<PAGE> 1
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 June 30, 1998
[ ] 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 1-041077
T & W FINANCIAL CORPORATION (Exact name of
registrant as specified in its charter)
WASHINGTON 91-1844249
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6416 PACIFIC HIGHWAY EAST, TACOMA, WASHINGTON 98424
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (253) 922-5164
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 92) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's common stock as of August
12, 1998 was 8,394,757
- --------------------------------------------------------------------------------
<PAGE> 2
T & W FINANCIAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Part I. Financial Statements
<TABLE>
<CAPTION>
Item I.Financial Statements Page
----
<S> <C> <C>
a) Income Statements
for the three months and six months ended June 30, 1998
and June 30, 1997 1
b) Balance Sheets
as of June 30, 1998, June 30, 1997 and December 31, 1997 2
c) Cash Flows Statements
for the six months ended June 30, 1998 and June 30, 1997 3
d) Shareholders' Equity
for the period ended June 30, 1998 4
e) Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
Signature
<PAGE> 3
T&W FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Revenues:
Lease contract revenue $ 3,585 $ 3,543 $ 8,554 $ 7,298
Gain on sale of leases 8,997 2,245 15,029 3,448
Fee income 473 77 890 134
Servicing & Other Income 1,589 483 2,176 738
-------- -------- -------- --------
Total Revenues 14,644 6,348 26,649 11,618
-------- -------- -------- --------
Expenses:
Interest expense 1,473 1,781 3,742 3,726
Compensation and related expenses 1,162 1,130 2,272 1,986
Amortization of initial direct cost 1,102 650 1,664 1,222
Provision for credit losses 1,038 120 1,428 402
Other general and administrative
expenses 2,446 727 2,974 1,073
-------- -------- -------- --------
7,221 4,408 12,080 8,409
-------- -------- -------- --------
Income before minority interest and
income taxes 7,423 1,940 14,569 3,209
Minority Interest -- --
(1,113) (291) (2,185) (481)
-------- -------- -------- --------
Income before income taxes 6,310 1,649 12,384 2,728
Income Taxes -- --
(2,272) (594) (4,459) (982)
-------- -------- -------- --------
Net Income $ 4,038 $ 1,055 $ 7,925 $ 1,746
======== ======== ======== ========
Earnings Per Share: Basic and Diluted $ 0.48 $ 0.18 $ 0.94 $ 0.30
Weighted Average Number of shares of
Common Stock and Common Stock
Equivalents Outstanding 8,400 5,800 8,400 5,800
</TABLE>
See accompanying notes
<PAGE> 4
T&W FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 14,530 $ 8,861
Dealer floor plans 5,541 --
Net investment in leases 113,309 103,890
Securitization receivables 37,083 6,750
Intangible assets, net 3,715 2,190
Other assets 14,886 2,489
-------- --------
Total Assets $189,064 $124,180
======== ========
Accounts payable and other accrued liabilities $ 14,145 $ 6,111
Notes payable - recourse 47,623 17,659
Notes payable - securitized 42,683 80,804
Security deposits 10,814 7,442
Deferred income taxes 15,659 --
-------- --------
Total Liabilities 130,924 112,016
-------- --------
Minority interest 9,368 --
-------- --------
Preferred Stock -- --
Common Stock and paid-in capital 28,263 3,438
Retained Earnings 20,509 8,726
-------- --------
Total Shareholders' Equity 48,772 12,164
-------- --------
Total Liabilities and Shareholders'
Equity $189,064 $124,180
======== ========
</TABLE>
See accompanying notes
<PAGE> 5
T&W FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Net Income $ 7,925 $ 3,209
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Amortization and depreciation 2,177 1,352
Provision for credit losses 1,428 402
Gain on sale of leases (15,029) (3,448)
Minority interest 2,185 --
Deferred taxes 4,459 --
Changes in assets and liabilities exclusive of
the effects of business acquisitions:
Increase (decrease) in accounts payable and
other accrued liabilities 7,038 (1,666)
Other -- (20)
--------- ---------
Net Cash Provided (Used) by Operating Activities 10,183 (171)
--------- ---------
Cash Flows From Investing Activities
New leases originated (137,000) (45,243)
Lease payments received 10,615 24,072
Initial direct costs incurred (3,269) (1,376)
Proceeds from sale of lease portfolio 156,515 54,213
Increase in other assets (6,644) (329)
Net cash (advances) payments on floor plans 1,256 --
Cash received in acquisition net of cash paid -- 191
Purchase of Equipment (431) --
--------- ---------
Net Cash Provided (Used) by Investing Activities 21,042 31,528
--------- ---------
Cash Flows From Financing Activities
Proceeds from recourse and nonrecourse borrowings 65,045 24,332
Payments on recourse and nonrecourse borrowings (111,121) (54,440)
Net increase in security deposits 1,190 1,182
Proceeds from sale of common stock, net of costs 146 --
Debt issue costs paid (508) (294)
Distributions to shareholders -- (1,340)
--------- ---------
Net Cash Provided (Used) by Financing Activities (45,248) (30,560)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (14,023) 797
Cash an Cash Equivalents, beginning of period 28,553 8,064
--------- ---------
Cash an Cash Equivalents, beginning of period $ 14,530 $ 8,861
========= =========
Income Taxes Paid $ - $ -
========= =========
Interest Paid 3,742 3,726
========= =========
</TABLE>
See accompanying notes
<PAGE> 6
T & W FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock and Retained Total
Paid in Capital Earnings
