<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-21370
LEASING SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0116801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 ALMADEN BOULEVARD, SUITE 1500, SAN JOSE, CALIFORNIA 95113
(Address of principal executive offices) (Zip code)
(408) 995-6565
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of Registrant's common stock outstanding at September 30,
1997 was 8,165,521 shares.
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
September 30, 1997 and December 31, 1996 1
Consolidated Condensed Income Statements
Three and nine month periods ended September 30, 1997 and 1996 2
Consolidated Condensed Statements of Cash Flows
Nine month periods ended September 30, 1997 and 1996 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information 11
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 12
</TABLE>
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 9,466 $ 6,888
Accounts receivable...................................................... 17,079 11,534
Investment in direct finance leases - net................................ 26,199 15,088
Investment in operating leases - net..................................... 466,420 361,872
Property and equipment - net............................................. 3,493 2,338
Other assets............................................................. 9,731 9,571
-------- --------
TOTAL ASSETS.......................................................... $532,388 $407,291
======== ========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES
Accounts payable - equipment purchases................................... $ 2,564 $ 4,252
Accrued and other liabilities............................................ 19,922 9,497
Recourse debt............................................................ 231,519 182,739
Nonrecourse debt......................................................... 195,756 138,919
Deferred income taxes.................................................... 11,047 8,328
-------- --------
TOTAL LIABILITIES..................................................... 460,808 343,735
-------- --------
SHAREHOLDERS' EQUITY
Common stock, authorized 20,000,000 shares, issued and outstanding:
8,165,521 and 8,170,836............................................... 37,974 37,658
Retained earnings........................................................ 33,782 25,624
Accumulated translation adjustment....................................... (176) 274
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................................ 71,580 63,556
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $532,388 $407,291
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
1
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Operating lease revenue.......................... $57,365 $38,825 $158,435 $96,927
Earned lease income.............................. 1,024 493 2,466 1,639
Interest income.................................. 34 93 200 305
Other............................................ 33 45 181 449
------- ------- -------- -------
TOTAL REVENUES............................... 58,456 39,456 161,282 99,320
------- ------- -------- -------
COSTS AND EXPENSES:
Depreciation - operating leases.................. 38,803 26,052 109,365 65,087
Selling, general and administrative.............. 4,998 3,588 13,415 9,007
Interest......................................... 8,210 5,290 21,851 13,028
Other............................................ 455 314 1,164 1,030
------- ------- -------- -------
TOTAL COSTS AND EXPENSES..................... 52,466 35,244 145,795 88,152
------- ------- -------- -------
INCOME BEFORE INCOME TAXES.......................... 5,990 4,212 15,487 11,168
PROVISION FOR INCOME TAXES.......................... 2,505 1,725 6,484 4,571
------- ------- -------- -------
NET INCOME.......................................... $ 3,485 $ 2,487 $ 9,003 $ 6,597
======= ======= ======== =======
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE.......................... $.42 $.30 $1.08 $.83
======= ======= ======== =======
COMMON AND COMMON
EQUIVALENT SHARES................................ 8,340 8,371 8,369 7,941
======= ======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
2
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... $ 127,767 $ 68,655
--------- ---------
INVESTING ACTIVITIES:
Cost of equipment acquired for lease.............................................. (248,716) (208,239)
Cash received over revenue recognized on leases................................... 57,927 10,494
Cash paid for acquisition, net of cash received................................... (8,898) -
Property and equipment purchases.................................................. (1,882) (1,098)
--------- ---------
Net cash used for investing activities............................................ (201,569) (198,843)
--------- ---------
FINANCING ACTIVITIES:
Borrowings:
Nonrecourse..................................................................... 167,328 100,118
Recourse........................................................................ 305,176 246,148
Repayments:
Nonrecourse..................................................................... (124,716) (51,404)
Recourse........................................................................ (270,429) (186,582)
Issuance of common stock.......................................................... 734 22,746
Purchase of outstanding common stock.............................................. (1,263)
Repayment of capital lease obligations............................................ - (143)
--------- ---------
Net cash provided by financing activities......................................... 76,830 130,883
--------- ---------
IMPACT OF EXCHANGE RATE
CHANGES ON CASH................................................................... (450) -
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.............................................. 2,578 695
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................... 6,888 8,423
--------- ---------
End of period..................................................................... $ 9,466 $ 9,118
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
3
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles
and the rules and regulations of the Securities and Exchange Commission for
interim financial statements. Accordingly, the interim statements do not
include all of the information and disclosures required for annual financial
statements. In the opinion of the Company's management, all adjustments
(consisting solely of adjustments of a normal recurring nature) necessary
for a fair presentation of these interim results have been included.
