<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration Statement No.: 333-12355
PROSPECTUS
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$62,500,000
[LOGO OF LEASING SOLUTIONS, INC.]
LEASING SOLUTIONS, INC.
6 7/8% Convertible Subordinated Notes Due 2003
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The 6 7/8% Convertible Subordinated Notes Due 2003 (the "Notes") are being
offered by Leasing Solutions, Inc. (the "Company") and will mature on October
1, 2003, unless previously redeemed or repurchased. Interest on the Notes is
payable on April 1 and October 1 of each year, commencing April 1, 1997. The
Notes are convertible into shares of the Common Stock of the Company ("Common
Stock") at any time after the date 60 days following the last date on which
the Notes are issued under the Indenture through maturity, unless previously
redeemed or repurchased, at a conversion price of $34.90 per share, subject to
adjustment in certain events as described herein. See "Description of Notes --
Conversion."
The Notes will constitute unsecured obligations of the Company subordinated in
right of payment to all existing and future Senior Debt (as defined herein) of
the Company. Senior Debt of the Company was approximately $230 million at July
31, 1996. See "Description of Notes -- Subordination." The Notes are
redeemable, in whole or in part, at the option of the Company at any time on
or after October 4, 1999, at the redemption prices set forth herein, plus
accrued interest. See "Description of Notes -- Optional Redemption." Subject
to certain conditions, following the occurrence of a Change of Control (as
defined herein), each holder has the right to cause the Company to repurchase
the Notes at 100% of the principal amount thereof, plus accrued interest. See
"Description of Notes -- Change of Control."
The Notes will be represented only by Global Securities registered in the name
of a nominee of The Depositary Trust Company, as Depositary (the
"Depositary"). Settlement for the Notes will be made in immediately available
funds. The Notes will trade in the Depositary's Same-Day Funds Settlement
System until maturity, and secondary market trading activity in the Notes will
therefore settle in immediately available funds. See "Description of Notes --
Global Securities."
The Common Stock is included in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market"). On October 3, 1996, the last reported sales price
of the Common Stock on the Nasdaq National Market was $28.50 per share. See
"Price Range of Common Stock." Application will be made to include the Notes
in The Nasdaq SmallCap Market under the symbol "LSSIG."
SEE "RISK FACTORS" ON PAGES 6 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
NOTES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(1)(3)
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<S> <C> <C> <C>
Per Note.............................. 100% 3% 97%
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Total(4).............................. $62,500,000 $1,875,000 $60,625,000
================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined in
"Underwriting") against certain liabilities, including liabilities under
the Securities Act of 1933, as amended ("Securities Act"). See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated to be $300,000.
(4) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to an additional $9,375,000 aggregate principal
amount of Notes on the same terms as set forth above. If all such
additional Notes are purchased by the Underwriters, the total Price to
Public will be $71,875,000, the total Underwriting Discounts and
Commissions will be $2,156,250, and the total Proceeds to Company will be
$69,718,750. See "Underwriting."
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The Notes are offered by the several Underwriters, subject to delivery by the
Company and acceptance by the Underwriters, to prior sale and to withdrawal,
cancellation or modification of the offer without notice. Delivery of the
Notes to the Underwriters is expected to be made to Prudential Securities
Incorporated through the facilities of the Depositary on or about October 9,
1996.
PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC.
October 3, 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: 7 World Trade Center, New York, New York 10048; and Suite 1400,
500 West Madison Street, Chicago, Illinois 60621-2511. Copies of such material
can be obtained from the Public Reference Section of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, at prescribed
rates. The Commission maintains a World Wide Web site that contains
information which the Company has filed electronically with the Commission.
The address of the Commission's World Wide Web site is http://www.sec.gov. The
Common Stock is quoted on the Nasdaq National Market under the symbol "LSSI."
Reports, proxy and information statements and other information described
above may be inspected and copied at facilities maintained by the Nasdaq Stock
Market at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
are incorporated herein by reference: (i) the Company's Annual Report on Form
10-K for the year ended December 31, 1995; (ii) the Company's Notice of 1995
Annual Meeting of Shareholders and Proxy Statement with respect to such
meeting; and (iii) the Company's Quarterly Reports on Form 10-Q, for the
quarterly periods ended March 31, 1996 and June 30, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Notes shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for all purposes of
this Prospectus and the Registration Statement to the extent that a statement
contained herein, therein or in any subsequently filed document which also is
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any and all of the documents incorporated by reference herein (other
than exhibits to such documents, unless exhibits are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to Leasing Solutions, Inc., 10 Almaden Boulevard, Suite 1500, San Jose,
California 95113, Attention: Vice President, Corporate Finance. The Company's
telephone number is (408) 995-6565.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AND OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus or
incorporated herein by reference. Prospective purchasers of the Notes offered
hereby should carefully consider the factors set forth under "Risk Factors."
Unless otherwise noted, the information contained in this Prospectus assumes
that the Underwriters' over-allotment option will not be exercised.
THE COMPANY
Leasing Solutions, Inc. (the "Company") is in the business of leasing
information processing and communications equipment to large, creditworthy
customers, primarily through vendor programs with equipment manufacturers. The
Company's focus is on operating leases because such leases provide the
opportunity for the Company to realize a substantial return through residuals
received upon remarketing the equipment to the original customer at the end of
the initial lease term. To date, the Company has purchased over $750 million of
equipment, representing over 275,000 assets. The Company has recently expanded
its operations to Western Europe.
The majority of the Company's vendor programs involve equipment utilized in
corporate desktop and client/server network environments. The Company estimates
that, during the first six months of 1996, desktop computers represented
approximately 85% of the purchase price of equipment purchased by the Company
for lease to its customers ("Dollar Volume"). The Gartner Group estimates that,
by 1998, more than 35% of desktop and midrange computer equipment in North
America will be leased. In order to better service their corporate customers,
the Company believes that many information processing and communications
equipment vendors are choosing to outsource their lease finance function to
independent leasing companies, such as the Company.
The Company's vendor programs generally involve equipment purchase and
remarketing relationships with manufacturers. The Company has existing vendor
programs for the United States with Apple Computer, Auspex Systems, Dell
Computer, Memorex Telex, NCR, Quickturn Design Systems, and Sybase. The Company
also has a vendor program with Dell Computer for Western Europe, and has
entered into a letter of intent with Cisco Systems for a vendor program in the
United States and Western Europe. In addition, the Company currently has a
significant lease financing relationship with a major systems integrator and
anticipates establishing additional systems integrator programs in the future.
The ten largest customers of the Company, by Dollar Volume, during the 18
months ended June 30, 1996, and listed alphabetically, were Apple Computer,
EDS, Ernst & Young LLP, Honeywell, L.L. Bean, Source Services, the State of
California, Tandy, Western Digital, and Xerox. The Company has over 400 master
lease agreements in place with its corporate customers.
Key factors contributing to the Company's growth in profitability have been
its ability to estimate residual values and maximize realized residual values
in the remarketing process. When estimating residual values, the Company
utilizes, among other sources, residual estimates available from independent
sources, such as the Gartner Group, input from its vendor relationships and the
experience and expertise of its management team. The Company believes that its
focus and management expertise with respect to the information processing and
communications equipment sector of the leasing industry have been important
elements of its successful remarketing efforts.
For equipment purchased through its vendor programs, the Company works
directly with the vendor's sales force in the remarketing process for equipment
manufactured by the vendor. The Company's vendor programs generally involve
residual sharing arrangements which provide financial incentives for vendors to
assist in the remarketing process. The Company believes that the value of its
equipment is greatest to the original customer when it is "embedded" in the
customer's operations, such as equipment used in client/server networks.
Therefore, the Company seeks to maximize the amount of equipment that is
remarketed in place to the original customer in order to realize the
considerably higher residual values that may result from such remarketing, as
compared to equipment sold or leased to a third party. Based on equipment
purchase cost, approximately 70% of the Company's equipment remarketed during
the 18 months ended June 30, 1996, was remarketed in place to the original
customer. See "Risk Factors -- Potential Reduction in Residual Values of Leased
Equipment."
3
<PAGE>
THE OFFERING
Securities Offered........ $62,500,000 ($71,875,000 if the Underwriters' over-
allotment option is exercised in full) aggregate
principal amount of 6 7/8% Convertible Subordinated
Notes due 2003 (the "Notes") to be issued under an
indenture (the "Indenture").
Interest Payment Dates.... April 1 and October 1 of each year at 6 7/8% per
annum commencing April 1, 1997. See "Description of
Notes."
Maturity.................. October 1, 2003.
Conversion Rights......... The Notes are convertible into Common Stock of the
Company at the option of the holder at any time
after the date 60 days following the last date on
which the Notes are issued under the Indenture
through maturity, unless previously redeemed or
repaid, at a conversion price of $34.90 per share
(equivalent to a conversion rate of approximately
28.653 shares per $1,000 principal amount of
Notes), subject to adjustment in certain events.
See "Description of Notes -- Conversion."
Redemption at the Option
of the Company............ The Notes are redeemable at any time on or after
October 4, 1999, in whole or in part, at the option
of the Company, at declining redemption prices set
forth herein, plus accrued interest. See
"Description of Notes -- Optional Redemption."
Change of Control......... In the event of a Change in Control (as defined in
"Description of Notes"), each holder of Notes will
have the right to require the Company to repurchase
all or any part of the holder's Notes at a
repurchase price of 100% of the principal amount
thereof, plus accrued interest. See "Description of
Notes -- Change of Control."
Subordination............. The Notes will constitute general unsecured
obligations of the Company and will be subordinated
in right of payment to all existing and future
Senior Debt (as defined in "Description of Notes")
of the Company, and are effectively subordinated to
all existing and future indebtedness and other
liabilities of Subsidiaries (as defined herein) of
the Company. At July 31, 1996, the Company had
approximately $230 million of indebtedness
outstanding that would have constituted Senior Debt
and the subsidiaries of the Company had
approximately $28 million of indebtedness
outstanding and other liabilities (excluding
intercompany liabilities) to which the Notes would
have been structurally subordinated. The Indenture
contains no limitations on the incurrence of
additional indebtedness or other liabilities by the
Company or any of its Subsidiaries. See
"Description of Notes -- Subordination."
Use of Proceeds........... Principally to fund the Company's equity investment
in equipment it leases to its customers and for
general corporate purposes. Also may be used to
repay a portion of its long-term, non-recourse
debt. See "Use of Proceeds."
Listing................... Application will be made to include the Notes in
The Nasdaq SmallCap Market under the symbol
"LSSIG." The Common Stock is included in the Nasdaq
National Market under the symbol "LSSI."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues....................... $50,818 $60,087 $80,676 $ 36,713 $ 59,864
Costs and expenses (1)............... 37,922 45,141 62,233 28,342 47,489
------- ------- ------- -------- --------
Transaction contribution............. 12,896 14,946 18,443 8,371 12,375
Selling, general and administrative
expenses............................ 7,435 7,294 8,584 4,077 5,419
------- ------- ------- -------- --------
Income before income taxes........... 5,461 7,652 9,859 4,294 6,956
Provision for income taxes........... 2,242 3,060 3,931 1,718 2,846
------- ------- ------- -------- --------
Net income........................... $ 3,219 $ 4,592 $ 5,928 $ 2,576 $ 4,110
======= ======= ======= ======== ========
Net income per share................. $ .66 $ .75 $ .93 $ .41 $ .53
======= ======= ======= ======== ========
Shares used in computing per share
amounts............................. 4,884 6,096 6,373 6,241 7,727
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Investment in leases.................................... $291,344 $291,344
Total assets............................................ 314,817 316,992
Recourse debt........................................... 118,728 71,364
Nonrecourse debt........................................ 123,264 110,303
6 7/8% Convertible Subordinated Notes................... -- 62,500
Retained earnings....................................... 20,361 20,361
Shareholders' equity.................................... 57,723 57,723
</TABLE>
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(1) All expenses other than selling, general and administrative expenses.
(2) Adjusted to reflect the sale of the Notes offered hereby (after deducting
underwriting discounts and commissions and estimated offering expenses) and
the application of the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS,
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, IN CONNECTION WITH AN
INVESTMENT IN THE NOTES OFFERED HEREBY.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events
or developments that the Company expects, believes or anticipates will or may
occur in the future, including, without limitation, with respect to demand and
competition for the Company's lease financing services and the products to be
leased by the Company, the continued availability to the Company of adequate
financing, risks and uncertainties of doing business in Europe, the ability of
the Company to recover its investment in equipment through remarketing, the
ability of the Company to manage its growth, the Company's business
strategies, and the Company's expansion of its operations, are forward-looking
statements. These statements are based on certain assumptions and, in certain
cases, analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks
or uncertainties, including the following risk factors, general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company.
Prospective investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in forward-looking statements.
POTENTIAL REDUCTION IN RESIDUAL VALUES OF LEASED EQUIPMENT. The Company has
historically emphasized operating leases with a term of 24 to 36 months,
rather than direct finance leases. In general, under the Company's operating
leases, the present value of the monthly lease payments will pay back 80% to
90% of the purchase price of the equipment, whereas the present value of the
monthly lease payments under its direct finance leases will generally pay back
the Company's entire investment in the equipment. As a result, under its
operating leases, the Company assumes the risk of not recovering its entire
investment in the equipment through the remarketing process.
At the inception of each operating lease, the Company estimates a residual
value for the leased equipment based on guidelines established by the
Company's Investment Committee. However, as is typical of information
processing and communications equipment, the equipment owned and leased by the
Company is subject to rapid technological obsolescence. Furthermore, decreases
in manufacturers' prices of equipment may adversely affect the market value of
such equipment, and thus its residual value. While the Company's experience
generally has resulted in aggregate realized residual values for equipment in
excess of the initial estimated residual values for such equipment, a decrease
in the market value of such equipment at a rate greater than expected by the
Company, whether due to rapid technological obsolescence, price decreases or
other factors, would adversely affect the residual values of such equipment.
In addition, since early 1993, the Company has entered into new vendor
programs and one systems integrator relationship that have produced
substantial lease volume. Approximately 68% of the purchase price of equipment
purchased by the Company for lease to its customers ("Dollar Volume") during
the 18 months ended June 30, 1996 has been purchased pursuant to such new
vendor programs or systems integrator relationship. The Company estimates that
during such 18 month period, desktop computers represented 85%, by its Dollar
Volume. The initial lease terms of most of the leases to which such equipment
is subject have not yet expired and, as a result, the Company does not yet
have remarketing experience with respect to such equipment. Additionally, the
desktop computer equipment purchased as a result of such new vendor programs
or such systems integrator relationship is a different type of information
processing and communications equipment than equipment for which the Company
has significant remarketing experience. Therefore, the Company's historical
experience in estimating residual values may not be applicable to equipment
distributed by such new vendors or systems integrator, and the Company's
historical remarketing experience is not necessarily indicative of future
performance.
6
<PAGE>
Accordingly, there can be no assurances that the Company's estimated
residual values for equipment will be achieved. If the Company's estimated
residual values with respect to any type of equipment are reduced or not
realized in the future, the Company may not recover its investment in such
equipment and, as a result, its operating results, cash flows and financial
condition could be materially adversely affected. As of June 30, 1996, the
total net unrealized residual (book) value of the Company's leased equipment
reflected in the Company's balance sheet was approximately $99 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations (hereinafter, "MD&A") -- Lease Accounting."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's future
quarterly operating results may fluctuate. The Company's quarterly results of
operations are susceptible to fluctuations for a number of reasons, including,
without limitation, any reduction of expected residual values related to the
equipment the Company leases. Quarterly operating results could also fluctuate
as a result of the sale by the Company of equipment in its lease portfolio, at
the expiration of a lease term or prior to such expiration, to the lessee or
to a third party or the sale of the stream of monthly rental payments under
its leases to a third party. Such sales of equipment or lease receivables may
have the effect of increasing revenues and net income during the quarter in
which the sale occurs, and reducing revenues and net income otherwise expected
in subsequent quarters. See "Potential Reduction in Residual Values of Leased
Equipment" above and "MD&A -- Lease Accounting," "MD&A -- Results of
Operations for the Three Years Ended December 31, 1995" and "MD&A -- Results
of Operations for the Six Months Ended June 30, 1996."
In the event the Company's revenues or earnings for any quarter are less
than the level expected by securities analysts or the market in general, such
shortfall could have an immediate and significant adverse impact on the market
price of the Company's Common Stock. Any adverse impact could be greater if a
shortfall occurs near the time of any material decrease in any widely followed
stock index or in the market price of the stock of one or more public
equipment leasing companies or major vendors or customers of the Company. See
"Possible Volatility of Share Price" below.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations for preceding quarters are not
necessarily meaningful and that such results for one quarter should not be
relied upon as an indication of future performance.
DEPENDENCE ON VENDORS AND SYSTEMS INTEGRATORS. In 1995, approximately 21%,
13% and 10% of the Company's lease volume (by Dollar Volume) resulted from
leases with respect to equipment purchased by the Company through its vendor
programs with Dell Computer, Memorex Telex and Apple Computer, respectively.
During the six months ended June 30, 1996, approximately 60%, 8% and 4%,
respectively, of such lease volume resulted from such vendor programs.
Furthermore, a major systems integrator with which the Company has a lease
financing relationship accounted for 14% of such lease volume during 1995 and
17% of such lease volume during the first six months of 1996. The loss of any
of its major vendors, and particularly Dell, or such systems integrator could
have a material adverse effect on the Company's results of operations and
financial condition. The inability of the Company to develop additional vendor
programs and systems integrator relationships could adversely affect the
Company's ability to continue to grow its lease portfolio. Several of the
Company's other vendor programs have not, to date, produced significant
volumes of leased equipment or revenues. See "Business -- Leasing and Sales
Activities -- Vendor Programs."
As noted, the Company's vendor program with Dell represented approximately
60% of its lease volume for the first six months of 1996. Virtually all of the
equipment purchased for lease under the Dell program is desktop computer
equipment. See "Potential Reduction in Residual Values of Leased Equipment"
above. The vendor program with Dell is non-exclusive and, accordingly, does
not require Dell to involve the Company in the lease financing requests of
Dell's customers. The Dell vendor program agreement presently expires in
January, 1998. In the event the Company's agreement with Dell were to expire
or Dell chose to refer a significant amount of the lease financing requests of
its corporate customers to other lease financing sources, the Company's lease
volume and ultimately its results of operations and financial condition would
be materially adversely affected.
7
<PAGE>
The Company has had a vendor program with Memorex Telex since the Company's
inception in 1986. As of June 30, 1996, the net book value of the Company's
leased equipment acquired from Memorex Telex reflected in the Company's
balance sheet was approximately $56 million. The agreements documenting the
Company's vendor program with, and portfolio acquisitions from, Memorex Telex
(see "Business -- Leasing and Sales Activities -- Vendor Programs") provide
that Memorex Telex will remarket its equipment purchased by the Company, or
assist the Company with respect to its remarketing of such equipment, when the
initial lease term ends. Memorex Telex has reported substantial losses over
the last few years and is having difficulties meeting its obligations. In the
event Memorex Telex does not improve its operating results and obtain
necessary additional capital in the near future, there is a substantial
possibility that it will file for protection under the bankruptcy laws.
However, if such filing occurs, there can be no assurances that Memorex Telex
will be able to successfully reorganize. As a result, Memorex Telex may not be
able to continue in business or may be forced to materially curtail its
business, either of which would adversely affect its ability to meet its
obligations under its agreements with the Company. Accordingly, a continuation
of Memorex Telex's financial difficulties could have a material adverse effect
on the Company's results of operations and financial condition.
The Company has had a vendor program with Apple Computer since mid-1993.
Apple has reported substantial losses from operations over the last year. In
the event Apple's financial difficulties result in it being acquired by a
company with a captive leasing subsidiary or an exclusive relationship with
another leasing company, there is an additional risk that Apple will not renew
its vendor program agreement with the Company when it expires at the end of
1996. Furthermore, if Apple's financial difficulties persisted over a longer
period, Apple may be forced to materially curtail its business, which could
affect its ability to meet its obligations under its agreement with the
Company, including its obligation to assist the Company with respect to
remarketing of Apple equipment purchased by the Company. Accordingly, a
continuation of Apple's financial difficulties could have a material adverse
effect on the Company's results of operations and financial condition.
DEPENDENCE ON AVAILABILITY OF FINANCING. The operating lease business on
which the Company focuses is a capital intensive business. The typical
operating lease transaction requires a cash investment by the Company of 10%
to 20% of the original equipment cost, commonly known in the equipment leasing
industry as an "equity investment." The Company's equity investment is
typically financed with either recourse borrowings, the net proceeds of the
sale of debt or equity securities or internally generated funds. It is
expected that the net proceeds from the sale of Notes in this offering will be
used primarily to provide capital for such equity investments. The balance of
the equipment cost is typically financed with the proceeds of long-term,
nonrecourse debt. In addition, the Company typically finances the acquisition
of equipment for lease through short-term, "warehouse" lines of credit prior
to obtaining long-term, permanent financing for the equipment. Accordingly,
the Company's ability to successfully execute its business strategy and to
sustain its growth is dependent, in part, on its ability to obtain recourse
and nonrecourse debt capital, both short-term and long-term, and to raise
additional debt or equity capital to meet its equity investment requirements
in the future. Although, to date, the Company has been able to obtain the
recourse and nonrecourse borrowing, and raise the other capital, it requires
to finance its business, no assurances can be given that the necessary amount
of such capital will continue to be available to the Company on favorable
terms or at all. In particular, any material failure of the Company to achieve
its residual value estimates through the remarketing of equipment would
adversely affect its ability to finance its equity investments. In addition,
the Company only recently expanded its lease financing activities to Western
Europe and, as yet, has not put into place any lines of credit to support such
activities. If the Company were unable to obtain any portion of its required
financing on favorable terms, the Company would be required to reduce its
leasing activity, which would have a material adverse effect on the Company's
results of operations and financial condition. See "MD&A -- Liquidity and
Capital Resources" and "Business -- Financing."
DEPENDENCE ON CREDITWORTHY CUSTOMERS. The Company has focused its marketing
and sales efforts, through its vendor programs and in general, on leasing
equipment to large, creditworthy customers. To date, the credit quality of the
Company's customers, and the Company's resulting successful delinquency and
default experience, have enabled the Company to raise sufficient amounts of
debt and equity capital to fund its equipment purchases. In the event the
actual or perceived credit quality of the Company's customer base
8
<PAGE>
materially decreases, or the Company has a material increase in its
delinquency and default experience, the Company may find it difficult to
continue to obtain the capital it requires, resulting in a material adverse
effect on its results of operations and financial condition (see "Dependence
on Availability of Financing" above). Furthermore, a material increase in the
Company's delinquency and default experience would, alone, have a material
adverse effect on its results of operations.
INTEREST RATE RISK. The Company's equipment leases are structured on a fixed
monthly rental basis. Prior to obtaining long-term financing for its leases
and the related equipment, the Company typically finances the purchase of
those assets through short-term, "warehouse" lines of credit which bear
interest at variable rates. The Company is exposed to interest rate risk on
leases financed through its warehouse facilities to the extent interest rates
increase between the time the leases are initially financed and the time they
are permanently financed. Increases in interest rates during this period could
narrow or eliminate the spread, or result in a negative spread, between the
effective interest rate the Company realizes under its leases and the interest
rate that the Company pays under its warehouse facilities or, more
importantly, under the borrowings used to provide long-term financing for such
leases. To protect the Company against this risk, the Company's Board of
Directors has approved a hedging strategy and, as appropriate, the Company
will hedge against such interest rate risk. To date, the Company has not
engaged in any such hedges. There can be no assurance, however, that the
Company's hedging strategy or techniques will be effective, that the
profitability of the Company will not be adversely affected during any period
of changes in interest rates or that the costs of hedging will not exceed the
benefits. See "MD&A -- Liquidity and Capital Resources."
