<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 (2) 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 May 8,
1998 was 8,394,457.
- --------------------------------------------------------------------------------
<PAGE> 2
T & W FINANCIAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Part I. Financial Statements
<TABLE>
<CAPTION>
Item I. Financial Statements Page
----
<S> <C>
a) Income Statements
for the three months ended March 31, 1998 and March 31, 1997 1
b) Balance Sheets
as of March 31, 1998 and December 31, 1997 2
c) Cash Flows Statements
for the three months ended March 31, 1998 and March 31, 1997 3
d) Shareholders' Equity
for the period ended March 31, 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 14
Signature
</TABLE>
<PAGE> 3
T&W FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
------- ------
<S> <C> <C>
Revenues:
Lease contract revenue ........................ $ 4,969 $3,755
Gain on sale of leases ........................ 6,032 1,203
Fee income .................................... 417 57
Servicing and other income .................... 586 255
------- ------
Total Revenues ............................. $12,004 $5,270
Expenses:
Interest expense .............................. 2,269 1,945
Compensation and related expenses ............. 482 856
Amortization of initial direct costs .......... 562 572
Provision for credit losses ................... 390 282
Other general and administrative expenses...... 1,155 346
------- ------
Total Expenses ............................. 4,858 4,001
------- ------
Net Income ...................................... $ 7,146 $1,269
------- ------
Income before minority interest and
income taxes ............................... $ 7,146 $1,269
Minority interest ............................. 1,072 190
Income before income taxes .................... 6,074 1,079
Provision for income taxes .................... 2,187 388
------- ------
Net income .................................... $ 3,887 $ 691
======= ======
Earnings per share: Basic and Diluted ........ $ .46 $ .12
Weighted average number of shares of
Common Stock and Common Stock
Equivalents Outstanding .................... 8,400 5,500
</TABLE>
See accompanying notes.
<PAGE> 4
T&W FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Cash and Cash Equivalents ........................... $ 54,880 $ 28,553
Dealer floor plans .................................. 6,523 6,797
Net Investment in Leases ............................ 95,105 148,954
Securitization Receivable, Net ...................... 24,148 16,362
Intangible Assets, net .............................. 2,874 2,954
Other Assets ........................................ 5,679 8,577
-------- --------
Total Assets ................................ $189,209 $212,197
======== ========
Accounts Payable and Other Accrued Liabilities ...... $ 10,067 $ 7,107
Notes Payable - Recourse ............................ 52,213 76,065
Notes Payable - Nonrecourse ......................... 50,114 60,317
Security Deposits ................................... 10,446 9,624
Deferred Income Tax Liabilities ..................... 13,387 11,200
-------- --------
Total Liabilities ........................... 136,227 164,313
-------- --------
Minority Interest.................................... 8,255 7,183
Commitments and Contingencies........................
Shareholders' Equity:
Common stock and paid-in capital .................. 28,256 28,117
Retained earnings ................................. 16,471 12,584
-------- --------
Total Shareholders' Equity .................. 44,727 40,701
-------- --------
Total Liabilities and Shareholders' Equity .. $189,209 $212,197
======== ========
</TABLE>
See accompanying notes.
<PAGE> 5
T&W FINANCIAL CORPORATION AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------=-------------------
1998 1997
---------- ------------
<S> <C> <C>
Net Income ................................... $ 3,887 $ 691
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Amortization and depreciation .............. 651 572
Provision for credit losses ................ 390 282
Minority interest .......................... 1,072 190
Gain on sale of leases ..................... (6,032) (1,203)
Changes in assets and liabilities, exclusive
of the effects of business combinations:
Increase (decrease) in accounts payable
and other accrued liabilities .......... 2,960 (1,106)
Net Cash Provided (Used) by Operating
Activities ................................... 2,928 (574)
-------- --------
Cash Flows From Investing Activities
New leases originated ...................... (63,600) (19,000)
Lease payments received, Net ............... 25,869 13,716
Net Cash (Used) Provided by Investing
Activities ................................. (37,731) (5,284)
-------- --------
Cash Flows From Financing Activities:
Proceeds from sale of lease portfolio ...... 73,830 19,950
Proceeds from recourse and
nonrecourse borrowings .................... 20,394 3,408
Payments on recourse and
nonrecourse borrowings ................... (34,055) (18,939)
Net increase in security deposits .......... 822 528
Proceeds from sale of common stock ......... 139 --
Debt issue costs paid ......................
