<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 SEPTEMBER 30, 1999
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 November
12, 1999 was 8,431,334.
<PAGE> 2
T & W FINANCIAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C>
a) Consolidated Statements of Income for the three and nine months
ended September 30, 1999 and 1998...................................... 1
b) Consolidated Balance Sheets as of September 30, 1999 and December
31, 1998 ............................................................. 2
c) Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998............................................ 3
d) Consolidated Statements of Shareholders' Equity for the periods
ended September 30, 1999 and December 31, 1998......................... 4
e) Notes to Interim Consolidated 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 September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Lease contract revenue $ 9,839 $ 4,421 $ 25,249 $ 12,975
Gain on sale of leases 5,548 10,725 14,628 25,754
Fee income 1,339 839 3,120 1,729
Servicing & Other Income 1,183 1,456 2,832 3,632
-------- -------- -------- --------
Total Revenues 17,909 17,441 45,829 44,090
-------- -------- -------- --------
Expenses:
Interest expense 6,349 2,176 14,694 5,918
Compensation and related expenses 3,545 1,992 9,740 4,264
Amortization of initial direct cost 1,492 1,274 3,236 2,938
Provision for credit losses 2,153 883 7,326 2,311
Other general and administrative
expenses 4,117 2,759 10,666 5,733
-------- -------- -------- --------
17,656 9,084 45,662 21,164
-------- -------- -------- --------
Income before minority interest
and income taxes 253 8,357 167 22,926
Minority Interest (38) (1,254) (25) (3,439)
-------- -------- -------- --------
Income (loss) before income taxes 215 7,103 142 19,487
Income Taxes (120) (2,556) (258) (7,015)
-------- -------- -------- --------
Income (loss) available for preferred
dividends 95 4,547 (116) 12,472
Preferred Stock Dividends (87) -- (175) --
-------- -------- -------- --------
Net income (loss) $ 8 $ 4,547 $ (291) $ 12,472
======== ======== ======== ========
Earnings Per Share: Basic and Diluted $ 0.00 $ 0.54 $ (0.03) $ 1.48
Weighted Average Number of shares of
Common Stock and Common Stock
Equivalents Outstanding 8,422 8,400 8,409 8,400
</TABLE>
See accompanying notes
1
<PAGE> 4
T&W Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 366 $ 11,394
Dealer floor plans 6,847 9,522
Net investment in leases 228,320 167,516
Securitization receivables 70,185 49,001
Intangible assets, net 19,828 5,260
Other assets 19,520 8,343
-------- --------
Total Assets $345,066 $251,036
======== ========
Liabilities
Accounts payable and other accrued liabilities $ 4,215 $ 18,000
Notes payable - recourse 219,893 103,758
Notes payable - nonrecourse 15,417 29,624
Security deposits 15,595 13,065
Deferred income taxes 17,727 17,642
-------- --------
Total Liabilities 272,847 182,089
-------- --------
Minority Interest 10,234 11,271
-------- --------
Commitments and Contingencies
Redeemable Preferred Stock of Subsidiary 4,342 --
-------- --------
Shareholders' Equity
Preferred Stock -- --
Common Stock and paid-in capital 28,564 28,306
Retained Earnings 29,079 29,370
-------- --------
Total Shareholders' Equity 57,643 57,676
-------- --------
Total Liabilities and Shareholders' Equity $345,066 $251,036
======== ========
</TABLE>
See accompanying notes
2
<PAGE> 5
T&W Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows From Operations
Lease Payments Received $ 152,411 $ 35,713
Cash from Sale of Leases 135,653 237,732
--------- ---------
288,064 273,445
Operating Expenses (39,528) (14,993)
Interest Payments on Debt (14,694) (5,918)
Income Taxes Paid (173) --
--------- ---------
Net Cash Provided by Operating Activities 233,669 252,534
--------- ---------
Cash Flows From Investing Activities
Purchase of Leased Equipment (333,850) (220,800)
Net Repayments on Floor Plan 2,675 293
Cash Paid in Business Acquisition (13,272) --
Cash Received in Acquisition, net of Cash Paid 1,126 --
Purchase of Equipment (992) (732)
--------- ---------
Net Cash Used by Investing Activities (344,313) (221,239)