DEPENDENCE ON MAJOR CUSTOMERS. The Company has two customers, the State of
California and Xerox Corporation, which accounted for 11.2% and 10.3%,
respectively, of 1995 revenues. During the first six months of 1996, the
Company had three customers, Xerox, the State of California and Ernst & Young
LLP, which accounted for 17.6%, 11.2% and 9.8%, respectively, of revenues for
that period. The Company's lease agreements with these customers presently
expire between now and mid-1999. In the event any of these customers, and
particularly Ernst & Young LLP (which has represented approximately 50% of the
Company's lease volume, by Dollar Volume, in the first six months of 1996), or
any of the Company's other major customers, ceases to lease additional
equipment or materially reduces the amount of equipment it leases from the
Company in the future, the Company's operating results could be materially
adversely affected.
MANAGEMENT OF GROWTH. In the past three and a half years, the Company
financed a significantly greater number of leases than it had in the prior
seven years of its existence. As a result of this rapid growth, the net book
value of the Company's lease portfolio grew from $69 million at December 31,
1992 to $291 million at June 30, 1996. In light of this growth, the historical
performance of the Company's lease portfolio may be of limited relevance in
predicting future lease portfolio performance. Any credit or other problems
associated with the large number of leases financed in recent years will not
become apparent until sometime in the future.
In order to support the anticipated growth of its business, the Company has
added a substantial number of new personnel since the beginning of 1995 and
expects to add a substantial number of additional personnel during the balance
of 1996 and during 1997. The Company is absorbing, and will continue to absorb
in the future, the effects of additional personnel costs and the
implementation of new software systems necessary to manage such growth. The
Company's future operating results will depend on its ability to attract, hire
and retain skilled employees and on the ability of its officers and key
employees to continue to implement and improve its operational and financial
control systems and to train and manage its employees. The Company's inability
to manage growth effectively, should it occur, or to attract and retain the
personnel it requires, could have a material adverse effect on the Company's
results of operations.
EXPANSION TO WESTERN EUROPE. In April 1996, the Company expanded its lease
financing activities to Western Europe by acquiring a small independent
leasing company in the United Kingdom. Although no assurances can be given,
the Company expects that, in addition to its present capabilities in the
United Kingdom, it will be in a position to provide lease financing to its
vendors' customers in Germany in the next few weeks and to their customers in
France, Belgium and the Netherlands by the end of 1996. International
activities pose certain risks not faced by leasing companies that limit
themselves to United States lease financing activities.
9
<PAGE>
Fluctuations in the value of foreign currencies relative to the U.S. dollar,
for example, could adversely impact the Company's results of operations.
International activities also could be adversely affected by factors beyond
the Company's control, including the imposition of or changes in government
controls, export license requirements, or tariffs, duties or taxes and changes
in economic and political conditions. In addition, cross-border leasing
transactions within Western Europe raise the risk that VAT or other taxes that
are not reimbursable by the lessee may be imposed on the transaction.
The principal impetus for the Company expanding its operations to Western
Europe was its vendor program agreement with Dell. The Company is in the
process of negotiating the extension of the term of this agreement with Dell,
which presently expires on October 31, 1996, to October 1997 or later. In the
event the agreement is not extended, the Company may not have the lease volume
in Europe to support its infrastructure and related costs and, as a result,
could experience losses in its European operations. Furthermore, the European
vendor program with Dell does not obligate Dell to participate in the
remarketing of equipment the Company purchases from Dell. Although the Company
recognizes that fact when estimating residuals for purposes of providing
pricing for leases of Dell equipment in Europe, no assurances can be given
that the Company will adequately take into account the impact on the Company's
ability to recover its estimated residuals on such equipment which results
from Dell not participating in such remarketing. See "Potential Reduction in
Residual Values of Leased Equipment" above.
COMPETITION. The information processing and communications equipment leasing
business is characterized by significant competition. The Company competes
with leasing companies, commercial banks and other financial institutions with
respect to opportunities to provide lease financing to end-user customers and
to provide vendor programs to manufacturers of such equipment. A substantial
number of the Company's competitors are significantly larger, and have
substantially greater resources, than the Company. The Company's relatively
limited amount of capital places it at a disadvantage in relation to its
larger competitors, particularly in connection with financing lease
transactions involving large dollar volumes of equipment where the cost of the
equipment substantially exceeds the amount of debt available for such
financing. See "Business -- Competition."
SUBORDINATION OF NOTES. The indebtedness evidenced by the Notes is
subordinate to the prior payment in full of all Senior Debt (as defined in
"Description of Notes"). At July 31, 1996, the Company had approximately $230
million of Senior Debt outstanding. In addition, because a substantial portion
of the Company's operations and financing activities are or will be conducted
through subsidiaries, claims of holders of indebtedness and of other creditors
of such subsidiaries will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes. At July 31, 1996, the Company's subsidiaries
had approximately $28 million of debt outstanding. The Indenture will not
limit the amount of additional indebtedness, including Senior Debt or pari
passu indebtedness, that the Company or any of its subsidiaries can create,
incur, assume or guarantee. During the continuance of any default (beyond any
applicable grace period) in the payment of principal, premium, interest or any
other payment due on the Senior Debt, no payment of principal or interest on
the Notes may be made by the Company. In addition, upon any distribution of
assets of the Company after any dissolution, winding up, liquidation or
reorganization, the payment of the principal and interest on the Notes is
subordinated to the extent provided in the Indenture to the prior payment in
full of all Senior Debt and is structurally subordinated to claims of
creditors of each subsidiary of the Company. By reason of this subordination,
in the event of the Company's dissolution, holders of Senior Debt may receive
more, proportionately, and holders of the Notes may receive less,
proportionately, than the other creditors of the Company. The Company's cash
flow and ability to service debt, including the Notes, are dependent, in part,
upon the earnings of its subsidiaries and the distribution of those earnings
to, or upon payments by those subsidiaries to, the Company. The ability of the
Company's subsidiaries to make such distributions or payments are subject to
contractual or statutory restrictions. See "Description of Notes."
REPURCHASE OF NOTES UPON CHANGE OF CONTROL; AVAILABILITY OF FUNDS. In the
event of a Change of Control (as defined in "Description of Notes"), each
holder of Notes will have the right to require that the Company repurchase the
Notes in whole or in part at a redemption price of 100% of the principal
amount thereof,
10
<PAGE>
plus accrued interest to the date of purchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds
to pay such redemption price for all Notes tendered by the holders thereof.
See "Subordination of Notes" above. The Company's ability to pay such
redemption price is, and may in the future be, limited by the terms of its
lines of credit or other agreements relating to indebtedness that constitute
Senior Debt. See "Description of Notes."
POSSIBLE VOLATILITY OF SHARE PRICE. The market price of the shares of the
Company's Common Stock has been highly volatile. In addition, in recent years
the stock market in general and the market for shares of small capitalization
stocks in particular have experienced extreme price fluctuations which have
often been unrelated to the operating performance of affected companies. For
example, the market price may be significantly affected by actual or
anticipated financial results of the Company, the market price of stocks of
other equipment leasing companies, announcements from vendors of the Company's
leased equipment regarding new products or technological innovations,
equipment price changes, a decision by a holder of a significant percentage of
the Company's outstanding shares to liquidate its position in those shares,
changes in government regulations, changes in prevailing interest rates,
accounting principles or tax laws applicable to the Company, the operating
results or financial condition of the Company's vendors or principal
customers, or acquisitions affecting the Company's vendors or principal
customers. See "Price Range of Common Stock." There can be no assurance that
the market price of the Company's Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF
COMMON STOCK. As of the expected effective date of this Prospectus,
approximately 6,268,287 shares of Common Stock (excluding the shares of Common
Stock issuable upon the conversion of the Notes) will be outstanding and
freely transferable without restriction. The Company and each of the Company's
directors and officers has agreed with the Underwriters not to sell any shares
of Common Stock within the 90-day period after the date hereof. At the end of
such 90-day period, approximately 1,922,158 shares subject to such lock-up
agreements will become eligible for sale, subject, with respect to
approximately 1,836,950 of those shares, to the provisions of Rule 144. Sales
of any such shares after such period could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $60,325,000 ($69,419,000 if the Underwriters' over-
allotment option is exercised in full), after deducting underwriting discounts
and commissions and estimated expenses of this offering. The Company intends
to use the net proceeds primarily to provide capital for its equity
investments in equipment for lease to its customers, including equipment in
portfolios acquired by the Company, and for general corporate purposes. It
may, as well, use a portion of the net proceeds to pay off a portion of its
long-term debt. A portion of such net proceeds may be used to acquire other
companies or businesses in the same industry as the Company and the lease
portfolios of other companies. The Company does consider such acquisitions in
the normal course of its business, but does not have any present commitments
or agreements with respect to any acquisitions. Although the Company is
presently negotiating the acquisition of a lease portfolio in Germany, it does
not expect to use any of the net proceeds of this offering to finance that
acquisition.
Prior to use of the net proceeds for the purposes described above, it will
be used to repay a portion of the Company's outstanding short-term debt under
its secured, recourse bank lines of credit, which, at June 30, 1996, totaled
$112,200,000. The Company will have the ability to reborrow all or a portion
of any such amount it repays to purchase equipment for lease. The debt under
such lines of credit bears interest at an effective weighted average rate
(based on the outstanding balance of each such line at June 30, 1996) of 8.2%
per annum. The recourse debt outstanding under such lines of credit at June
30, 1996 matures from August, 1996 through 2001. Proceeds of such borrowings
were used to purchase equipment for lease to customers. The Company may use a
portion of the net proceeds to pay off a long-term, nonrecourse loan to
Leasing Solutions Receivables, Inc., a subsidiary of the Company. The loan,
which bears interest at 9.71% per annum and matures in May 1998, had a
principal balance of $12,961,000 at June 30, 1996. If the Company does not use
the entire net proceeds for such purposes, it will invest such available funds
in United States government agency secured investments, or commercial paper
rated Baa3 or better by Moody's Investor Services (or with a substantially
similar rating), with maturities not in excess of three months.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is included on the Nasdaq National Market under
the symbol "LSSI." The following table sets forth, for the periods indicated,
the high and low sales prices of the Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1994
First Quarter................................................. $12.750 $ 8.000
Second Quarter................................................ $10.750 $ 7.750
Third Quarter................................................. $ 9.750 $ 7.750
Fourth Quarter................................................ $ 9.000 $ 5.625
FISCAL 1995
First Quarter ................................................ $10.375 $ 6.375
Second Quarter................................................ $12.000 $ 9.125
Third Quarter................................................. $15.250 $11.000
Fourth Quarter................................................ $16.250 $12.500
FISCAL 1996
First Quarter................................................. $15.625 $12.500
Second Quarter................................................ $17.250 $12.625
Third Quarter................................................. $28.750 $13.500
</TABLE>
On October 3, 1996, the last reported sales price for the Common Stock on
the Nasdaq National Market was $28.50 per share. As of August 31, 1996, there
were approximately 180 shareholders of record of the Company's Common Stock.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, and as adjusted to reflect the sale of the Notes offered hereby, and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Recourse debt (1)......................................... $118,728 $ 71,364
Nonrecourse debt (1)...................................... 123,264 110,303
6 7/8% Convertible Subordinated Notes (2)................. -- 62,500
-------- --------
Total debt............................................ $241,992 $244,167
-------- --------
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized, none
outstanding.......................................... -- --
Common Stock, 10,000,000 shares authorized, 8,099,082
shares outstanding (3)............................... 37,342 37,342
Retained earnings..................................... 20,361 20,361
Accumulated translation adjustment.................... 20 20
-------- --------
Total shareholders' equity.......................... 57,723 57,723
-------- --------
Total capitalization...................................... $299,715 $301,890
======== ========
</TABLE>
- --------
(1) For information with respect to the Company's debt, see Note 7 of Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
(2) Before deducting underwriting discounts and commissions and estimated
offering expenses.
(3) Does not include an aggregate of 1,382,317 of Common Stock reserved for
issuance under the Company's stock option plans and stock purchase plan,
521,677 shares of which are subject to outstanding options, or 66,667
shares subject to an outstanding warrant of the Company, all as of June
30, 1996.
DIVIDEND POLICY
The Company has never declared or paid a dividend to shareholders and does
not anticipate declaring or paying a dividend in the foreseeable future, as
the Company's Board of Directors intends to retain earnings for use in the
business. Several of the agreements with respect to the Company's secured bank
lines of credit include a covenant which prohibits the Company from paying
dividends in any year in excess of 25% of its net income for that year. Any
future determination concerning the payment of dividends will depend upon the
existence of such restriction, the Company's financial condition, the
Company's results of operations, and such other factors as the Board of
Directors deems relevant.
THE COMPANY
The Company was formed in 1986 and is a California corporation. The
Company's corporate offices are located at 10 Almaden Boulevard, Suite 1500,
San Jose, California 95113, and its telephone number is (408) 995-6565.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data as of December 31, 1994
and 1995 and for each of the three years in the period ended December 31, 1995
has been derived from the consolidated financial statements of the Company
included herein which have been audited. The selected consolidated financial
data as of December 31, 1991, 1992 and 1993 and for the years ended December
31, 1991 and 1992 has been derived from audited consolidated financial
statements not included herein. The selected consolidated financial data
presented below as of and for the six month periods ended June 30, 1995 and
1996 have been derived from unaudited interim consolidated financial
statements and the accounting records of the Company. In the opinion of
management, such unaudited interim consolidated financial statements include
all adjustments necessary to fairly state the information set forth therein.
The following data should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein and incorporated herein by reference and MD&A herein. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Operating lease
revenue............... $14,902 $20,779 $41,455 $54,216 $ 77,046 $34,752 $ 58,014
Earned lease income.... 3,538 5,341 6,603 4,256 2,885 1,513 1,146
Gain on sale of leased
equipment............. 1,785 2,951 2,416 1,103 271 206 88
Other revenues......... 3,070 1,032 344 512 474 242 616
------- ------- ------- ------- -------- ------- --------
Total revenues......... 23,295 30,103 50,818 60,087 80,676 36,713 59,864
------- ------- ------- ------- -------- ------- --------
Costs and expenses:
Depreciation-operating
leases................ 10,287 14,209 29,830 37,781 51,164 23,557 39,035
Selling, general and
administrative
expenses.............. 4,569 6,197 7,435 7,294 8,584 4,077 5,419
Interest expense....... 4,804 6,459 7,701 6,523 10,428 4,506 7,738
Other expenses......... 2,499 250 391 837 641 279 716
------- ------- ------- ------- -------- ------- --------
Total costs and
expenses.............. 22,159 27,115 45,357 52,435 70,817 32,419 52,908
------- ------- ------- ------- -------- ------- --------
Income before income
taxes.................. 1,136 2,988 5,461 7,652 9,859 4,294 6,956
Provision for income
taxes.................. 366 1,180 2,242 3,060 3,931 1,718 2,846
------- ------- ------- ------- -------- ------- --------
Net income.............. $ 770 $ 1,808 $ 3,219 $ 4,592 $ 5,928 $ 2,576 $ 4,110
======= ======= ======= ======= ======== ======= ========
Net income per share(1). $ .18 $ .43 $ .66 $ .75 $ .93 $ .41 $ .53
======= ======= ======= ======= ======== ======= ========
Shares used in computing
per share amounts...... 4,234 4,247 4,884 6,096 6,373 6,241 7,727
======= ======= ======= ======= ======== ======= ========
Ratio of earnings to
fixed charges(2)....... 1.23 1.45 1.69 2.14 1.93 1.93 1.87
OPERATING DATA:
Lease originations..... $79,889 $24,006 $87,255 $85,568 $149,382 $45,968 $127,853
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in leases... $87,201 $68,577 $93,891 $124,621 $208,483 $140,879 $291,344
Total assets........... 91,667 74,096 100,715 141,364 224,102 154,217 314,817
Recourse debt.......... 9,682 8,077 7,503 9,897 71,681 34,727 118,728
Nonrecourse debt....... 66,720 58,078 68,878 89,594 93,354 81,918 123,264
Shareholders' equity... 1,929 3,744 11,099 24,438 30,912 27,180 57,723
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of net income per share.
(2) For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income before income taxes plus fixed charges and (ii)
fixed charges consist of interest expense plus that portion of rental
expense deemed by the Company to be representative of the interest factor.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LEASE ACCOUNTING
Since 1990, the Company has principally engaged in two types of lease
transactions which, in accordance with Statement of Financial Accounting
Standards No. 13 ("SFAS 13"), are classified as operating leases or direct
finance leases. The allocation of income among accounting periods within a
lease term will vary depending upon the lease classification, as described
below.
Direct Finance Leases. Direct finance leases transfer substantially all
benefits and risks of equipment ownership to the lessee. A lease is a direct
finance lease if the collectibility of lease payments is reasonably certain
and it meets one of the following criteria: (1) the lease transfers ownership
of the equipment to the lessee by the end of the lease term; (2) the lease
contains a bargain purchase option; (3) the lease term at inception is at
least 75% of the estimated economic life of the leased equipment; or (4) the
present value of the minimum lease payments is at least 90% of the fair value
of the leased equipment at inception of the lease.
Direct finance leases are recorded as "Investment in direct finance leases"
upon acceptance of the equipment by the customer. At the inception of the
lease, unearned lease income represents the amount by which the gross lease
payments receivable plus estimated residual value exceeds the equipment cost.
Unearned lease income is recognized, using the interest method, as earned
lease income over the lease term.
Operating Leases. All lease contracts which do not meet the criteria of
direct finance leases are accounted for as operating leases. Monthly lease
payments are recorded as operating lease revenues. Leased equipment is
recorded, at the Company's cost, as "Investment in operating leases" and
depreciated on a straight-line basis over the lease term to the estimated
residual value at the expiration of the lease term. The residual value of an
item of leased equipment is its estimated fair market value at the expiration
of the lease. Residual values are estimated at the inception of the lease and
reviewed quarterly over the term of the lease. Estimated residual values of
leased equipment may be adjusted downward, if necessary. Decreases in
estimated residual values are made as the change in residual value becomes
apparent, and are reflected over the remaining term of the lease by increased
depreciation expense for operating leases or by decreased earned lease income
for direct finance leases.
When equipment is sold, the net proceeds realized in excess of the estimated
residual value are recorded as a "Gain on sale of leased equipment," or the
amount by which the estimated residual value exceeds the net proceeds is
recorded as a loss. To date, the Company has not had a net loss from aggregate
equipment sales for any quarterly reporting period. When equipment is re-
leased, the Company continues to depreciate the equipment in accordance with
the Company's then current estimate of its residual value, and the monthly
lease payments are recorded as revenue when billed.
Substantially all of the leases which the Company enters into are
noncancelable transactions under which the obligor must make all scheduled
payments, maintain the equipment, accept the risk of loss of such equipment
and pay all equipment related taxes. See "Business -- Leasing and Sales
Activities -- Lease Terms and Conditions."
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Revenues. Total revenues increased $9,269,000, or 18%, from $50,818,000 in
1993 to $60,087,000 in 1994, and $20,589,000, or 34%, to $80,676,000 in 1995.
Operating lease revenue increased $12,761,000, or 31%, from $41,455,000 in
1993 to $54,216,000 in 1994, and $22,830,000, or 42%, to $77,046,000 in 1995.
The increase in operating lease revenue for both periods reflects a higher
average investment in operating leases, resulting from an increase in
operating leases originated or acquired by the Company over the three year
period. Earned lease income decreased $2,347,000, or 36%, from $6,603,000 in
1993 to $4,256,000 in 1994, and $1,371,000, or 32%, to $2,885,000 in 1995, as
a result of outstanding direct finance leases being paid down and
15
<PAGE>
fewer new direct finance leases being originated, due principally to the
Company's focus on operating leases. Gains on sale of leased equipment
decreased $1,313,000, or 54%, from $2,416,000 in 1993 to $1,103,000 in 1994,
and decreased $832,000, or 75%, to $271,000 in 1995. The decreases in 1994 and
1995 are principally due to several significant transactions being sold at a
gain in 1993 and 1994, with no such significant transactions in 1995.
Depreciation-Operating Leases. Depreciation increased $7,951,000, or 27%,
from $29,830,000 in 1993 to $37,781,000 in 1994, and $13,383,000, or 35%, to
$51,164,000 in 1995. The increase in depreciation for both years is
principally the result of an increase in the operating lease base, resulting
from increases in operating leases originated or acquired by the Company over
the three year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $141,000, or 2%, from $7,435,000 in 1993 to
$7,294,000 in 1994, and increased $1,290,000, or 18%, to $8,584,000 in 1995.
The decrease from 1993 to 1994 is primarily due to a decrease in discretionary
year end bonuses. The increase from 1994 to 1995 is due to increased personnel
costs and compensation associated with the overall growth in leasing
activities, increase in personnel in areas such as lease contract
administration and information systems to support growth, and an increase in
discretionary year end bonuses from the prior year.
Interest Expense. Interest expense decreased $1,178,000, or 15%, from
$7,701,000 in 1993 to $6,523,000 in 1994, and increased $3,905,000, or 60%, to
$10,428,000 in 1995. The decrease in interest expense from 1993 to 1994 was
due to lower average outstanding debt, combined with lower average interest
rates in 1994. The Company's average effective borrowing rate decreased in
1994 due to (1) use of short-term lines of credit to finance certain leases
prior to permanent financing, (2) use of publicly sold, lease-backed debt
securities to refinance existing leases and to permanently finance new leases,
and (3) maturing higher rate debt. The increase in interest expense in 1995
was due to higher average recourse and nonrecourse debt outstanding, related
to the higher average investment in leases, and an increase in average
interest rates. The increased rates in 1995 resulted principally from the
issuance of $17.5 million of nonrecourse subordinated debt to finance a
portion of the Company's then existing equity investments in leases, thus
providing cash for future equity investments in leases.
Income Taxes. Provisions for income taxes were 41.1%, 40.0% and 39.9% of
income before income taxes for the years 1993, 1994 and 1995, respectively.
Net Income. As a result of the foregoing factors, net income and net income
per share increased in each of the years 1993, 1994 and 1995. Net income
increased $1,373,000, or 43%, from $3,219,000 in 1993 to $4,592,000 in 1994,
and $1,336,000, or 29%, to $5,928,000 in 1995.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenues. Total revenues increased 63% to $59,864,000, for the six month
period ended June 30, 1996, compared with the corresponding prior year period.
Operating lease revenue increased 67% to $58,014,000, for the six month period
ended June 30, 1996, compared with the corresponding prior year period. The
increase in operating lease revenue reflects a higher average investment in
operating leases, resulting from an increase in operating leases originated by
the Company over the past year, and a significant increase in interim rents
received, compared to the same period of 1995. Earned lease income decreased
24% to $1,146,000 for the six month period ended June 30, 1996, compared with
the corresponding prior year period. The decrease is a result of outstanding
direct finance leases being paid down and of the Company and its customers
continuing to focus their leasing activity in 1996 on operating leases.
Depreciation-Operating Leases. Depreciation expense for operating leases
increased 66% to $39,035,000 for the six month period ended June 30, 1996,
compared with the corresponding prior year period. The increase is due to the
increase in the operating lease base, resulting from increases in operating
leases originated by the Company over the past year.
16
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 33% to $5,419,000, for the six month period
ended June 30, 1996, compared with the corresponding prior year period. The
increase is primarily attributable to increased compensation and benefit costs
as a result of an increase in the number of employees, increases in travel
costs associated with increased leasing activity and the commencement of the
Company's operations in Europe, and increased occupancy costs resulting from
an expansion of the Company's headquarters and the commencement of the
Company's operations in the United Kingdom.
Interest Expense. Interest expense increased 72% to $7,738,000, for the six
month period ended June 30, 1996, compared with the corresponding prior year
period. The increase is due to higher average recourse and non-recourse debt
outstanding, which resulted from additional borrowings to fund the growth in
the Company's lease portfolio.