---------------- -------- -------
<S> <C> <C> <C>
Balance at December 31, 1997 $28,117 $12,584 $40,701
Net Income (unaudited)
7,925 7,925
Issuance of common stock
146 146
------- ------- -------
Balance at June 30, 1998 $28,263 $20,509 $48,772
======= ======= =======
</TABLE>
See accompanying notes
<PAGE> 7
T & W FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
T & W Financial Corporation ("T&W" or the "Company") is a specialized
commercial finance company that was formed in November 1997 to provide capital
equipment financing principally in the form of leases, to commercial entities.
Previously, the Company's operations were part of a group of pass-through
entities, each having primarily the same two individual owners. The assets,
liabilities and operations of these pass-through entities were transferred to a
newly formed limited liability company owned 85% by T&W and 15% by T & W Funding
Company VI, L.L.C., an entity owned by T&W's senior management. The Company's
operations extend throughout the United States, with no significant
concentration in any region except the Pacific Northwest. The Company's
headquarters are located in Tacoma, Washington.
The accompanying consolidated balance sheets and related interim consolidated
statements of income, and cash flows are unaudited. In the opinion of
management, all adjustments, which consist of only normal recurring items
necessary for the fair presentation of these interim financial statements have
been included. Interim results are not necessarily indicative of the results
expected for the full year.
NOTE 2. NET INVESTMENT IN LEASES
The Company's investments in leases have been pledged as collateral for certain
notes payable. The investment in leases which are in SPE's and pledged as
collateral for related debt are referred to herein as "Securitized". The net
investment in leases presented on a basis by type of borrowing for which the
investment is pledged as collateral is summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Securitized ---
Minimum lease payments receivable $ 50,918 $ 95,559
Estimated residual value of leased equipment, net 6,729 9,651
Unearned lease revenue (7,859) (17,106)
--------- ---------
49,788 88,104
--------- ---------
Not Securitized ---
Minimum lease payments receivable 67,727 15,205
Estimated residual value of leased equipment, net 5,816 2,200
Unearned lease revenue (13,008) (3,283)
--------- ---------
60,535 14,122
--------- ---------
Allowance for Credit Losses (1,103) (1,005)
--------- ---------
Initial Direct Costs, net 4,089 2,669
--------- ---------
Net Investment in Leases $ 113,309 $ 103,890
========= =========
</TABLE>
<PAGE> 8
A summary of activity in the allowance for credit losses account is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
1998 1997
------- -------
<S> <C> <C>
BALANCE, beginning of period $ 1,235 $ 1,323
------- -------
Provision for credit losses 1,428 402
------- -------
Charge-offs (1,314) (226)
Recoveries 379 31
------- -------
Net charge-offs (935) (195)
------- -------
Decrease related to leases sold (625) (525)
======= =======
BALANCE, end of period $ 1,103 $ 1,005
======= =======
</TABLE>
NOTE 3. NOTES PAYABLE - RECOURSE
Notes payable for which the lender has recourse against the Company are secured
by guarantees of shareholders and for lines of credit borrowings, underlying
pledged leases, and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Payable to bank drawn of a $75 million credit facility, interest
payable monthly at 1.5% above the LIBOR rate, due in 1999 $42,000 $ --
Payable to bank drawn of a $15 million credit line, interest
payable monthly at 2.0% above 30 day LIBOR rate due as
payments are made on underlying leases (last lease payment
due October 2001) 399 2,954
Payable to bank drawn of a $5 million credit line, interest
payable monthly at 2.0% above LIBOR, due July 1998 658 --
Payable to bank drawn of a $15 million credit line, interest
payable monthly at the annual Eurodollar rate, due
October 1997 -- 6,905
Payable to bank drawn of a $7.5 million credit line, interest
payable monthly at 2.0% above LIBOR, due July 1997 -- 1,253
Payable to affiliate, interest payable monthly at 2.0% above
LIBOR, due May and July 1997 -- 1,650
Acquisition notes payable, interest at 8%, $750,000 due
October 1998 with remaining principal and interest due
quarterly to 2007, net of imputed interest discount
of $225,000 4,566 4,750
Other -- 147
------- -------
$47,623 $17,659
======= =======
</TABLE>
<PAGE> 9
NOTE 4. SUBSEQUENT EVENTS
In July 1998, the Company acquired substantially all of the assets of
privately-held Member Services Corporation, and established Member Services
Company, L.L.C. to provide alternative financing for community banks. The new
entity is 70% owned by T&W, with the remaining 30% owned by private
shareholders.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements are made throughout this Management's Discussion
and Analysis of Financial Condition and Results of Operations. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"anticipates", "believes", "estimates", "expects", "intends", "plans", "seeks",
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the results of the
Company to differ materially from those indicated by such forward-looking
statements, including those detailed in this section. Unless the context
otherwise requires, the terms "Company" and "T&W" mean T&W Financial
Corporation, its predecessors, subsidiaries and affiliates.
