operations, we are not involved in any questionable tax transactions and we file
in almost every state with a corporate income tax. Therefore, applying FIN No.
48 did not result in an adjustment to beginning retained earnings nor did it
affect our effective tax rate. Our fiscal 2005 and 2004 tax returns were audited
by the IRS in fiscal 2007 and our fiscal 1996 and 1995 tax returns were audited
by the IRS in fiscal 1997. These audits were completed with no changes to the
tax we reported. We only take uncertain positions on our income tax returns when
tax law is unclear and subject to interpretation and we believe not taking the
position would unfairly distort our income tax liability. One state is currently
examining our income tax returns. Our federal tax returns are open to
examination for three years and our state tax returns are generally open to
examination for three to five years.
We record interest and penalties related to uncertain tax positions in
income tax expense. The gross liability recorded for uncertain tax positions was
$1,200 on August 1, 2007 including $200 of interest and penalties. The entire
amount, net of $300 of federal income tax benefits on state income taxes, would
lower our effective tax rate if recognized. There were no material changes to
these amounts at October 31, 2007 and we do not expect any significant changes
in the next twelve months.
7
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements" ("SFAS No. 157") in September 2006. SFAS No. 157
defines fair value (replacing all prior definitions) and creates a framework to
measure fair value, but does not create any new fair value measurements. SFAS
No. 157 is effective in the first quarter of fiscal years beginning after
November 15, 2007. It will become effective for us on August 1, 2008. We are
evaluating how it may affect our consolidated financial statements.
The FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB Statement No. 115" in
February 2007. SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value at specified
election dates and to report unrealized gains and losses on these items in
earnings at each subsequent reporting date. SFAS No. 159 is effective in the
first quarter of fiscal years beginning after November 15, 2007. It will become
effective for us on August 1, 2008. We are evaluating how it may affect our
consolidated financial statements.
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:
========================================================================
October 31, 2007 July 31, 2007
------------------------------------------------------------------------
Loans:
Fixed rate $1,757,914 $1,757,211
Floating rate 164,433 168,574
------------------------------------------------------------------------
Total loans 1,922,347 1,925,785
Direct financing leases * 202,825 202,568
------------------------------------------------------------------------
Finance receivables $2,125,172 $2,128,353
========================================================================
* includes residual values of $43,800 at October 31, 2007 and $42,900
at July 31, 2007
Line of credit arrangements contain off-balance sheet risk and are subject
to the same credit policies and procedures as other finance receivables. The
unused portion of these commitments was $37,100 at October 31, 2007 and $31,400
at July 31, 2007.
Allowance for credit losses activity is summarized below:
========================================================================
Three Months Ended October 31, 2007 2006
------------------------------------------------------------------------
Allowance - beginning of period $ 23,992 $ 24,100
Provision 400 --
Write-downs (973) (647)
Recoveries 601 594
------------------------------------------------------------------------
Allowance - end of period $ 24,020 $ 24,047
========================================================================
Percentage of finance receivables 1.13% 1.18%
========================================================================
Net charge-offs * $ 372 $ 53
========================================================================
Loss ratio ** 0.07% 0.01%
========================================================================
* 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:
========================================================================
October 31, 2007 July 31, 2007
------------------------------------------------------------------------
Finance receivables classified as
non-accrual $25,961 $18,817
Assets received to satisfy finance
receivables 2,085 2,342
------------------------------------------------------------------------
Non-performing assets $28,046 $21,159
========================================================================
8
The allowance for credit losses included $400 at October 31, 2007 and $500
at July 31, 2007 specifically allocated to $6,800 and $4,100 of impaired finance
receivables, respectively. We did not recognize any income in the three months
ended October 31, 2007 or 2006 on impaired loans before we collected our net
investment.
NOTE 3 - DEBT
Debt is summarized below:
========================================================================
October 31, 2007 July 31, 2007
------------------------------------------------------------------------
Fixed rate term notes:
5.00% due 2010 - 2011 $ 250,000 $ 250,000
5.45% - 5.57% due 2011 - 2014 325,000 325,000
6.80% due 2008 5,000 5,000
------------------------------------------------------------------------
Total fixed rate term notes 580,000 580,000
Fixed rate term notes swapped to
floating rates due 2008 - 2010 112,000 143,250
2.0% convertible debentures due 2034 175,000 175,000
------------------------------------------------------------------------
Total term debt 867,000 898,250
Asset securitization financings 195,500 425,000
Bank borrowings 527,292 50,050
Commercial paper 70,208 289,700
------------------------------------------------------------------------
Total principal 1,660,000 1,663,000
Fair value adjustment of hedged debt (1,300) (2,400)
------------------------------------------------------------------------
Total debt $ 1,658,700 $ 1,660,600
========================================================================
Term Notes
We repaid $31,250 of fixed rate term notes swapped to floating rates at
maturity in the first quarter of fiscal 2008. The floating rate on these notes
was 8.58%.
Convertible Debentures
The debentures are due at maturity in April 2034, but we can redeem them
anytime starting in April 2009 by paying the principal amount in cash and
debenture holders can require us to repurchase them on each five-year
anniversary of issuance or when a specified corporate transaction occurs by
paying the principal amount in cash. Debenture holders can also convert the
debentures into cash and common stock before maturity as discussed below.
The debentures can only be converted (i) in any fiscal quarter when the
closing price of our common stock is at least 30% higher than the conversion
price for at least 20 of the last 30 trading days of the prior fiscal quarter
(the "market price condition") (ii) if the debentures are rated 'BB' or lower by
Fitch Ratings, Inc. (three ratings levels lower than the initial rating) (iii)
if we call the debentures for redemption or (iv) if a specified corporate
transaction occurs. No event allowing for the debentures to be converted has
occurred through October 31, 2007. The market price condition would have been
met at October 31, 2007 if the price of our common stock closed above $36.49 for
the required period. The closing price of our common stock was $27.02 on October
31, 2007.
The debentures can only convert into shares of our common stock when their
value exceeds their principal amount because we irrevocably elected (under the
original terms of the debentures and without modifying the debentures) in fiscal
2005 to pay the value of converted debentures, not exceeding the principal
amount, in cash instead of issuing shares of our common stock. Their value
equals the number of convertible shares multiplied by the market value of our
common stock. There were 6,234,000 convertible (but not issuable) shares, the
adjusted conversion price was $28.07 per share and the adjusted conversion rate
was 35.62 shares for each $1 (one thousand) of principal at October 31, 2007. If
the value of converted debentures exceeds their principal amount, shares of
common stock needed to pay the value over principal would equal the difference
between the conversion date price of our common stock and the conversion price,
divided by the conversion date price and multiplied by the number of convertible
shares.
The conversion rate and number of convertible shares increased and the
conversion price decreased in the first quarter of fiscal 2008 because we paid
cash dividends on our common stock. The conversion rate, conversion price and
9
number of convertible shares were 35.43, $28.22 and 6,200,000, respectively at
July 31, 2007. Future cash dividends will cause additional conversion rate and
convertible shares increases and conversion price decreases.