Income Taxes. The provision for income taxes was 40% and 41% for the six
month periods ended June 30, 1995 and 1996, respectively.
Net Income. Net income increased 60% to $4,110,000, for the six month period
ended June 30, 1996, compared with the corresponding prior year period, as a
result of the increases in the components of total revenues specifically
described above. Earnings per share increased 29% to $.53 for the six month
period. Net income increased faster than earnings per share principally due to
the effect of the issuance of additional shares of Common Stock in the
Company's public offering in February 1996.
QUARTERLY RESULTS OF OPERATIONS FOR 1994, 1995 AND 1996
The following table sets forth a summary of the Company's operating results
for each quarter in 1994, 1995 and the first two quarters of 1996. The
information for each of these quarters is unaudited but includes all
adjustments which management considers necessary for a fair presentation
thereof.
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------- ------------------------------- ---------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30,
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $13,084 $15,123 $15,682 $16,198 $17,115 $19,598 $20,841 $23,122 $26,637 $33,227
Total costs and
expenses............... 11,528 13,512 13,679 13,716 15,030 17,389 18,294 20,104 23,675 29,233
Income before income
taxes.................. 1,556 1,611 2,003 2,482 2.085 2,209 2,547 3,018 2,962 3,994
Net income.............. $ 918 $ 982 $ 1,191 $ 1,501 $ 1,251 $ 1,325 $ 1,528 $ 1,824 $ 1,777 $ 2,333
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share.... $ .16 $ .16 $ .19 $ .24 $ .20 $ .21 $ .24 $ .28 $ .25 $ .28
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing
per share amount....... 5,693 6,229 6,232 6,230 6,278 6,328 6,355 6,531 7,214 8,239
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Revenues. Revenues increased in each of the above-referenced quarters
principally due to increased investment in leases, resulting from increases in
operating leases originated or acquired by the Company over those quarters,
which increased operating lease revenue. The increase in revenues from the
first quarter to the second quarter of 1994 of $2,039,000, or 16%, is
principally the result of the purchase of a significant operating lease
portfolio. The increase in revenues from the first quarter to the second
quarter of 1995 of $2,483,000, or 15%, is the result, in part, of increased
investment in leases which resulted in increased operating lease revenue. This
increase in revenues also resulted from the acceleration of the receipt of
remarketing proceeds from two significant transactions. The increase in
revenues from the third quarter to the fourth quarter of 1995 of $2,281,000,
or 11%, is principally due to the origination of leases during the fourth
quarter of 1995. Total revenues increased by $3,515,000, or 15%, and
$6,590,000, or 25%, for the first and second quarters of 1996, respectively,
compared to the immediately preceding quarter. These increases represented
increases in operating lease revenues, reflecting increases in operating
leases originated by the Company in the previous quarter, as well as increases
in interim rents received.
17
<PAGE>
Costs and Expenses. Costs and expenses increased in each quarter principally
as a result of increased operating lease depreciation due to a higher
investment in operating leases, resulting from increases in operating leases
originated or acquired by the Company over those quarters, and increased
interest expense due to a higher debt balance and higher average interest
rates. Costs and expenses increased $1,984,000, or 17%, from the first quarter
to the second quarter of 1994 principally as a result of the purchase of the
significant lease portfolio noted above, and the related increase in
depreciation, and a related charge for the prepayment of debt on that
portfolio. Costs and expenses increased $1,314,000, or 10%, from the fourth
quarter of 1994 to the first quarter of 1995 principally as a result of
increased depreciation expense from leases originated in both of those
quarters and an increase in interest expense. Costs and expenses increased
$2,359,000, or 16%, from the first quarter to the second quarter of 1995
principally as a result of increased depreciation related to the increased
investment in leases and remarketing transactions noted above. Costs and
expenses increased $1,810,000, or 10%, from the third quarter to the fourth
quarter of 1995 principally as a result of depreciation from leases originated
in both of those quarters. Costs and expenses increased by $3,571,000, or 18%,
and $5,558,000, or 23%, for the first and second quarters of 1996,
respectively, compared to the immediately preceding quarter. These increases
resulted principally from increases in depreciation expense caused by
increased investment in operating leases and from increases in interest
expense caused by increased borrowings to finance the purchase of equipment
subject to such operating leases.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, any
reduction of expected residual values related to the equipment the Company
leases. Quarterly operating results could also fluctuate as a result of the
sale by the Company of equipment in its lease portfolio, at the expiration of
a lease term or prior to such expiration, to the lessee or to a third party.
Such sales of equipment may have the effect of increasing revenues and net
income during the quarter in which the sale occurs, and reducing revenues and
net income otherwise expected in subsequent quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $22,658,000 during the
six month period ended June 30, 1996, compared to net income of $4,110,000 for
the same period. Cash flow from operations was higher than net income
primarily as a result of non-cash expenses, such as depreciation and
amortization, of $39,350,000, offset by uses of cash in operations, including
resulting changes in accounts payable, income taxes payable, and other assets
and liabilities, totaling $20,802,000. Investing activities, which are
primarily related to investments in equipment for lease, used $122,424,000
during the six month period. Financing activities in the six month period
generated $99,495,000 from $223,959,000 in new borrowings of recourse and non-
recourse debt and $22,681,000 from the Company's issuance of common stock in
its public offering in February, 1996 and upon exercise of options,
aggregating $246,640,000, offset by repayment of capital lease obligation and
recourse and non-recourse borrowings, aggregating $147,145,000. The net result
of the above activity for the six month period was a decrease in cash and cash
equivalents of $271,000.
The financing necessary to support the Company's leasing activities has
principally been provided from nonrecourse and recourse borrowings.
Historically, the Company has obtained recourse and nonrecourse borrowings
from money center banks, regional banks, insurance companies, finance
companies and financial intermediaries. Beginning in 1994, the Company,
through its wholly-owned subsidiary, Leasing Solutions Receivables, Inc.,
began obtaining long-term financing for a substantial portion of its leasing
activity through the issuance of secured, nonrecourse debt securities (a
"securitization"). Borrowings under the securitizations are secured by lease
receivables and the underlying equipment financed under such arrangements.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. The Company's
available credit under these short-term, recourse facilities currently totals
$184,000,000. A brief description of each of those facilities presently in
place follows.
(1) $155,000,000 facility syndicated, with ten banks, expiring September
11, 1997. Borrowings under the facility bear an interest rate, at the
Company's option, of the agent bank's prime rate or LIBOR plus 135 basis
points.
18
<PAGE>
(2) $15,000,000 facility with one bank, with borrowings available through
January 31, 1997, and repayments due 240 days after borrowing. Borrowings
under the facility bear interest at LIBOR plus 250 basis points.
(3) $3,000,000 revolving facility, expiring November 15, 1996, with one
bank. Borrowings under the facility bear interest at the bank's prime rate
plus 75 basis points. In addition to interim financing of lease
transactions, proceeds borrowed under this facility are available for
general corporate purposes.
(4) $11,000,000 revolving facility, expiring November 15, 1996, with one
bank. Borrowings under the facility bear interest at the bank's prime rate
plus 100 basis points. In addition to interim financing of lease
transactions, proceeds under this facility are available for general
corporate purposes.
In addition, the Company has a $15,000,000 revolving facility, expiring
October 15, 1997, with one bank. Borrowings under the facility bear interest
at the bank's prime rate. The proceeds of borrowings under this line are used
exclusively to fund certain accounts payable to one of the Company's vendors
resulting from the purchase of equipment for lease to one significant customer
of the Company.
The Company also has a $100,000,000 non-recourse lease receivables purchase
facility with an affiliate of Citicorp. This is a revolving facility, expiring
in March 1997, and borrowings under the facility bear interest at a rate of
125 basis points over average life treasuries at the time of borrowing. To
date, the Company has refinanced approximately $46,000,000 of borrowings under
its other short-term facilities through this facility, at interest rates of
6.77% and 7.42%. The Company intends to refinance, from time to time, under
this facility, additional borrowings under its other short-term facilities in
order to fix the interest rate for these borrowings. The Company expects to
refinance, on a long-term basis, leases financed under this existing facility
under a new securitization facility, with another affiliate of Citicorp, at
the same interest rate provided by this existing facility. Although the
Company expects that the new securitization facility will become effective
during the next few weeks, no assurances can be given.
Borrowings under the above-described lines of credit are generally secured
by lease receivables and the underlying equipment financed under the facility.
Payments under the Company's borrowings and the maturities of its long-term
borrowings are typically structured to match the payments due under the leases
securing the borrowings. At June 30, 1996, the aggregate outstanding balance
under these lines of credit was $155,293,000, with a weighted average interest
rate of 7.8% per annum. The agreements for the lines of credit contain
covenants regarding leverage (a recourse liabilities-to-equity ratio of not
more than 4.5 to 1), interest coverage, minimum net worth and profitability
and a limitation on the payment of dividends. At June 30, 1996, the Company
had a recourse liabilities-to-equity ratio of 2.2 to 1.
Occasionally, the Company will obtain long-term, non-recourse financing for
individual significant lease transactions at the time or shortly after it
purchases the related equipment. The Company borrowed an aggregate of
$43,807,000 in 1995, and $33,618,000 in the six month period ended June 30,
1996, under such arrangements. An aggregate of $56,439,000, ($6,496,000 of
which is recourse), with a weighted average interest rate of 8.3% per annum,
remained outstanding under all such arrangements as of June 30, 1996.
The Company's debt financing activities typically provide approximately 80%
to 90% of the purchase price of the equipment purchased by the Company for
lease to its customers. The 10% to 20% balance of the purchase price (the
Company's equity investment in equipment) must generally be financed by cash
flow from its operations, the proceeds of subordinated debt, or its
equivalent, or recourse debt, or common stock or convertible debt sold by the
Company. In February, 1996, the Company closed a public stock offering of
1,800,000 shares of its Common Stock, under which the Company received net
proceeds of $22,493,000. Debt financing for the Company's equity investment is
not readily available in the marketplace and normally requires an interest
rate materially higher than is required by the Company's conventional debt
financing. Although the Company expects that the credit quality of its lessees
and its residual return history will continue to allow it to obtain such
financing, no assurances can be given that such financing will be available,
at acceptable terms or at all.
19
<PAGE>
The arrangements under which the Company expects to finance its leasing
activities in Europe are likely to be substantially similar to the lease
financing arrangements utilized by the Company in the United States. The
Company's European subsidiaries will engage in nonrecourse and recourse
borrowings, with terms comparable to its domestic borrowings, to provide most
of the purchase price of equipment and finance its equity investment in
equipment from one or more of the equity sources described above. The Company
has not yet secured lines of credit to support its European leasing
activities. However, although no assurances can be given, it expects that such
lines will be provided by both United States financial institutions currently
lending to the Company and by European financial institutions.
The Company's current lines of credit, if renewed or replaced, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and recourse
and non-recourse), anticipated long-term financing of individual significant
lease transactions, and its estimated cash flow from operations are
anticipated to provide adequate capital to fund the Company's operations,
including acquisitions and financings under its vendor programs, for the next
twelve months. Although no assurances can be given, the Company expects to be
able to renew or timely replace its existing lines of credit, to continue to
have access to the public and private securities markets, both debt and
equity, and to be able to enter into new lines of credit and individual
financing transactions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market
in general, such shortfall could have an immediate and significant adverse
impact on the market price of the Company's stock. Any such adverse impact
could be greater if any such shortfall occurs near the time of any material
decrease in any widely followed stock index or in the market price of the
stock of one or more public equipment leasing companies or major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a
result of sales by the Company of equipment it has leased to its customers or
of sales of the lease receivables under the leases with its customers. Such
sales of equipment or lease receivables, which are an ordinary but not
predictable part of the Company's business, will have the effect of increasing
revenues, and, to the extent sales proceeds exceed net book value, net income,
during the quarter in which the sale occurs. Furthermore, any such sale may
result in the reduction of revenue, and net income, otherwise expected in
subsequent quarters, as the Company will not receive lease revenue from the
sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding
quarters are not necessarily meaningful and that such results for one quarter
should not be relied upon as an indication of future performance.
20
<PAGE>
BUSINESS
Leasing Solutions, Inc. (the "Company") is in the business of leasing
information processing and communications equipment to large, creditworthy
customers, primarily through vendor programs with equipment manufacturers. The
Company's focus is on operating leases because such leases provide the
opportunity for the Company to realize a substantial return through residuals
received upon remarketing the equipment to the original customer at the end of
the initial lease term. To date, the Company has purchased over $750 million
of equipment, representing over 275,000 assets. The Company has recently
expanded its operations to Western Europe.
The Company's vendor programs generally involve equipment purchase and
remarketing relationships with manufacturers. The Company has existing vendor
programs for the United States with Apple Computer, Auspex Systems, Dell
Computer, Memorex Telex, NCR, Quickturn Design Systems, and Sybase. The
Company also has a vendor program with Dell Computer for Western Europe, and
has entered into a letter of intent with Cisco Systems for a vendor program in
the United States and Western Europe. In addition, the Company has a lease
financing relationship with a major systems integrator. The ten largest
lessees of the Company by Dollar Volume during the 18 months ended June 30,
1996, and listed alphabetically, were Apple Computer, EDS, Ernst & Young LLP,
Honeywell, L.L. Bean, Source Services, State of California, Tandy, Western
Digital and Xerox. The Company has over 400 master lease agreements in place
with corporate customers. Although the Company has and will continue to lease
a variety of information processing and communications equipment, it estimates
that, during the first six months of 1996, desktop computers represented
approximately 85% of its Dollar Volume.
The Company works directly with a vendor's sales force in the remarketing
process for equipment distributed by that vendor. The Company's vendor
programs generally involve residual sharing arrangements which provide
financial incentives for vendors to assist in the remarketing process. The
Company believes that the value of its equipment, and particularly equipment
used in client/server network environments, is greatest to the original
customer due to its "embedded" nature in the customer's operations. Therefore,
the Company seeks to maximize the amount of equipment that is remarketed in
place to the original customer in order to realize the considerably higher
residual values that may result from such remarketing, as compared to
equipment sold or leased to a third party. Based on equipment purchase cost,
approximately 70% of the Company's equipment remarketed during the 18 months
ended June 30, 1996, was remarketed in place to the original customer.
INDUSTRY OVERVIEW
The equipment leasing industry in the United States has greatly expanded
during the last decade. According to the Equipment Leasing Association
("ELA"), a leading industry trade association, lease financing continues to
play a significant role in the United States economy, representing 30% of all
business investment in productive assets during 1995. The ELA also estimates
that approximately 80% of all United States companies lease some or all of
their equipment. Thus, the equipment leasing industry has been and continues
to be a major provider of financing for equipment in the United States.
According to the United States Department of Commerce, the annual volume of
new capital equipment, measured by original equipment cost, placed on lease in
the United States in 1995 was approximately $160 billion. According to the
ELA, computers (excluding mainframes) accounted for approximately 15% of the
dollar volume of all 1995 lease activity.
Most large companies are significant users of information processing and
communications equipment, including equipment used in client/server networks.
Since such companies acquire and upgrade information processing and
communications equipment frequently, many use leasing as a primary means of
equipment acquisition. Leasing, particularly through operating leases, also
provides a lessee with greater flexibility than ownership in the event it
outgrows its equipment or requires upgrades of its equipment to higher
performance levels. In addition, operating leases enable a company to obtain
the equipment it needs, while preserving cash flow and receiving favorable
accounting and tax treatment. The Gartner Group, an information technology
21
<PAGE>
market research firm, estimates that by the year 1998, more than 35% of
desktop and midrange computer equipment used in North America will be leased.
Information processing and communications equipment is often used in
client/server network applications. A major trend toward utilizing
client/server networks in corporate applications began in the late-1980s. This
trend was driven by the proliferation of personal computers and the
development of networking applications that distribute computer power to the
desktop. Client/server computing provides an alternative to the highly
centralized, relatively expensive mainframe and mini-computer systems that
connect multiple "dumb" terminals to a central processor and were the mainstay
of the computing world until this decade. A client/server network consists of
multiple desktop client computers with their own microprocessors and memory
and the ability to access files and applications stored on high performance
servers. Network server shipments alone grew from $2.3 billion in sales in
1989 to $7.2 billion in sales in 1994, according to International Data
Corporation, which estimates the market for servers will grow at a compounded
annual rate of 20% from 1994 to 1998. The Company believes that the use of
other network related equipment is likely to grow proportionately.
Over the last few years, there has been a trend toward large manufacturers
of information processing and communications equipment outsourcing their
equipment financing function to independent leasing companies, such as the
Company, as opposed to providing this function through a captive finance
organization. Outsourcing allows the vendor to focus on its core competencies
of designing, manufacturing, marketing and selling equipment, rather than
providing financing for its equipment. Additionally, large users of
information processing and communications equipment often acquire products
from multiple manufacturers to satisfy their network requirements.
Manufacturers, however, are typically unwilling to finance other
manufacturers' products through their own captive finance organization. By
outsourcing their leasing functions to independent leasing companies, vendors
can typically provide more comprehensive leasing services to their customers
and thus often seek the assistance of independent leasing companies to provide
such financing. Moreover, large corporate users of information processing and
communications equipment are increasingly utilizing the services of their
lease financing sources to provide equipment management and asset tracking
functions for their leased equipment.
BUSINESS STRATEGY
The Company's business strategy is to maximize residual values and grow its
lease portfolio by maintaining a highly focused and specialized approach to
its business. Key elements of the Company's business strategy include the
following.
Focus on Information Processing and Communications Equipment. By focusing on
information processing and communications equipment and, in particular,
client/server network products, the Company takes advantage of the background
and expertise of its management, most of whom have extensive sales and
financing experience with manufacturers of information processing and
communications products. A large portion of the market for these products
includes client/server or decentralized computing applications. The Company
has positioned itself to take advantage of the shift away from mainframe
computing toward the client/server network environment, a market which has
grown rapidly. In addition, the Company invests significant resources in
understanding the specific products of each of its vendors with which it has
vendor programs. As a result, the Company is able to make more informed
decisions regarding residual values of such products and the pricing of lease
transactions, thereby maximizing opportunities for residual profits. The
Company believes that the residual value of the equipment it leases to its
customers is enhanced due to the "embedded" nature of client/server networks
and the resulting tendency for such equipment to remain in place after the end
of the original lease term.
Focus on Vendor Programs and Systems Integrator Relationships. The
significant majority of the equipment purchased for lease to end-user
customers by the Company is purchased from manufacturers with which the
Company has a vendor program. In addition, the Company has leased a
significant amount of equipment as a result of a recently developed lease
financing relationship with a major systems integrator. The Company utilizes a
vendor's and systems integrator's sales organization to gain access to a large
and diversified
22
<PAGE>
end-user customer base without incurring the costs of establishing independent
customer relationships. The vendor relationship also typically provides for
the upgrade, refurbishment, re-certification and remarketing of equipment
purchased by the Company. Through the Company's relationship with each of its
vendors and the vendor's involvement in remarketing the equipment, at or near
the expiration of the lease term, the residual risk associated with ownership
of the equipment is reduced and the Company's residual profit opportunity is
enhanced. The Company encourages its vendor's assistance on remarketing
through its practice of sharing with the vendor its residual profits derived
from the vendor's equipment. The Company is continually seeking significant
new vendor programs and systems integrator relationships in an effort to
enhance its growth and its return on investment. See "Leasing and Sales
Activities--Vendor Programs" below.
Focus on Operating Leases. Operating leases provide the Company with the
opportunity to utilize its expertise and relationships to realize a
substantial return through residuals received upon remarketing the equipment
to the original customer at the end of the initial lease term. The Company
believes that large users of information processing and communications
equipment, and particularly client/server networking products, are becoming
increasingly aware of the benefits of financing their equipment requirements
on an operating lease basis. The Company also believes that the principal
benefits of operating lease financing to its customers include preserving cash
flow and receiving favorable accounting and tax treatment.
Focus on Major Corporate Customers. The Company seeks to reduce the
financial risk associated with the lease transactions it originates by
focusing its marketing programs and resources on large, creditworthy end-user
customers, or lessees. This focus has allowed the Company to significantly
reduce the risk of payment default by its customers. Additionally, once the
Company has a master lease agreement with a customer, its ability to lease
other manufacturers' products to that customer is enhanced, which can result
in substantial non-vendor lease volume. As of December 31, 1995, the net book
value of the Company's portfolio of equipment acquired other than through its
vendor programs, as well as non-vendor equipment acquired by the Company
through its vendor programs, was approximately $83 million, or 40% of the net
book value of the Company's total portfolio as of that date.
Focus on Maintaining a Responsive Organizational Structure. The Company
provides custom leasing services and support to its vendors and their
customers through its seven United States regional offices located in the
Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City and San Jose
metropolitan areas and supports its customers and vendors through several
United States field offices. The Company provides such services and support to
customers and vendors in Western Europe through an office near London, and
expects to commence operations in Germany and other significant Western
European countries by late 1996. Through its seven United States regional
leasing offices and United Kingdom office, staffed with experienced leasing
and administrative personnel, the Company seeks to minimize the time required
to respond to customer requests and maximize the economic return from
individual lease transactions through direct contact with both the end-user
customer and the vendor's sales representative. The Company also has invested
substantial resources to develop its proprietary pricing and asset tracking
and management control systems ("PATS"). These systems assist the Company in
quickly providing lease quotes to its customers, generally within one business
day after receipt of a request.
Focus on International Expansion. In April 1996, the Company initiated its
international expansion by acquiring an independent leasing company in the
United Kingdom that leases information processing equipment. The Company is
focusing on international expansion in order to leverage its existing vendor
relationships in the United States to broaden its potential customer base and
to create additional lease financing opportunities with new vendors that have
substantial international activities. The Company is currently negotiating the
acquisition of a portfolio of information processing equipment and related
leases in Germany. It plans to have operations in Germany in the near future,
and expects to have operations in France, Belgium and the Netherlands by the
end of 1996. The Company may participate in additional international markets
in the future as may be necessary to meet the demands of existing and
prospective vendors.
23
<PAGE>
CUSTOMERS
Through its vendor programs, the Company currently services over 400
customers in connection with its direct leasing activities. In addition, the
Company estimates that over an additional 1000 customers are serviced in
connection with its private-label leasing activities. Private-label leasing
involves a vendor leasing equipment to end-users on its own form of lease,
selling the lease and related equipment to the Company, and billing and
collecting the monthly rental payments under the lease on behalf of the
Company. The services and support provided by the Company include custom lease
payment streams and structures, short-term leasing, technology refresh leases,
trial leases, asset swaps and trade-ins, upgrade and add-on financing, renewal
and remarketing, personalized invoicing and asset management and reporting.
The Company's typical customers are large, creditworthy corporations that
require several million dollars of equipment per year and are repeat customers
for one or more of the Company's vendor relationships. Repeat business
generated through existing relationships is an important source of revenue for
the Company. Over 90% of the lessees with whom the Company has a master lease
agreement have more than one lease supplement in place with the Company.
Additionally, once the Company has a master lease agreement with a customer,
its ability to lease other manufacturers' products to that customer is
enhanced.
The ten largest customers of the Company, measured by the Dollar Volume
during the 18 months ended June 30, 1996, are listed alphabetically below. The
total Dollar Volume associated with these customers represented approximately
71% of the Company's total new lease originations for that 18 month period.
<TABLE>
<S> <C>
Apple Computer Source Services
EDS State of California
Ernst & Young LLP Tandy
Honeywell Western Digital
L.L. Bean Xerox
</TABLE>
From January 1, 1993 through June 30, 1996, approximately 68% of the
Company's total lease transactions (based on Dollar Volume) were with
customers whose credit ratings, or the credit ratings of their parent
companies, were Baa or better, as rated by Moody's Investor Services, or with
customers who were not rated but possess a credit profile equivalent to a
Moody's Baa rating. The Company believes that its business is not dependent on
any single customer. However, during 1995, the State of California and Xerox
accounted for 11.2% and 10.3%, respectively, of its revenues, and during the
first six months of 1996, Xerox, the State of California and Ernst & Young LLP
accounted for 17.6%, 11.2% and 9.8%, respectively, of the Company's revenues.