The Company's forward-looking statements are based primarily on the
Company's current expectations and are subject to a number of risks and
uncertainties. Important factors to consider in evaluating the Company's forward
looking statements include (1) the Company's ability to continue to fund its
current business strategy with cost effective asset securitization facilities;
(2) the level of credit enhancement required by rating agencies to achieve
investment grade status for debt securities issued by the special purpose
entities or owner trusts which purchase leases from the Company (the "SPEs");
(3) the collectibility of securitization receivables which represent the excess
cash flows anticipated by the SPEs; (4) the Company's ability to identify
suitable acquisition candidates or complete acquisitions on reasonable terms;
(5) the Company's ability to attract and retain qualified management personnel;
(6) the existence of a market for used equipment that must be sold or re-leased
to recover the residual value of such equipment recorded by the Company, when
guarantors of the residual values cannot satisfy their obligations to the
Company; (7) the Company's ability to create and maintain relationships with
equipment providers and referral sources to generate sufficient origination
volume; and (8) the ability of lessees to comply with the terms of their leases
so these leases may qualify to serve as collateral under the Company's bank
lines of credit or as part of the lease pool under the Company's securitization
facilities; (9) the Company's ability to continue rapid growth into new markets
while attempting to maintain credit quality and customer satisfaction; and (10)
changes in general economic conditions in the markets in which the Company may,
from time to time, compete. In view of the risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this Quarterly
Report on Form 10-Q will, in fact, have the results indicated, and accordingly,
the actual results of the Company may differ materially from those indicated by
such forward-looking statements.
OUTLOOK-ISSUES AND UNCERTAINTIES
IMPACTS OF INFLATION AND CHANGING PRICES. The consolidated financial
statements and related financial data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. As a result, interest rates
generally
<PAGE> 11
have a more significant impact on the Company's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or the same extent as the prices of goods and services.
The Company's profitability is largely determined by the difference or
spread between the effective interest charged by the Company under its leases
and the interest paid by the Company under its lines of credit and
securitizations. The leases underwritten by the Company typically require
payments to be made by the lessee over a one to seven-year term at a fixed rate
of interest that is determined by rates prevailing in the market at the time of
lease approval. The Company finances the purchase of equipment that it leases
primarily through lines of credit and the securitization of pooled leases. All
of such lines of credit and certain of such securitizations require payments by
the Company at variable rates of interest that are subject to frequent
adjustment to reflect rates prevailing in the market for short-term borrowings.
Accordingly, an increase in interest rates due to inflation or other causes
could have a material adverse effect on the Company's financial condition,
results of operations and prospects by reducing or eliminating the spread
between the interest charged by the Company under its leases and the interest
paid by the Company under its credit facilities and variable rate
securitizations. Moreover, an increase in interest rates may cause the Company
to raise the rate of interest that it charges to lessees, thereby reducing the
demand for the Company's lease products. In addition, until the Company
securitizes its leases, it may fund the purchase of equipment and other costs of
such leases from lines of credit and working capital. An increase in interest
rates could have a material adverse effect on the Company's financial condition,
results of operations and prospects by reducing the gain on sale recognized by
the Company in future securitizations. The Company has entered into interest
rate swap agreements on behalf of the SPES to protect against the risk
of significant increases in interest rates. However, such agreements limit the
Company's ability to participate in the benefits of lower interest rates. In
addition, there can be no assurance that such agreements will adequately
insulate the Company from interest rate risks.