Asset Securitization Financings
We have a $425,000 asset securitization facility providing committed
revolving financing through April 2008. The facility was renewed in April 2007.
If the facility is not renewed again, we could convert borrowings outstanding
into term debt. The term debt would be repaid monthly from collections of
securitized receivables and would be repaid by April 2010 if the facility was
fully borrowed. Finance receivables include $473,000 and $480,000 of securitized
receivables at October 31, 2007 and July 31, 2007, respectively. We can
securitize an additional $373,000 of finance receivables at October 31, 2007. We
replaced $229,500 of borrowings under this facility in the first quarter of
fiscal 2008 with borrowings under our committed bank credit facilities because
the interest rates were lower.
Borrowings under the facility are limited to 94% of eligible securitized
receivables. Securitized receivables ninety or more days past due, classified as
impaired or subject to a bankruptcy, or whose terms are outside of defined
limits, are ineligible to be borrowed against. The facility also restricts the
amount of net charge-offs of securitized receivables and the amount of
delinquent securitized receivables. The facility would terminate if these
restrictions are exceeded, and borrowings outstanding would then be repaid
monthly from collections of securitized receivables.
Bank Borrowings
We have $555,000 of committed unsecured revolving credit facilities from
eleven banks expiring as follows; $85,000 within one year and $470,000 between
July 2009 and October 2012. Borrowings outstanding at October 31, 2007 matured
within one week, were rolled over (reborrowed) and remain outstanding.
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. We
were in compliance with all debt covenants and restrictions at October 31, 2007.
None of the agreements have a material adverse change clause. All of our debt is
senior.
Long-term debt comprised the following:
========================================================================
October 31, 2007 July 31, 2007
------------------------------------------------------------------------
Term notes $ 599,400 $ 599,100
Bank borrowings and commercial
paper supported by bank credit
facilities expiring after one year 470,000 339,750
Convertible debentures 175,000 175,000
Asset securitization financings 94,000 222,000
------------------------------------------------------------------------
Total long-term debt $1,338,400 $1,335,850
========================================================================
NOTE 4 - DERIVATIVES
We entered into interest rate locks (in the form of Treasury locks) with a
total notional amount of $75,000 in August 2007. The rate locks expire in
January 2008. We designated the rate locks as cash flow hedges of our
anticipated issuance of fixed rate term notes hedging the risk of higher
interest payments on the notes for the first five years from increases in market
interest rates before the notes are issued. Changes in the effective portion of
the fair value of the rate locks are deferred as accumulated other comprehensive
income and recognized as an adjustment to interest expense over the five-year
term of the notes. Any ineffective portion would be recognized currently in
interest expense. The fair value of the rate locks was a $960 liability at
October 31, 2007 and is reported in other comprehensive income net of deferred
income tax of $372 at October 31, 2007.
We have fixed to floating interest rate swaps with a total notional amount
of $112,000 at October 31, 2007 and $143,250 at July 31, 2007. The swaps
effectively converted fixed rate term notes into floating rate term notes. We
designated the swaps as fair value hedges of fixed rate term notes. The swaps
expire on the notes' maturity dates. Semiannually, we receive fixed amounts from
the swap counterparty banks equal to the interest we pay on the hedged fixed
rate notes, and we pay amounts to the swap counterparty banks equal to the
swaps' floating rates multiplied by the swaps' notional amounts. We record the
differences between these amounts in interest expense. The swaps' floating rates
change semiannually to a fixed amount over
10
six-month LIBOR. The average pay rate of 5.90% at October 31, 2007 exceeded the
4.50% average receive rate by 140 basis points (1.40%). The average pay rate was
6.90% and the average receive rate was 4.88% at July 31, 2007. The fair value of
the swaps was a liability of $1,300 at October 31, 2007 and $2,400 at July 31,
2007.
NOTE 5 - STOCKHOLDERS' EQUITY
We repurchased and retired 423,000 shares of our common stock in the first
quarter of fiscal 2008 under our repurchase program for $12,011 at a $28.42
average price per share. There was $33,200 available for future repurchases
under the program at October 31, 2007. We paid a $0.15 per share quarterly cash
dividend in the first quarter of fiscal 2008.
NOTE 6 - STOCK PLANS
We have two stockholder approved stock plans; the 2006 Stock Incentive
Plan (the "2006 Plan") and the Amended and Restated 2001 Management Incentive
Plan (the "Amended MIP"). The 2006 Plan provides for the issuance of 2,500,000
incentive or non-qualified stock options, shares of restricted stock, stock
appreciation rights, stock units and common stock to officers, other employees
and directors subject to annual participant limits, and expires in December
2016. Awards may be subject to performance goals. The exercise price of stock
options can not be less than the fair market value of our common stock when
granted and the term of stock options is limited to ten years. There were
2,087,000 shares available for future grants under the 2006 Plan at October 31,
2007. The Amended MIP provides for the issuance of 1,000,000 shares of
restricted stock, with an annual participant limit of 200,000 shares, and cash
or stock bonuses to be awarded to our CEO and other selected officers subject to
predetermined performance goals. The Amended MIP expires in December 2011. There
were 675,000 shares available for future grants under the Amended MIP at October
31, 2007.
We also have a Supplemental Retirement Benefit ("SERP") for our CEO. We
awarded 150,000 stock units vesting annually in equal amounts over eight years.
Subject to forfeiture, our CEO will receive shares of common stock equal to the
number of stock units vested when our CEO retires. At October 31, 2007, 94,000
units were vested.
Options granted through the first half of fiscal 2005 were mostly
incentive stock options with a six-year term vesting 25% after two, three, four
and five years. Options granted in the second half of fiscal 2005 were
non-qualified options with a four-year term vesting 33 1/3% on July 31, 2005,
2006 and 2007. Options granted after fiscal 2005 were non-qualified options with
a five-year term vesting 25% after one, two, three and four years.
Shares of restricted stock awarded through fiscal 2007 (excluding 435,000
shares awarded to executive officers in February 2006) vest annually in equal
amounts over initial periods of three to eight years (seven year average).
Shares of restricted stock awarded to executive officers in February 2006 vest
when the officer's service terminates, other than upon a non-qualifying
termination, after six months (i) after the executive officer attains age 62 or
(ii) after August 2026 if earlier (twelve year average).
We awarded 150,000 shares of performance-based restricted stock to
executive officers under the 2006 Plan and 75,000 of performance-based
restricted stock to our CEO under the Amended MIP in the first quarter of fiscal
2008. Shares earned would vest in October 2012.
All unvested shares of restricted stock and the SERP stock units would
vest immediately upon the sale of the Company or the employees' death or
disability. Unvested shares of restricted stock awarded before fiscal 2007 and
the SERP stock units would also vest immediately upon a qualifying employment
termination, but only a portion (based on the percentage of the vesting period
elapsed) of the shares awarded to executive officers in February 2006 would vest
immediately upon a qualifying employment termination. Unvested shares and units
would be forfeited upon any other employment termination. Dividends are paid on
all unvested shares of restricted stock. The restricted stock agreements and the
SERP also allow employees to pay income taxes required to be withheld at vesting
by surrendering a portion of the shares or units 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 stock-based awards further align employees' and directors'
objectives with those of our stockholders. We issue new shares when options are
exercised or when we award shares of restricted stock, and we do not have a
policy to repurchase shares in the open market when options are exercised or
when we award shares of restricted stock.