In the event any of those customers, and particularly Ernst & Young LLP (which
represented approximately 50% of the Company's lease volume, by Dollar Volume,
in the first six months of 1996), or any of its future significant customers
ceases to lease additional equipment, or materially reduces the amount of
equipment it leases, from the Company in the future, and such reduction in
lease volume is not replaced by other existing or new customers, the Company's
operating results could be materially adversely affected. The Company does not
anticipate that Ernst & Young LLP will need to lease equipment in 1997 at the
same volumes as it has in 1996. See "Risk Factors--Dependence on Major
Customers."
LEASING AND SALES ACTIVITIES
Vendor Programs
A majority of the Company's Dollar Volume for the twelve months ended
December 31, 1995, and the six months ended June 30, 1996, was generated
through vendor programs. All of the vendor programs presently in place, with
the exception of Memorex Telex and Auspex, have been entered into since 1993.
The programs with equipment vendors generally involve purchasing agreements
and remarketing agreements. These purchase and remarketing agreements
generally have terms of one year. Certain of such agreements are extended
automatically for one year terms, unless they are terminated by either party
upon the expiration of the then existing term with prior written notice
ranging from 90 to 180 days. Customers introduced to the Company through its
vendor programs typically acquire equipment from several manufacturers, which
results in additional lease volume to the Company from "non-vendor"
manufacturers. This non-vendor equipment is typically part of a client/server
network environment and remains in place along with the vendor's equipment.
24
<PAGE>
The table below displays the distribution of the Company's equipment
portfolio by Dollar Volume and percent of aggregate Dollar Volume during the
twelve months ended December 31, 1995, and the six months ended June 30, 1996,
and by percent of net book value at December 31, 1995.
<TABLE>
<CAPTION>
DISTRIBUTION OF PORTFOLIO (1)
-----------------------------------------------------------------
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------- -----------------------
PERCENT OF PERCENT OF
AGGREGATE AGGREGATE
DOLLAR DOLLAR DOLLAR DOLLAR NET BOOK VALUE AT
VOLUME VOLUME VOLUME VOLUME DECEMBER 31, 1995
------------ ---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
Dell Computer........... $ 31,290,000 21% $ 76,979,000 60% 12%
Memorex Telex........... 19,389,000 13% 9,800,000 8% 24%
Apple Computer.......... 14,546,000 10% 5,116,000 4% 9%
Storage Technology (2).. 12,858,000 9% 1,410,000 1% 10%
Systems integrator (3).. 21,377,000 14% 21,537,000 17% 11%
Other vendors........... 2,642,000 2% 130,000 -- 3%
Non-vendors............. 47,280,000 31% 12,881,000 10% 31%
------------ ---- ------------ ---- ----
$149,382,000 100% $127,853,000 100% 100%
============ ==== ============ ==== ====
</TABLE>
- --------
(1) The information used to calculate the percentages in this table was
derived from databases that are not part of the Company's accounting
records. However, the data in such databases was derived from the same
sources as data in the Company's accounting records, and the Company
believes such information is accurate.
(2) Storage Technology is not expected to account for any material Dollar
Volume in the future.
(3) The systems integrator with which the Company has a relationship does not
manufacture equipment. The percentages of Dollar Volume and net book value
for such systems integrator may include equipment from a variety of
manufacturers, including equipment manufactured by the Company's vendors.
A description of each of the Company's vendors and the products that the
Company purchases or finances are as follows:
Apple Computer, Inc. Apple designs, manufactures and sells personal
computers and peripheral products. Its principal product line is the Macintosh
series of desktop and portable computers.
Auspex Systems, Inc. Auspex designs, manufactures and sells RISC-based file
servers and a line of systems and board upgrades. Its main product is a
UNIX/NFS-based, high-end file server, designed to be the central disk-storage
resource in large computer networks.
Dell Computer Corporation. Dell is a leading direct manufacturer of computer
systems and one of the largest personal computer manufacturers in the world.
Dell designs and customizes products and services to end-user requirements,
and offers an extensive selection of peripherals and software.
Memorex Telex Corporation. Memorex Telex designs, manufactures and sells
computer peripheral and communications products, such as terminals, printers
and controllers, intelligent systems, and networking products.
NCR Corporation. NCR's Enterprise Computing Division designs, manufactures
and sells mid-range and high-end commercial parallel processing systems. Its
products feature the Teradata parallel relational database system that is
capable of processing large volumes of transactions, as well as store,
correlate and analyze massive amounts of information. The vendor agreement
with NCR was entered into in July 1996.
Quickturn Design Systems, Inc. Quickturn designs, manufacturers, markets and
supports system level verification solutions for the design of integrated
circuits and electronic systems. Quickturn's emulation systems
25
<PAGE>
are intended to improve design quality and to reduce time-to-market and
prototype integrated circuit development costs.
Sybase, Inc. Sybase develops and markets a full line of relational database
management system software products optimized for on-line transaction
processing applications in client/server oriented, networked computing
environments.
In August 1996, the Company entered into a Letter of Intent with Cisco
Systems to provide lease financing for Cisco's enterprise-level
internetworking customers in the United States and Western Europe. The Company
is currently negotiating a definitive agreement with Cisco to provide such
lease financing services, and, although no assurances can be given,
anticipates entering into that agreement by the end of October 1996.
A substantial majority of transactions entered into under a typical vendor
program are direct leases. Under these direct leases, lessees enter into
master lease agreements directly with the Company, rather than with the
vendor. The master lease agreement sets forth the basic terms and conditions
under which the Company will lease equipment to the lessee. The lease of
specific equipment is documented with a simple supplement to the master lease
agreement, thereby avoiding the necessity of negotiating a new master lease
agreement each time the lessee desires to acquire additional equipment. Such a
lease structure also makes it convenient for the lessee to acquire add-ons
and/or upgrades to equipment it has leased from the Company and for the
Company to finance such add-ons and upgrades. In the 18-month period ended
June 30, 1996, these direct lease agreements accounted for approximately 93%
of the Company's lease volume (excluding portfolio purchases), as measured by
Dollar Volume.
Under a typical vendor program, the Company works with the lessee and the
vendor's sales personnel to help structure the initial lease. The Company
finances the lease, purchases the related equipment and administers the lease
(including billing and collecting). At the end of the initial lease term, the
Company and the vendor typically work together to remarket the equipment. See
"Remarketing" below.
Additionally, the Company has established a relationship with a systems
integrator who assists large users of information processing and
communications equipment with their network systems procurement and related
financing requirements. The Company has generated significant lease volume,
and anticipates generating significant lease volume in the future, with this
systems integrator. The equipment acquired by the Company from this systems
integrator is similar to those products provided through its vendor programs.
When estimating residual values and providing lease pricing for the products
leased through system integrators, the fact that the Company has no formal
remarketing agreement with these sources is taken into account.
Development Activities
The Company's objective is to leverage its existing customer relationships,
funding sources, regional leasing and support staff and back office operations
support organization by systematically adding new vendor programs and system
integrator relationships and expanding the scope of its existing programs and
relationships, including by increasing the geographic coverage of its vendor
programs outside the United States. See "Business--Strategy" and
"International Expansion." This objective is accomplished through a dedicated
group responsible for vendor and systems integrator development activity. The
Company believes that one of its major strengths is its ability and
willingness to customize its programs and relationships to meet the other
party's specific marketing and financial objectives. The Company believes that
this ability to customize its programs and its willingness to make a capital
investment in the equipment it acquires makes it an attractive lease financing
source for vendors and systems integrators considering a lease financing
program or relationship.
26
<PAGE>
Once a vendor program agreement is signed or a systems integrator
relationship is established, the Company's implementation process with the
vendor's or systems integrator's organization commences. This extensive
process involves presentations and training sessions at various levels and in
various locations throughout the country in which the program is to be
implemented. These training programs familiarize the Company's sales employees
with the other party's products, customer base and methods of doing business,
and the other party's sales employees with the lease financing opportunities
offered by the Company which they may make available to their existing and
prospective customers. Recognizing that, with the addition of each new vendor
program and systems integrator relationship, the Company incurs significant
incremental costs in the implementation process, the Company intends to
continue to be selective in establishing additional programs and relationships
in the future.
Products Leased
The information processing and communications equipment that the Company
presently purchases for lease include communication controllers, database
machines, desktop computers (which include laptop computers), display
stations, file servers, printers, tape and disk products, and network routers
and automatic switches. The majority of the equipment acquired by the Company
since 1994 is utilized in client/server network environments. The software
licenses financed by the Company, which have to date involved immaterial
volume, are principally with respect to database software. The table below
displays the distribution of equipment purchased by the Company, by product
type and percentage of Dollar Volume of equipment purchased, during 1993, 1994
and 1995.
EQUIPMENT VOLUME BY PRODUCT TYPE
(Percent by Dollar Volume of equipment purchased)
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Desktop Computers.......................................... 6% 32% 58%
Tape and Disk Products..................................... 38% 15% 10%
Printers................................................... 9% 6% 8%
Central Processors......................................... 10% 15% 4%
Communications Devices..................................... 13% 10% 4%
Display Stations........................................... 14% 5% 2%
File Servers............................................... 3% 5% 2%
Software................................................... 3% 4% 1%
Other...................................................... 4% 8% 11%
---- ---- ----
100% 100% 100%
</TABLE>
The Company estimates that, during the first six months of 1996, desktop
computers represented approximately 85% of the equipment purchased by the
Company, as measured by Dollar Volume. Approximately 60% of its Dollar Volume
for that six month period was represented by equipment, principally desktop
computers, purchased under the Company's vendor program with Dell.
Lease Terms and Conditions
Substantially all of the Company's lease transactions are net leases with a
specified non-cancelable lease term. These non-cancelable leases have a "hell-
or-high-water" provision which requires the lessee to make all lease payments
under all circumstances. A net lease requires the lessee to make the full
lease payment and pay any other expenses associated with the use of equipment,
such as maintenance, casualty and liability insurance, sales or use taxes and
personal property taxes. The lessee also has the responsibility of obtaining
the additional items required under a net lease, such as maintenance and
insurance. However, many of the Company's more creditworthy customers are
permitted to self insure against equipment losses.
27
<PAGE>
The vast majority of the leases the Company enters into have a lease term of
from two to four years. These leases are either operating leases or direct
finance leases. Generally leases having a term of three years or less are
classified as operating leases and leases having a term greater than three
years are classified as direct finance leases. Although the Company is
principally engaged in the business of writing operating leases, it has in the
past entered into direct finance leases for material amounts of equipment and
expects to do so again in the future, particularly in its European operations.
See "MD&A -- Lease Accounting" for a further discussion of such leases.
Under several of the Company's vendor programs, the Company offers the
vendor's customers "technology refresh" leases. These leases typically have a
24 or 36 month original term with an option permitting the lessee to exchange
the equipment subject to the lease for new equipment on or after a designated
date. Upon exercising the option, the term of the lease is extended so that
its balance is equal to the 24 to 36 month original term of the lease. The
"technology refresh" option permits the lessee to upgrade its equipment on
specified terms and provides an opportunity for the lease to be extended.
Remarketing
The results of the remarketing process ultimately determine the degree of
profitability of a lease transaction. The Company's remarketing strategy is to
keep its equipment installed in place at the end of the initial lease term.
Typically, remarketing equipment in place produces better residual returns
than equipment sold or leased to a third party. Prior to the expiration of the
original lease term, the Company initiates the remarketing process for the
related equipment. The Company is able to maximize its revenues and residual
return by focusing its efforts on keeping the equipment in place at the end of
the initial lease term by (1) re-leasing it to the initial lessee for a
specified term, (2) renting the equipment to the initial lessee on a month-to-
month basis, or (3) selling the equipment to the initial lessee. If the
Company is unsuccessful in keeping the equipment in place, it will attempt to
sell or lease the equipment to a different customer, or sell the equipment to
equipment brokers or dealers. Based on equipment purchase cost, approximately
70% of the Company's equipment remarketed during the 18 months ended June 30,
1996, was remarketed in place to the initial lessee. Of the Company's leases
which were remarketed in place during that period, approximately 50% have been
remarketed through a lease renewal, 30% have been leased on a month-to-month
basis and 20% have been sold to the original customer. No assurances, however,
can be given that the Company's past successes in remarketing its equipment in
place will be repeated in the future, primarily because the Company has little
history with respect to remarketing desktop computers, which make up a
substantial and growing percentage of the Company's equipment portfolio.
Leases with respect to approximately 34% (by Dollar Volume) of the equipment
purchased by the Company since its inception have been remarketed, and
virtually all of such equipment has been remarketed through one or more of
these remarketing activities. The Company believes that the residual value of
the equipment it leases to its customers that are used in client/server
networks, including desktop computers, is enhanced due to the "embedded"
nature of products in such networks and the resulting tendency for such
equipment to remain in place after the end of the original lease term. See
"Risk Factors--Potential Reduction in Residual Values of Leased Equipment."
Procedures and obligations of the Company and its vendors with respect to
remarketing are defined through the Company's equipment purchase and
remarketing agreements with vendors. The Company has dedicated significant
resources, through both its headquarters and field offices, to support the
remarketing effort. The Company's sales force usually works directly with the
vendor's sales force to remarket Company-owned equipment. The Company's sales
personnel are provided incentives to remarket such equipment. In addition,
through payment of a remarketing fee and a sharing of residual profits, the
Company provides incentives to vendors and their sales personnel, to assist in
the remarketing efforts.
The following table with respect to the Company's remarketing experience
sets forth an economic analysis of remarketing activities from the Company's
25 to 36 month operating leases for the periods from its inception through
each of December 31, 1993, 1994 and 1995 and June 30, 1996. This economic
analysis has been prepared by the Company's management to assist in
determining pricing and internal rates of return on the
28
<PAGE>
Company's equity investment in equipment. Certain of the information used to
prepare such analysis was derived from databases that are not a part of the
Company's accounting records and was compiled based on certain assumptions
made by the Company's management. However, the data in such databases is
derived from the same sources as data in the Company's accounting records, and
the Company believes such information is accurate and the assumptions are
reasonable.
<TABLE>
<CAPTION>
FROM INCEPTION THROUGH
-----------------------------------
DEC. 31, DEC. 31, DEC. 31, JUNE 30,
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity Invested (% of Original Equipment Cost).......................... 12% 11% 11% 11%
Dollar-Weighted Average Lease Term (Months)............................. 35 35 35 35
Residual Value Realized (% of Original Equipment Cost).................. 36% 37% 38% 38%
Return on Equity Invested (Compounded Annually)......................... 46% 51% 52% 53%
Ratio of Realized Residual Value to Initially Estimated (Booked)........ 117% 123% 126% 129%
</TABLE>
The Company's historical experience in estimating residual values may not be
applicable to certain of the information processing and communications
equipment that the Company has recently purchased for lease. Approximately 68%
(by Dollar Volume) of such equipment purchased in the 18 month period ended
June 30, 1996 was purchased pursuant to vendor programs entered into since
January 1993 and a lease financing relationship with a major systems
integrator. The initial lease terms of the leases to which such equipment is
subject have not yet expired and, as a result, the Company does not yet have
remarketing experience with respect to such equipment. Therefore, the
Company's historical experience in estimating residual values may not be
applicable to such equipment. Accordingly, for that reason and others, the
Company's historical remarketing experience is not necessarily indicative of
future performance and no assurances can be given that the Company will be
able to achieve remarketing results in the future that are comparable to the
historical remarketing results shown above.
Default and Loss Experience
The cumulative default and loss experience of the Company with respect to
lease payments under the leases in its portfolio as of December 31, 1993, 1994
and 1995 and June 30, 1996 is set forth below.
CUMULATIVE DEFAULT AND LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FROM INCEPTION THROUGH
---------------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS
-------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Acquisitions (1).. $400,608 $486,176 $635,558 $763,411
Cumulative Gross
Defaults (2)(4)........ $ 1,419 0.4% $ 1,430 0.3% $ 1,526 0.2% $ 1,698 0.2%
Cumulative Recoveries
(3).................... 872 0.2 883 0.2 904 0.1 950 0.1
-------- --- -------- --- -------- --- -------- ---
Net Losses.............. $ 547 0.2% $ 547 0.1% $ 622 0.1% $ 748 0.1%
======== === ======== === ======== === ======== ===
</TABLE>
- --------
(1) Total Acquisitions represents the total cost (aggregate purchase price of
the equipment) to the Company since inception in 1986 through and
including the date set forth above.
(2) Cumulative Gross Defaults represents the total defaults of all lessees
experienced by the Company since inception in 1986 through and including
the date set forth above measured as the aggregate of the Company's net
book value in such lease and any recorded receivable on such lease at the
date of default.
(3) Cumulative Recoveries represents the total recoveries with respect to
defaults of all lessees since inception of the Company in 1986 through and
including the date set forth above.
(4) A lessee is deemed to be in default when it fails to meet its obligations
to make monthly rental payments under its lease, and fails to cure such
breach, pursuant to the terms of the lease, and the Company declares the
lessee in "default" by written notice to the lessee.
29
<PAGE>
Purchase of Portfolios
In addition to originating leases for end-user customers, the Company has
purchased portfolios of equipment and related leases from its vendors and
other leasing companies and lease brokers. To date, the vast majority of all
equipment portfolio acquisitions have involved products marketed by vendors
with which the Company has a vendor program. The Company prefers to have a
remarketing program in place with the vendor of products in any portfolio it
purchases, although the existence of such a relationship is not a condition to
the purchase of a portfolio. In circumstances where it does not have such a
relationship, the Company will normally only acquire information processing
and communications equipment with functions similar to those of its then
current vendors' equipment.
From January 1, 1993 through June 30, 1996, the Company made 12 separate
portfolio acquisitions for an aggregate purchase price of approximately $89
million. During 1993, 1994 and 1995, respectively, the Company acquired five,
four and three portfolios, respectively, of equipment for an aggregate
purchase price of $55.3 million, $23.1 million, and $10.5 million,
respectively. The Company made no portfolio purchases in the first six months
of 1996. The vast majority of such equipment is subject to a remarketing
agreement with its manufacturer or is manufactured by one of the Company's
vendors. The largest portfolio purchase, which occurred in January 1993,
involved approximately $33 million of leases and related equipment previously
sold by the Company. In addition, since 1994, the Company has purchased from
Storage Technology or its affiliates, for an aggregate purchase price of $32.8
million, seven portfolios of leases originated by the vendor and the related
equipment.
Process Control and Administrative Systems
The Company has developed an administration system and controls which
feature a series of checks and balances. The Company's system and controls are
designed to protect against entering into lease transactions that may have
undesirable economics or unacceptable levels of risk, without impeding the
flow of business activity or preventing its sales organization from being
creative and responsive to the needs of vendors and customers.
The Company's regional offices are each staffed with a Director of Leasing
and at least one Contract Administrator who work with the vendors' sales
personnel to offer lease financing solutions to the vendors' end-user
customers. Once the Company commits to a lease transaction, its contract
administrators initiate a process of systematically preparing and gathering
relevant lease information and lease documentation. The contract
administrators are also responsible for monitoring the documentation through
the Company's home office documentation and review process. Prior to the
Company entering into any lease agreement, each transaction is evaluated based
on the Company's pre-determined standards regarding residual values, lease
structure, lease documentation and customer credit. The Company approves, and
delivers documentation to its customers, in most instances, in less than two
business days after a request for approval of the transaction has been
submitted to the Company's headquarters by one of its Directors of Leasing.
The Company utilizes an Investment Committee to review the residual values
it will use to price standard transactions. The Investment Committee also must
approve the pricing, including residual values, for all transactions involving
$1 million or more in aggregate purchase price if the pricing parameters are
outside previously approved guidelines. The Investment Committee is composed
of the Chief Executive Officer, Chief Financial Officer, Vice President,
Leasing, Vice President, Contract Administration, Controller, Vice President-
Corporate Finance and Treasurer of the Company. In addition, there is a
separate credit approval process whereby transactions up to $1 million require
the approval of the Supervisor, Credit Administration and the Chief Financial
Officer. All transactions over $1 million require the additional approval of
the President.
The Company's leasing and administrative personnel utilize the Company's
proprietary PATS system to structure lease financing opportunities and provide
the equipment management capabilities necessary to maximize the value of the
leased equipment during and after the initial lease term. Its use of the PATS
system, along with direct contact with customers, permits the Company to
customize the lease transaction to the
30
<PAGE>
customer's specific requirements. The PATS system analyzes and prices
transactions based upon residual values previously set by the Investment
Committee, the debt rate at which the Company expects to obtain financing
according to the lessee's credit rating and administrative costs associated
with the transaction. Because most of the Company's business involves vendor
products with existing creditworthy customers, the documentation, credit and
structure review activities may be completed in a few hours. This expeditious
review process and the preparation of lease documents in the Company's
regional offices allow the Company to approve and document transactions
quickly while adhering to the Company's system and controls.
International Expansion
Commencing in early 1996, the Company embarked on a plan to increase its
geographic coverage for vendor programs by expanding its lease financing
activities outside the Untied States. The first step in this international
expansion was into Western Europe, and was accomplished in April 1996 with the
acquisition of a small independent leasing company in the United Kingdom. This
company focused on leasing information processing equipment. The Company is
currently negotiating to acquire an existing portfolio of information
processing equipment and related leases in Germany. It plans to have
operations in Germany in the near future, and expects to have operations in
France, Belgium and the Netherlands by to the end of 1996.
The Company currently has a vendor program agreement in place with Dell
Computer, and a letter of intent for a vendor program with Cisco Systems,
covering Western Europe. Although no assurances can be given, the Company
anticipates entering into other new vendor relationships covering Western
Europe in the next few months. The Company may participate in additional
international markets in the future as may be necessary to meet the demands of
existing and prospective vendors.
Financing
The Company's financing strategy is to obtain substantially all of its
required long-term borrowings from the proceeds of sales of nonrecourse,
secured debt securities in the public and private debt securities markets
through "securitizations" or by other similar secured financings. From time to
time, the Company will obtain long-term financing for one or more leases with
a single customer. Prior to securitizing its leases, the Company finances its
acquisition of equipment on a short-term basis through secured "warehouse"
lines of credit until such time as its portfolio of equipment is of sufficient
size to permit it to efficiently finance the portfolio on a long-term basis.
Payments under the Company's borrowings and the maturities of its long-term
borrowings are typically structured to match the payments due under the leases
securing the borrowings. Although the Company has not done so to date, it may
engage in hedging transactions, pursuant to the hedging strategy approved by
its Board of Directors, in order to protect itself, when necessary, against
increases in interest rates prior to obtaining fixed rate, long-term financing
for its equipment. The Company recently expanded its operations to Western
Europe, and does not, as yet, have in place lines of credit to finance its
leasing activities in those countries. See "MD&A -- Liquidity and Capital
Resources" and "Risk Factors -- Interest Rate Risk."
Nonrecourse Debt. The credit standing of the Company's customers allows the
Company to obtain long-term financing for most of its leases on a nonrecourse
basis. Under such a nonrecourse loan, the Company typically borrows an amount
equal to the committed lease payments under the financed lease, discounted at
a fixed interest rate. The lender is entitled to receive the monthly lease
payments under the financed lease in repayment of the loan, and takes a
security interest in the related equipment and those lease payments. The
Company retains ownership of such equipment. Interest rates under this type of
financing reflect the financial condition of the lessees, the term of the
leases, the amount of the loan and the nature and manufacturer of the
equipment.