--------- ---------
Cash Flows From Financing Activities
Proceeds from Sale of Common Stock, net of costs 258 146
Borrowings Under Debt Agreements - Leases 377,964 201,528
Borrowings Under Debt Agreements - Acquisitions 20,000 --
Principal Payments on Debt (297,544) (245,261)
Distributions to Minority Interests (1,062) (309)
--------- ---------
Net Cash Provided (Used) by Financing Activities 99,616 (43,896)
--------- ---------
Net Decrease in Cash and Cash Equivalents (11,028) (12,601)
Cash and Cash Equivalents, beginning of period 11,394 16,619
--------- ---------
Cash and Cash Equivalents, end of period $ 366 $ 4,018
========= =========
Reconciliation of Net Income (Loss) to Net Cash Provided
by Operating Activities
Net Income (Loss) $ (291) $ 12,472
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization and depreciation 6,555 4,044
Provision for credit losses 7,326 2,311
Gain on sale of leases (14,628) (25,754)
Minority interest 25 3,439
Deferred taxes 85 7,015
Preferred dividends accrued 175 --
Lease payments received 118,865 15,203
Initial direct costs incurred (3,706) (3,425)
Proceeds from sale of lease portfolio 135,653 237,732
Debt Issue costs paid (2,490) (786)
Changes in assets and liabilities exclusive of the effects of business
acquisitions:
Increase in other assets (2,116) (1,612)
Net increase in security deposits 2,345 2,174
Decrease in accounts payable and
other accrued liabilities (14,129) (279)
--------- ---------
$ 233,669 $ 252,534
========= =========
</TABLE>
See accompanying notes
3
<PAGE> 6
T&W Financial Corporation and Subsidiaries
Consolidated Statement of Shareholders' Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common
Stock and
Paid in Retained
Shares Capital Earnings Total
------ ------- --------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 (Audited) 8,384 $ 28,117 $ 12,584 $ 40,701
Issuance of common stock 13 189 189
Net Income * * 16,786 16,786
-------- -------- -------- --------
Balance at December 31, 1998 (Audited) 8,397 28,306 29,370 57,676
Issuance of common stock 34 258 258
Net Loss * * (291) (291)
-------- -------- -------- --------
Balance at September 30, 1999 (Unaudited) 8,431 $ 28,564 $ 29,079 $ 57,643
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE> 7
T & W FINANCIAL CORPORATION AND AFFILIATES
NOTES TO INTERIM CONSOLIDATED 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
T&W Financial Services Company, L.L.C. ("TWFSC") 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 certain members of 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, cash flows and shareholders' equity are unaudited and have
been prepared in accordance with generally accepted accounting principles. 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 entire 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
(the "SPEs") and pledged as collateral for related debt are referred to herein
as "Securitized". The net investment in leases presented by type of borrowing
for which the investment is pledged as collateral is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
------------------ -----------------
<S> <C> <C>
SECURITIZED:
Minimum lease payments receivable..... $ 83,444 $ 36,349
Estimated residual value of leased
equipment, net...................... 6,953 5,481
Unearned lease revenue ............... (12,309) (5,473)
--------- ---------
78,088 36,357
--------- ---------
NOT SECURITIZED:
Minimum lease payments receivable..... 176,757 131,859
Estimated residual value of leased
equipment, net...................... 3,089 16,370
Unearned lease revenue ............... (30,029) (20,021)
--------- ---------
149,817 128,208
--------- ---------
Allowance for credit losses .......... (5,112) (2,106)
Initial direct costs, net ............ 5,527 5,057
--------- ---------
Net Investment in Leases ........ $ 228,320 $ 167,516
========= =========
</TABLE>
The allowance for credit losses is maint ained at a level the Company believes
is sufficient for estimated future losses related to uncollectible lease
receivables. A summary of activity in the allowance for credit losses account is
as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months ended Year ended