IMPACTS OF RECENTLY ISSUED ACCOUNTING STANDARDS. Recently issued accounting
standards having relevant applicability to the Company consist primarily of
Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information", each of which relate
to additional reporting and disclosure requirements effective for financial
statement periods beginning after December 15, 1997. It is not expected that the
adoption of these accounting pronouncements will have a material effect on the
Company's operating results or financial condition.
OVERVIEW
The leases that the Company originates are "direct financing" leases in
that they transfer substantially all of the benefits and risks of equipment
ownership to the lessee. A lease is classified as a direct financing lease for
accounting purposes if the collection of the minimum lease payments is
reasonably predictable, no significant uncertainties exist relating to
non-reimbursable costs yet to be incurred by the lessor under the lease and the
lease meets one of the following criteria: (i) ownership of the property is
transferred to the lessee at the end of the lease term; (ii) the lease contains
a bargain purchase option; (iii) the term of the lease is at least equal to 75%
of the estimated economic life of the leased equipment; or (iv) the present
value
<PAGE> 12
of the minimum lease payments is at least equal to 90% of the fair value of the
leased equipment at the inception of the lease. Since the Company's leases are
classified as direct financing leases, the Company records total lease rentals,
estimated residual values and initial direct costs as the gross investment in
the lease. The difference between the gross investment in the lease and the cost
of the leased equipment (including initial direct costs) is recorded as
"unearned income". Lease contract income is recognized over the term of the
lease by amortizing the unearned income using the interest method. For income
tax purposes, the Company treats its leases as "true" leases or operating leases
which, through depreciation deductions related to the leased equipment, generate
tax benefits for the Company and its subsidiaries.
The Company finances a majority of its lease originations utilizing
securitizations. The Company has utilized several structures in its
securitizations, each designed to reduce the Company's cost of capital or
improve upon existing financing terms. Prior to 1997, the Company's
securitizations, which did not transfer control of the leases, were recorded as
financings for financial reporting purposes. Beginning in 1997, the Company's
securitizations qualified as sales for financial reporting purposes in
accordance with the new accounting standard for the transfer of financial
assets, SFAS No. 125, as control of the leases was transferred. Accordingly,
gain on sale of leases was recognized beginning in 1997. The Company's current
lease securitization structure is a commercial paper based conduit facility in
which the Company contributes its leases (including related residuals) to a
special purpose limited liability entity. Such entity sells the leases to
an unaffiliated special purpose corporate entity which administers a
multi-seller commercial paper conduit.
The change in structure of the Company's securitizations from financings to
sales has had, and will continue to have, a significant effect on the Company's
balance sheet and income statement. Under financing treatment the Company
recorded its net investment in leases as assets and the funds raised from
securitizations as non-recourse notes payable on its balance sheet. Under sale
treatment the only item to appear on the balance sheet is an asset, the
securitization receivable. The existing balance of net investment in leases and
non-recourse notes payable should decline over time as the existing on-balance
sheet leases are paid down and new leases are sold under new securitization
facilities. Under financing treatment the Company records lease contract revenue
and interest expense on the non-recourse debt. Initial direct costs associated
with the origination of leases are amortized as an expense over the life of the
leases and provisions for credit losses are recorded based upon loss experience.
Under sale treatment the Company records a gain on sale of leases. Initial
direct costs associated with the origination of the leases sold are expensed at
the time of the sale and reduce the reported gain on sale. As a result of the
Company's securitizing a majority of its current lease originations using a
structure which qualifies for sales treatment, the Company's lease contract
revenue and interest expense on the non-recourse notes payable will decline as
existing leases paydown.
The Company sells each pool of leases for a price equal to the present
value of future cash flows, including guaranteed residuals. Upon sale, the
Company receives in cash a substantial portion of the present value of future
cash flows, with the remaining balance held as collateral by the SPE. Any such
amount is included on the Company's balance sheet as the securitization
receivable. Recourse to the Company in such sales is limited to the extent of
the securitization receivable with respect to the leases sold. The Company
retains the servicing
<PAGE> 13
rights and responsibilities for each pool of leases sold and receives as
compensation normal servicing fees over the life of such leases.
The Company recognizes gain on the sale of leases at each sale date based
on a determination of the present value of the estimated future amounts to be
realized by the Company in connection with such sale. These estimates consider
all cash flows generated by the leases sold over their life less: (i) trustee
and other transaction related fees; (ii) credit enhancement expenses, if any
(such as the monoline insurers' fee, if the leases are wrapped; (iii) normal
servicing fees, which are retained by the Company in its capacity as servicer
and are recognized over the life of the transaction; and (iv) payments to
purchasers under the certificates. The securitization receivable is reduced by
an allowance which is estimated by the Company to be adequate to cover future
credit losses. No allowance is made for estimated prepayments, which
historically have been insignificant due to the non-cancellable nature of the
leases.