Historically, such nonrecourse loans have provided between 80% and 90% of
the funds necessary to acquire equipment. The Company normally obtains the
balance of the acquisition cost, commonly known in the leasing industry as the
"equity investment" in the equipment, from the proceeds of recourse, and
occasionally nonrecourse, borrowings by the Company, from its internally
generated funds or from the proceeds of sales of
31
<PAGE>
its Common Stock. The Company expects to use the net proceeds from the sale of
the Notes primarily to finance such "equity investments" over time.
The Company is not liable for the repayment of nonrecourse loans unless the
Company breaches certain limited representations and warranties in the loan
agreements. The lender assumes the credit risk of each lease financed with
recourse debt, and its only recourse, upon a default under a lease, is against
the lessee and such equipment. Because the Company's ability to obtain
nonrecourse lease financing from lenders depends on the credit standing of its
lessees, the Company targets large, creditworthy customers. See "Customers"
above.
The Company utilizes the public and private debt securities markets, through
securitizations, to provide a substantial portion of the nonrecourse debt it
requires. The utilization of securitizations has reduced the Company's
effective interest cost for its nonrecourse debt. The Company expects to
obtain most of its long-term debt requirements in the future from the proceeds
of sales of such debt or similar securities in the public and private debt
markets. See "Risk Factors -- Dependence on Availability of Financing" and
"MD&A -- Liquidity and Capital Resources."
In order to manage certain expected tax liabilities in Europe, the Company
may, from time to time, finance leases generated in Europe by selling the
related lease receivable. Under such arrangements, the Company would grant a
security interest in the underlying equipment, rather than sell it, and thus
retain its interest in the anticipated remarketing proceeds from the
equipment.
Recourse Financing. The other significant source of financing for equipment
acquisitions by the Company is recourse borrowings, both long-term and short-
term. This type of financing has been used principally to "warehouse"
portfolios of leases and the related equipment on a short-term basis, until
the Company is in a position to efficiently finance the portfolio on a long-
term, nonrecourse basis. In addition, when the Company finances its equity
investment in leased equipment with lenders, it often does so on a recourse
basis. See "Risk Factors -- Dependence on Availability of Financing" and
"MD&A -- Liquidity and Capital Resources."
The loans available to the Company under recourse arrangements are secured
by the financed equipment and the monthly lease payments due under the related
lease. Upon default by a lessee under a lease covering equipment financed
through recourse borrowings, the financial institution providing the financing
can seek recourse from the Company for the balance due on such financing.
COMPETITION
The Company competes in the information processing and communications
equipment leasing marketplaces with other independent leasing companies,
captive lessors and bank affiliated lessors. The Company's business is highly
competitive, both with respect to obtaining and maintaining vendor program
arrangements and providing lease financing to end-user customers. The Company
competes directly with various independent leasing companies, such as El
Camino Resources, Comdisco, Leasetec and G.E. Capital, and certain captive or
"semi-captive" leasing companies such as IBM Credit Corporation and AT&T
Credit. Many of the Company's competitors have substantially greater resources
and capital and longer operating histories.
A substantial number of the Company's competitors are significantly larger,
and have substantially greater resources, than the Company. The Company's
relatively limited amount of capital places it at a disadvantage in relation
to its larger competitors, particularly in connection with financing lease
transactions involving large dollar volumes of equipment where the cost of the
equipment substantially exceeds the amount of debt available for such
financing. See "Risk Factors -- Competition."
The Company believes it competes on the basis of price, responsiveness to
customer needs, flexibility in structuring lease transactions, relationships
with its vendors and knowledge of its vendors' products. The Company has found
it most effective to compete on the basis of providing a high level of
customer service and by structuring custom vendor programs and lease
transactions that meet the needs of its vendors and customers.
32
<PAGE>
The Company also believes that its cost of capital is comparable to that of
its larger competitors, primarily due to its financing strategy of utilizing
the public and private debt securities markets to finance its lease
receivables. Other important elements that affect the Company's
competitiveness are the high degree of knowledge and competence of its key
employees, specifically relating to information processing and communications
equipment and operating lease financing.
EMPLOYEES
As of June 30, 1996, the Company had 103 employees (five of whom were part-
time), 18 of whom were located in its regional or field offices in the United
States, 13 of whom are located in its European office in the United Kingdom,
and 72 of whom were located in its San Jose, California home office. At that
date, the Company also retained 15 temporary workers, eight of whom were in
San Jose and seven of whom were in the regional or field offices. The Company
intends to hire a substantial number of additional personnel over the next
several months. However, there can be no assurance that the Company will be
able to attract and retain personnel with the experience and expertise
necessary to meet its anticipated operating requirements. See "Risk Factors --
Management of Growth."
PROPERTIES
The Company's home office is located in leased space at 10 Almaden
Boulevard, Suite 1500, San Jose, California 95113. The Company also leases
office space for its regional offices in the Atlanta, Boston, Chicago, Dallas,
Los Angeles and New York City metropolitan areas, as well as for its European
office in the United Kingdom. At June 30, 1996, the aggregate monthly rent
under all of the Company's office leases, with respect to an aggregate of
approximately 27,000 square feet, was approximately $47,000.
LITIGATION
The Company is not involved in any legal proceedings, and is not aware of
any pending or threatened legal proceedings, that would have a material
adverse effect upon its financial condition or results of operations.
33
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Hal J Krauter (1) 58 Chairman, President, Chief Executive Officer and Director
Robert J. Kearns III 55 Executive Vice President, Finance and Chief Financial Officer
Ronald M. Bannerman 47 Vice President, Vendor Programs
Dorian Jay DiMarco 36 Vice President, Vendor Programs
Glenda B. Allen 53 Vice President, Contract Administration and Secretary
Steven J. Pressler 43 Vice President, Leasing
Steven L. Yeffa 37 Vice President, Finance -- International
Timothy P. Laehy 40 Vice President, Corporate Finance and Treasurer
Ian Harrison (2) 42 Vice President and Managing Director
Terence W. Murphy 36 Controller and Chief Accounting Officer
Louis R. Adimare 48 Director
George L. Bragg
(1)(3)(4) 64 Director
James C. Castle (3)(4) 59 Director
</TABLE>
- --------
(1) Member of Corporate Development Committee. (See "Committees and Meetings"
below.)
(2) Mr. Harrison is Managing Director of Leasing Solutions International,
Ltd., the Company's European subsidiary.
(3) Member of Audit Committee.
(4) Member of Independent Committee under stock based incentive plans.
Hal J Krauter co-founded the Company in 1986. He has been President and
Chief Executive Officer of the Company since its inception, and served as
Chief Financial Officer from March 1994 to January 1995. In April 1996, he
became Chief Operating Officer. Prior to founding the Company, he served as
President of Drivetech, Inc., a manufacturer of disk drives, from 1983 to
1984, and as President of MAD Computer Systems, Inc., a manufacturer of
personal computers, from 1984 until 1986. Earlier, he was the founder and
first President of Memorex Finance Company, the equipment leasing affiliate of
Memorex Corporation, from 1979 to 1983. Prior to founding Memorex Finance
Company, he held various financial and management positions with Memorex
Corporation, a supplier of IBM plug compatible products, and IBM Corporation,
from 1960 through 1979, including Vice President and Chief Financial Officer
of Memorex.
Robert J. Kearns III joined the Company in January 1995 as its Vice
President, Finance and Chief Financial Officer. He became an Executive Vice
President in January 1996. He served as Vice President -- Capital Markets
Group for GECAS, a GE Capital affiliate, in its structured finance and lease
finance operations, from 1989 to June 1994. From 1984 to 1989, he served as a
Senior Vice President of Manufacturers Hanover Leasing International/The CIT
Group, with lease financing responsibilities in the Far East and Europe. From
1980 to 1984, he acted as President of a leasing operation, headquartered in
Bahrain, which provided equipment financing in the Middle East. From 1969 to
1980, he served in a variety of management and lending positions, focusing on
both international and U.S. investment and commercial banking, with Chase
Manhattan Bank, Marine Midland and Citicorp Leasing International, as well as
a private investment banking company.
Ronald M. Bannerman joined the Company in June 1991 as Vice President,
Leasing. In September 1992, he was appointed to the position of Vice
President, Vendor Programs. From 1983 until he joined the Company, he served
as a Vice President of Citicorp North America, Inc., an integrated banking and
finance company, in its Equipment Finance/Leasing Group. While at Citicorp, he
established its West Coast high technology equipment leasing office and
managed the sales force of that office. Prior to joining Citicorp, he managed
the captive finance
34
<PAGE>
company and third party leasing activities of Four-Phase Systems, a
manufacturer of business systems, as Director, Finance Administration, from
1978 until 1983.
Dorian Jay DiMarco joined the Company in October 1992 as Director of Vendor
Programs, and was appointed Vice President, Vendor Programs in January 1995.
Prior to joining the Company, he was with GE Capital Computer Leasing, a
computer leasing company, serving as a Director of Portfolio Acquisition and
Vendor Programs from June 1991 to July 1992, and as the Eastern Regional Sales
Manager from September 1989 to June 1991. From 1986 to 1989, he was the
Western Regional Sales Manager for General Electric Calma Company, a
manufacturer of computer-aided design and manufacturing systems.
Glenda B. Allen joined the Company in 1986 as Director, Contract
Administration. In November 1995, she became the Company's Vice President,
Contract Administration. In January 1996, she became Secretary of the Company.
From 1982 through 1985, she served as an account executive in the receivables
financial group of Westinghouse Credit Corporation, a financial services
company. From 1985 through 1986 and 1979 through 1982, she served as Director,
Contract Administration for Memorex Finance Company. She also served in
various administrative capacities with Memorex Corporation from 1974 through
1979. From 1968 through 1972, she served as a Credit Manager for GE Credit
Corporation.
Steven J. Pressler joined the Company in January 1996 as Vice President,
Leasing. He served as a Vice President and Western Regional Sales Manager for
Heller Financial, Inc., an integrated financial services company, from October
1994 until joining the Company. In that capacity, he managed the lease
financing and vendor program activities for his region. From 1983 to October
1994, he served in various capacities, including, most recently, Senior Vice
President of Tucker Leasing-Capital Corporation, which was in the lease
financing business on a national basis. From 1974 until he joined Tucker, he
served in a variety of leasing and credit positions with Chemical Bank,
Industrial Credit Corporation (a subsidiary of Litton Industries) and
Equitable Life Insurance.
Ian Harrison joined the Company in August 1996 as the Managing Director of
Leasing Solutions International, Ltd., the Company's European subsidiary. He
became a Vice President of the Company in September 1996. From January 1992
until joining the Company, he served as Director -- Northern Europe and Sales
and Marketing Director-Europe of AT&T Capital Europe Limited, a financial
services company. From 1985 through December 1991, he acted as the Managing
Director of Wang Equipment Services, the finance company of Wang Laboratories.
Before joining Wang, he served as Special Projects Manager and Sales and
Marketing Director, from 1983 to 1985, of Armco Europe Finance, a financial
services company. Earlier, from 1982 to 1983, Mr. Harrison was a funding
manager for International Brokerage and Leasing, a computer leasing and lease
brokerage company.
Terence W. Murphy joined the Company in August 1995 as its Controller. He
became Chief Accounting Officer in January 1996. From January 1994 until he
joined the Company, he was the principal and sole owner of a firm providing
tax, accounting and financial consulting services to businesses. From December
1989 to December 1993, he was Controller of LB Credit Corporation, an
equipment finance company. Prior to joining LB Credit, he served as an
Assistant Controller of Wells Fargo Leasing from 1987 to December 1989. Wells
Fargo Leasing was acquired by LB Credit in December 1989. Mr. Murphy is a
licensed CPA.
Timothy P. Laehy joined the Company in February 1991 as a Financial Analyst.
In April 1996, he was appointed to the positions of Vice President, Corporate
Finance and Treasurer. From 1990 through 1991, Mr. Laehy served as a Senior
Associate at Recovery Equity Investors, a private investment fund. From 1988
through 1990, he served as an Associate at Guarantee Acceptance Capital
Corporation, an investment bank.
Steven L. Yeffa joined the Company in December 1991 as Director, Funding and
was promoted to Treasurer in January 1995. In April 1996, he was appointed
Vice President, Finance--International. Since July 1996, he has been located
at the Company's European office in the United Kingdom. From 1989 to 1991, he
served as Vice President, Funding at Matsco Financial Corporation, an
equipment leasing company. From 1984 to 1989,
35
<PAGE>
he served as Asset Manager at CP National Corporation, a regional public
utility, for which Mr. Yeffa directed the operations of their wholly-owned
leasing company, CPN Leasco.
Louis R. Adimare co-founded the Company in 1986. Since August 1987 until
March 1996, he served as the Company's Executive Vice President, concentrating
on leasing activities and strategic relations. He was the Company's Chief
Operating Officer from September 1992 to March 1996. Prior to founding the
Company, he had been a Regional Leasing Manager, for Memorex Finance Company
from 1984 to 1986, and a District Manager, for Memorex Corporation from 1982
to 1984. From 1969 until 1982, he held sales and sales management positions at
Honeywell Information Systems, which was in the computer systems business.
Mr. Adimare retired as an Officer of the Company in March 1996.
George L. Bragg has been Chairman of Markwood Capital Alliance, which
provides management consulting and financing services to high technology and
special situation companies, since September 1994. From October 1993 to
September 1994, he was President and a Director of Nichols Institute, which
provides clinical testing services to hospitals, laboratories and physicians
on a nationwide basis. From July 1991 to March 1993, he served in various
executive capacities, including Vice Chairman, with Western Digital
Corporation, which manufactures and sells disk drives for the personal
computer market. He was a director of Western Digital from October 1990 until
November 1995. He served as Chairman and President of Boston Street Capital, a
management and investment consulting firm, from September 1990 until December
1991. From 1989 until 1990, he served as Chairman of the Board, Chief
Executive Officer and President of Sooner Federal Savings Association. He
became President and Chief Operating Officer of Telex Corporation, which was
in the computer networking and terminal workstation business, in 1986. When
Telex merged with Memorex Corporation in 1988, he became Managing Director and
Executive Vice President of Memorex Telex N.V., which positions he held until
1989. Mr. Bragg is a director of Old America Stores and Eltron International,
Inc.
James C. Castle, Ph.D., has been, since August 1992, the Chairman and Chief
Executive Officer of U.S. Computer Services, which provides subscriber
management and billing services. Prior to joining U.S. Computer Services, he
served as President and Chief Executive Officer, from August 1991 to April
1992, of Teradata Corporation, a public company purchased by NCR in February
1992, which develops and sells high performance systems and related products
and services for relational database management. He was the President and
Chief Executive Officer of Infotron Systems Corporation, a communications
network systems company, from 1987 to 1991, and President of TBG Information
Systems, Inc., which was engaged in the information systems and services
businesses, from 1984 to 1987. He also served as the Executive Vice President
of Memorex Corporation from 1982 to 1984. Dr. Castle is a director of PAR
Technology Corporation and ADC Telecommunications.
COMMITTEES AND MEETINGS
The audit committee of the Board of Directors of the Company (the "Board")
currently consists of George L. Bragg and James C. Castle, two of the
Company's non-employee directors. The audit committee reviews, and discusses
with management and the Company's independent accountants, the Company's
financial reporting and accounting practices. It also reports to the Board
concerning such reporting and practices.
The Company does not have a compensation committee or any other Board
committee performing equivalent functions. Decisions regarding executive
officer compensation, except as described below, are made by the Board as a
whole, with Mr. Krauter abstaining with respect to decisions regarding his
compensation. The Company does not currently have a standing nominating
committee of the Board.
In connection with the Board's approval of the Company's 1995 Stock Option
and Incentive Plan, a committee of the Board, composed of the Company's non-
employee directors (the "Independent Committee"), was appointed to administer
and approve grants under that plan. The Independent Committee also administers
the Company's Employee Stock Purchase Plan.
The Board also has a Corporate Development Committee of two Directors. Mr.
Krauter and Mr. Bragg presently serve as its members. The committee's charter
is to assist in the Company's efforts to identify, and consider the purchase
of, businesses and portfolios of leases and equipment that may be suitable for
acquisition by the Company, to screen acquisition candidates and, as
appropriate, to negotiate the principal terms and conditions of any such
acquisition.
36
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of August 31, 1996,
regarding the beneficial ownership of the Common Stock of the Company, with
respect to (i) each officer and director of the Company, (ii) each person who
is known by the Company to own beneficially 5% or more of the Common Stock,
and (iii) all directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED(2)(3) SHARES
------------------- ------------ -----------
<S> <C> <C>
Hal J Krauter (4)...................................... 1,209,750 14.5%
Robert J. Kearns III................................... 19,109 *
Glenda B. Allen........................................ 7,954 *
Ronald M. Bannerman.................................... 10,974 *
Dorian Jay DiMarco..................................... 5,598 *
Steven J. Pressler..................................... -- *
Timothy P. Laehy....................................... 916 *
Steven L. Yeffa........................................ 11,949 *
Ian Harrison (5)....................................... -- *
Terence W. Murphy...................................... 2,500 *
Louis R. Adimare....................................... 804,000 9.6%
George L. Bragg........................................ 64,467 *
James C. Castle........................................ 18,317 *
J.& W. Seligman & Co.(6)............................... 846,872 10.2%
All directors and officers as a group (13 persons)..... 2,155,534 25.9%
</TABLE>
- --------
* Less than 1%.
(1) Except as noted, all addresses are 10 Almaden Boulevard, Suite 1500, San
Jose, California 95113.
(2) The number of shares beneficially owned is deemed to include shares as to
which the persons named have or share either investment or voting power.
Unless otherwise noted, and except for voting powers held jointly with a
person's spouse, each person identified possesses sole voting and
investment power with respect to the shares shown.
(3) Includes an aggregate of 230,876 shares which such persons have a right to
acquire, on or before December 31, 1996, upon exercise of outstanding
stock options granted under the Company's stock option plans. The amount
of such shares for each person named above, other than J.&W. Seligman &
Co., is as follows: Mr. Krauter -- 87,500; Mr. Kearns -- 37,500; Ms.
Allen -- 2,687; Mr. Bannerman -- 3,762; Mr. DiMarco -- 1,406; Mr.
Pressler -- none; Mr. Laehy -- none; Mr. Yeffa -- 1,437; Mr. Adimare --
78,750; Mr. Harrison -- none; Mr. Murphy -- 2,500; Mr. Bragg -- 1,667; and
Mr. Castle -- 13,667.
(4) Includes 78,000 shares held of record by certain members of Mr. Krauter's
family, with respect to which he disclaims beneficial ownership.
(5) Mr. Harrison's address is Continental House, West End, Woking, Surrey,
GU24 9PJ United Kingdom.
(6) From a Schedule 13G filed with the Securities and Exchange Commission by
the shareholder on or about February 2, 1996. The actual number of shares
beneficially owned may have changed since that date. The shareholder's
address is 100 Park Avenue, New York, NY 10017.
37
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued under an indenture to be dated as of October 9,
1996 (the "Indenture") between the Company and Bankers Trust Company, as
trustee (the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The terms of the
Notes will include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"), as in effect on the date of the Indenture. The Notes will be subject
to all such terms, and holders of the Notes are referred to the Indenture and
the TIA for a statement of such terms. The following is a summary of important
terms of the Notes and does not purport to be complete. Reference should be
made to all provisions of the Indenture, including the definitions therein of
certain terms and all terms made a part of the Indenture by reference to the
TIA. Certain definitions of terms used in the following summary are set forth
under "Certain Definitions" below. As used in this section, the "Company"
means Leasing Solutions, Inc.
GENERAL
The Notes will be general unsecured, subordinated obligations of the
Company, will mature on October 1, 2003 (the "Maturity Date"), and will be
limited to an aggregate principal amount of $62,500,000 ($71,875,000 if the
Underwriters' over-allotment option is exercised in full). The Notes are
exchangeable, and transfers thereof will be registrable without charge
therefor, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge in connection therewith.
The Notes will accrue interest at the rate per annum set forth on the cover
page of this Prospectus from October 9, 1996, or from the most recent interest
payment date to which interest has been paid or duly provided for, and accrued
and unpaid interest will be payable semi-annually in arrears on April 1 and
October 1 of each year, beginning April 1, 1997. Interest will be paid to the
person in whose name the Note is registered at the close of business on the
March 15th or September 15th immediately preceding the relevant interest
payment date; provided that, with respect to a Note or portion thereof called
for redemption, or repurchased in connection with a Change of Control, during
the period from a record date to (but excluding) the next succeeding interest
payment date, accrued interest shall be payable (unless such Note is
converted) to the holder of the Note redeemed or repurchased. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose or, at the
option of the Company, payment of interest may be made by check mailed to the
holders of the Notes at their respective addresses set forth in the register
of holders of Notes. Until otherwise designated by the Company, the Company's
office or agency maintained for such purpose will be the principal corporate
trust office of the Trustee. For interest payments on a Note of U.S.
$5,000,000 or more in principal amount, the holder of such Note may elect at
any time to have payment made by transfer to a United States Dollar account.
The Notes will be issued in the form of a Global Security, which will be
deposited with DTC in New York, New York as custodian (the "Custodian") and as
Depositary (in such capacity, the "Depositary"). Interests in the Global
Security will be shown in, and transfers thereof will be effected only
through, records maintained by DTC and its participants (as hereinafter
defined).
So long as the Custodian holds a Global Security, the Custodian will be
considered the sole owner or Holder of such Global Security for purposes of
the Indenture and such Global Security. Except as provided below, owners of
beneficial interests in the Global Securities will not be entitled to have
Notes registered in their names, will not be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders thereof under the Indenture.
The Indenture does not contain any financial covenants, and does not limit
or contain any restriction on (i) the payment of dividends, (ii) the Company's
ability to incur Senior Debt or (iii) the issuance or repurchase of securities
of the Company. The Indenture contains no covenants or other provisions to
afford protection to
38
<PAGE>
holders of Notes in the event of a highly leveraged transaction or a change in
control of the Company except to the extent described under "Change of
Control" below.
GLOBAL SECURITIES
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC's Next-Day Settlement System and are
subject to changes by it from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact DTC's systems or their participants directly to discuss these matters.
Upon the issuance of the Global Security, DTC will credit, on its internal
system, the respective principal amounts of the individual beneficial
interests in the Global Securities to the accounts of persons who maintain
accounts with DTC ("participants"). Such accounts initially will be designated
by or on behalf of the initial purchasers. Ownership of beneficial interests
in the Global Securities will be limited to participants or persons who hold
interests through participants. Ownership of beneficial interests in the
Global Securities will be shown on, and the transfer of such interests will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants) and in accordance with the
applicable procedures of DTC (in addition to those under the Indenture
referred to herein).
Unless Notes in definitive registered form are issued, owners of beneficial
interests in a Global Security will not be entitled to have any portions of
such Global Security registered in their names, will not receive or be
entitled to receive physical delivery of Notes in certificated form and will
not be considered the owners or Holders of such Global Security (or any Notes
represented thereby) under the Indenture or the Notes.
In the event of an increase or decrease in the aggregate principal amount of
the Notes represented by any Global Security, whether pursuant to conversion,
exchange for an interest in another Global Security, the issue of additional
Notes to be represented by such Global Security, the issue of definitive notes
or the repurchase and cancellation of the Notes represented by such Global
Security or otherwise, the Holder will present such Global Security to the
Company or its agent for increase or decrease, as the case may be, of the
aggregate principal amount of the Notes represented by such Global Security by
annotation thereon.
Payments of the principal of and interest on Global Securities will be made
to the Holder thereof. Neither the Company, the Trustee nor any of their
respective agents will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Global Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
See""Payments'' below.
Subject to the following considerations, beneficial interests in a Global
Security will trade in DTC's Next Day Funds Settlement System, and secondary
market trading activity in such interests will therefore settle in next-day
funds. The Company expects that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Security held by it or
its nominee, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Security as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in "street
name." Such payments will be the responsibility of such participants.