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
------------------ ------------------
<S> <C> <C>
BALANCE, beginning ........................ $ 2,106 $ 1,235
Provision for credit losses ............... 7,326 5,249
Charge-offs ............................... (4,325) (2,875)
Recoveries ................................ 236 454
Additional allowance related to leases
acquired through business combinations .. 769 --
Allowance allocated to leases sold ........ (1,000) (1,957)
------- -------
BALANCE, ending ........................... $ 5,112 $ 2,106
======= =======
</TABLE>
5
<PAGE> 8
NOTE 3. NOTES PAYABLE - RECOURSE
Notes payable for which the lender has recourse against the Company are secured
by guarantees of certain shareholders of the Company and for lines of credit
borrowings, underlying pledged leases and dealer floor plans, and are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
US DOLLAR OBLIGATIONS
Payable to bank drawn on a $75 million credit facility, interest payable
monthly at prime for the base rate portion ($50 million outstanding at
September 30, 1999) and at 1.5% above 30 LIBOR for the alternative rate
portion ($25 million outstanding at September 30, 1999) (8.25% and 6.94%,
respectively at September 30, 1999), due November 1999 $ 75,000 $ 60,000
Payable to bank drawn on a $15 million credit line, interest payable
monthly at 1.5% above 30 day LIBOR, due as payments are made on underlying
leases (last lease payment due October 2001) -- 240
Payable to bank drawn on a $3 million credit line, interest payable
monthly at 1% over prime (9.25% at September 30, 1999), due August 2000 3,000 1,750
Payable to bank drawn on a $7.5 million credit line, interest payable
monthly at 2.0% above 30 day LIBOR (7.44% at September 30, 1999), due upon
demand 7,117 6,645
Payable to financial institution, drawn on a $125 million credit line,
interest payable monthly at 1.25% above 30 day LIBOR (6.62% at September
30, 1999), due August 2000 47,916 1,523
Payable to financial institution, drawn on a $20 million credit line,
interest payable monthly at 6.0% above 30 day LIBOR (11.37% at September
30, 1999), due December 1999, secured by securitization receivables 20,000 --
Lease payable to finance company, payments due monthly at $62,260 interest
at an implicit rate of 7.67%, due June 2002 1,837 --
Acquisition notes payable, interest at 8%, $1 million paid January, 1999,
with remaining principal and interest due quarterly to 2007, net of
imputed interest discount of $225,000 and $194,000 at September 30,1999
and December 31, 1998, respectively 3,269 4,487
-------- --------
158,139 74,645
-------- --------
CANADIAN DOLLAR OBLIGATIONS
Payable to bank drawn on a Cdn$30 million credit line (temporarily
increased to Cdn$40 million at December 31, 1998) interest payable monthly
at 0.75% above prime (7.0% at September 30, 1999), due September, 2000 7,171 25,155
Payable to bank drawn on a Cdn$135 million securitization facility
interest payable monthly at 5.76%, due as payments are made on underlying
leases (last lease payment scheduled April 2005) 50,745 --
Payable to bank drawn on a Cdn$3 million credit line, interest payable
monthly at 7.25%, due on demand 1,925 --
Payable lease, interest payable monthly at 12.5%, due December 2000 454 --
Debenture, interest payable quarterly at 9%, due December 31, 1999 228 --
Debenture, interest payable quarterly at 9%, due October 1, 2004 1,190 --
Other 41 --
Loan payable to affiliate with interest imputed at 8%, due 2003 -- 3,958
-------- --------
61,754 29,113
-------- --------
$219,893 $103,758
======== ========
</TABLE>
6
<PAGE> 9
NOTE 4. SECURITIZATIONS
On September 30, 1999 the Company funded $62 million into a $225 million
securitization facility. The securitization facility was privately placed with a
major financial institution on an interim basis and is anticipated to be funded
on a permanent basis in a private placement during the first quarter of 2000. In
connection therewith, SPEs 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 accounted for such
transaction for financial reporting purposes as a sale of the lease interests.