The Company evaluates the carrying value of the securitization receivable
for each sale transaction at the end of each reporting period in light of actual
credit loss experience of the underlying leases sold and makes adjustments to
charge or credit operating results accordingly. To date, the Company has not
recorded any such adjustments. The Company believes that there is no active
market for the sale of its securitization receivable.
The Company intends to continue to sell a substantial portion of its
leases which it originates, using the most recent securitization structure or
similar securitization structures. There can be no assurance, however, that the
Company will be able to sell its future leases, or that the terms of any such
sales will be as favorable or similar to the terms of the Company's current
sale transactions.
Due to the recognition of earnings from the gain resulting from the sale
of the Company's leases, the Company's reported earnings during a particular
period will be impacted by the amount and timing of sales which the Company
may consummate in such future period. Variations in quarterly earnings will
depend on the amount and timing of the completion of such sales.
<PAGE> 14
<TABLE>
<CAPTION>
First Quarter Ended Second Quarter Ended
March 31, 1998 June 30, 1998
------------------- --------------------
<S> <C> <C>
Operating Data:
Lease financing receivables originated:
Number of contracts 1,033 871
Lease originations(1) $ 63,600 $ 73,400
Leases serviced:
Number of contracts 10,367 10,521
Portfolio of leases serviced (2) $ 363,400 $ 403,348
Average portfolio yield (3) 12.5% 13.3%
Credit quality statistics
Delinquencies as a percentage of
portfolio of leases serviced
31-60 days 3.44% 2.00%
61-90 days 1.70% 1.60%
91-120 days 1.70% 1.90%
Over 120 days 1.23% .90%
Total 8.07% 6.40%
Net charge-offs (4) 0.20% 0.53%(5)
</TABLE>
(1) Represents the equipment cost for leases originated during the period.
(2) Represents the aggregate minimum lease payments, excluding residual values
except for guaranteed residuals under all leases serviced by the Company
held as direct financing leases and leases sold to SPEs.
(3) Represents the average yield recognized during the period for the portfolio
of leases serviced.
(4) Represents charge-offs (reduced by recoveries), divided by the respective
period's average net investment including residuals, under all leases
serviced by the Company and either held as direct financing leases or sold.
(5) Year to date charge-off percentage, annualized.
RESULTS OF OPERATIONS
The Company's revenues are comprised of lease contract revenue, gain on
sale of leases, fee income, and servicing and other income. Lease contract
revenue is the revenue recognized from the net investment in leases held. Gain
on sale of leases is the revenue recognized under sale treatment for leases
securitized. Fee income represents security deposits which are recognized as
income upon lease expirations and commitment fees received upon the origination
of leases. Servicing and other income includes normal servicing fees, late fees,
interest income and amounts received from the owner trust relating to interest
rate collar agreements.
The Company's expenses are comprised of interest expense, compensation
and related expenses, amortization of initial direct costs, provisions for
credit losses and other general and administrative expenses. Interest expense
includes
<PAGE> 15
the expense related to notes payable and the amortization of related
debt issuance costs. Compensation and related expenses include salaries and
bonuses paid to employees and management fees to affiliates. Amortization of
initial direct costs relates to costs associated with originating leases,
including commissions, which are amortized over the period of the leases.
Provisions for credit losses are provided based on estimated future credit
losses. Other general and administrative expenses include trustee, legal and
other professional fees, and occupancy and other office-related expenses.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Leases originated increased from $50.3 million for the six months ended June 30,
1997 to $137.0 million for the comparable period in 1998, representing an
increase of 172%. The number of leases originated increased from 1,301 for the
six months ended June 30, 1997 to 1,904 for the comparable period in 1998.
Increase in dollar volume and the increase in the number of leases originated
was due to an increase in the average ticket size in 1998 over the 1997 period.
The average annualized yield of the portfolio of leases serviced increased from
12.7% for the six months ended June 30, 1997 to 13.3% for the comparable period
in 1998.
The portfolio of leases serviced increased from $174.8 million at June 30, 1997
to $403.3 million at June 30, 1998, representing an increase of 131%. This
increase was due to an increase in lease originations.
Lease contract revenue increased from $7.3 million for the six months ended June
30, 1997 to $8.6 million for the comparable period in 1998, representing an
increase of 18% due primarily to a 9.1% increase in the net investment in leases
owned and an increase in average yield of the lease portfolio during the 1998
period.
As described above, the Company's securitizations have predominantly
been structured as sales for financial reporting purposes, rather than as
financing transactions as was the case in prior years. During the six months
ended June 30, 1998, the Company recognized a gain on sale of $15.0 million.