The laws of some U.S. states require that certain persons take physical
delivery of securities in certificated form. Consequently, the ability to
transfer beneficial interests in a Global Security to such persons may be
limited. Because DTC can act only on behalf of participants, which, in turn,
act on behalf of indirect participants (as hereinafter defined) and certain
banks, the ability of a person having a beneficial interest in a Global
Security
39
<PAGE>
to pledge such interest to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
DTC has advised that it will take any action permitted to be taken by a
Holder of Global Securities (including taking action required by it for
conversion as described below) only at the direction of one or more
participants to whose accounts with DTC interests in the Global Securities are
credited and only in respect of such portion of the aggregate principal amount
of the Global Security as to which such participant or participants has or
have given such direction. However, if payment of principal of the Notes
becomes due following the occurrence of an Event of Default (as defined in
"Events of Default and Remedies" below) under the Notes, DTC reserves the
right to cause the Global Securities to be exchanged for legended definitive
Notes, and to distribute such Notes to its participants.
DTC has also advised as follows: (i) DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and a "Clearing Agency" registered pursuant to
the provisions of Section 17A of the Exchange Act; (ii) DTC was created to
hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts to its participants, thereby eliminating the
need for the physical transfer and delivery of certificates;
(iii) Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other
organizations; and (iv) indirect access to the DTC system is available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
DEFINITIVE NOTES
Definitive Notes in registered form will be issued if (i) DTC notifies the
Company that it is unwilling or unable to continue as Global Security Holder,
or if at any time it ceases to be a clearing agency registered under the
Exchange Act and a successor Global Security Holder is not appointed by the
Company within 90 days, or (ii) payment of principal of the Notes becomes due
following the occurrence of an Event of Default under the Notes and the Holder
requires that definitive Notes be issued.
Any definitive Notes will be issued in denominations of $1,000 or integral
multiples of $1,000 in excess thereof.
Notwithstanding any statement herein, the Company reserves the right to
impose or remove such transfer, certification, substitution or other
requirements and to require such restrictive legends on Notes as it may
determine are necessary to ensure compliance with the securities laws of the
U.S., and the status therein, and any other applicable laws may require.
CONVERSION
The holders of Notes will be entitled at any time after the date 60 days
following the last Issue Date of the Notes and prior to the close of business
on the last trading day prior to the Maturity Date of the Notes, subject to
prior redemption or repurchase, to convert any Notes or portions thereof (in
denominations of $1,000 or multiples thereof) into Common Stock of the
Company, at the conversion price set forth on the cover page of this
Prospectus, subject to adjustment as described below (the "Conversion Price").
Except as described below, no adjustment will be made on conversion of any
Notes for interest accrued thereon or for dividends on any Common Stock
issued. If Notes not called for redemption are converted after a record date
for the payment of interest and prior to the next succeeding interest payment
date, such Notes must be accompanied by funds equal to the interest payable on
such succeeding interest payment date on the principal amount so converted.
The Company is not required to issue fractional shares of Common Stock upon
conversion of Notes and, in lieu thereof, will pay a cash adjustment based
upon the market price of the Common Stock on the last trading day prior to the
date of conversion. In the case of Notes called for redemption by the Company,
conversion rights will expire at the close of business on the trading day
preceding the date fixed for redemption, unless the
40
<PAGE>
Company defaults in payment of the redemption price, in which case the
conversion right will terminate at the close of business on the date such
default is cured. In the event any holder exercises its repurchase right upon
a Change of Control, such holder's conversion right will terminate. See
"Change of Control" below.
The right of conversion attaching to any Note may be exercised by the holder
by delivering the Note at the specified office of a conversion agent,
accompanied by a duly signed and completed notice of conversion, together with
any funds that may be required as described in the preceding paragraph. The
conversion date shall be the date on which the Note, the duly signed and
completed notice of conversion, and any funds that may be required as
described in the preceding paragraph shall have been so delivered. A holder
delivering a Note for conversion will not be required to pay any taxes or
duties payable in respect of the issue or delivery of Common Stock on
conversion, but will be required to pay any tax or duty which may be payable
in respect of any transfer involved in the issue or delivery of the Common
Stock in a name other than the holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the holder have been paid.
The Conversion Price is subject to adjustment (under formula set forth in
the Indenture) in certain events, including: (i) the issuance of Common Stock
as a dividend or distribution on Common Stock of the Company; (ii) certain
subdivisions and combinations of the Common Stock; (iii) the issuance to all
holders of Common Stock of certain rights or warrants to purchase Common
Stock; (iv) the dividend or other distribution to all holders of Common Stock
of shares of capital stock of the Company (other than Common Stock) or
evidences of indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to
above and dividends and distributions in connection with the liquidation,
dissolution or winding up of the Company or paid exclusively in cash); (v)
dividends or other distributions consisting exclusively of cash (excluding any
cash portion of distributions referred to in clause (iv)) to all holders of
Common Stock to the extent such distributions, combined together with (A) all
such all-cash distributions made within the preceding 12 months in respect of
which no adjustment has been made plus (B) any cash and the fair market value
of other consideration payable in respect of any tender offers by the Company
or any of its Subsidiaries for Common Stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 15% of the
Company's market capitalization (being the product of the then current market
price of the Common Stock times the number of shares of Common Stock then
outstanding) on the record date for such distribution; and (vi) the purchase
of Common Stock pursuant to a tender offer made by the Company or any of its
Subsidiaries to the extent that the aggregate consideration, together with (X)
any cash and the fair market value of any other consideration payable in any
other tender offer expiring within 12 months preceding such tender offer in
respect of which no adjustment has been made plus (Y) the aggregate amount of
any such all-cash distributions referred to in clause (v) above to all holders
of Common Stock within the 12 months preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 15% of the
Company's market capitalization on the expiration of such tender offer.
In the case of (i) any reclassification or change of the Common Stock, (ii)
a consolidation, merger or combination involving the Company or (iii) a sale
or conveyance to another corporation of the property and assets of the Company
as an entirety or substantially as an entirety, in each case as a result of
which holders of Common Stock shall be entitled to receive stock, other
securities, or other property or assets (including cash) with respect to or in
exchange for such Common Stock, the holders of the Notes then outstanding will
be entitled thereafter to convert such Notes into the kind and amount of
shares of stock, other securities or other property or assets, which they
would have owned or been entitled to receive upon such reclassification,
change, consolidation, merger, combination, sale or conveyance had such Notes
been converted into Common Stock immediately prior to such reclassification,
change, consolidation, merger, combination, sale or conveyance (assuming, in a
case in which the Company's shareholders may exercise rights of election, that
a holder of Notes would not have exercised any rights of election as to the
stock, other securities or other property or assets receivable in connection
therewith and received per share the kind and amount received per share by a
plurality of non-electing shares). Certain of the foregoing events may also
constitute or result in a Change of Control requiring the Company to offer to
repurchase the Notes. See "Change of Control" below.
41
<PAGE>
In the event of a taxable distribution to holders of Common Stock (or other
transaction) that results in any adjustment of the Conversion Price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain
other circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Tax Considerations"
below.
No adjustment in the Conversion Price will be required unless such
adjustment would require a change of at least 1% of the Conversion Price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the Conversion Price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of the
foregoing.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Debt, whether outstanding on the date of
the Indenture or thereafter incurred. Upon any distribution to creditors of
the Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior
Debt will be entitled to receive payment in full of all obligations in respect
of such Senior Debt before the holders of Notes will be entitled to receive
any payment with respect to the Notes.
In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Debt then outstanding would be entitled to
payment in full of all obligations in respect of such Senior Debt before the
holders of the Notes are entitled to receive any payment or distribution in
respect thereof. The Indenture further requires that the Company promptly
notify holders of Senior Debt if payment of the Notes is accelerated because
of an Event of Default.
The Company also may not make any payment upon or in respect of the Notes if
(i) a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of Senior Debt occurs and is continuing
beyond any applicable period of grace, or (ii) any other default occurs and is
continuing with respect to Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Company or other person permitted to give such
notice under the Indenture. Payments on the Notes may and shall be resumed (i)
in the case of a payment default, upon the date on which such default is cured
or waived, and (ii) in the case of a nonpayment default, the earlier of the
date on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received. No new
period of payment blockage may be commenced unless and until (i) 365 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice, and (ii) all scheduled payments of principal, premium, if any, and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Debt may receive
more, ratably, and holders of the Notes may receive less, ratably, than the
other creditors of the Company. Such subordination will not prevent the
occurrence of any Event of Default under the Indenture.
The Notes are obligations exclusively of the Company. Since the operations
of the Company are partially conducted through Subsidiaries, the cash flow and
the consequent ability to service debt, including the Notes, of the Company,
are partially dependent upon the earnings of its Subsidiaries and the
distribution of those earnings to, or upon loans or other payments of funds by
those Subsidiaries to, the Company. The payment of dividends
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and the making of loans and advances to the Company by its Subsidiaries may be
subject to statutory or contractual restrictions, are dependent upon the
earnings of those Subsidiaries and are subject to various business
considerations.
Any right of the Company to receive assets of any of its Subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders
of the Notes to participate in those assets) will be effectively subordinated
to the claims of that Subsidiary's creditors (including trade creditors),
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary, in which case the claims of the Company would still be
subordinate to any security interests in the assets of such Subsidiary and any
indebtedness of such Subsidiary senior to that held by the Company.
At July 31, 1996, the Company had approximately $230 million of indebtedness
outstanding that would have constituted Senior Debt (excluding accrued
interest and Senior Debt constituting liabilities of a type not required to be
reflected as a liability on the balance sheet of the Company in accordance
with GAAP). At July 31, 1996, there was also outstanding approximately $28
million of indebtedness and other obligations of Subsidiaries of the Company
(excluding intercompany liabilities and liabilities of a type not required to
be reflected as a liability on the balance sheet of such Subsidiaries in
accordance with GAAP) as to which the Notes would have been structurally
subordinated. The Indenture will not limit the additional indebtedness,
including Senior Debt, that the Company can create, incur, assume or
guarantee, nor will the Indenture limit the amount of indebtedness and other
liabilities that any Subsidiary can create, incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of Notes receives any payment or distribution of assets of the Company of any
kind in contravention of any of the terms of the Indenture, whether in cash,
property or securities, including, without limitation, by way of set-off or
otherwise, in respect of the Notes before all Senior Debt is paid in full,
then such payment or distribution will be held by the recipient in trust for
the benefit of holders of Senior Debt, and will be immediately paid over or
delivered to the holders of Senior Debt or their representative or
representatives to the extent necessary to make payment in full of all Senior
Debt remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior Debt.
OPTIONAL REDEMPTION
The Notes may be redeemed at the option of the Company, in whole or from
time to time in part, on and after October 4, 1999, on not less than 20 nor
more than 60 days prior written notice to the holders thereof by first class
mail, at the following redemption prices (expressed as percentages of
principal amount) if redeemed during the 12-month period beginning October 1
of each year indicated (October 4, in the case of 1999):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1999........................................................... 103.438%
2000........................................................... 102.292%
2001........................................................... 101.146%
2002........................................................... 100.000%
2003........................................................... 100.000%
</TABLE>
If less than all the Notes are to be redeemed, the Trustee will select Notes
for redemption pro rata or by lot or by any other method that the Trustee
considers fair and appropriate. The Trustee may select for redemption a
portion of the principal of any Note that has a denomination larger than
$1,000. Notes and portions thereof will be redeemed in the amount of $1,000 or
integral multiples of $1,000. The Trustee will make the selection from Notes
outstanding and not previously called for redemption.
Provisions of the Indenture that apply to the Notes called for redemption
also apply to portions of the Notes called for redemption. If any Note is to
be redeemed in part, the notice of redemption will state the portion of the
principal amount to be redeemed. Upon surrender of a Note that is redeemed in
part only, the Company will execute and the Trustee will authenticate and
deliver to the holder a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.
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On and after the redemption date, unless the Company shall default in the
payment of the redemption price, interest will cease to accrue on the
principal amount of the Notes or portions thereof called for redemption and
for which funds have been set apart for payment. In the case of Notes or
portions thereof redeemed on a redemption date which is also a regularly
scheduled interest payment date, the interest payment due on such date shall
be paid to the person in whose name the Note is registered at the close of
business on the relevant record date.
CHANGE OF CONTROL
In the event of a Change of Control (as defined below), each holder will
have the option, subject to the terms and conditions of the Indenture, to
require the Company to purchase all or any part (provided that the principal
amount must be $1,000 or an integral multiple thereof) of the holder's Notes
on the date that is 30 Business Days after the occurrence of such Change of
Control (the "Change of Control Purchase Date") for a purchase price equal to
100% of the principal amount thereof, plus accrued and unpaid interest up to
but not including the Change of Control Purchase Date, subject to the
Company's ability to make such payments pursuant to the terms of agreements,
whether or not amended after the issuance of such Notes, relating to Senior
Debt, whether or not presently in existence.
Within 20 business days after the occurrence of a Change of Control, the
Company shall mail to the Trustee and to each holder and cause to be published
a written notice of the Change of Control, setting forth, among other things,
the terms and conditions of, and the procedures required for exercise of, the
holder's right to require the purchase of such holder's Notes.
To exercise the purchase right upon a Change of Control, a holder must
deliver written notice of such exercise to the Paying Agent at any time prior
to the close of business on the Change of Control Purchase Date, specifying
the Notes with respect to which the purchase right is being exercised. Such
notice of exercise may be withdrawn by the holder by a written notice of
withdrawal delivered to the Paying Agent at any time prior to the close of
business on the Change of Control Purchase Date.
The Company will comply with the provisions of Rule 13e-4 and Rule 14e-1
under the Exchange Act, will file Schedule 13E-4 or any successor or similar
schedule required thereunder, and will otherwise comply with all federal and
state securities laws in connection with any offer by the Company to purchase
Notes at the option of the holders upon a Change of Control.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of the Company and
the removal of incumbent management. The Company is not aware of any specific
effort to accumulate shares of Common Stock or to obtain control of the
Company by means of a merger, tender offer, solicitation, or otherwise, nor is
the Change of Control purchase feature part of a plan by management to adopt a
series of anti-takeover provisions. Instead, the Change of Control purchase
feature is a result of negotiations between the Company and the Underwriters.
Depending on the terms of the transaction, a future highly leveraged
transaction, reorganization, restructuring, merger, or similar transaction
involving the Company's present management or directors could constitute a
Change of Control. Neither the Company nor its current management has any
present intention to engage in a transaction involving a Change of Control,
although it is possible that the Company or its management may decide to do so
in the future.
Subject to the limitation on mergers and consolidations discussed below, the
Company could, in the future, enter into certain transactions, including
certain recapitalizations, the sale of all or substantially all of its assets,
or the liquidation of the Company, that would not constitute a Change of
Control under the Indenture, but that would increase the amount of Senior Debt
(or any other indebtedness) outstanding at such time or substantially reduce
or eliminate the Company's assets. There are no restrictions in the Indenture
on the creation of additional Senior Debt (or any other indebtedness), and,
under certain circumstances, the incurrence of significant amounts of
additional Indebtedness could have an adverse effect on the Company's ability
to service its Indebtedness, including the Notes.
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<PAGE>
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the Change of Control Purchase
Price for all Notes tendered by the holders thereof. In addition, the right to
require the Company to repurchase Notes as a result of the occurrence of a
Change of Control could create an event of default under future Senior Debt of
the Company, as a result of which any repurchase could, absent a waiver, be
blocked by the subordination provisions of the Notes. See "Subordination"
above. Further, the terms of future Senior Debt or other future Indebtedness
ranking pari passu in right of payment with the Notes could require that such
Indebtedness be repaid upon the occurrence of a Change of Control. Failure by
the Company to repurchase the Notes when required will result in an Event of
Default with respect to the Notes whether or not such repurchase is permitted
by the subordination provisions thereof.
A "Change of Control" will be deemed to have occurred when: (i) any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange
Act) (a) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act) of shares representing more than 50% of the
combined voting power of the then outstanding securities entitled to vote
generally in elections of directors of the Company ("Voting Stock"), or (b)
has the right or the ability by voting right, contract or otherwise to elect
or designate for election 50% or more of the directors of the Company, or (ii)
the Company consolidates with or merges into any other corporation, or
conveys, transfers, or leases all or substantially all of its assets to any
person, or any other corporation merges into the Company, and, in the case of
any such transaction, the outstanding Common Stock of the Company is changed
or exchanged as a result, unless the stockholders of the Company immediately
before such transaction own, directly or indirectly immediately following such
transaction, at least a majority of the combined voting power of the
outstanding voting securities of the corporation resulting from such
transaction in substantially the same proportion as their ownership of the
Voting Stock immediately before such transaction.
The definition of Change of Control includes a phrase relating to the lease,
transfer or conveyance of "all or substantially all" of the assets of the
Company. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a holder of Notes to
require the Company to repurchase such Notes as a result of a lease, transfer
or conveyance of less than all of the assets of the Company to another person
or group may be uncertain.
MERGER AND CONSOLIDATION
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another corporation, person or entity as an entirety or
substantially as an entirety unless (i) the Company is the surviving
corporation, or the entity or the person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made, is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
person formed by or surviving any such consolidation or merger (if other than
the Company), or the entity or person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made, assumes
all the obligations of the Company under the Notes and the Indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction, no Default or Event of Default
exists; and (iv) the Company or such person shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
such transaction and the supplemental indenture comply with the Indenture and
that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more subsidiaries of
the Company, the capital stock of which constitutes all or substantially all
of the properties and assets of the Company, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
45
<PAGE>
Upon any such consolidation, merger, sale, assignment, conveyance, lease,
transfer or other disposition in accordance with the foregoing, the successor
person formed by such consolidation or into which the Company is merged or to
which such sale, assignment, conveyance, lease, transfer or other disposition
is made will succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Indenture with the same effect as if such
successor had been named as the Company therein, and thereafter (except in the
case of a sale, assignment, transfer, lease, conveyance or other disposition)
the predecessor corporation will be relieved of all further obligations and
covenants under the Indenture and the Notes.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being (i) default in
payment of the principal of, or premium, if any, on the Notes, whether or not
such payment is prohibited by the subordination provisions of the Indenture,
(ii) default for 30 days in payment of any installment of interest on the
Notes, whether or not such payment is prohibited by the subordination
provisions of the Indenture, (iii) default by the Company for 90 days after
notice in the observance or performance of any other covenants in the
Indenture, (iv) failure of the Company to repurchase the Notes when required,
whether or not such payment is prohibited by the subordination provisions of
the Indenture, (v) failure to provide timely notice of a Change of Control or
(vi) certain events involving bankruptcy, insolvency or reorganization of the
Company or any material subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee, by written notice to the Company, or the holders
of not less than 25% in aggregate principal amount of the then outstanding
Notes, by written notice to the Company and the Trustee, may declare the
unpaid principal of, premium, if any, and accrued and unpaid interest on all
the Notes then outstanding to be due and payable. Upon such declaration, such
principal amount, premium, if any, and accrued and unpaid interest will become
immediately due and payable, notwithstanding anything contained in the
Indenture or the Notes to the contrary, but subject to the provisions limiting
payment described in "Subordination" above. If any Event of Default specified
in clause (vi) above occurs with respect to the Company, all unpaid principal
of, and premium, if any, and accrued and unpaid interest on the Notes then
outstanding will automatically become due and payable, subject to the
provisions described in "Subordination" above, without any declaration or
other act on the part of the Trustee or any holder of Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee is under no obligation to exercise
any of its rights or powers under the Indenture at the request, order or
direction of any of the holders, unless such holders have offered to the
Trustee an indemnity satisfactory to it against any loss, liability or
expense. Subject to all provisions of the Indenture and applicable law, the
holders of a majority in aggregate principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. If a Default or Event of Default occurs and is
continuing and is known to the Trustee, the Indenture requires the Trustee to
mail a notice of Default or Event of Default to each holder within 60 days of
the occurrence of such Default or Event of Default, provided, however, that
the Trustee may withhold from the holders notice of any continuing Default or
Event of Default (except a Default or Event of Default in the payment of
principal of, premium, if any or interest on the Notes) if it determines that
withholding notice is in their interest. The holders of a majority in
aggregate principal amount of the Notes then outstanding, by notice to the
Trustee, may rescind any acceleration of the Notes and its consequences if all
existing Events of Default (other than the nonpayment of principal of,
premium, if any, and interest on the Notes that has become due solely by
virtue of such acceleration) have been cured or waived and if the rescission
would not conflict with any judgment or decree of any court of competent
jurisdiction. No such rescission shall affect any subsequent Default or Event
of Default or impair any right consequent thereto.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption
46
<PAGE>
provisions of the Indenture, an equivalent premium shall also become and be
immediately due and payable to the extent permitted by law upon the
acceleration of the Notes. If an Event of Default occurs prior to any date on
which the Company is prohibited from redeeming the Notes by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of the
Notes prior to such date, then the premium specified in the Indenture shall
also become immediately due and payable to the extent permitted by law upon
the acceleration of the Notes.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may, on behalf of the holders of all the Notes, waive any past
Default or Event of Default under the Indenture and its consequences, except
Default in the payment of principal of, premium, if any, or interest on the
Notes (other than the non-payment of principal of, premium, if any, and
interest on the Notes that has become due solely by virtue of an acceleration
that has been duly rescinded as provided above) or in respect of a covenant or
provision of the Indenture that cannot be modified or amended without the
consent of all holders of Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the holders of
not less than 66 2/3% in aggregate principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of 66 2/3% in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder) (i) reduce the
principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or, other than as set forth in the next paragraph, alter
the provisions with respect to the redemption of the Notes, (iii) reduce the
rate of or change the time for payment of interest on any Notes, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Indenture and the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Notes to receive payments
of principal of, premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note, (viii) make any change in the
foregoing amendment and waiver provisions or (ix) except as permitted by the
Indenture, increase the Conversion Price or, other than as set forth in the
next paragraph, modify the provisions of the Indenture relating to conversion
of the Notes in a manner adverse to the holders thereof. In addition, any
amendment to the provisions of Article XI of the Indenture (which relate to
subordination) will require the consent of the holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of holders of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to (i) cure any ambiguity, defect or inconsistency, (ii) provide for
uncertificated Notes in addition to or in place of certificated Notes, (iii)
provide for the assumption of the Company's obligations to holders of Notes in
the circumstances required under the Indenture as described under "Merger and
Consolidation" above, (iv) provide for conversion rights of holders of Notes
in certain events, such as a consolidation, merger or sale of all or
substantially all of the assets of the Company, (v) reduce the Conversion
Price, (vi) make any change that would provide any additional rights or
benefits to the holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such holder, or (vii) comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA.
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<PAGE>
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while Notes
remain outstanding if (i) all outstanding Notes will become due and payable at
their scheduled maturity within one year, or (ii) all outstanding Notes are
scheduled for redemption within one year, and, in either case, the Company has
deposited with the Trustee an amount sufficient to pay and discharge all
outstanding Notes on the date of their scheduled maturity or the scheduled
date of redemption.
GOVERNING LAW
The Indenture will provide that the Notes will be governed by, and construed
in accordance with, the laws of the State of New York, without giving effect
to applicable principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption or repurchase. Also, the Company is not required to
transfer or exchange any Note for a period of 15 days before a selection of
Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. In case an Event of Default shall occur (and shall not
be cured) and holders of the Notes have notified the Trustee of such event,
the Trustee will be required to exercise its powers with the degree of care
and skill of a prudent person in the conduct of such person's own affairs.
Subject to such provisions, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request of any of the
holders of Notes, unless they shall have offered to the Trustee security and
indemnity satisfactory to it.
The Indenture and the TIA will contain certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received in respect
of any such claim as security or otherwise. Subject to the TIA, the Trustee
will be permitted to engage in other transactions, provided, however, that if
it acquires any conflicting interest (as described in the TIA), it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means any particular Senior Debt in which the
instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party)
expressly provides that such Indebtedness shall be "Designated Senior Debt"
for purposes of the Indenture (provided that such instrument, agreement or
other document may place limitations and conditions on the right of such
Senior Debt to exercise the rights of Designated Senior Debt).