In May 1999 and September 1999, Onset Capital Corporation, a Canadian joint
venture, completed its second and third securitizations for Cdn$20.2 million
(US$13.4 million) and Cdn$30.6 million (US$20.8 million), respectively. The
facility is structured by CIBC Wood Gundy, the investment banking arm of
Canadian Imperial Bank of Canada. These are the second and third securitizations
of an overall committed facility for Cdn$135 million (US$89.5 million). Under
this facility, the initial cash flows to the Company are considered debt under
generally accepted accounting principles and there is no immediate recognition
of gain from the sale of the lease receivables. The Company will recognize the
net interest margin over the lives of the leases.
NOTE 5. ACQUISITION AND REDEEMABLE PREFERRED STOCK
In April 1999, the Company completed the stock acquisition of Accel Financial
Group ("AFG"), a Canadian financial services company and joint venture partner
in Onset for Cdn$2.50 per share, (US$13.2 million cash). Additionally, in
connection with the acquisition, 2,603,287 shares of AFG common stock were
converted to 2,603,287 shares of Class B Redeemable Preferred Stock of TWFC
Financial Holdings Ltd. ("LTD"), a subsidiary of TWFSC, at Cdn$2.50, (US$4.3
million).
The Class B Preferred Stock is non voting, has no par value, has liquidation
preferences at Cdn$2.50, and is redeemable at the rate of 10% a year for 10
years at a redemption price of Cdn$2.50 per share. Dividends on the Class B
Stock are payable quarterly at the rate of 8% per year and in preference to any
dividends on LTD's common stock. In the event of any liquidation, dissolution or
winding up of LTD, the holders of the outstanding shares of Class B Redeemable
Preferred Stock shall be entitled to be paid an amount equal to the face value
per share held before any sums shall be paid or assets distributed to the
holders of the common stock. If assets are insufficient to fully liquidate the
Redeemable Preferred Stock, then a pro-rata liquidation will be made. Holders of
Redeemable Preferred Stock are not entitled to vote on matters submitted to the
common shareholders of LTD unless required by Yukon law. TWFSC has guaranteed
the payment of all preferred dividends and the mandatory redemptions of the
Class B Preferred Stock of LTD.
NOTE 6. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS
At September 30, 1999, the Company had advanced P.L.M. Consulting Group, L.L.C.
("PLM"), a company owned by four members of Company's Senior management,
approximately $4.7 million (the "PLM Receivable"). Subsequent to September 30,
PLM repaid approximately $2.1 million of the outstanding amount. The PLM
Receivable is included in the Company's balance sheet in other assets.
On November 3, 1999, the Company completed the $40 million initial phase of its
planned $75 million lease funding facility with Bank of America, N.A. On
November 9, 1999, a majority owned joint venture of the company received a
commitment on a $150 million warehouse lease funding facility from a major
financial institution.