Since the Company plans to continue to structure its securitizations as sale
transactions, it anticipates that gain on sale of leases will increase and
become a larger portion of revenues in the future.
Fee income increased from $134,000 for the six months ended June 30, 1997 to
$890,000 for the comparable period in 1998, representing an increase of 564%.
This increase was due primarily to the Company's increased business activity of
charging fee income on lease transactions.
Servicing and other income increased from $738,000 for the six months ended June
30, 1997 to $2.2 million for the comparable period in 1998, representing an
increase of 198%, due primarily to income received from interest income and an
increase in the serviced portfolio.
Total revenues increased from $11.6 million for the six months ended June 30,
1997 to $26.7 million for the comparable period in 1998, representing an
increase of 130%, primarily as a result of the above factors.
<PAGE> 16
Compensation and related expenses increased from $2.0 million for the six months
ended June 30, 1997 to $2.3 million for the comparable period in 1998,
representing an increase of 15%. The increase was due primarily to an increased
number of total employees.
Amortization of initial direct costs increased from $1.2 million for the six
months ended June 30, 1997 to $1.7 million for the comparable period in 1998,
representing an increase of 42%. Initial direct costs, relative to the
investment in leases, increased from December 31, 1996 to December 31, 1997 (the
beginning of the six month periods ended June 30, 1997 and 1998, respectively),
which resulted in increased amortization charges during the 1998 period as
compared to the prior year.
The provision for credit losses increased from $402,000 for the six months ended
June 30, 1997 to $1.4 million for the comparative period in 1998, representing
an increase of 248%. This increase was due to increased originations and
delinquency rates.
Other general and administrative expenses increased from $1.1 million for the
six months ended June 30, 1997 to $3.0 million for the comparable period in
1998, representing an increase of 173%. The increase was due primarily to
increased trustee and legal fees incurred during the 1998 period, a significant
portion of which relates to the most recent securitization structure, and to
increased occupancy and related costs associated with supporting the Company's
growth.
Total expenses increased from $8.4 million for the six months ended June 30,
1997 to $12.1 million for the comparable period in 1998, representing an
increase of 44%.
As a result of the above factors, net income increased from $1.7 million for the
six months ended June 30, 1997 to $7.9 million for the comparable period in
1998, an increase of 365%.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Leases originated increased from $30.7 million for the three months ended June
30, 1997 to $73.4 million for the comparable period in 1998. The number of
leases originated increased from 702 for the three months ended June 30, 1997 to
871 for the comparable period in 1998.
Lease contract revenue increased from $3.5 million for the three months ended
June 30, 1997 to $3.6 million for the comparable period in 1998, representing an
increase of 3%. The increase in lease contract revenue was due to the increase
in the Company's average net investment in leases.
Fee income increased from $77,000 for the three months ended June 30, 1997 to
$473,000 for the comparable period in 1998, representing an increase of 514%.
This increase was due primarily to the Company's increased business activity of
charging fee income on lease transactions.
Servicing and other income increased from $483,000 for the three months ended
June 30, 1997 to $1.6 million for the comparable period in 1998, representing an
increase of 231%. This
<PAGE> 17
increase was related to interest income and an increase in the serviced
portfolio.
Total revenues increased from $6.3 million for the three months ended June 30,
1997 to $14.6 million for the comparable period in 1998, representing an
increase of 132%, primarily as a result of the above factors.
Interest expense directly associated with the Company's lease borrowings
decreased from $1.8 million for the three months ended June 30, 1997 to $1.5
million for the comparable period in 1998, representing a decrease of 17%. The
decrease in such interest expense was primarily due to the lower average
borrowings.
Compensation related expenses increased from $1.1 million for the three months
ended June 30, 1997 to $1.2 million for the comparable period in 1998,
representing an increase of 9%. The increase was due to increases in the number
of employees and compensation levels necessitated by the growth of the Company.
Amortization of initial direct costs increased from $650,000 for the three
months ended June 30, 1997 to $1.1 million for the comparable period in 1998, an
increase of 69%, due primarily to the increase in investment in leases.
The provisions for credit losses increased from $120,000 for the three months
ended June 30, 1997 to $1.0 million for 1998, representing an increase of 817%.
This increase was due to increased originations and delinquency rates.
General and administrative expenses, increased from $727,000 for the three
months ended June 30, 1997 to $2.4 million, representing an increase of 230%.
The increase was due primarily to increased trustee and legal fees incurred
during the 1998 period, a significant portion of which relates to the most
recent securitization structure, and to increased occupancy and related costs
associated with supporting the Company's growth.