Intercompany accounts and transactions have been eliminated. These financial
statements and related notes should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. The balance sheet
at December 31, 1996 has been derived from the audited financial statements
included in the Annual Report on Form 10-K. The results for the interim
period ended September 30, 1997 are not necessarily indicative of the
results to be expected for the entire year.
2. CASH AND CASH EQUIVALENTS
-------------------------
Cash equivalents are comprised of highly liquid debt instruments with
maturities of three months or less. At September 30, 1997, $3,401,000 of
such amount was restricted solely for repayment of the debt securities of
Leasing Solutions Receivables, Inc. II and Leasing Solutions Receivables,
Inc. III, the Company's wholly-owned subsidiaries, issued in private
placements in 1997, and as collateral therefor, and was not available to
other creditors or for other uses.
3. INVESTMENT IN LEASES
--------------------
The components of the net investment in direct finance leases and in
operating leases as of September 30, 1997, and December 31, 1996, are shown
below (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Direct finance leases:
Minimum lease payments receivable $ 24,814 $ 15,397
Estimated unguaranteed residual values 4,896 1,609
Initial direct costs - net 40 12
Unearned lease income (3,551) (1,930)
--------- ---------
Investment in direct finance leases - net $ 26,199 $ 15,088
========= =========
Operating leases:
Equipment under operating leases $ 739,313 $ 560,128
Initial direct costs - net 7,003 4,316
Accumulated depreciation (279,683) (202,404)
Allowance for doubtful accounts (213) (168)
--------- ---------
Investment in operating leases - net $ 466,420 $ 361,872
========= =========
</TABLE>
A substantial portion of the increase in investment in leases was financed
with nonrecourse and recourse debt.
4
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. PORTFOLIO ACQUISITION
---------------------
In April 1997, the Company acquired a lease portfolio from Scott Capital, a
Canadian company engaged primarily in computer leasing. The net purchase
price in the acquisition was US$8,898,000. In connection with this
transaction, the Company acquired tangible assets (primarily leases) and
intangible assets with a total value of US$37,156,000, assumed recourse and
nonrecourse debt of US$28,258,000, and recorded goodwill of $2,320,000,
which is being written off over seven years. The acquisition of assets was
accounted for as a purchase. In addition, the Company has assumed the office
leases of the Canadian entity and has hired its 19 employees. The results of
Scott Capital have been included in the Company's operations from April
1997, the month of acquisition. The impact of pro forma adjustments on the
combined results of operations is not material.
5. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In February 1997, the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
The Company is required to adopt SFAS 128 in the fourth quarter of fiscal
1997 and, at that time, will restate earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic EPS would have been $.43 and $.31 for the quarters ended September
30, 1997 and 1996, respectively, and $1.10 and $.85 for the nine month
periods ended September 30, 1997 and 1996. Diluted EPS under SFAS 128 would
not have been significantly different than EPS currently reported for the
periods.
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income),
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from nonowner sources,
and No. 131 (Disclosures about Segments of an Enterprise and Related
Information), which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
6. RECLASSIFICATIONS
-----------------
Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
5
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
1997.
RESULTS OF OPERATIONS
Total revenues increased $19,000,000, or 48%, to $58,456,000 and $61,962,000,
or 62%, to $161,282,000 for the three and nine month periods ended September
30, 1997, respectively, compared with the corresponding prior year periods.
Almost all the increase for both periods was in operating lease revenue. The
increase in operating lease revenue for both periods reflects a higher average
investment in operating leases, resulting from increases in operating leases
originated by the Company over the past year. The third quarter and nine month
increase in revenue was also due, in part, to the acquisition of a portfolio
from a Canadian company in April 1997, offset, with respect to the third
quarter, by the affect of a sale of a mature lease portfolio.
Depreciation expense for operating leases increased $12,751,000, or 49%, to
$38,317,000 and $44,278,000, or 68%, to $109,365,000 for the three and nine
month periods ended September 30, 1997, respectively, compared with the
corresponding prior year periods. The increases are primarily due to the
increase in the operating lease base, resulting from increases in operating
leases originated by the Company over the past year and the acquisition of a
portfolio from a Canadian company. In addition, the Company's lease portfolio
as of September 30, 1997, had a higher percentage of shorter term leases,
which the Company depreciates over a shorter period, compared to its portfolio
as of September 30, 1996.