7
<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 find adequate sources to fund
its continued operations, including payment of its obligations and lease
fundings; (2) the Company's ability to reduce its use of gain on sale
accounting, to manage growth and credit risk and to integrate new technologies;
(3) 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");
(4) the collectability of securitization receivables which represent the excess
cash flows anticipated by the SPEs; (5) the Company's ability to integrate
acquisitions successfully; (6) the Company's ability to attract and retain
qualified management personnel; (7) 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; (8) the Company's ability to create and
maintain relationships with equipment providers and referral sources to generate
sufficient origination volume; and (9) 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
This report should be read in conjunction with the Company's audited annual
report (Form 10-K) for the year ended December 31, 1998 which has additional
information and disclosures that will assist the reader in understanding the
Company, the financial statements presented and the analysis that follows.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS AS OF OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
1999 1998 1999 1998
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA:
Lease financing Receivables Originated
Number of contracts .......................... 2,898 954 8,426 2,858
Lease originations(1) ........................ $92,731 $83,800 $ 333,850 $ 220,800
Leases serviced Number of contracts ............ 20,836 10,894
Portfolio of leases serviced(2) .............. $ 792,246 $ 476,019
Average portfolio yield(3) ................... 12.2% 12.8%
Credit quality statistics Delinquencies as a 3.74% 2.27%
Percentage of portfolio of leases serviced
31--60 days ................................
61--90 days ................................ 0.79% 0.96%
91--120 days ............................... 1.17% 0.55%
Over 120 days .............................. 2.41% 0.77%
----------- -----------
Total ................................. 8.11% 4.55%
=========== ===========
Net charge-offs(4) ........................... 0.90% 0.45%
</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 by the Company and either held as direct financing leases or
sold.
8
<PAGE> 11
RESULTS OF OPERATIONS
The Company's revenues comprise 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, interest income and
amounts received from the owner trust relating to interest rate collar
agreements.
The Company's expenses comprise 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998.
Leases originated increased from $220.8 million for the nine months ended
September 30, 1998 to $333.9 million for the comparable period in 1999,
representing an increase of 51.2%. The portfolio of leases serviced increased
from $476.0 million at September 30, 1998 to $792.2 million at September 30,
1999, representing an increase of 66.4%. This increase was due to the increase
in lease originations for the nine months ended September 30, 1999 as compared
to the nine months ended September 30, 1998.
Lease contract revenue increased from $13.0 million for the nine months ended
September 30, 1998 to $25.2 million for the comparable period in 1999,
representing an increase of 93.8% due primarily to an increased average net
investment in leases owned during the 1999 period.
Gain on sale of leases decreased from $25.8 million for the nine months ended
September 30, 1998 to $14.6 million for the comparable period in 1999
representing a decrease of 43.4%. The decrease is primarily due to management's
decision to migrate away from gain on sale accounting and retain more assets on
the balance sheet.
Fee income increased from $1.7 million for the nine months ended September 30,
1998 to $3.1 million for the comparable period in 1999, representing an increase
of 82.4%. This change was due primarily to the Company's increased number of
lease originations and an increase in the lease portfolio.
Servicing and other income decreased from $3.6 million for the nine months ended
September 30, 1998 to $2.8 million for the comparable period in 1999,
representing a decrease of 22.2%, as a result of reduced interest income due to
a decrease in the level of interest-earning funds.
Total revenues increased from $44.1 million for the nine months ended September
30, 1998 to $45.8 million for the comparable period in 1999, representing an
increase of 3.9% as a result of the net changes discussed above.
Interest expense increased from $5.9 million for the nine months ended September
30, 1998 to $14.7 million for the comparable period in 1999, representing an
increase of 149.2%. The increase was due to increased average borrowings
outstanding during the 1999 period as compared to the prior year, and increase
in the weighted average interest rate on borrowed funds.
Compensation and related expenses increased from $4.3 million for the nine
months ended September 30, 1998 to $9.7 million for the comparable period in
1999, representing an increase of 125.6%. The increase was due primarily to the
increase in the number of employees as the Company continues to increase its
portfolio of leases serviced. In October, 1999, the Company eliminated
approximately 25% of its workforce in order to reduce operating expenses.