Distributions to shareholders............... -- --
-------- -------
Net Cash Provided by Financing
Activities................................. 61,130 4,947
Net Increase (Decrease) in Cash and
Cash Equivalents ........................... 26,327 (911)
Cash and Cash Equivalents, beginning
of period .................................. 28,553 8,064
-------- --------
Cash and Cash Equivalents, end of period ..... $ 54,880 $ 7,153
======== ========
</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 PAID IN RETAINED
CAPITAL EARNINGS TOTAL
------------ --------- -------
<S> <C> <C> <C>
Balance at December 31, 1997 ..... $28,117 $12,584 $40,701
Net income (unaudited) ......... -- 3,887 3,887
Issuance of common stock ....... 139 139
Distributions to shareholders... -- -- --
------- ------- -------
Balance at March 31, 1998 ........ $28,256 $16,471 $44,727
======= ======= =======
</TABLE>
<PAGE> 7
T & W FINANCIAL CORPORATION AND AFFILIATES
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 and Canada, 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 Special purpose entities
(singularly "SPE" and collectively, "SPEs") 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>
MARCH 31, 1998 DECEMBER 31, 1997
(UNAUDITED) (AUDITED)
<S> <C> <C>
Securitized -
Minimum lease payments receivable $ 61,668 $ 70,811
Estimated residual value of leased equipment, 10,344 8,620
net
Unearned lease revenue (11,325) (11,619)
-------- --------
Securitized, net 60,687 67,812
-------- --------
Not Securitized-
Minimum lease payments receivable 41,231 78,428
Estimated residual value of leased equipment, 847 14,651
net
Unearned lease revenue (8,577) (13,186)
-------- --------
Not Securitized, net 33,501 79,893
-------- --------
Allowance for Credit Losses (1,565) (1,235)
Initial Direct Costs, net 2,482 2,484
-------- --------
Net Investment in Leases $ 95,105 $148,954
======== ========
</TABLE>
<PAGE> 8
A summary of activity in the allowance for credit losses account is as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
BALANCE, beginning of period $1,235 $ 1,323
Provision for credit losses 390 1,581
Charge-offs (60) (405)
Recoveries -- 50
------ -------
Net Charge-offs (60) (355)
------ -------
Decrease related to leases sold -- (1,314)
------ -------
BALANCE, end of period $1,565 $ 1,235
====== =======
</TABLE>
NOTE 3. NOTES PAYABLE - RECOURSE
Notes Payable for which the lender has recourse against the Company are secured
by guaranties of shareholders and the underlying pledged leases and dealer floor
plans (for lines of credit borrowings) and are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Payable to bank drawn on a $75 million credit facility
(reduced to $50 million in February 1998), interest
payable at 1.5% above the LIBOR rate (7.47%) at
December 31, 1997), due in 1999 $45,856 $69,212
Payable to bank drawn on a $15 million credit line,
interest payable monthly at 2.0% above the 30 day
LIBOR rate, (7.97% at December 31, 1997), due May 1998 1,050 1,201
Payable to bank drawn on a $5.0 million credit line,
interest payable monthly at 2.0% above LIBOR (7.97%
at December 31, 1997), due July 1998 658 912
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 $237,000 4,649 4,740
------- -------
Total Notes Payable - Recourse $52,213 $76,065
</TABLE>
NOTE 4. SECURITIZATIONS
On March 31, 1998 the Company closed a securitization facility for $86 million
which was privately placed and in connection therewith, SPE's were formed to
issue lease-backed notes. Pursuant to terms of the facility, the Company sells
and transfers pools of leases to the first SPE, which then sells and transfers
rights and pledges an interest in the leased equipment to a second SPE. The
Company retains servicing rights for which it receives monthly servicing fee
income. The Company acounted for such transaction for financial reporting
purposes as a sale of the lease interests.