- -------------------------------------
Total expenses increased from $4.4 million for the three months ended June 30,
1997 to $7.4 million for the comparable period in 1998, representing an increase
of 68%.
As a result of the above factors, net income increased from $1.1 million for the
three months ended June 30, 1997 to $4.0 million for the comparable period in
1998, representing an increase of 264%.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires a substantial amount of cash to implement its
business strategy. The Company funds its operations primarily through
securitizations and bank borrowings. The Company will continue to require access
to significant additional funding to maintain and expand its volume of lease
originations. The Company's most significant use of cash includes the purchase
of equipment subject to direct financing leases and the principal payments on
notes payable.
<PAGE> 18
The following table sets forth the major components of the increase in cash and
cash equivalents:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1998
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ (171) $ 10,183
Net cash provided by investing activities 31,528 21,042
Net cash used for financing activities (30,560) (45,248)
-------- --------
Net increase (decrease) in cash and cash equivalents $ 797 $(14,023)
======== ========
</TABLE>
SECURITIZATIONS.
The Company has utilized several structures in its securitizations, each
designed to reduce the Company's cost of capital or improve upon existing
financing terms. Prior to 1997, the Company's securitizations, which did not
transfer control of the leases, were recorded as financings for financial
reporting purposes. Beginning in 1997, the Company's securitizations qualified
as sales for financial reporting purposes in accordance with the new accounting
standard for the transfer of financial assets, SFAS No. 125, as control of the
leases was transferred. Accordingly, gain on sale of leases was recognized
beginning in 1997. The Company's current lease securitization structure is a
commercial paper based conduit facility in which the Company contributes its
leases (including related residuals) to a special purpose limited liability
entity. Such entity sells the leases to an unaffiliated special purpose
corporate entity which administers a multi-seller commercial paper conduit.
From 1992 through June 30, 1998, the Company has completed the following
securitizations:
<TABLE>
<CAPTION>
COMMENCEMENT SUBORDINATION LEVEL
DATE AMOUNT RATING AGENCY (EXCLUDING GUARANTEED RESIDUALS)
------------ ------ ------ ------ --------------------------------
<S> <C> <C> <C> <C>
April 1992 ....... $12.1 million AA+ Duff & Phelps 20%
May 1993 ......... 10.6 million AAA/Aaa S&P/Moody's 13%
June 1994 ........ 30.0 million A-1/P-1 S&P/Moody's 13%
July 1995 ........ 90.0 million AAA/Aaa S&P/Moody's 8%
February 1997 .... 61.6 million AAA/Aaa S&P/Moody's 8%
September 1997 ... 74.3 million AAA (93%) 2%
BBB (6%)
March 1998 ....... 86.0 million AAA/BBB Duff & Phelps/Fitch 2.5%
June 1998 ........ 109.2 million A-1/P-1 S&P/Moody's -%
-------------
TOTAL................$473.8 million
</TABLE>
<PAGE> 19
The Company continually seeks to improve the efficiency of its securitizations
by reducing the Company's cost of capital or improving upon existing financing
terms. In the Company's latest securitization the subordination level was
insignificant when excluding guaranteed residuals and the spread was 45 basis
points over comparable United States Treasury securities. The effect of these
reduced subordination levels and spreads has been to decrease the effective cost
of the securitizations to the Company.
Bank Lines of Credit and Other Credit Facilities. The Company uses bank lines
of credit to fund leases pending inclusion in the Company's securitizations and
to fund leases for retention in the Company's retained portfolio. Borrowings
under the lines of credit are repaid with the proceeds received by the Company
from securitizations and revenue received by the Company from retained leases.
The Company will seek to obtain replacement or additional sources of financing
as its current lines of credit expire or become fully utilized.
The Company currently maintains an aggregate of $95 million in secured lines
of credit to finance equipment purchases subject to on balance sheet direct
financing leases. At June 30, 1998, the Company had an aggregate of $50.9
million available under such lines of credit. These lines of credit include: (i)
a $15.0 million line of credit with Seafirst Bank under which interest is
payable monthly at a rate of LIBOR plus 2% (this line expires during October
2001); (ii) a $5.0 million line of credit with Key Bank of Washington under
which interest is payable monthly at a rate of LIBOR plus 2.0% (this line
expired on July 1998); (iii) a $75 million credit facility with First Union,
N.A. under which interest is payable monthly at LIBOR plus 1.5% (this facility
expires in 1998). These lines of credit are secured by the on balance sheet
leases and guarantees from the minority member of T & W Financial Services
Company L.L.C. and senior management of the Company, and limit the amount of
funds which may be advanced to the Company to a percentage of the discounted
value of such leases. The Company also maintains an additional aggregate of $5.0
million in an unsecured line of credit from a bank and a credit arrangement with
PLM to finance internal operations and the purchase of leases prior to their
securitization or placement on "lease-line" secured credit facilities. At June
30, 1998, the Company had no advances under this line.