The provision for credit losses increased from $2.3 million for the nine months
ended September 30, 1998 to $7.3 million for the comparative period in 1999,
representing an increase of 217.4%. This increase was due to increased
originations and an increase in the provision rate, as a percentage of
originations from 1% in 1998 to 2% in 1999. Net charge-offs increased to .90%
for the nine months ended September 30, 1999. The increase results primarily
from a larger credit that was written off during third quarter. Delinquencies
were up as a result of the change in business mix and also as a result of
certain delinquent vehicle leases. The delinquencies on vehicle leases included
leases with remarketing agreements
9
<PAGE> 12
with the vehicle manufacturer. During the remarketing period, the subject leases
are recorded as delinquent. At September 30, 1999, this resulted in
approximately .11% of the increase.
Other general and administrative expenses increased from $5.7 million for the
nine months ended September 30, 1998 to $10.7 million for the comparable period
in 1999, representing an increase of 87.7%. The increase was due primarily to
increased occupancy and related costs associated with supporting the Company's
growth and from the amortization of goodwill associated with acquisitions.
Total expenses increased from $21.2 million for the nine months ended September
30, 1998 to $45.7 million for the comparable period in 1999, representing an
increase of 115.6%.
As a result of the above factors, the Company reported net income of $12.5
million for the nine months ended September 30, 1998 and a net loss of $291,000
for the comparable period in 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
Leases originated increased from $83.8 million for the three months ended
September 30, 1998 to $92.7 million for the comparable period in 1999,
representing an increase of 10.6%. The portfolio of leases serviced increased
from $476.0 million at September 30,1998 to $792.2 million at September 30,
1999, representing an increase of 66.4%. This increase was due to lease
originations increasing at a greater rate than the pay-down on leases.
Lease contract revenue increased from $4.4 million for the three months ended
September 30, 1998 to $9.8 million for the comparable period in 1999,
representing an increase of 122.7% due primarily to the increase average net
investment in leases during 1999 as the Company continues to retain more leases.
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
September 30, 1998, the Company recognized a gain on sale of $10.7 million
compared to $5.5 million for the comparable period in 1999. Since the Company
plans to begin to structure its securitizations as debt transactions and
retaining leases on its balance sheet, it anticipates that gain on sale of
leases will continue to decrease and lease contract revenue will increase in the
future.
Fee income increased from $839,000 for the three months ended September 30, 1998
to $1.3 million for the comparable period in 1999, representing an increase of
54.9%. This increase was due primarily to the Company's increased level of
originations during the comparable periods and the increase in the Company's
retained lease portfolio.
Servicing and other income decreased from $1.5 million for the three months
ended September 30, 1998 to $1.2 million for the comparable period in 1999,
representing a decrease of 20.0%, due primarily to reduced interest income
resulting from reduced levels of funds available to invest in other
interest-earning assets.
Total revenues increased from $17.4 million for the three months ended September
30, 1998 to $17.9 million for the comparable period in 1999, representing an
increase of 2.9%.
Interest expense increased from $2.2 million for the three months ended
September 30, 1998 to $6.3 million for the comparable period in 1999,
representing an increase of 186.4%. The increase was due to increased average
borrowings outstanding during the 1999 period as compared to the prior year, and
a higher weighted average interest rate on borrowings.
Compensation and related expenses increased from $2.0 million for the three
months ended September 30, 1998 to $3.5 million for the comparable period in
1999, representing a decrease of 75.0%. The increase was due primarily to the
increase in the number of employees as the Company continues to increase its
portfolio of leases serviced. In October, 1999, the Company eliminated
approximately 25% of its workforce in order to reduce operating expenses.
Amortization of initial direct costs increased from $1.3 million for the three
months ended September 30, 1998 to $1.5 million for the comparable period in
1999, representing an increase of 15.4%. The increase was due primarily to an
increase in the on balance sheet lease portfolio.
The provision for credit losses increased from $883,000 for the three months
ended September 30, 1998 to $2.2 million for the comparative period in 1999,
representing an increase of 149.2%. This increase was due to increased
originations and an increase in the provision rate, as a percentage of
originations from 1% in 1998 to 2% in 1999.