11
Stock option activity and related information for the three months ended
October 31, 2007 are summarized below (options and intrinsic value in
thousands):
==========================================================================
Weighted-Average
----------------------
Exercise Remaining Intrinsic
Options Price Term (years) Value *
--------------------------------------------------------------------------
Outstanding - August 1, 2007 1,124 $22.60
Granted -- --
Exercised (98) 19.25
Forfeited (12)
---------------------------------------
Outstanding - October 31, 2007 1,014 $22.89 2.3 $4,400
==========================================================================
Exercisable - October 31, 2007 526 $21.19 1.5 $3,100
==========================================================================
* number of options multiplied by the difference between the $27.02
closing price of our common stock on October 31, 2007 and the average
exercise price
Information on stock option exercises follows (in thousands, except
intrinsic value per option):
==========================================================================
Three Months Ended October 31, 2007 2006
--------------------------------------------------------------------------
Number of options exercised 98 54
Total intrinsic value * $1,000 $ 500
Intrinsic value per option 10.20 9.25
Excess tax benefits realized 223 120
==========================================================================
* options exercised multiplied by the difference between the closing
prices of our common stock on the exercise dates and the exercise
prices
Restricted stock activity for the three months ended October 31, 2007 is
summarized below (shares in thousands):
==================================================================
Weighted-Average
Shares Grant-Date Fair Value
------------------------------------------------------------------
Unvested - August 1, 2007 1,050 $25.34
Granted 225 28.52
Vested (10) 25.95
Forfeited --
----------------------------------------
Unvested - October 31, 2007 1,265 $25.90
==================================================================
Information on shares of restricted stock that vested follows (in
thousands, except intrinsic value per share):
==========================================================================
Three Months Ended October 31, 2007 2006
--------------------------------------------------------------------------
Number of shares vested 10 10
Total intrinsic value * $ 279 $ 274
Intrinsic value per share 27.86 27.38
Excess tax benefits realized 20 6
==========================================================================
* shares vested multiplied by the closing prices of our common stock on
the dates vested
Future compensation expense (before deferral under SFAS No. 91) for
stock-based awards unvested at October 31, 2007 and expected to vest, and the
average expense recognition periods follow:
==================================================================
Expense Weighted-Average Years
------------------------------------------------------------------
Restricted stock $22,600 5.6
Stock options 1,200 2.4
Stock units 1,100 2.0
----------------------------------------
Total $24,900 5.3
==================================================================
12
Total compensation recorded, compensation capitalized (deferred
recognizing) under SFAS No. 91, compensation included in salaries and other
expenses and tax benefits recorded for stock-based awards follow:
==========================================================================
Three Months Ended October 31, 2007 2006
--------------------------------------------------------------------------
Compensation for stock options:
-------------------------------
Total recorded $ 170 $ 289
Capitalized under SFAS No. 91 108 177
--------------------------------------------------------------------------
Included in salaries and other expenses $ 62 $ 112
==========================================================================
Tax benefits recorded $ 12 $ 16
==========================================================================
Compensation for shares of restricted
stock and stock units:
-------------------------------------
Total recorded $ 1,743 $ 1,374
Capitalized under SFAS No. 91 615 558
--------------------------------------------------------------------------
Included in salaries and other expenses $ 1,128 $ 816
==========================================================================
Tax benefits recorded $ 424 $ 312
==========================================================================
Total stock-based compensation:
-------------------------------
Total recorded $ 1,913 $ 1,663
Capitalized under SFAS No. 91 723 735
--------------------------------------------------------------------------
Included in salaries and other expenses $ 1,190 $ 928
==========================================================================
Tax benefits recorded $ 436 $ 328
==========================================================================
NOTE 7 - EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") was calculated as follows (in thousands,
except per share amounts):
==========================================================================
Three Months Ended October 31, 2007 2006
--------------------------------------------------------------------------
Net income $12,666 $12,230
==========================================================================
Weighted-average common shares outstanding
(used for basic EPS) 24,681 26,196
Effect of dilutive securities:
Stock options 184 287
Shares of restricted stock and stock units 389 271
Shares issuable upon conversion of
convertible debt 175 --
--------------------------------------------------------------------------
Adjusted weighted-average common shares
outstanding (used for diluted EPS) 25,429 26,754
==========================================================================
Net income per common share:
Diluted $ 0.50 $ 0.46
==========================================================================
Basic $ 0.51 $ 0.47
==========================================================================
Antidilutive stock options * 257 150
==========================================================================
* excluded from the calculation because they would have increased
diluted EPS
The convertible debentures lower diluted EPS when the quarterly average
price of our common stock exceeds the adjusted conversion price. When this
occurs, shares of common stock needed to deliver the value of the debentures
over their principal amount based on the average stock price would be included
as shares outstanding in calculating diluted EPS. Shares to be included would
equal the difference between the average stock price and the adjusted conversion
price, divided by the average stock price and multiplied by the number of
convertible shares, currently 6,234,000 (referred to as the treasury stock
method). The $28.88 average price of our common stock for the three months ended
October 31, 2007 exceeded the $28.07 adjusted conversion price resulting in
175,000 dilutive shares.
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 in the United States 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. We lend money under installment sale
agreements, secured loans and leases (collectively referred to as "finance
receivables") to small and medium sized businesses for their equipment financing
needs. Finance receivable transactions generally range between $50,000 and $1.5
million, have terms generally ranging between two and five years and provide for
monthly payments. The average transaction size is approximately $220,000. 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 (money currently available for us to borrow) is important. We borrow
from banks and insurance companies and we issue commercial paper to other
investors. Approximately 80% of our finance receivables were funded with debt at
October 31, 2007.
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 asset quality of our receivables (iii) maintaining liquidity and
(iv) managing our interest rate risk. Interest rates on our finance receivables
were 92% fixed and 8% floating, and interest rates on our debt were 45% fixed
and 55% floating at October 31, 2007. Therefore, changes in market interest
rates affect our profitability significantly. The asset quality of our finance
receivables can also affect our profitability significantly. Asset quality can
affect finance income, provisions for credit losses and operating expenses
through reclassifying receivables to or from non-accrual status, incurring
write-downs 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, loss ratio, non-performing assets, delinquencies,
receivables growth, leverage, available liquidity, net interest margin and net
interest spread, and expense and efficiency ratios.