Subsequent to June 30, 1998 the Company entered into a new credit facility
for $75 million with Lehman Brothers, allowing the Company to have additional
capacity and liquidity. The interest rate on this facility is 80 basis points
over LIBOR and the facility will expire in one year, if not renewed. In addition
the Company increased its unsecured lines of credit by $2.0 million.
The Company believes, based on its historical cash requirements and anticipated
uses of cash, that the cash currently available and the cash to be derived from
the Company's operating, investing and financing activities will be sufficient
to meet its cash requirements, and implement its business plan through the end
of 1998.
YEAR 2000
The Company has been working with an external consultant and an internal
committee of employees to address the scope of its year 2000 issue and
implement any necessary resolutions.
The Company is making inquiries to customers and suppliers on which the
operation of its business are critically dependent to determine their year 2000
readiness. An analysis of the responses from software vendors and suppliers
received so far indicates substantial compliance with year 2000 issues, so that
it currently appears that any effect based on a third party's noncompliance
would not be material.
To date, the Company's major business systems have been reviewed and
tested for year 2000 compliance. Based on such review the Company believes that
the majority of all critical business systems appear to be year 2000 compliant.
The Company's estimates that its new lease servicing software will be chosen by
the end of the third quarter of fiscal year 1998 with implementation of the new
system to begin approximately in the fourth quarter. When the Company changes
to a new accounting software package in the first quarter of 1999, all critical
business systems should be year 2000 compliant.
Over the past year, the Company has spent approximately $300,000 to
upgrade all of its computer hardware and networking software, and not solely to
resolve potential year 2000 problems. Although the Company has already upgraded
its hardware, the Company has still budgeted $250,000 over the next two years
to upgrade and fully integrate its software and business and processing systems
to maintain year 2000 compliance. Although no contingency plan has yet been
created by the Company to deal with potential year 2000 issues, it continues to
assess and analyze the potential effects from the year 2000 and will prepare
such a contingency plan if, based on its continuing review and analysis, the
Company believes one is warranted.
<PAGE> 20
'
Part II. Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11. Computation of Earnings Per Share is on page 4.
27. Financial Data Schedule.
99. Rule 135C Press Release of the Company (8/5/98)
(B) REPORTS ON FORM 8-K
T&W Financial Corporation filed no reports on Form 8-K during the
quarter ended June 30, 1998.
ITEMS 1 THROUGH 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
Signature
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.
T&W Financial Corporation
Date: August 14, 1998 By: /s/ Paul B. Luke
Paul B. Luke
Senior Vice President,
Chief Financial Officer,
Treasurer and Director
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule for the six months ended June 30, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,247
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 137,807
<CURRENT-LIABILITIES> 19,195
<BONDS> 94,599
0
0
<COMMON> 3,438
<OTHER-SE> 12,274
<TOTAL-LIABILITY-AND-EQUITY> 137,807
<SALES> 0
<TOTAL-REVENUES> 20,080
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,858
<LOSS-PROVISION> 774
<INTEREST-EXPENSE> 5,638
<INCOME-PRETAX> 6,810
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,810
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Contact: Paul B. Luke
Senior Vice President/CFO
T&W Financial Corp.
(253) 922-5164, ext. 308
Linda Press/Steve Hawkins
Sitrick And Company
(310) 788-2850
FOR IMMEDIATE RELEASE
T&W TO MAKE PRIVATE OFFERING OF $100 MILLION IN SENIOR NOTES
Funds to be Used for Company's Expansion
TACOMA, WASHINGTON, AUGUST 5, 1998 -- T&W FINANCIAL CORPORATION (NASDAQ: TWFC)
announced today that it proposes to make a private offering of approximately
$100 million of senior notes pursuant to the provisions of Rule 144A and
Regulation S.
The Company anticipates making the offering in September and using the
proceeds to finance the expansion of its business.
Based in Tacoma, Washington, and founded in 1976, T&W Financial
Corporation is a specialty commercial finance company. It provides equipment
leasing, focusing primarily on the "small ticket" sector of the market, which
are leases less than $250,000. Its customers are small- to medium-sized
independent businesses throughout the U.S. and Canada.
This release contains forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements.
Readers should not place undue reliance on the forward-looking statements, which
reflect management's view only as of the date hereof. T&W undertakes no
obligations to publicly revise these forward-looking statements to reflect
subsequent events or circumstances. Readers should also carefully review the
risk factors described in documents T&W files from time to time with the
Securities and Exchange Commission.