"Event of Default" has the meaning set forth under "Events of Default and
Remedies" above.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which principles are in effect from time to
time.
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"Indebtedness" means, with respect to any person, all obligations and other
liabilities, whether or not contingent, of such person: (i) (a) for borrowed
money (including, but not limited to, any indebtedness secured by a security
interest, mortgage or other lien on the assets of the Company that is (1)
given to secure all or part of the purchase price of property subject thereto,
whether given to the vendor of such property or to another, or (2) existing on
property at the time of acquisition thereof, (b) evidenced by a note,
debenture, bond or other written instrument, (c) under a lease required to be
capitalized on the balance sheet of the lessee under GAAP or under any lease
or related document (including a purchase agreement) that provides that the
Company is contractually obligated to purchase or cause a third party to
purchase and thereby guarantee a minimum residual value of the lease property
to the lessor and the obligations of the Company under such lease or related
document to purchase or to cause a third party to purchase such leased
property, (d) in respect of letters of credit, bank guarantees or bankers'
acceptances (including reimbursement obligations with respect to any of the
foregoing), (e) with respect to Indebtedness secured by a mortgage, pledge,
lien, encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance to which the property or assets of such person are subject,
whether or not the obligation secured thereby shall have been assumed by or
shall otherwise be such person's legal liability, (f) in respect of the
balance of deferred and unpaid purchase price of any property or assets, (g)
under interest rate or currency swap agreements, cap, floor and collar
agreements, spot and forward contracts and similar agreements and
arrangements; (ii) with respect to any obligation of others of the type
described in the preceding clause (i) or under clause (iii) below assumed by
or guaranteed in any manner by such person or in effect guaranteed by such
person through an agreement to purchase (including, without limitation, "take
or pay" and similar arrangements), contingent or otherwise (and the
obligations of such person under any such assumptions, guarantees or other
such arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements
to, any of the foregoing.
"Issue Date" means the date on which the Notes are issued under the
Indenture.
"Material Subsidiary" means, at any date of determination, any Subsidiary of
the Company that, together with its subsidiaries, as of the end of such fiscal
year, was the owner of more than 25% of the consolidated assets of the
Company, after eliminating any inter-company receivables of such Subsidiary,
all as set forth on the most recently available consolidated financial
statements of the Company and its consolidated Subsidiaries for such fiscal
year prepared in conformity with GAAP.
"Maturity Date" means October 1, 2003.
"Obligations" means any principal, interest, penalties and fees payable
under the documentation governing any Indebtedness.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
"Senior Debt" means the principal of, premium, if any, and interest
(including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on
or in connection with Indebtedness of the Company, whether outstanding on the
date of the Indenture or thereafter created, incurred, assumed, guaranteed or
in effect guaranteed by the Company (including all deferrals, renewals,
extensions or refundings of, or amendments, modifications or supplements to
the foregoing); provided, however, that Senior Debt does not include (i)
Indebtedness evidenced by the Notes, (ii) any liability for federal, state,
local or other taxes owed or owing by the Company, (iii) Indebtedness of the
Company to any Subsidiary of the Company except to the extent such
Indebtedness is of a type described in clause (ii) of the definition of
Indebtedness, (iv) trade payables of the Company (other than, to the extent
they may otherwise constitute trade payables, any obligations of the type
described in clause (ii) of the definition of Indebtedness), and (v) any
particular Indebtedness in which the instrument creating or evidencing the
same or the assumption or guarantee thereof (or related agreements or
documents to which the Company is a party) expressly provides that such
Indebtedness shall not be senior in right of payment to, or is pari passu
with, or is subordinated or junior to, the Notes.
49
<PAGE>
"Subsidiary" means, with respect to any person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of capital stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such person or one or more of the other subsidiaries of that
person (or a combination thereof), and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such person or a
subsidiary of such person or (b) the only general partners of which are such
person or of one or more subsidiaries of such person (or any combination
thereof).
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock. As of August 31, 1996, 8,105,237 shares
of Common Stock were outstanding and the Company had approximately 180
shareholders of record. No shares of Preferred Stock are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. In general and
subject to any voting rights applicable to any shares of Preferred Stock then
outstanding, the approval of proposals submitted to a vote of shareholders
requires a favorable vote of either the majority of the voting power of the
holders of Common Stock or the majority of the voting power of the shares
represented and voting at a duly held meeting at which a quorum is present.
Additionally, under California law, certain fundamental matters affecting the
Company may require a favorable vote of a greater percentage. The
shareholders, upon giving the notice required by law, may cumulate votes for
the election of directors. Under cumulative voting, each shareholder may give
one nominee, whose name is placed in nomination prior to the commencement of
voting, a number of votes equal to the number of directors to be elected,
multiplied by the number of votes to which a shareholder's shares are normally
entitled, or distribute such number of votes among as many nominees as the
shareholder sees fit. The effect of cumulative voting is that the holders of a
majority of the outstanding shares of Common Stock may not be able to elect
all of the Company's directors.
Subject to preferences that may be applicable to any shares of Preferred
Stock then outstanding, the holders of the shares of Common Stock will be
entitled to receive ratably such dividends, if any, as may be declared by the
Board out of legally available funds and to share pro rata in any distribution
to the shareholders, including any distribution upon liquidation of the
Company. However, the current policy of the Board is to retain earnings for
the operation of the Company's business, and the Company is currently
contractually limited in the amount of cash dividends it may pay. See
"Dividend Policy."
All outstanding shares of Common Stock are, and the shares of Common Stock
that would be issued upon the conversion of the Notes offered hereby will be,
upon payment therefor, validly issued, fully paid and non-assessable. The
shares of Common Stock are not subject to any conversion or redemption rights,
and have no preemptive rights or other rights to subscribe for additional
securities.
PREFERRED STOCK
The Board may, without further action of the shareholders of the Company,
issue shares of Preferred Stock in one or more series and fix the rights and
preferences thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series,
and increase or decrease the number of shares of any such series (but not
below the number of such shares then outstanding). The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the
rights of holders of any Preferred Stock that may be issued in the future.
Issuance of Preferred
50
<PAGE>
Stock provides desirable flexibility in connection with possible acquisitions
and other corporate purposes. However, the Board, without further shareholder
approval, can issue Preferred Stock with voting and conversion rights that
would adversely affect the voting power and other rights of the holders of
Common Stock. In addition, the Board can issue and sell shares of Preferred
Stock to designated persons, the impact of which could make it more difficult
for a holder of a substantial block of Common Stock to remove incumbent
directors or otherwise gain control of the Company. The Company has no present
plans to issue any shares of Preferred Stock.
RIGHTS AS A LISTED CORPORATION
The Company is a "listed corporation," as defined in the California General
Corporation Law. As a listed corporation, it has the right to amend its
Articles of Incorporation to divide its Board into two classes of directors or
eliminate cumulative voting, or both. Such amendment would require the
approval of shareholders of the Company holding a majority of the outstanding
shares of Common Stock. Hal J Krauter and Louis R. Adimare, directors of the
Company, own an aggregate of approximately 22% of the outstanding Common
Stock.
Any such classified board provision in the Company's Articles of
Incorporation might discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders. In addition,
the classified board provision could delay shareholders from removing a
majority of the Board for two years, unless they can show cause and obtain the
requisite vote. Without cumulative voting, a purchaser of a block of stock of
the Company constituting less than a majority of the outstanding shares will
have no assurance of proportional representation on the Board. Furthermore,
without cumulative voting, a person or group controlling the vote of a
majority of the shares of Common Stock of the Company could elect all of the
directors.
51
<PAGE>
CERTAIN TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relevant to original purchasers of the Notes. This discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect). This summary does not purport to discuss all aspects of
federal income taxation that may be relevant to a particular holder in light
of its individual investment circumstances or to certain types of holders
which may be subject to special tax rules (e.g., dealers in securities, banks,
insurance companies, tax-exempt organizations and non-United States persons).
In addition, this summary does not discuss any aspect of state, local or
foreign tax law and assumes that the holders will hold the Notes as "capital
assets" as defined in the Code (generally, property held for investment).
ALL PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND
CONCERNING ANY RECENTLY PROPOSED CHANGES IN APPLICABLE TAX LAWS.
INTEREST
Interest on the Notes should be taxable to the holders of the Notes as
ordinary interest income in accordance with each holder's method of accounting
for U.S. federal income tax purposes.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes on the conversion of a Note into shares of Common Stock. However, a
holder will recognize capital gain (or loss) with respect to cash paid in lieu
of a fractional share of Common Stock to the extent that the amount of such
cash exceeds (or is exceeded by) the portion of the adjusted basis of the Note
allocable to such fractional share. Such gain (or loss) will be long term if
the Note has been held for more than one year. The adjusted tax basis of
shares of Common Stock received on conversion will equal the adjusted tax
basis of the Note converted, reduced by the portion of the adjusted tax basis
allocated to any fractional share of Common Stock exchanged for cash. The
holding period of the shares of the Common Stock received on conversion will
include the holding period of the Note converted.
CONSTRUCTIVE DIVIDEND
The conversion price of the Notes is subject to adjustment under certain
circumstances. Certain adjustments in the conversion price that may occur in
limited circumstances (particularly adjustments to reflect a taxable dividend
to holders of Common Stock) may be deemed to constitute a constructive
distribution if and to the extent that such adjustments increase the
proportionate interest of a holder in the fully diluted Common Stock, whether
or not such holder ever exercises its conversion privilege. Such a
constructive distribution will result in ordinary income to holders (subject
to a possible dividends received deduction in the case of corporate holders)
to the extent of the Company's current and accumulated earnings and profits.
For example, a decrease in the conversion price in the event of distributions
of evidences of indebtedness or assets to holders of Common Stock will
generally result in deemed dividend treatment to holders, whereas a decrease
in the event of stock dividends or the distribution of rights to subscribe for
Common Stock generally will not.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
In general, a holder will recognize gain or loss upon the sale, exchange,
redemption, retirement or other disposition of a Note measured by the
difference (if any) between (i) the amount of cash and the fair market value
of any property received (except to the extent that such cash or other
property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis of the Note. Any such gain or loss would be
long-term capital gain or loss if the
52
<PAGE>
Note has been held for more than one year at the time of the sale or exchange.
A holder's initial tax basis in a Note will be the cash price it paid
therefor.
DIVIDENDS
Dividends paid on shares of Common Stock received upon conversion of a Note
will be taxable to a holder as ordinary income, to the extent paid out of the
Company's current or accumulated earnings and profits. Subject to certain
restrictions, dividends received by a corporate a holder generally should be
eligible for the 70% dividends received deduction.
SALE OF COMMON STOCK
A holder of Common Stock received on conversion of a Note who sells or
otherwise disposes of such stock in a taxable transaction will recognize
capital gain or loss equal to the difference between the cash and the fair
market value of any property received on such sale and the holder's tax basis
in such stock. Such gain or loss will be long-term gain or loss if the holding
period for such Common Stock was more than one year.
BACKUP WITHHOLDING
A holder may be subject to "backup withholding" at a rate of 31% with
respect to certain "reportable payments", including interest payments and,
under certain circumstances, principal payments on the Notes, proceeds of a
sale of the Notes, and dividends on, and proceeds from the sale of, the Common
Stock received on conversion of the Notes. These backup withholding rules
apply if the holder, among other things, (i) fails to furnish a social
security number or other taxpayer identification number ("TIN") within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties
of perjury, that the TIN furnished is the correct number and that such holder
is not subject to backup withholding. A holder who does not provide the
Company with its correct TIN also may be subject to penalties imposed by the
IRS. Any amount withheld from a payment to a holder under the backup
withholding rules is refundable or creditable against the holder's federal
income tax liability, provided that the required information is furnished to
the IRS. Backup withholding will not apply, however, with respect to payments
made to certain holders, including corporations, tax-exempt organizations and
certain foreign persons, provided their exemption from backup withholding is
properly established.
SHARES ELIGIBLE FOR FUTURE SALE
At the time of the offering, approximately 6,268,287 shares of Common Stock
(excluding the shares of Common Stock issuable upon the conversion of the
Notes) will be outstanding and freely transferable without restriction. The
Company and each of the Company's directors and officers have agreed that, for
a period of 90 days after the date of this Prospectus, they will not directly
or indirectly, offer, sell, offer to or contract to sell, pledge, grant any
option to purchase or otherwise sell or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option
to purchase or sell or other sale or disposition) of any Common Stock or any
securities convertible or exchangeable or exercisable therefor, or other
capital stock of the Company or any right or option to acquire Common Stock or
other capital stock of the Company without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters. At the end
of such 90-day period, approximately 1,922,158 shares subject to such lock-up
agreements will become eligible for sale, subject, with respect to
approximately 1,836,950 of those shares, to the provisions of Rule 144.
In general, under Rule 144 a person (or persons whose shares must be
aggregated for purposes of the volume limitation under the rule), including
any affiliate, who has beneficially owned shares for at least two years
53
<PAGE>
would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the outstanding shares of the Common
Stock (approximately 80,000 shares) or the reported average weekly trading
volume of the Common Stock in the over-the-counter market for the four weeks
preceding the sale. Sales under Rule 144 are also subject to certain manner of
sale restrictions and notice requirements and to the availability of current
public information about the Company. Affiliates are also subject to the
volume and other limitations with respect to all shares held by them
regardless of whether such shares are restricted shares. Persons who have not
been affiliates of the Company for at least three months, or who have held
their shares for more than three years, are entitled to sell such shares
without any volume limitations, in reliance upon paragraph (k) of Rule 144.
No predictions can be made as to the effect, if any, that possible future
sales of the Notes, the issuance of Common Stock upon conversion of the Notes
or possible future sales of shares of Common Stock by present or future
shareholders or by persons who exercise options under either of the Company's
stock option plans will have on the market price of the Common Stock
prevailing from time to time. See "Security Ownership of Management and
Principal Shareholders." Sales of substantial amounts of the Common Stock in
the public market, including any future public offering of such stock, or the
"overhang" of significant numbers of shares that might be sold by affiliates
or other holders of such shares or the Notes, could adversely affect
prevailing market prices and could impair the Company's future ability to
issue capital through an offering of its capital securities.
If the Company proposes to register any of its securities for sale under the
Securities Act, for either its own account or the account of others, pursuant
to a firm commitment underwritten public offering, each of Hal Krauter, Louis
Adimare and George Bragg, directors of the Company, is entitled to notice of
such registration and to include their shares therein. These rights are
subject to certain conditions, including the right of the Company to exclude
or limit the number of shares included in such registration if the
underwriters determine that marketing conditions so require. A total of
approximately 1,836,950 shares of Common Stock are subject to these
registration rights.
54
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Smith Barney Inc. are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the
Company the aggregate principal amount of Notes set forth opposite their
respective names below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- -----------
<S> <C>
Prudential Securities Incorporated.............................. $31,250,000
Smith Barney Inc................................................ 31,250,000
-----------
Total......................................................... $62,500,000
===========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Notes offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company they
propose to offer the Notes initially at the public offering price set forth on
the cover page of this Prospectus; that the Underwriters may allow to selected
dealers a concession of 0.18% of the principal amount of the Notes; and that
such dealers may reallow a concession of 0.025% of the principal amount of the
Notes to certain other dealers. After the initial public offering, the
offering price and the concession may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an additional $9,375,000
in aggregate principal amount of Notes at the initial public offering price,
less underwriting discount and commissions, as set forth on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the Notes offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will be obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional Notes as the number set forth next to
such Underwriter's name in the preceding table bears to $62,500,000.
The Company and each of the Company's directors and officers have agreed
that, for a period of 90 days after the date of this Prospectus, they will
not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any Common
Stock or any securities convertible into or exchangeable or exercisable
therefore, or other capital stock of the Company or any right to purchase or
acquire Common Stock or other capital stock of the Company without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters.
The Company has agreed to indemnify the Underwriters or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The legality of the Notes being offered hereby and the Common Stock of the
Company to be issued upon the conversion of the Notes has been passed upon for
the Company by Brown & Bain, P.A., Palo Alto, California. Certain legal
matters will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Palo Alto, California. Douglas Clark Neilsson, Esq., who is Of
Counsel with Brown & Bain, P.A. and acts as the General Counsel of the
Company, owns 2,850 shares of the Common Stock and holds options, under the
Company's stock option plans, to acquire an aggregate of 35,750 shares of
Common Stock.
55
<PAGE>
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995 of Leasing
Solutions, Inc. included and incorporated by reference in this Prospectus and
the related financial statement schedule also incorporated by reference in the
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and also incorporated by
reference in the Registration Statement, and are included and incorporated in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
56
<PAGE>
LEASING SOLUTIONS, INC.
----------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheets for the Years ended December 31, 1994 and
1995 and for the Six Months ended June 30, 1996...................... F-3
Consolidated Income Statements for the Years ended December 31, 1993,
1994 and 1995 and for the Six Months ended June 30, 1995 and 1996.... F-4
Consolidated Statements of Shareholders' Equity for the Years ended
December 31, 1993, 1994 and 1995 and for the Six Months ended June
30, 1996............................................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1993, 1994 and 1995 and for the Six Months ended June 30, 1995 and
1996................................................................. F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
LEASING SOLUTIONS INC. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Leasing Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Leasing
Solutions, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Leasing Solutions, Inc. and
subsidiary at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 26, 1996
F-2
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND
JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 11,706,000 $ 8,423,000 $ 8,152,000
Accounts receivable..................... 2,413,000 4,068,000 11,589,000
Investment in direct finance leases-net. 22,365,000 18,461,000 19,255,000
Investment in operating leases-net...... 102,256,000 190,022,000 272,089,000
Property and equipment-net.............. 935,000 1,527,000 1,715,000
Other assets............................ 1,689,000 1,601,000 2,017,000
------------ ------------ ------------
TOTAL ASSETS.......................... $141,364,000 $224,102,000 $314,817,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable-equipment purchases.... $ 11,877,000 $ 19,376,000 $ 1,846,000
Accrued and other liabilities........... 3,633,000 5,709,000 8,484,000
Income taxes payable.................... 916,000 553,000 75,000
Recourse debt........................... 9,897,000 71,681,000 118,728,000
Nonrecourse debt........................ 89,594,000 93,354,000 123,264,000
Capital lease obligations............... 50,000 143,000 --
Deferred income taxes................... 959,000 2,374,000 4,697,000
------------ ------------ ------------
TOTAL LIABILITIES..................... 116,926,000 193,190,000 257,094,000
------------ ------------ ------------
COMMITMENTS (Note 8) -- -- --
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000
shares; none outstanding................ -- -- --
Common stock, authorized 20,000,000
shares; shares outstanding: 1994--
6,136,929; 1995--6,263,930; and 1996--
8,099,082.............................. 14,115,000 14,661,000 37,342,000
Retained earnings....................... 10,323,000 16,251,000 20,361,000
Accumulated translation adjustment...... -- -- 20,000
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY.............. 24,438,000 30,912,000 57,723,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $141,364,000 $224,102,000 $314,817,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Operating lease
revenue.............. $39,908,000 $53,886,000 $77,046,000 $34,752,000 $58,014,000
Earned lease income... 6,603,000 4,256,000 2,885,000 1,513,000 1,146,000
Operating lease
revenue--related
party................ 1,547,000 330,000 -- -- --
Gain on sale of lease
equipment............ 2,416,000 1,103,000 271,000 206,000 88,000
Interest income....... 239,000 327,000 462,000 237,000 327,000
Other................. 105,000 185,000 12,000 5,000 289,000
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES...... 50,818,000 60,087,000 80,676,000 36,713,000 59,864,000
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Depreciation--
operating leases..... 29,830,000 37,781,000 51,164,000 23,557,000 39,035,000
Selling, general and
administrative....... 7,435,000 7,294,000 8,584,000 4,077,000 5,419,000
Interest.............. 7,701,000 6,523,000 10,428,000 4,506,000 7,738,000
Other................. 391,000 837,000 641,000 279,000 716,000
----------- ----------- ----------- ----------- -----------
TOTAL COSTS AND
EXPENSES........... 45,357,000 52,435,000 70,817,000 32,419,000 52,908,000
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES.................. 5,461,000 7,652,000 9,859,000 4,294,000 6,956,000
PROVISION FOR INCOME
TAXES.................. 2,242,000 3,060,000 3,931,000 1,718,000 2,846,000
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 3,219,000 $ 4,592,000 $ 5,928,000 $ 2,576,000 $ 4,110,000
=========== =========== =========== =========== ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT
SHARE.................. $.66 $.75 $.93 $.41 $.53
=========== =========== =========== =========== ===========
COMMON AND COMMON
EQUIVALENT SHARES...... 8,099,082 6,096,000 6,373,000 6,241,000 7,727,000
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1,
1993 .................. 3,931,688 $ 1,197,000 $ 2,547,000 $ 3,744,000
Issuance of common
stock................ 1,000,000 3,916,000 -- 3,916,000
Exercise of stock
options.............. 184,638 65,000 -- 65,000
Repurchase of common
stock................ (73,892) (3,000) (35,000) (38,000)
Tax benefit of stock
option transactions.. -- 193,000 -- 193,000
Net income............ -- -- 3,219,000 3,219,000
--------- ----------- ----------- -----------
BALANCES, December 31,
1993................... 5,042,434 5,368,000 5,731,000 11,099,000
Issuance of common
stock................ 1,009,190 8,564,000 -- 8,564,000
Exercise of stock
options.............. 85,305 78,000 -- 78,000
Tax benefit of stock
option transactions.. -- 105,000 -- 105,000
Net income............ -- -- 4,592,000 4,592,000
--------- ----------- ----------- -----------
BALANCES, December 31,
1994................... 6,136,929 14,115,000 10,323,000 24,438,000
Issuance of common
stock................ 10,122 87,000 -- 87,000
Exercise of stock
options.............. 116,879 190,000 -- 190,000
Tax benefit of stock
option transactions.. -- 269,000 -- 269,000
Net income............ -- -- 5,928,000 5,928,000
--------- ----------- ----------- -----------
BALANCES, December 31,
1995................... 6,263,930 14,661,000 16,251,000 30,912,000
Issuance of common
stock*............... 1,804,455 22,556,000 -- 22,556,000
Exercise of stock
options*............. 30,697 125,000 -- 125,000
Foreign currency
translation
adjustment*.......... -- -- $20,000 20,000
Net income*........... 4,110,000 4,110,000
--------- ----------- ----------- ------- -----------
BALANCES, June 30,
1996*.................. 8,099,082 $37,342,000 $20,361,000 $20,000 $57,723,000
========= =========== =========== ======= ===========
</TABLE>
- --------
* Unaudited
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 3,219,000 $ 4,592,000 $ 5,928,000 $ 2,576,000 $ 4,110,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 29,897,000 38,136,000 51,655,000 23,765,000 39,350,000
Provision for
uncollectible
amounts............... 60,000 5,000 -- -- 25,000
Deferred income taxes.. (1,021,000) 820,000 1,415,000 (709,000) 2,323,000
Changes in assets and
liabilities:
Accounts receivable.. (601,000) (157,000) (1,655,000) (264,000) (7,521,000)
Other assets......... (285,000) (1,018,000) 88,000 (444,000) (416,000)
Accounts payable -
equipment purchases. 6,187,000 5,334,000 7,499,000 (7,599,000) (17,530,000)
Accrued and other
liabilities......... 1,691,000 (351,000) 2,076,000 1,360,000 2,775,000
Income taxes
receivable and
payable............. 2,225,000 (1,553,000) (94,000) (211,000) (478,000)
Other................ -- -- -- -- 20,000
----------- ----------- ------------ ----------- ------------
Net cash provided by
operating activities... 41,372,000 45,808,000 66,912,000 18,474,000 22,658,000
----------- ----------- ------------ ----------- ------------
INVESTING ACTIVITIES
Property and equipment
purchases.............. (386,000) (636,000) (921,000) (144,000) (503,000)
Cash received over
revenue recognized..... 34,691,000 17,052,000 14,356,000 6,153,000 5,932,000
Cost of equipment
acquired for lease..... (65,777,000) (82,980,000) (149,382,000) (45,968,000) (127,853,000)
Cost of equipment
acquired for lease-
related party.......... (21,478,000) (2,588,000) -- -- --
----------- ----------- ------------ ----------- ------------
Net cash used for
investing activities... (52,950,000) (69,152,000) (135,947,000) (39,959,000) (122,424,000)
----------- ----------- ------------ ----------- ------------
FINANCING ACTIVITIES
Borrowings:
Nonrecourse............ 69,390,000 114,600,000 61,307,000 20,848,000 63,466,000
Recourse............... 24,866,000 76,428,000 105,597,000 42,982,000 160,493,000
Repayments:
Nonrecourse............ (58,590,000) (93,884,000) (57,547,000) (28,524,000) (33,556,000)
Recourse............... (25,440,000) (74,034,000) (43,813,000) (18,152,000) (113,446,000)
Issuance of common stock
- net of repurchases... 4,136,000 8,747,000 277,000 166,000 22,681,000
Repayment of capital
lease obligations...... (44,000) (50,000) (69,000) (46,000) (143,000)
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities... 14,318,000 31,807,000 65,752,000 17,274,000 99,495,000
----------- ----------- ------------ ----------- ------------
INCREASE (DECREASE) IN
CASH AND
CASH EQUIVALENTS....... 2,740,000 8,463,000 (3,283,000) (4,211,000) (271,000)
CASH AND CASH
EQUIVALENTS
Beginning of period.... 503,000 3,243,000 11,706,000 11,706,000 8,423,000
----------- ----------- ------------ ----------- ------------
End of period.......... $ 3,243,000 $11,706,000 $ 8,423,000 $ 7,495,000 $ 8,152,000
=========== =========== ============ =========== ============
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Note receivable
converted to
operating lease....... $ 2,132,000
===========
</TABLE>
F-6
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
1. THE BUSINESS
Leasing Solutions, Inc. (the "Company") was incorporated in California and
commenced operations in July 1986. The Company is principally a vendor leasing
company engaged in the business of leasing information processing and
communications equipment, primarily to large, domestic, creditworthy customers
in a variety of industries. In January 1994, the Company formed a wholly-owned
subsidiary, Leasing Solutions Receivables, Inc., as a special purpose
corporation to issue debt securities collateralized by lease receivables and
the underlying leased equipment.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial information as of June 30, 1996, and with respect to the six
months ended June 30, 1995 and 1996, included in these financial statements,
and the related information disclosed in these footnotes, are unaudited. In
the opinion of management, such information contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of such periods. The results of operations for the
six months ended June 30, 1996 are not necessarily indicative of the results
to be expected for the entire year.