Significant events
A crisis started in the credit markets in mid-August 2007. A credit crisis
makes it difficult for companies, especially finance companies, to obtain funds
and makes obtaining funds more expensive. The crisis is generally believed to
have been caused by problems in the subprime mortgage markets. We do not provide
subprime mortgage financing. The crisis (i) disrupted the asset-backed and
dealer commercial paper markets significantly (ii) caused LIBOR rates to
increase by over 50 basis points (0.50%) and (iii) caused credit spreads to
widen. Our asset securitization financings are funded with our bank lenders'
asset-backed commercial paper and the interest rates on our floating rate debt
are based on a credit spread over LIBOR.
Before the crisis started, we had $425.0 million of asset securitization
financings and $320.0 million of commercial paper outstanding at an average rate
of 5.5%. The crisis (i) caused the interest rates on our asset securitization
financings and commercial paper to exceed 6.0% (ii) made it difficult for us to
issue dealer commercial paper and (iii) caused our credit spreads on term debt
to be nearly double their pre-crisis levels.
In its initial response to the crisis, the Federal Reserve added
significant liquidity to the credit markets at more favorable rates. Major
United States banks then offered borrowings at favorable interest rates. We had
$560.0 million available under committed revolving unsecured credit facilities
with eleven banks when the crisis started. We discuss these facilities in the
Liquidity section. Therefore, we had the ability to forgo issuing dealer
commercial paper at over 6.0% and to repay a significant amount of our asset
securitization financings by borrowing under these bank credit facilities. We
borrowed the full amount under each facility during the quarter. We estimate we
lowered our interest expense by $0.4 million during the quarter by replacing our
commercial paper related debt with bank borrowings.
In mid September 2007, the Federal Reserve lowered its target Federal
Funds Rate by 50 basis points (0.50%); the first decrease in over four years.
This caused an immediate reduction of the interest rates on our floating rate
debt and helped
14
bring some stability back to the commercial paper markets. As a result, we
started to issue a limited amount of dealer commercial paper in October 2007 but
credit spreads on the asset-backed commercial paper that funds our asset
securitization financings remained high. The Federal Reserve lowered its target
Federal Funds Rate by 25 basis points (0.25%) again at the end of October 2007.
As a result of the credit crisis, our commercial paper outstanding
decreased from $320.0 million to a low of $61.0 million and we repaid $229.5
million of asset securitization financings during the quarter. The commercial
paper markets are not expected to return to their pre-crisis state for some
time. Therefore, we do not expect our commercial paper to increase
significantly.
Interest rates on our commercial paper and asset securitization financings
are normally lower than interest rates on our bank borrowings. This is why we
borrowed the full amount under our $425.0 million asset securitization facility,
had over $300.0 million of commercial paper and had over $500.0 million
available under our bank credit facilities before the credit crisis. But since
the crisis started, interest rates on our bank borrowings have been and continue
to be lower than rates on our dealer commercial paper and asset securitization
financings. Therefore, we continue to borrow under our bank credit facilities.
Having $555.0 million of committed unsecured revolving bank credit
facilities allowed us to fund our operations without being disrupted by the
credit crisis and mitigated the effects of higher market interest rates. We have
always stressed the importance of having ample liquidity from diverse, reliable
sources.
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. In Note 1 to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended July 31, 2007, we describe 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.
Allowance for Credit Losses
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 significant judgment. The
allowance is based on total finance receivables, net 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
customers and guarantors, collateral values and other factors. We may need to
change the allowance level significantly if unexpected changes in these
conditions or factors occur. Increases in the allowance would reduce net income
through higher provisions for credit losses. The allowance was $24.0 million
(1.13% of finance receivables) at October 31, 2007 including $0.4 million
specifically allocated to impaired receivables.
The allowance includes amounts specifically allocated to impaired
receivables and an amount to provide for losses inherent in the remainder of
finance receivables (the "general allowance"). We evaluate the fair value of an
impaired receivable and compare it to the carrying amount. The carrying amount
is the amount the receivable is recorded at when we evaluate the receivable and
may include a prior write-down or specific allowance. If our estimate of fair
value is lower than the carrying amount, we record a write-down or establish a
specific allowance depending on (i) how we determined fair value (ii) how
certain we are of our estimate and (iii) the level and type of factors and items
other than the primary collateral, such as guarantees and secondary collateral,
supporting our fair value estimate.
To estimate the general allowance, we analyze historical write-down
activity to develop percentage loss ranges by risk profile. Risk profiles are
assigned to receivables based on past due status and the customers' industry. 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 to arrive at the estimated allowance. We record a provision
for credit losses if the recorded allowance differs from our current estimate.
Although our method is designed to calculate probable losses, because
significant estimates are used, the adjusted calculated range of losses may
differ from actual losses significantly.
Non-Performing Assets
We record non-accrual (impaired) finance receivables and repossessed
equipment (assets received to satisfy receivables) at their current estimated
fair value (if less than their carrying amount). We estimate fair value of these
non-
15
performing assets by evaluating the expected cash flows of impaired receivables
and the market value and condition of the collateral or assets. We evaluate
market value based on recent sales of similar equipment, used equipment
publications, our market knowledge and information from equipment vendors.
Unexpected adverse changes in or incorrect estimates of expected cash flows,
market value or the condition of collateral or assets, or time needed to sell
equipment would require us to record a write-down. This would lower net income.
Non-performing assets totaled $28.0 million (1.3% of finance receivables) at
October 31, 2007.
Residual Values
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 or incorrect
projections of future equipment values. This would lower net income. Residual
values totaled $43.9 million (2.1% of finance receivables) at October 31, 2007.
Historically, we have realized the recorded residual value on disposition.
Income Taxes
We record a liability for uncertain income tax positions according to FIN
No. 48. FIN No. 48 requires us to (i) identify uncertain tax positions we take
on our income tax returns (ii) determine if these tax positions would more
likely than not be allowed by a taxing authority, and if tax positions pass this
more-likely-than-not test, (iii) estimate the amount of tax benefit to record.
Therefore, we must record a liability for tax benefits from positions that fail
the test and from positions where the full amount of the tax benefits are not
expected to be realized. Identifying uncertain tax positions, determining if
they pass the test and determining the liability to record requires a
significant amount of judgment because tax laws are complicated and subject to
interpretation, and because FIN No. 48 requires us to assess the outcome of
hypothetical challenges to these positions by taxing authorities. Actual
outcomes of these uncertain tax positions differing from our assessments
significantly and taxing authorities examining positions we did not consider
uncertain could require us to record additional income tax expense including
interest and penalties on any underpayment of tax. This would lower net income.
Stock-Based Compensation
We record compensation expense for stock options under SFAS No. 123R using
the Black-Scholes option pricing model. This model requires us to estimate the
expected volatility of the price of our common stock, the expected life of
options and the expected dividend rate. SFAS No. 123R also requires us to
estimate forfeitures of stock awards. Estimating volatility, expected life,
dividend rate and forfeitures requires significant judgment and an analysis of
historical data. If actual results differ from our estimates significantly,
compensation expense for options and shares of restricted stock and our results
of operations could be impacted materially.