Other general and administrative expenses increased from $2.8 million for the
three months ended September 30, 1998 to $4.1 million for the comparable period
in 1999, representing an increase of 46.4%. The increase was due primarily to
10
<PAGE> 13
costs of moving into the new headquarters building, the amortization of goodwill
associated with acquisitions, and increased professional fees related to the
increased number of securitization facilities.
Total expenses increased from $9.1 million for the three months ended September
30, 1998 to $17.7 million for the comparable period in 1999, representing an
increase of 94.8%.
As a result of the above factors, the Company reported net income of $4.5
million for the three months ended September 30, 1998 and $8,000 for the
comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to short-term and long-term
sources of cash. In order to implement its business strategy, the Company
primarily requires a substantial amount of cash in order to: (i) pay operating
expenses; (ii) finance the purchase of equipment that it leases; (iii) pay the
fees and expenses incurred in the securitization of leases; (iv) pay the fees
and interest expense under its bank lines of credit; and (v) satisfy working
capital requirements. These cash requirements, which have been satisfied through
securitizations, bank borrowings and the initial public offering of the
Company's stock, have increased as the Company's lease originations increased.
No assurance can be given that the Company will have access to the capital
markets in the future for equity or debt issuances or for securitizations or
that financing through bank lines of credit or other means will be available on
acceptable terms to satisfy the Company's cash requirements.
The following table sets forth the major components of the increase in cash and
cash equivalents:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
Net cash provided by operating activities ............ $ 233,669 $ 252,534
Net cash provided by (used) by investing activities .. (344,313) (221,239)
Net cash provided (used) by financing activities ..... 99,616 (43,896)
--------- ---------
Net decrease in cash and cash equivalents ............ $ (11,028) $ (12,601)
========= =========
</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. At September 30, 1999, cash and cash
equivalents totaled $366,000 or .1% of total assets. The Company's operating
income has been insufficient to fund the cost of operations resulting from its
continuing growth. To meet its obligations, the Company must seek sources of
financing other than operating income and reduce its rate of growth. The Company
anticipates that it will require at least approximately $10 million by November
30, 1999, which amount it is attempting to obtain from a variety of sources,
including but not limited to, the sale of the Company's stock, repayment of the
PLM Receivable, the sale of certain portfolio assets and additional borrowings.
In addition, the Company is reducing its rate of growth and cutting expenses as
previously described.
CREDIT FACILITIES
The Company uses secured revolving credit and term loan facilities provided by
various banks and lenders to fund the acquisition and origination of leases. At
September 30, 1999, the Company maintained various lines of credit which
provided for immediately available advances of up to $205.5 million. Advances
under these lines of credit totaled $153 million. In addition, the Company had a
committed Cdn$135 million (US $89.5 million) securitization facility. Advances
on this facility totaled US $50.7 million.
As a result of migrating off gain on sale accounting, TWFSC and the Company have
failed to meet certain minimum interest coverage ratios as required by certain
loan agreements that were entered into prior to commencing such migration. The
lenders have not declared TWFSC or the Company in default and have allowed TWFSC
and the Company to remain in technical breach of these agreements. The Company
is attempting to renegotiate certain provisions of the applicable loan
agreements that will establish an appropriate benchmark for the interest
coverage ratio calculation to reflect the fact that the Company no longer
employs gain on sale accounting to the extent that it did when the loan
agreements were executed. If the lenders declare a default under any of the
applicable loan agreements, the Company's ability to continue operations would
be jeopardized.
11
<PAGE> 14
The Company's warehouse line of credit with First Union National Bank matures on
November 24, 1999 at which time the remaining balance of the line of credit must
be paid in full. As of November 15, 1999, the remaining balance of the loan is
approximately $55 million. The Company has asked First Union to extend this line
of credit through December 31, 1999. If the extension is not obtained, the
Company could be declared in default of the Credit Agreement, which in turn,
could lead to defaults under other loan agreements and the Company's ability to
continue operations would be jeopardized.