Selling, general and administrative expenses increased $1,410,000, or 39%, to
$4,998,000 and $4,408,000, or 49%, to $13,415,000 for the three and nine month
periods ended September 30, 1997, respectively, compared with the corresponding
prior year periods. For the three and nine month periods ended September 30,
1997, the increases are primarily attributable to increased compensation and
benefit costs as a result of an increase in the number of employees, expenses
attributable to the commencement of the Company's operations in Europe and
Canada, increased occupancy costs resulting from an expansion of the Company's
headquarters and the commencement of the Company's operations in the United
Kingdom and Canada. Additionally, the nine month period ended September 30, 1997
increase is due, in fact, to interest costs and professional fees related to a
settlement of a tax audit adjustment, and costs related to the enhancement of
the Company's management information systems.
Interest expense increased $2,920,000, or 55%, to $8,210,000 and $8,823,000, or
68%, to $21,851,000 for the three and nine month periods ended September 30,
1997, respectively, compared with the corresponding prior year periods. The
increase is primarily due to higher average recourse and nonrecourse debt
outstanding, which resulted from additional borrowings to fund the growth in the
Company's lease portfolio.
The provision for income taxes was 42% for the three and nine month periods
ended September 30, 1997, compared to the 42% and 41% rates, respectively, for
the corresponding prior year periods. The increase for the nine month period is
due to increases in new leases with customers located in states with higher
state income tax rates.
Net income increased 40% to $3,485,000 and 36% to $9,003,000 for the three and
nine month periods ended September 30, 1997, respectively, compared with the
corresponding prior year periods, principally as a result of the increase in the
components of total revenues, reduced by the increases in the components of
total costs, specifically described above. Earnings per share increased 40% to
$.42 and 30% to $1.08 for the three and nine month periods, respectively. For
the nine month period, net income rose faster than earnings per share for the
same period due to
6
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
an increase in the average number of common shares outstanding, primarily as a
result of the Company's secondary public offering of Common Stock completed in
February, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $127,767,000 during the
nine month period ended September 30, 1997, due, in part, to net income of
$9,003,000 that period. Cash flow from operations was higher than net income
primarily as a result of non-cash expenses such as depreciation of
$110,465,000, as well as net changes in accounts payable, accrued and other
liabilities, deferred taxes, and other assets, totaling $8,299,000. Investing
activities, which are primarily related to investments in equipment for lease,
used $201,569,000 during the nine month period. Financing activities in the
nine month period generated $76,830,000 from the Company's new borrowings of
$472,504,000 of recourse and nonrecourse debt, and $734,000 from exercise of
options, aggregating $473,238,000, offset by purchases of outstanding common
stock and repayments of recourse and nonrecourse borrowings, aggregating
$396,408,000. Additionally, the impact of exchange rate changes on cash was
$450,000. The net result of these activities for the nine month period was an
increase in cash and cash equivalents of $2,578,000.
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
principally from money center banks, regional banks, and insurance companies.
In January 1997, the Company, through its wholly-owned subsidiary, Leasing
Solutions Receivables II, Inc., obtained long-term financing for its leasing
activities through a $100,000,000 commercial paper-backed conduit, revolving,
nonrecourse line of credit provided by an affiliate of a money center bank.
Borrowings under this facility of approximately $67,765,000, as of September 30,
1997, bear interest at a weighted average rate of 7.3% per annum (based on the
commercial paper rate plus 123 basis points at the time of borrowing). Such
borrowings through the Company's subsidiaries ("Securitizations") are secured by
lease receivables and the underlying equipment financed under such arrangements.
In February 1996, the Company closed a public stock offering in which it sold
1,800,000 shares of the Company's Common Stock. The Company received net
proceeds of approximately $22,540,000 from the offering. In October 1996, the
Company closed a public debt offering for $71,875,000 of convertible
subordinated notes. The notes constitute general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future debt
of the Company. The Company received net proceeds of approximately $69,400,000
from the offering. The seven year notes bear interest at a rate of 6.875% per
annum and are convertible into the Company's Common Stock at a conversion price
of $34.90. Interest is payable in April and October of each year. Principal is
payable upon maturity in October 2003. The Company may call, or prepay, all or
a portion of the notes beginning in October 1999. These equity and debt public
offerings were made principally to raise "equity" for the Company's purchase of
equipment for lease to its customers.
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 totaled
$190,000,000 at September 30, 1997. A brief description of each of those
facilities follows.