<PAGE> 9
NOTE 5. SUBSEQUENT EVENTS
The Company entered into a letter of intent on February 20, 1998 to purchase
a lease portfolio from a third party for approximately $20 million. At the
present time the Company does not plan on entering into a definitive agreement
for this acquisition and the acquisition is indefinitely on hold.
In February 1998, the Company entered into a short-term bridge financing
agreement for approximately $37.7 million. At the end of March 1998 the bridge
facility was converted to an interim securitization facility for $100 million.
This interim securitization facility will be increased from $100 million to a
larger facility in June 1998. As of March 31, 1998 $68.8 million had been sold
to the interim securitization facility.
<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
"believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar
expressions are intended to identify forward-looking statements.
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. 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.
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 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 in the early years of the lease term 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
<PAGE> 11
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 owner trust and the
owner trust then sells certificates backed by 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
structuring its securitizations as sales, the Company's lease contract revenue
and interest expense on the non-recourse notes payable will decline as existing
lease paydowns.
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 owner trust. 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 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 as in the most
recent securitizations); (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) principal and interest 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-cancelable 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 would make adjustments
to charge or credit operating results accordingly. To date, the Company has not
recorded any such adjustments. The Company believes that there is currently 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.
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31,
1998
-----------
<S> <C>
OPERATING DATA:
Lease financing receivables
originated:
Number of contracts 1,033
Lease originations(1) $ 63,600
Leases serviced:
Number of contracts 10,367
Portfolio of leases serviced(2) $ 363,400
Average portfolio yield(3) 12.5%
Credit quality statistics:
Delinquencies as a percentage of
portfolio of leases serviced
31 -- 60 days 3.44%
61 -- 90 days 1.70%
91 -- 120 days 1.70%
Over 120 days 1.23%
-----------
Total 8.07%
Net charge-offs(4) 0.20%
</TABLE>
(1) Represents the equipment cost for leases originated during the period.
(2) Represents the aggregate of minimum lease payments, excluding residual
values except for guaranteed residuals related to the Specialty Vehicle
Finance Division 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 in the Company and either held as direct financing
leases or sold.
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
the expense related to notes payable and the amortization of related debt
issuance costs. Compensation and related expenses include salaries and bonuses
for 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.
<PAGE> 12
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
Leases originated increased from $19 million for the three months ended March
31, 1997 to $64 million for the comparable period in 1998, representing an
increase of 237%. The portfolio of leases serviced increased from $157.7
million at March 31, 1997 to $363.4 million at March 31, 1998, representing an
increase of 130%. This increase was due to an increase in lease originations.
Lease contract revenue increased from $3.8 million for the three months ended
March 31, 1997 to $5.0 million for the comparable period in 1998, representing
an increase of 31.6% due primarily to an increased average net investment in
leases owned 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 three months ended March
31, 1998, the Company recognized a gain on sale of $6 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 $57,000 for the three months ended March 31, 1997 to
$417,000 for the comparable period in 1998, representing an increase of 632%.
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 $255,000 for the three months ended
March 31, 1997 to $586,000 for the comparable period in 1996, representing an
increase of 130%, due primarily to income received from the owner trust
principally related to interest rate collar agreements during 1998.
Total revenues increased from $5.3 million for the three months ended March 31,
1997 to $12.0 million for the comparable period in 1998, representing an
increase of 126%.
Interest expense increased from $1.9 million for the three months ended March
31, 1997 to $2.3 million for the comparable period in 1998, representing an
increase of 21%. The increase was due to increased average borrowings
outstanding during the 1998 period as compared to the prior year.
Compensation and related expenses decreased from $856,000 for the three months
ended March 31, 1997 to $482,000 for the comparable period in 1998, representing
a decrease of 56.3%. The decrease was due primarily to direct compensation
expenses attributable to originations that were sold, shown as a reduction of
the gain on sale of leases.
Amortization of initial direct costs decreased from $572,000 for the three
months ended March 31, 1997 to $562,000 for the comparable period in 1998,
representing a decrease of 1.7%. Initial direct costs, relative to the
investment in leases, decreased from December 31, 1996 to December 31, 1997 (the
beginning of the three month periods ended March 31, 1998 and 1997,
respectively), which resulted in decreased amortization charges during the 1998
period as compared to the prior year.