To address its obligations to repay First Union, the Company is pursuing the
following steps. The Company is having discussions with local financial
institutions to with regard to their participation in the Company's $40 million
warehouse facility with Bank of America. A portion of the additional capacity
may be used to repay a portion of the First Union loan. Also, Bank One, N.A. has
issued a commitment letter to TWFSC's joint venture subsidiary, Prime One
Capital Company L.L.C., to establish a $150 million warehouse line of credit for
its commercial auto leases. The Company anticipates that approximately $50
million of the line will be available in mid-December and $30 million of such
line will be used to repay its obligation to First Union. In addition, the
Company is pursuing certain portfolio sales.
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 1999
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%
March 1998............... 86.0 million AAA/BBB Duff & Phelps/Fitch 2.5%
June 1998................ 117.5 million A-1/P-1 S&P/Moody's 0.0%
September 1998........... 77.4 million AAA/A Duff & Phelps/Fitch 3.0%
December 1998............ 67.5 million A-1/P-1 S&P/Moody's 0.0%
March 1999............... 110.0 million AAA/A Duff & Phelps/Fitch 0.0%
---------------
TOTAL............... $ 737.0 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 0% and
the spread was 55 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.
Historically, the Company has structured its securitization facilities such that
they would be considered sales under generally accepted accounting principles.
As previously announced, the Company intends to reduce the use of such
structured facilities and structure future facilities to be considered as debt
transactions and retaining leases on its balance sheet. The primary effect under
this change is there is no immediate recognition of gain upon the sale of the
lease receivables, and income is recognized based on the net interest margin
over the life of the receivables.
On October 22, 1999, the Company's operating subsidiary, TWFSC, in its capacity
as servicer, received a notice of default from Norwest Bank Minnesota, N.A., in
its capacity as trustee, for an alleged failure to meet certain terms of an
12
<PAGE> 15
agreement pursuant to which TWFSC services securitized leases originated by
itself and its affiliates. Management believes that the alleged default was
remedied on the date of receipt of the notice, and systems, including a lockbox
arrangement, have been established by TWFSC to avoid the circumstances giving
rise to any such alleged default in the future.
The Company continues to move toward the closing of a securitization facility in
an amount of $225 million. The terms of the securitization permit the
securitization of substantially all of the leases originated by TWFSC and its
affiliates. Lehman Brothers is underwriting the securitization and the Company
anticipates that it will close no later than the second week of December, 1999.
13
<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 September 10, 1999, T & W Financial Corporation (the "Company")
filed a report on Form 8-K to report that the Company has entered into an
amended and restated agreement with P.L.M. Consulting Group, L.L.C. and its
members effective July 1, 1999 (the "Agreement"). Pursuant to the Agreement,
P.L.M. provides the Company with the services of Michael A. Price, Thomas W.
Price, Paul B. Luke and Kenneth W. McCarthy, Jr. to act as executive officers of
T&W Financial Corporation. Under the Agreement, P.L.M. is entitled to an annual
base fee of $1,260,000 and an incentive fee with respect to each calendar
quarter based on the Company's Return on Average Managed Assets as adjusted
annually by the performance of the Company's common stock as more fully
described in the Agreement.
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: November 15, 1999 By: /s/ Thomas J. Virgin
Thomas J. Virgin
Senior Vice President,
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 366
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 345,066
<CURRENT-LIABILITIES> 47,771
<BONDS> 235,310
4,342
0
<COMMON> 28,564
<OTHER-SE> 29,079
<TOTAL-LIABILITY-AND-EQUITY> 345,066
<SALES> 0
<TOTAL-REVENUES> 45,829
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,617
<LOSS-PROVISION> 7,326
<INTEREST-EXPENSE> 14,694
<INCOME-PRETAX> 142
<INCOME-TAX> 258
<INCOME-CONTINUING> (116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (291)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