Principles of consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Leasing Solutions
Receivables, Inc., after elimination of intercompany accounts and
transactions.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. Actual results
could differ from those estimates.
Cash and cash equivalents--Cash equivalents are highly liquid debt
instruments with a remaining maturity of three months or less from date of
purchase by the Company. At December 31, 1994, December 31, 1995, and June 30,
1996, $3,832,000, $3,983,000 and $5,060,000, respectively, of such amount was
restricted in connection with certain debt securities issued by the Company
and was not available for other uses (see Note 7).
Investment in direct finance leases--Lease contracts (whether financed with
recourse or nonrecourse debt) which meet the appropriate criteria specified in
Statement of Financial Accounting Standards (SFAS) No. 13 are classified as
direct finance leases. Direct finance leases are recorded upon acceptance of
the equipment by the customer. Original unearned lease income represents the
excess of the gross lease receivable and estimated residual value over the
equipment cost. Unearned lease income is recognized as revenue (earned lease
income) over the lease term at a constant rate of return on the net investment
in the lease.
Investment in operating leases--Leases which do not meet the criteria of
direct finance leases are accounted for as operating leases. Leased equipment
is recorded at cost and depreciated over the lease term, to the estimated
residual value at the expiration of the lease term, generally on a straight-
line basis. Purchased portfolios of certain leases are depreciated on an
accelerated method. The Company reviews estimated net realizable values on a
regular basis and adjustments are made as necessary.
Initial direct costs are capitalized and amortized over the original lease
term.
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives, which range from three
to five years.
F-7
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets to be Disposed of" effective January 1, 1995. The adoption of
this statement had no effect on the Company's financial condition or results
of operations.
Income taxes--Deferred income taxes are provided for temporary differences
between financial statement and income tax reporting, in accordance with SFAS
No. 109.
Net income per share--Net income per common and common equivalent share is
computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents (stock options and warrants)
outstanding during the year. The difference between primary and fully diluted
net income per share is not significant in any year.
Recently Issued Accounting Standard--In October 1995, The Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments, such as stock purchase plans. The
new standard permits companies to continue to account for equity transactions
with employees under existing accounting rules, but requires disclosure in a
note to the financial statements of the pro-forma net income and earnings per
share as if the Company had applied the new method of accounting. The Company
intends to follow these disclosure requirements for its employee stock plans.
As a result, adoption of the new standard will not impact reported earnings or
earnings per share, and will have no effect on the Company's cash flows.
Reclassifications--Certain items have been reclassified in the prior period
financial statements to conform to the 1995 presentation and had no effect on
net income or shareholders equity.
3. INVESTMENT IN DIRECT FINANCE LEASES
Investment in direct finance leases represents equipment leased for up to
five years. The components of the net investment in direct finance leases, as
of December 31, 1994 and 1995 and June 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Minimum lease payments receivable.... $24,984,000 $19,832,000 $20,386,000
Estimated unguaranteed residual
value................................ 876,000 1,372,000 1,658,000
Initial direct costs--net............ 59,000 73,000 30,000
Unearned lease income................ (3,554,000) (2,816,000) (2,819,000)
----------- ----------- -----------
Investment in direct finance leases--
net.................................. $22,365,000 $18,461,000 $19,255,000
=========== =========== ===========
</TABLE>
Interest rates implicit in the leases generally range from 5% to 22%.
During 1993, an unaffiliated lessee and the Company mutually agreed to
extend certain leases for a five-month period. As a result of this extension,
the Company has no further residual interest in the equipment. The
unaffiliated lessee referred to above has the right to prepay both the
original lease payments and the extended lease payments of the leases it has
with the Company. In 1993, the lessee prepaid and purchased certain leases
with a net book value of $13,394,000, resulting in a $1,532,000 gain on sale.
In 1994, the lessee prepaid portions of certain leases in the aggregate amount
of $4,000,000, which did not result in any gain or loss on sale. As of
December 31, 1994 and 1995, the net book value of leases subject to this
prepayment arrangement was $13,308,000 and $5,262,000, respectively.
F-8
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
4. INVESTMENT IN OPERATING LEASES
Investment in operating leases primarily represents equipment leased for two
to three years. The components of the net investment in operating leases, as
of December 31, 1994 and 1995 and June 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Equipment under operating
leases......................... $ 175,079,000 $ 301,255,000 $ 417,583,000
Initial direct costs--net...... 674,000 1,664,000 2,324,000
Accumulated depreciation....... (73,310,000) (112,784,000) (147,680,000)
Allowance for doubtful
accounts....................... (187,000) (113,000) (138,000)
------------- ------------- -------------
Investment in operating
leases--net.................... $ 102,256,000 $ 190,022,000 $ 272,089,000
============= ============= =============
</TABLE>
5. FUTURE MINIMUM LEASE PAYMENTS
Future minimum lease payments to be received by the Company on direct
finance leases and noncancelable operating leases, as of December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCE
YEARS ENDED DECEMBER 31 LEASES OPERATING LEASES
----------------------- -------------- ----------------
<S> <C> <C>
1996......................................... $10,854,000 $ 78,842,000
1997......................................... 4,315,000 55,565,000
1998......................................... 3,054,000 25,151,000
1999......................................... 1,504,000 4,092,000
2000......................................... 105,000 591,000
----------- ------------
Total.................................... $19,832,000 $164,241,000
=========== ============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment, as of December 31, 1994 and 1995, consist of:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Equipment and software ............................ $ 1,530,000 $ 2,399,000
Furniture.......................................... 219,000 245,000
----------- -----------
Total.............................................. 1,749,000 2,644,000
Accumulated depreciation........................... (814,000) (1,117,000)
----------- -----------
Property and equipment--net........................ $ 935,000 $ 1,527,000
=========== ===========
</TABLE>
7. DEBT AND CREDIT FACILITIES
The Company and its wholly-owned subsidiary, Leasing Solutions Receivables,
Inc. (the "Subsidiary") utilize their lease receivables and the underlying
leased equipment as collateral to obtain debt financing on either a recourse
or nonrecourse basis for the acquisition of equipment for lease. Principal and
interest payments on the debt are generally due monthly in amounts that are
approximately equal to the total payments due from the lessee under the leases
that collateralize the debt. Under recourse financing, in the event of a
default by a lessee, the lender has recourse against the lessee, the equipment
serving as collateral, and the borrower. Under nonrecourse financing, in the
event of a default by a lessee, the lender generally only has recourse against
the lessee and the equipment serving as collateral, but not against the
borrower.
F-9
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Prior to 1994, the Company obtained debt financing for its leasing activity
primarily from banks, insurance and finance companies, and financial
intermediaries. In 1994, the Company, through the Subsidiary, initiated a
program to provide long-term, permanent financing for a substantial portion of
its leasing activity through the issuance of nonrecourse debt securities. Such
financing is generally known as a securitization.
On an interim basis, prior to a portfolio of leases being permanently
financed under a securitization, or other long-term loan agreement, the
Company finances its lease transactions under short-term, secured, recourse
credit facilities. The Company has the following such short-term facilities in
place as of December 31, 1995:
. a $92,500,000 revolving facility ($51,009,000 outstanding at December 31,
1995) syndicated with eight banks, expiring September 13, 1996.
Borrowings under the facility bear an interest rate, at the Company's
option, of the agent bank's prime rate (8.50% at December 31, 1995) or
LIBOR (5.77% at December 31, 1995) plus 150 basis points.
. a $10,000,000 revolving facility ($5,637,000 outstanding at December 31,
1995) with one bank, with borrowing available through June 30, 1996, and
repayments due 240 days after each borrowing. Borrowings under the
facility bear interest at the federal funds rate (5.33% at December 31,
1995) plus 240 basis points.
. a $3,000,000 revolving facility (all outstanding at December 31, 1995)
with one bank expiring July 26, 1996. Borrowings under the facility bear
interest at the bank's prime rate (8.50% at December 31, 1995) plus 75
basis points. In addition to interim financing of lease transactions,
proceeds borrowed under this facility are available for general corporate
purposes.
. an $11,000,000 revolving facility ($7,500,000 outstanding at December 31,
1995) with one bank, expiring September 20, 1996. Borrowings under the
facility bear interest at the bank's prime rate (8.50% at December 31,
1995) plus 100 basis points. In addition to interim financing of lease
transactions, proceeds under this facility are available for general
corporate purposes.
Borrowings under the above facilities are generally secured by lease
receivables and the underlying equipment financed under the respective
facility. The agreements for the facilities contain covenants regarding
leverage, interest coverage, minimum net worth and profitability and a
limitation on the payment of dividends. As of December 31, 1994, the Company
had $9,159,000 outstanding under similar facilities. The Company maintains
relationships with several other banks for additional recourse financing. At
December 31, 1994 and 1995, the Company had $738,000 and $4,535,000 (bearing
interest at rates ranging from 7.3% to 10.5%) outstanding under facilities
from such sources. Operating and direct finance leases and the related
underlying leased equipment serving as collateral for the above secured
borrowings had an aggregate net book value of $70,782,000 at December 31,
1995.
In order to issue nonrecourse, lease-backed debt securities to permanently
finance its lease transactions, the Subsidiary filed a $150,000,000 shelf
registration statement with the Securities and Exchange Commission in January
1994. Securities issued under this registration are collateralized by the
lease receivables financed by such securities and residual proceeds of the
underlying equipment and are backed by credit enhancement provided by a
national bond guarantor. The Subsidiary had two issuances under the shelf
registration in 1994. The first was for $36,685,000, issued in April 1994 at a
coupon rate of 5.575%, and is due through March 1998, with $21,244,000 and
$6,892,000 (including accrued interest) outstanding at December 31, 1994 and
1995, respectively. The second was for $37,499,000, issued in December 1994 at
a coupon rate of 8.075%, and is due through October 1999, with $37,625,000 and
$20,360,000 (including accrued interest) outstanding at
F-10
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
December 31, 1994 and 1995, respectively. Of the April 1994 issuance,
$30,046,000 was used to refinance existing recourse and nonrecourse debt with
various financial institutions. Covenants for the securities include certain
restrictions on the use of cash and restrictions on the sale or transfer of
assets. Cash restrictions include requirements that (a) all rent received by
the Subsidiary from leases collateralizing the securities be held in trust and
used for repayment of the securities, and (b) a reserve account be
established, in a maximum amount of $2,046,000, to be used to repay, in the
event of a default by a lessee, any outstanding balance under the securities
relating to such defaulted lease if proceeds from the sale of the related
underlying equipment was not sufficient to repay such balance. At December 31,
1994, and 1995, $2,526,000 and $1,501,000 of lease receipts were held in trust
and an additional $1,306,000 and $2,482,000, respectively, were held in the
reserve account. These amounts were unavailable for other uses.
In 1995 the Company issued $17,500,000 of nonrecourse subordinated debt at a
coupon rate of 9.71% due through May 1998. Borrowings under this arrangement
are to be repaid from expected residuals from portfolios of equipment subject
to the two public securitizations and are secured by the residual cash flows
from such portfolios. At December 31, 1995, the Company had $16,541,000
outstanding under this arrangement. The residual interests securing this
borrowing had a net book value of $17,683,000 at December 31, 1995.
The Company continues to maintain relationships with banks, insurance and
finance companies, and financial intermediaries as additional nonrecourse,
permanent financing sources. At December 31, 1994 and 1995, the Company had
$30,725,000 and $49,561,000, respectively, outstanding under facilities from
such sources at debt rates ranging from 5% to 13%.
Collateral for nonrecourse debt includes $105,878,000 and $112,790,000 of
net investment in direct finance and operating leases and related underlying
leased equipment at December 31, 1994 and 1995, respectively.
Future maturities of nonrecourse and recourse debt are as follows:
<TABLE>
<CAPTION>
NONRECOURSE RECOURSE
YEARS ENDED DECEMBER 31 DEBT DEBT
----------------------- ----------- -----------
<S> <C> <C>
1996................................................. $50,230,000 $71,681,000
1997................................................. 32,308,000 --
1998................................................. 10,478,000 --
1999................................................. 338,000 --
----------- -----------
Total............................................ $93,354,000 $71,681,000
=========== ===========
</TABLE>
Cash paid for interest in 1993, 1994 and 1995 was $7,417,000, $7,233,000 and
$10,294,000, respectively.
F-11
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
8. COMMITMENTS
The Company leases its facilities under noncancelable operating leases
expiring through 2000. Rent expense for 1993, 1994 and 1995 was $351,000,
$377,000 and $377,000, respectively.
Future minimum annual rental payments for all leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31 LEASES LEASES
------------------------ ------- ----------
<S> <C> <C>
1996................................................... $ 57,000 $ 513,000
1997................................................... 57,000 516,000
1998................................................... 51,000 510,000
1999................................................... -- 505,000
2000................................................... -- 506,000
-------- ----------
Total................................................. 165,000 $2,550,000
======== ==========
Amount representing interest........................... (22,000)
--------
Present value of minimum lease payments................ $143,000
========
</TABLE>
9. RELATED PARTY TRANSACTIONS
Prior to February 1994, Memorex Telex Corporation was a significant
shareholder of the Company. In February 1994, Memorex Telex sold its entire
remaining interest in the Company, at which point they were no longer a
related party. The Company has an agreement with Memorex Telex which
designates the Company as a lease financing source for Memorex Telex products.
The Company's sales force works directly with Memorex Telex to provide leases
for Memorex Telex customers and to secure agreements for the extension, re-
lease, or sale of such equipment to initial and/or subsequent customers. The
parties will share the net remarketing proceeds generated after the original
equipment cost and related fees are fully recovered by the Company, at an
agreed upon rate of return.
Transactions between Memorex Telex and the Company included purchases of
equipment for lease by the Company with aggregate purchase prices of
$2,588,000 and $21,478,000 through February 1994 and during 1993.
Memorex Telex, as a lessee, had lease transaction obligations with the
Company at December 31, 1993, with an underlying investment of $1,303,000. All
such obligations were fully paid in 1994. Through February 1994 and during
1993, the Company recognized $330,000 and $1,547,000 in operating lease
revenue from lease transactions with Memorex Telex. In addition, the Company
recognized interest income of $134,000 in 1993 from lease transactions with
Memorex Telex.
F-12
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
10. INCOME TAXES
The provision for income taxes at December 31 consists of:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $2,536,000 $1,749,000 $1,984,000
State.................................... 727,000 491,000 532,000
---------- ---------- ----------
Total current.............................. 3,263,000 2,240,000 2,516,000
---------- ---------- ----------
Deferred:
Federal.................................. (763,000) 385,000 1,236,000
State.................................... (258,000) 435,000 179,000
---------- ---------- ----------
Total deferred............................. (1,021,000) 820,000 1,415,000
---------- ---------- ----------
Total provision............................ $2,242,000 $3,060,000 $3,931,000
========== ========== ==========
</TABLE>
The cumulative items giving rise to deferred taxes at December 31 were as
follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liability:
Lease transactions treated differently for tax
and financial reporting........................ $(4,157,000) $(8,896,000)
----------- -----------
Deferred tax assets:
Alternative minimum tax credits................. 2,631,000 5,890,000
State income tax................................ 450,000 471,000
Other........................................... 117,000 161,000
----------- -----------
Total deferred tax asset......................... 3,198,000 6,522,000
----------- -----------
Net deferred tax liability....................... $ (959,000) $(2,374,000)
=========== ===========
</TABLE>
The effective tax rate differs from the federal statutory income tax rate as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate ............................................ 35.0% 35.0% 35.0%
State taxes, net of federal effect......................... 3.8 4.9 4.8
Other...................................................... 2.3 0.1 0.1
---- ---- ----
Total...................................................... 41.1% 40.0% 39.9%
==== ==== ====
</TABLE>
Cash paid for income taxes in 1993, 1994, and 1995 $381,000, $3,666,000, and
$2,687,000, respectively.
11. SHAREHOLDERS' EQUITY
Stock Option Plans--The Company's stock option plans provide that incentive
and nonqualified stock options to purchase up to an aggregate of 1,840,000
shares of the common stock of the Company may be granted to key contributors
to the Company, including officers, directors and employees. Options are
granted at the fair market value of the common stock as of the date of grant,
as determined by the Board of Directors. Options generally become exercisable
ratably over three or four years and expire five or ten years from the grant
date.
F-13
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
At December 31, 1995, the Company had reserved 853,676 shares for issuance
under these plans.
Activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE TOTAL
--------- -------------- ----------
<S> <C> <C> <C>
Outstanding, January 1, 1993 .......... 418,355 $ .10 - 2.50 $ 267,000
Granted.............................. 66,900 4.00 - 5.00 309,000
Exercised............................ (184,638) .10 - 2.50 (65,000)
Canceled............................. (11,100) .50 - 1.25 (9,000)
-------- -------------- ----------
Outstanding, December 31, 1993......... 289,517 .50 - 5.00 502,000
Granted.............................. 164,450 6.50 - 10.00 1,329,000
Exercised............................ (85,305) .50 - 4.50 (78,000)
Canceled............................. (15,960) .50 - 10.00 (66,000)
-------- -------------- ----------
Outstanding, December 31, 1994......... 352,702 .50 - 9.75 1,687,000
Granted.............................. 259,725 7.25 - 15.25 2,165,000
Exercised............................ (116,879) .50 - 9.50 (191,000)
Canceled............................. (19,174) 1.00 - 10.13 (128,000)
-------- -------------- ----------
Outstanding, December 31, 1995......... 476,374 $ .50 - 15.25 $3,533,000
======== ============== ==========
</TABLE>
At December 31, 1995, options to purchase 147,241 shares were exercisable
and options for 377,302 shares were available for future grant under the Stock
Option Plans.
At December 31, 1995, warrants to purchase 66,667 shares were exercisable at
$6.00 per share. These warrants expire in April 1998.
Stock Purchase Plans--In 1994, the shareholders of the Company approved the
1994 Employee Stock Purchase Plan (the "ESPP") under which 200,000 shares of
the Company's common stock were reserved for issuance. The ESPP permits
virtually all employees to purchase common stock, through payroll deductions,
at the lower of (a) 85% of the fair market value of the common stock on the
first day of each twelve-month offering period, or (b) 85% of the fair market
value of the common stock on the applicable exercise date. Each offering
period has two six-month exercise periods with the last day of each exercise
period being an exercise date. During 1994 and 1995, employees purchased 9,190
and 10,122 shares, respectively, under the ESPP for a total purchase price of
$87,000 and $64,000, respectively. At December 31, 1995, the Company had
reserved 180,688 shares for issuance under the ESPP.
12. SIGNIFICANT CUSTOMER
One customer accounted for 19% of the Company's revenues in 1993. No
customer accounted for more than 10% of the Company's revenues in 1994. Two
customers accounted for 11% and 10% of the Company's revenues in 1995.
F-14
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's
financial instruments is in accordance with the provisions of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The valuation methods
used by the Company are set forth below.
The accuracy and usefulness of the fair value information disclosed herein
is limited by the following factors:
. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
. These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holding of a
particular financial asset.
. SFAS No. 107 excludes from its disclosure requirements lease contracts
and various significant assets and liabilities that are not considered to
be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of the
Company.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Assets:
Cash............................................... $ 8,423,000 $ 8,423,000
Liabilities:
Recourse debt...................................... $71,681,000 $71,734,000
Non-recourse debt.................................. $93,354,000 $94,127,000
</TABLE>
The following methods and assumptions were used by the Company in computing
the estimated fair value in the above table:
Cash--The carrying amounts of these financial instruments approximated
their fair value.
Debt and Subordinated Notes Payable--The fair value of recourse and
nonrecourse debt is based on the borrowing rates currently available to
the Company for debt with similar terms and average maturities.
F-15
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED)
In February 1996, the Company closed a public offering of 2,000,000 shares
of its Common Stock, 1,800,000 of which were sold by the Company. It received
net proceeds of $22,493,000 from the offering.
In April 1996, the Company acquired all of the stock of a company, located
in the United Kingdom, in the equipment leasing business. The purchase price
in the acquisition was U.S. $1,100,000, $150,000 of which was held back at
closing as security for the seller's performance of certain of its obligations
and representations and warranties in the purchase agreement. The acquisition
was accounted for as a purchase.
In September 1996, the syndicated revolving credit facility described in
footnote 7 above was amended to increase the aggregate availability thereunder
from $92,500,000 at December 31, 1995 to $155,000,000.
F-16
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CON-
STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY AN-
YONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO-
RIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 12
Capitalization............................................................ 13
Dividend Policy........................................................... 13
The Company............................................................... 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 21
Management................................................................ 34
Security Ownership of Management and Principal Shareholders............... 37
Description of Notes...................................................... 38
Description of Capital Stock.............................................. 50
Certain Tax Considerations................................................ 52
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 55
Legal Matters............................................................. 55
Experts................................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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$62,500,000
[LOGO OF LEASING SOLUTIONS, INC.]
LEASING SOLUTIONS, INC.
6 7/8% Convertible Subordinated
Notes Due 2003
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
October 3, 1996
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