RESULTS OF OPERATIONS
Comparison of three months ended October 31, 2007 to three months ended October
31, 2006
=========================================================================
Three Months Ended
October 31,
($ in millions, except per ------------------
share amounts) 2007 2006 $ Change % Change
-------------------------------------------------------------------------
Finance income $49.6 $46.9 $ 2.7 6%
Interest expense 22.1 20.9 1.2 6
Net finance income before
provision for credit losses 27.5 26.0 1.5 6
Provision for credit losses 0.4 -- 0.4 --
Salaries and other expenses 6.5 6.1 0.4 7
Provision for income taxes 7.9 7.7 0.2 3
Net income 12.7 12.2 0.5 3
Diluted earnings per share 0.50 0.46 0.04 9
Basic earnings per share 0.51 0.47 0.04 9
=========================================================================
Net income increased by 3% to $12.7 million in the first quarter of fiscal
2008 from $12.2 million in the first quarter of fiscal 2007. The increase
resulted from receivables growth and the higher net yield on finance
receivables, partially offset by higher net charge-offs and higher salary
expense.
16
Finance income increased by 6% to $49.6 million in the first quarter of
fiscal 2008 from $46.9 million in the first quarter of fiscal 2007. The increase
resulted from the 5% increase in average finance receivables ($106.5 million) to
$2.13 billion in the first quarter of fiscal 2008 from $2.02 billion in the
first quarter of fiscal 2007 and, to a lesser extent, the higher net yield on
finance receivables. Higher market interest rates raised the net yield on
finance receivables to 9.28% in the first quarter of fiscal 2008 from 9.21% in
the first quarter of fiscal 2007. Higher non-accrual finance receivables
partially offset these positive factors.
Interest expense (incurred on debt used to fund finance receivables)
increased by 6% to $22.1 million in the first quarter of fiscal 2008 from $20.9
million in the first quarter of fiscal 2007. The increase resulted from the 7%
($105.0 million) increase in average debt and was partially offset by the four
basis point (0.04%) decrease in our cost of debt to 5.33% in the first quarter
of fiscal 2008 from 5.37% in the first quarter of fiscal 2007.
Net finance income before provision for credit losses on finance
receivables increased by 6% to $27.5 million in the first quarter of fiscal 2008
from $26.0 million in the first quarter of fiscal 2007. Net interest margin (net
finance income before provision for credit losses expressed as an annualized
percentage of average finance receivables) increased to 5.15% in the first
quarter of fiscal 2008 from 5.11% in the first quarter of fiscal 2007.
We recorded a $0.4 million provision for credit losses on finance
receivables in the first quarter of fiscal 2008. This is the first provision we
recorded in two years. The provision for credit losses is the amount needed to
change the allowance for credit losses to our estimate of losses inherent in
finance receivables. Net charge-offs (write-downs of finance receivables less
recoveries) were $0.4 million in the first quarter of fiscal 2008 and $53,000 in
the first quarter of fiscal 2007, and the loss ratio (net charge-offs expressed
as an annualized percentage of average finance receivables) was 0.07% in the
first quarter of fiscal 2008 and 0.01% in the first quarter of fiscal 2007.
Salaries and other expenses increased by 7% to $6.5 million in the first
quarter of fiscal 2008 from $6.1 million in the first quarter of fiscal 2007.
The increase resulted from salary increases. The expense ratio (salaries and
other expenses expressed as an annualized percentage of average finance
receivables) was 1.22% in the first quarter of fiscal 2008 and 1.20% in the
first quarter of fiscal 2007. The efficiency ratio (expense ratio expressed as a
percentage of net interest margin) improved to 23.7% in the first quarter of
fiscal 2008 from 23.5% in the first quarter of fiscal 2007.
Diluted earnings per share increased by 9% to $0.50 per share in the first
quarter of fiscal 2008 from $0.46 per share in the first quarter of fiscal 2007,
and basic earnings per share increased by 9% to $0.51 per share in the first
quarter of fiscal 2008 from $0.47 per share in the first quarter of fiscal 2007.
The percentage increase in diluted and basic earnings per share was higher than
the percentage increase in net income because we repurchased 2.4 million shares
of our common stock in the last three fiscal quarters.
FINANCE RECEIVABLES AND ASSET QUALITY
We discuss trends and characteristics of our finance receivables and our
approach to managing credit risk in this section. The key aspect is asset
quality. Asset quality statistics measure our underwriting standards, skills and
policies and procedures and can indicate the direction and levels of future net
charge-offs and non-performing assets.
=========================================================================
October 31, July 31,
($ in millions) 2007 * 2007 * $ Change % Change
-------------------------------------------------------------------------
Finance receivables $2,125.2 $2,128.4 $ (3.2) --%
Allowance for credit losses 24.0 24.0 -- --
Non-performing assets 28.0 21.2 6.8 32
Delinquent finance receivables 15.6 9.9 5.7 58
Net charge-offs 0.4 0.1 0.3 202
As a percentage of receivables:
-------------------------------
Allowance for credit losses 1.13% 1.13%
Non-performing assets 1.32 0.99
Delinquent finance receivables 0.73 0.46
Net charge-offs (annualized) 0.07 0.02
=========================================================================
* as of and for the quarter ended
17
Finance receivables decreased $3 million during the first quarter of
fiscal 2008 to $2.13 billion at October 31, 2007. Finance receivables comprise
installment sale agreements and secured loans (collectively referred to as
loans) and direct financing leases. Loans were 90% ($1.92 billion) of finance
receivables and leases were 10% ($203 million) at October 31, 2007.
Finance receivables originated in the first quarter of fiscal 2008 and
2007 were $259 million and $320 million, respectively. Originations decreased
because demand for transportation and construction equipment financing weakened.
Finance receivables collected in the first quarter of fiscal 2008 and 2007 were
$258 million and $263 million, respectively.
Our primary focus is the credit quality of our receivables. We manage our
credit risk by using disciplined and sound 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 a remaining useful 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 equipment possessing these characteristics can mitigate potential net
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 customer. The
limit was $41.5 million at October 31, 2007. Our ten largest customers accounted
for 6.0% ($127.4 million) of total finance receivables at October 31, 2007.
Our allowance for credit losses was $24.0 million at October 31, 2007 and
July 31, 2007. The allowance level remained at 1.13% of finance receivables at
October 31, 2007. We determine the allowance quarterly based on our analysis of
historical losses and the past due status of receivables adjusted for expected
recoveries and any differences between current and historical loss trends and
other factors.
Net charge-offs of finance receivables (write-downs less recoveries) were
$0.4 million in the first quarter of fiscal 2008 compared to $0.1 million in the
fourth quarter of fiscal 2007 and the annualized loss ratios were 0.07% and
0.02%. Net charge-offs were higher because of the increase in non-performing
assets.