<PAGE> 13
The provision for credit losses increased from $282,000 for the three months
ended March 31, 1997 to $390,000 for the comparative period in 1998,
representing an increase of 38.3%. This increase was due to increased
originations offset by a decrease in the provision rate (as a percentage of
originations) due to improved actual loss experience.
Other general and administrative expenses increased from $346,000 for the three
months ended March 31, 1997 to $1.2 million for the comparable period in 1998,
representing an increase of 247%. The increase was due primarily to increased
occupancy and related costs associated with supporting the Company's growth.
Total expenses increased from $4.0 million for the three months ended March 31,
1997 to $4.9 million for the comparable period in 1997, representing an increase
of 22.5%.
As a result of the above factors, net income increased from $691,000 for the
three months ended March 31, 1997 to $3.9 million for the comparable period in
1997, an increase of 464%.
<PAGE> 14
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.
The following table sets forth the major components of the increase in cash and
cash equivalents:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net cash provided (used) by operating activities 2,928 (574)
Net cash used for investing activities (37,731) (5,284)
Net cash provided by financing activities 61,130 4,947
-------------- --------------
Net increase (decrease) in cash and cash equivalents 26,327 (911)
============== ==============
</TABLE>
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support lease originations and satisfy line
of credit repayment requirements. The Company generally maintains sufficient
cash and short-term investments to meet short-term liquidity needs. At March 31,
1998, cash and cash equivalents totaled $54.9 million or 29% of total assets. At
March 31, 1998, the Company maintained various lines of credit which provided
for
<PAGE> 15
immediately available advances of up to $70 million, and advances under these
lines of credit totaled $47.6 million.
Cash provided by operating activities totaled $2.9 million for the three months
ended March 31, 1998 compared to cash used by operating activities of $574,000.
The providing of cash from operating activities in 1998 is attributed
principally to an increase in payables of $3 million during the three months
ended March 31, 1998.
Cash used by investing activities totaled $37.7 million for the three months
ended March 31, 1998, compared to cash used in investing activities of $5.3
million for the three months ended March 31, 1997. Lease payments received for
the three months ended March 31, 1998 totaled $25.9 million as compared to
$13.7 million for the three months ended March 31, 1997. Cash used for
equipment purchased for leases originated in these same periods totaled $63.6
million and $19 million, respectively.
Cash provided by financing activities was $61.1 million during the three months
ended March 31, 1998, consisting principally of $54.4 million of borrowings
under line of credit arrangements to fund lease originations and paydowns of
those lines of credit of $34.1 million upon receipt of proceeds of $73.8 million
from the sale of leases.
SECURITIZATIONS.
Securitizations involve the pooling of lease receivables for sale in the
secondary market. The primary advantages of securitizations include: (i) quick
access to significant amounts of capital to fund growth in lease originations;
(ii) relatively lower cost of funds than commercial bank financing; and (iii)
greater flexibility with respect to sources of funding. From 1992 through
December 31, 1997 the Company has completed the following securitizations:
<TABLE>
<CAPTION>
COMMENCEMENT SUBORDINATION
DATE AMOUNT RATING AGENCY LEVEL
------------ ------------- ------- ------------- -------------
<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%
October 1997........ 74.3 million AAA/Aaa Duff & Phelps 2%
-------------
TOTAL.......... $278.6 million
</TABLE>
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 2% and
the spread was 64 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.
The Company has been able to fund substantially all of its lease originations
without impairing its working capital. Cash used for principal payments on notes
payable is principally generated from the monthly lease payments which are
pledged as collateral for the notes.
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 1999.
<PAGE> 16
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.
(B) REPORTS ON FORM 8-K
On February 12, 1998, T&W Financial Corporation filed a report on Form
8-K/A1 to amend a current report filed on Form 8-K filed on December 15,
1997. The Form 8-K/A1 was filed solely to add the financial statements
of the business unit acquired as required by Item 7(a) and the pro forma
financial information required by Item 7(b).
ITEMS 1 THROUGH 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
SIGNATURE
Pursuant to the requirements of the Securitites 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: May 14, 1998 By: /s/ Paul B. Luke
Paul B. Luke
Senior Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule for the nine months ended
March 31, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