The net investments in non-accrual (impaired) finance receivables,
repossessed equipment (assets received to satisfy receivables), total
non-performing assets and delinquent finance receivables (transactions with more
than a nominal portion of a contractual payment 60 or more days past due) follow
($ in millions):
=========================================================================
October 31, July 31, October 31,
2007 2007 2006
-------------------------------------------------------------------------
Non-accrual finance receivables * $25.9 $18.8 $14.1
Repossessed equipment 2.1 2.4 1.0
-------------------------------------------------------------------------
Total non-performing assets $28.0 $21.2 $15.1
=========================================================================
Delinquent finance receivables $15.6 $ 9.9 $ 7.0
=========================================================================
Percentage of non-accrual receivables
not delinquent 55% 69% 75%
=========================================================================
* before specifically allocated allowance of $0.4 million at October 31,
2007, $0.5 million at July 31, 2007 and $0.2 million at October 31,
2006
Delinquent receivables, non-accrual receivables and net charge-offs
increased during the first quarter of fiscal 2008 but are still at favorable
levels. We expect continued moderate increases in these amounts because of
weaker economic conditions and the crisis in the credit markets.
18
LIQUIDITY AND CAPITAL RESOURCES
We describe our need for raising capital (debt and equity), our need for a
substantial amount of liquidity (money currently available for us to borrow),
our approach to managing liquidity and our current funding sources in this
section. Key indicators are leverage (the number of times debt exceeds equity),
available liquidity, credit ratings and debt diversification. Our leverage is
low for a finance company, we have been successful in issuing debt, we have
ample liquidity available and our debt is diversified with maturities staggered
over seven years.
Liquidity and access to capital are vital to our operations and growth. We
need continued availability of funds to originate or acquire 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 bank 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 provider.
Our term notes are rated 'BBB+' by Fitch Ratings, Inc. ("Fitch", a
Nationally Recognized Statistical Ratings Organization) and our commercial paper
is rated 'F2' by Fitch. As a condition of our 'F2' credit rating, commercial
paper outstanding is limited to the unused amount of our committed credit
facilities. Fitch affirmed its investment grade ratings on our debt in January
2007 and maintained its stable outlook. Our access to capital markets and our
credit spreads are partly dependent on these investment grade credit ratings.
We had $187.0 million available to borrow under our asset securitization
and committed bank credit facilities (after subtracting commercial paper
outstanding) at October 31, 2007. We believe we can increase our asset
securitization facility and issue more term notes. The increase in our asset
securitization facility would be limited to $350.0 million. We believe, but
cannot assure, sufficient capital is available to us to sustain our future
operations and growth.
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. We
were in compliance with all debt covenants and restrictions at October 31, 2007.
None of the agreements have a material adverse change clause.
Debt and stockholders' equity changed little during the first quarter of
fiscal 2008. Debt was $1.66 billion at October 31, 2007 and at July 31, 2007,
and stockholders' equity was $387.9 million at October 31, 2007 and $387.8
million at July 31, 2007. Therefore, leverage (debt-to-equity ratio) remained at
4.3 at October 31, 2007. Our leverage is considered low allowing for substantial
asset growth and additional equity repurchases. Historically, our leverage has
not exceeded 5.5 which is also considered low for a finance company.
Debt comprised the following ($ in millions):
================================================================================
October 31, 2007 July 31, 2007
------------------ -----------------
Amount Percent Amount Percent
--------------------------------------------------------------------------------
Term notes $ 692.0 42% $ 723.3 43%
Asset securitization financings 195.5 12 425.0 26
Convertible debentures 175.0 10 175.0 11
Borrowings under bank credit facilities 527.3 32 50.0 3
Commercial paper 70.2 4 289.7 17
--------------------------------------------------------------------------------
Total principal 1,660.0 100% 1,663.0 100%
Fair value adjustment of hedged debt (1.3) (2.4)
--------------------------------------------------------------------------------
Total debt $ 1,658.7 $1,660.6
================================================================================
Term Notes
We repaid $31.3 million of the fixed rate term notes swapped to floating
rates at maturity in the first quarter of fiscal 2008. The floating rate on
these notes was 8.58%.
19
Asset Securitization Financings
We have a $425.0 million asset securitization facility. We established the
facility in July 2001. The facility provides for committed revolving financing
for one year. The facility was renewed a sixth time in April 2007 and expires in
April 2008. If the facility is not renewed again, we could convert borrowings
into term debt. The term debt would be repaid monthly from collections of
securitized receivables and would be repaid by April 2010 if the facility was
fully borrowed based on the contractual payments of the $473.0 million of
securitized receivables at October 31, 2007.
We replaced $229.5 million of borrowings under this facility in the first
quarter of fiscal 2008 with borrowings under our committed bank credit
facilities. The interest rates on bank borrowings were lower because of the
crisis in the credit markets.
Borrowings under the facility are limited to 94% of eligible securitized
receivables. Securitized receivables ninety or more days past due, classified as
impaired or subject to a bankruptcy, or whose terms are outside of defined
limits, are ineligible to be borrowed against. The facility also restricts the
amount of net charge-offs of securitized receivables and the amount of
delinquent securitized receivables. The facility would terminate if these
restrictions are exceeded, and borrowings outstanding would then be repaid
monthly from collections of securitized receivables.
The unsecured debt agreements of our major operating subsidiary allow 40%
of its finance receivables to be securitized ($846.0 million at October 31,
2007). Therefore, we could securitize an additional $373.0 million of finance
receivables at October 31, 2007.
Convertible Debentures
We issued the convertible debentures in April 2004. They are due at
maturity in April 2034, but we can redeem (commonly referred to as a "call")
them anytime starting in April 2009 by repaying the principal amount in cash and
debenture holders can require us to repurchase them on each five-year
anniversary of issuance or when a specified corporate transaction occurs by
paying the principal amount in cash (commonly referred to as a "put"). Debenture
holders can also convert the debentures into cash and common stock before
maturity as discussed below.
The debentures can only be converted (i) in any fiscal quarter when the
closing price of our common stock is at least 30% higher than the conversion
price for at least 20 of the last 30 trading days of the prior fiscal quarter
(the "market price condition") (ii) if the debentures are rated 'BB' or lower by
Fitch (three ratings levels lower than the initial rating) (iii) if we call the
debentures for redemption or (iv) if a specified corporate transaction occurs.
No event allowing for the debentures to be converted has occurred through
October 31, 2007. The market price condition would have been met at October 31,
2007 if the price of our common stock closed above $36.49 for the required
period. The closing price of our common stock was $27.02 on October 31, 2007.
The debentures can only convert into shares of our common stock when their
value exceeds their principal amount because we irrevocably elected in fiscal
2005 to pay the value of converted debentures, not exceeding the principal
amount, in cash instead of issuing shares of our common stock. Their value
equals the number of convertible shares multiplied by the market value of our
common stock. There are 6.2 million convertible (but not issuable) shares, the
adjusted conversion price is $28.07 per share and the adjusted conversion rate
is 35.62 shares for each $1,000 of principal. If the value of converted
debentures exceeds their principal amount, shares of common stock needed to pay
the value over principal would equal the difference between the conversion date
price of our common stock and the conversion price, divided by the conversion
date price and multiplied by the number of convertible shares. The conversion
rate and number of convertible shares increase and the conversion price
decreases when we pay dividends on our common stock.
Bank Credit Facilities
We have $555.0 million of committed unsecured revolving credit facilities
from eleven banks (a $25.0 million decrease from July 31, 2007). This includes
$500.0 million of facilities with original terms ranging from two to five years
and $55.0 million of facilities with an original term of one year. The average
remaining term of the multi-year facilities is 3.6 years. These facilities range
from $15.0 million to $110.0 million. Borrowings under these facilities can
mature between 1 and 270 days. Borrowings outstanding at October 31, 2007
matured within one week and were rolled over (reborrowed) and remain
outstanding. We borrow amounts mostly for one day, and also for one week or one
month depending on the interest rates and roll the borrowings over when they
mature depending on whether we issue or repay other debt.
20
These committed facilities are a low-cost source of funds and support our
commercial paper program. We can borrow the full amount under each facility
immediately. None of the facilities are for commercial paper back-up only and
the facilities do not have usage fees. These facilities may be renewed, extended
or increased before they expire.
Commercial Paper
We issue commercial paper direct and through a $500.0 million program with
maturities between 1 and 270 days. The amount of commercial paper we could issue
can not exceed the unused amount of our committed credit facilities ($187.0
million October 31, 2007).
Stockholders' Equity
We repurchased 0.4 million shares of our common stock in the first quarter
of fiscal 2008 for $12.0 million paying an average price of $28.42 per share. We
financed the repurchases with borrowings under our bank credit facilities. There
was $33.2 million available for future repurchases under our repurchase program
at October 31, 2007. Repurchases are discretionary and future repurchases are
contingent upon several conditions.
We paid $3.9 million of cash dividends and we received $2.1 million from
stock option exercises and excess tax benefits from stock-based awards in the
first quarter of fiscal 2008.
MARKET INTEREST RATE RISK AND SENSITIVITY
We discuss how changes in market interest rates affect our net interest
spread and how we manage interest rate risk in this section. Net interest spread
(net yield of finance receivables less cost of debt) is an integral part of a
finance company's profitability and is calculated below:
========================================================================
Three Months Ended October 31, 2007 2006
------------------------------------------------------------------------
Net yield of finance receivables 9.28% 9.21%
Cost of debt 5.33 5.37
------------------------------------------------------------------------
Net interest spread 3.95% 3.84%
========================================================================
Our net interest spread was 11 basis points (0.11%) higher in the first
quarter of fiscal 2008 compared to the first quarter of fiscal 2007 because (i)
the yield on our finance receivables increased and (ii) recent decreases in
short-term market interest rates lowered our cost of debt in the first quarter
of fiscal 2008.
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 and decreases in short-term
rates increase our net interest spread because our floating rate debt (includes
short-term debt) exceeds our floating rate finance receivables by a significant
amount. Interest rates on our debt change faster than the yield on our
receivables because 55% of our debt is floating rate compared to floating rate
finance receivables of only 8%. Our net interest spread is also affected when
the differences between short-term and long-term rates change. Long-term rates
normally exceed short-term rates. When this excess narrows (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. We can mitigate the effects of an inverted yield curve by
issuing long-term fixed rate debt. The yield curve remained inverted during most
of the first quarter of fiscal 2008.
Short-term market interest rates decreased in the first quarter of fiscal
2008 because the Federal Reserve lowered the target Federal Funds Rate 50 basis
points (0.50%) in the middle of the quarter and another 25 basis points (0.25%)
at the end of the quarter. As a result, our cost of debt decreased by 25 basis
points (0.25%) during the quarter. Long-term market interest rates also
decreased during the quarter. Lower long-term market interest rates would
decrease the cost of future issuances of fixed-rate term debt but this effect
would be offset by higher credit spreads caused by the crisis in the credit
markets. Lower long-term market interest rates could also result in lower yields
on finance receivables.
Our income is subject to the risk of rising short-term market interest
rates and a flat or inverted yield curve at October 31, 2007 because floating
rate debt exceeded floating rate receivables by $740.6 million (see the table
21
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 and have been accelerated by prepayments. At October 31,
2007, $686.3 million (35%) of fixed rate finance receivables are scheduled to be
collected in one year and the average remaining life of fixed rate finance
receivables excluding prepayments is approximately twenty months. Historically,
annual collections have exceeded 50% of average receivables. We do not match the
maturities of our debt to our finance receivables. The fixed and floating rate
amounts and percentages of our finance receivables and capital at October 31,
2007 follow ($ in millions):
==================================================================================
Fixed Rate Floating Rate
------------------- -----------------
Amount Percent Amount Percent Total
----------------------------------------------------------------------------------
Finance receivables $ 1,960.8 92% $ 164.4 8% $ 2,125.2
==================================================================================
Debt (principal) $ 755.0 45% $ 905.0 55% $ 1,660.0
Stockholders' equity 387.9 100 -- -- 387.9
----------------------------------------------------------------------------------
Total debt and equity $ 1,142.9 56% $ 905.0 44% $ 2,047.9
==================================================================================
Floating rate debt comprises bank borrowings, asset securitization
financings, floating rate swaps of fixed rate notes and commercial paper, and
reprices (interest rates change based on current short-term market interest
rates) at October 31, 2007 as follows: $739.9 million (82%) within one month,
$45.9 million (5%) in two to three months and $119.2 million (13%) in four to
six months. Asset securitization financings reprice daily as the underlying
commercial paper matures. The floating rate swaps of fixed rate notes last
repriced in October 2007. The repricing frequency of floating rate debt follows
(in millions):
=========================================================================
Balance Repricing Frequency
-------------------------------------------------------------------------
Bank borrowings $527.3 generally daily
Asset securitization financings 195.5 generally daily
Floating rate swaps of fixed
rate notes 112.0 semiannually (in 180 days)
Commercial paper 70.2 1 to 150 days (50 day average)
=========================================================================
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.
This hypothetical change in rates would reduce quarterly net income by
approximately $0.7 million at October 31, 2007 based on scheduled repricings of
floating rate debt, fixed rate debt maturing within one year and the expected
effects on the yield of new receivables. This amount increases to $1.1 million
excluding the expected increase in the yield of new receivables. We believe
these amounts are acceptable considering the cost of floating rate debt has been
historically lower than fixed rate debt. Actual future changes in market
interest rates and the effect on net income may differ materially from these
amounts. These hypothetical reductions of quarterly net income at October 31,
2006 were $0.6 million or $1.1 million. Other factors that may accompany an
actual immediate 100 basis point rise in market interest rates were not
considered in the calculation.
We monitor and manage our exposure to potential adverse changes in market
interest rates with derivative financial instruments and by changing the
proportion of our fixed and floating rate debt. We may use derivatives to hedge
our exposure to interest rate risk on existing debt and debt expected to be
issued. We do not speculate with or trade derivatives.
We entered into interest rate locks (in the form of Treasury locks) with a
total notional amount of $75.0 million in August 2007. The rate locks expire in
January 2008. We designated the rate locks as cash flow hedges of our
anticipated issuance of fixed rate term notes hedging the risk of higher
interest payments on the notes for the first five years from increases in market
interest rates before the notes are issued. Changes in the effective portion of
the fair value of the rate locks are deferred as accumulated other comprehensive
income and recognized as an adjustment to interest expense over the five-year
term of the notes. Any ineffective portion would be recognized currently in
interest expense. The fair value of the rate locks was a $1.0 million liability
at October 31, 2007 and is reported in other comprehensive income net of
deferred income tax of $0.4 million at October 31, 2007.
We also have fixed to floating interest rate swaps with a total notional
amount of $112.0 million at October 31, 2007. The swaps effectively convert
fixed rate term notes into floating rate term notes. Semiannually, we receive
fixed amounts from the swap counterparty banks equal to the interest we pay on
the hedged fixed rate notes, and we pay amounts to the swap counterparty banks
equal to the swaps' floating rates multiplied by the swaps' notional amounts.
The swaps' floating rates change semiannually to a fixed amount over six-month
LIBOR (4.81% at October 31, 2007). The swaps
22
increased interest expense by $0.6 million and $0.8 million in the first quarter
of fiscal 2008 and 2007, respectively. The average pay rate of 5.90% at October
31, 2007 exceeded the 4.50% average receive rate by 140 basis points (1.40%).
The average pay rate was 6.90% and the average receive rate was 4.88% at July
31, 2007. The average remaining term of the swaps at October 31, 2007 is one
year. In the first quarter of fiscal 2008, a swap with a $31.3 million notional
amount and an 8.58% rate expired when the swapped 6.23% fixed rate term notes
matured.
NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - An Interpretation of FASB 109",
("FIN No. 48") became effective for us on August 1, 2007. FIN No. 48 requires us
to determine if any tax positions taken on our income tax returns lowering the
amount of tax currently due would more likely than not be allowed by a taxing
authority. If tax positions pass this more-likely-than-not test, the benefits
recorded from them are limited to the amount having a greater than 50% chance of
being realized upon being challenged by a taxing authority. For tax positions
failing the more-likely-than-not test, no income tax benefits can be recorded.
Applicable interest and penalties on any unrecognized tax benefits must be also
accrued.
Applying FIN No. 48 to account for uncertain tax positions was not
significantly different from how we previously accounted for uncertain tax
positions because our income taxes are straightforward. We have no foreign
operations, we are not involved in any questionable tax transactions and we file
in almost every state with a corporate income tax. Therefore, applying FIN No.
48 did not result in an adjustment to beginning retained earnings nor did it
affect our effective tax rate. Our fiscal 2005 and 2004 tax returns were audited
by the IRS in fiscal 2007 and our fiscal 1996 and 1995 tax returns were audited
by the IRS in fiscal 1997. These audits were completed with no changes to the
tax we reported. We only take uncertain positions on our income tax returns when
tax law is unclear and subject to interpretation and we believe not taking the
position would unfairly distort our income tax liability. One state is currently
examining our income tax returns. Our federal tax returns are open to
examination for three years and our state tax returns are generally open to
examination for three to five years.
We record interest and penalties related to uncertain tax positions in
income tax expense. The gross liability recorded for uncertain tax positions was
$1.2 million on August 1, 2007 including $0.2 million of interest and penalties.
The entire amount, net of $0.3 million of federal income tax benefits on state
income taxes, would lower our effective tax rate if recognized. There were no
material changes to these amounts at October 31, 2007 and we do not expect any
significant changes in the next twelve months.
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements" ("SFAS No. 157") in September 2006. SFAS No. 157
defines fair value (replacing all prior definitions) and creates a framework to
measure fair value, but does not create any new fair value measurements. SFAS
No. 157 is effective in the first quarter of fiscal years beginning after
November 15, 2007. It will become effective for us on August 1, 2008. We are
evaluating how it may affect our consolidated financial statements.
The FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB Statement No. 115" in
February 2007. SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value at specified
election dates and to report unrealized gains and losses on these items in
earnings at each subsequent reporting date. SFAS No. 159 is effective in the
first quarter of fiscal years beginning after November 15, 2007. It will become
effective for us on August 1, 2008. We are evaluating how it may affect our
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Statements in this report containing the words or phrases "can be,"
"expect," "anticipate," "may," "believe," "appears," "estimate," "intend,"
"could," "should," "would," "if," "outlook" and other words and phrases
expressing our expectations are "forward-looking statements." Actual results
could differ from those contained in the forward-looking statements materially
because they involve various assumptions and known and unknown risks and
uncertainties. Information about risk factors that could cause actual results to
differ materially is discussed in "Part I, Item 1A Risk Factors" in our Annual
Report on Form 10-K for the year ended July 31, 2007 and other sections of this
report. Risk factors include (i) an economic slowdown (ii) the inability to
collect finance receivables and the sufficiency of the allowance for credit
losses (iii) the inability to obtain capital or maintain liquidity (iv) rising
short-term market interest rates and adverse changes in the yield
23
curve (v) increased competition (vi) the inability to retain key employees and
(vii) adverse conditions in the construction and road transportation
industries. Forward-looking statements do not guarantee our future performance
and apply only as of the date made. We are not required to update or revise
them for future or unanticipated events or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2, Market Interest Rate Risk and Sensitivity.
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)
at the end of the period covered by this report. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded 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 recorded, processed, summarized and reported timely.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting
during the first quarter of fiscal 2008 that materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
For the Quarter Ended October 31, 2007
========================================================================================
(c) Total Number of (d) Maximum Number
(a) Total Shares Purchased (or Approximate Dollar
Number (b) Average as Part of Publicly Value) of Shares that May
of Shares Price Paid Announced Plans or Yet Be Purchased Under
Month Purchased per Share Programs the Plans or Programs
----------------------------------------------------------------------------------------
September 2007 136,800 $ 28.52 136,800 $ 41,303,000
October 2007 285,822 28.37 285,822 33,195,000
------------------------------------------------------------
Total 422,622 $ 28.42 422,622
========================================================================================
We did not sell any unregistered shares of our common stock during the
first quarter of fiscal 2008. We established our $50.0 million common stock and
convertible debt repurchase program in June 2007.
Item 5. Other Information
We issued a press release on December 4, 2007 reporting our results for
the quarter ended October 31, 2007. The press release is attached as Exhibit
99.1. 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
Item 6. Exhibits
Exhibit No. Description of Exhibit
--------------------------------------------------------------------------------
3.1 (a) Articles of Incorporation
3.2 (b) Certificate of Amendment of Articles of Incorporation dated
December 9, 1998
3.3 (c) Amended and Restated By-laws dated March 5, 2007
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 December 4, 2007
Previously filed with the Securities and Exchange Commission as an exhibit to
our:
--------------------------------------------------------------------------------
(a) Registration Statement on Form S-1 (Registration No. 33-46662) filed
May 28, 1992
(b) Form 10-Q for the quarter ended January 31, 1999
(c) Form 10-Q for the quarter ended January 31, 2007
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)
December 6, 2007
----------------
(Date)
26