7
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
(1) $160,000,000 (which is expected to increase to $175,000,000 in the fourth
quarter) revolving facility syndicated with nine banks, expiring October 29,
1998. At September 30, 1997, $124,662,000, with a weighted average interest
rate of 7.3% per annum, was outstanding under this facility. 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. This facility was renewed
for an additional year at October 31, 1997, on which date $141,052,000, with a
weighted average interest rate of 7.1% per annum, was outstanding.
(2) $15,000,000 revolving facility with one bank, with borrowings available
through April 1998, and repayments due 240 days after borrowing. At September
30, 1997, there were no amounts outstanding under this facility. Borrowings
under the facility bear interest at LIBOR plus 150 basis points.
(3) $15,000,000 revolving facility with one bank, expiring May 1998.
Borrowings under the facility bear interest at the bank's prime rate plus 95
basis points. At September 30, 1997, $4,500,000, with an interest rate of
9.45% per annum, was outstanding under this facility. In addition to interim
financing of lease transactions, proceeds borrowed under this facility are
available for general corporate purposes.
The Company also has a $15,000,000 revolving facility, expiring October 15,
1998, with one bank. Borrowings under the facility bear interest at the bank's
prime rate. At September 30, 1997, $7,778,000, with an interest rate of 8.5% per
annum, was outstanding under this facility. The proceeds of borrowings under
this line are used exclusively to fund certain accounts payable to two of the
Company's vendors resulting from the purchase of equipment for lease.
In March 1996, the Company entered into a $100,000,000, nonrecourse revolving
facility with an affiliate of a money center bank. This bank has agreed to
extend this line until March 1998, and borrowings under the facility bear
interest at rates ranging from 135 to 200 basis points over average life
treasuries at the time of borrowing. To date, the Company has refinanced
approximately $93,187,000 of borrowings under its other short-term facilities
through this facility. The Company paid down approximately $50,465,000 of this
facility in January 1997 from the proceeds of the Securitization mentioned above
entered into in January 1997. At September 30, 1997, $22,899,000 was outstanding
under this facility and the weighted average interest rate on that amount was
7.3% per annum (based on average life treasuries plus 175 to 200 basis points at
the time of borrowing). The Company expects 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.
Borrowings under the above-described facilities 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. The agreements for the facilities contain covenants regarding
leverage (a recourse liabilities-to-equity ratio of not more than 5.5 to 1),
interest coverage, minimum net worth and profitability and a limitation on the
payment of dividends. At September 30, 1997, the Company had a recourse
liabilities-to-equity ratio of 3.7 to 1. Under the renewed revolving facility,
the recourse liabilities-to-equity ratio would be 2.5 to 1 at September 30,
1997. If the Company finances, on a long-term, nonrecourse basis, the equipment
and related leases presently financed under its short-term, recourse facilities,
its recourse liabilities-to-equity ratio will decrease to below 2 to 1.
Occasionally, the Company will obtain long-term, nonrecourse financing for
significant individual or pooled lease transactions (typically with one lessee)
at the time, or shortly after, it purchases the related equipment. The Company
borrowed an aggregate of $13,771,000 under such arrangements in the third
quarter of 1997. An aggregate of $113,571,000 ($8,479,000 of which is recourse),
with a weighted average interest rate of 8.1% per annum, remained outstanding
under all such arrangements as of September 30, 1997.
8
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
In 1995, the Company issued $17,500,000 of nonrecourse subordinated debt, at a
coupon rate of 9.7%, due through May 1998. In June 1997, the Company, through
a newly formed, wholly-owned subsidiary, Leasing Solutions Receivables III,
Inc., financed, through a $8,500,000 nonrecourse sale to an affiliate of a major
life insurance company, a portion of its residual interest in a lease portfolio.
Such portion of the residual interest had a book value of $5,941,000.
Approximately $6,000,000 of the proceeds were used to repay the balance of the
subordinated debt described above, which was owed to the same financing source.
As a result of the acquisition of a Canadian lease portfolio in April 1997,
the Company's Canadian subsidiary assumed recourse debt of $14,033,000 and
nonrecourse debt, under two separate lines, of $14,225,000. At September 30,
1997, outstanding recourse debt was $14,224,000, and nonrecourse debt was
$18,213,000, under these lines, with weighted average interest rates of 5.0%
and 7.3%, respectively.
The Canadian Subsidiary has two lines, with aggregate available of approximately
$28,080,000. A brief description of these facilities follows:
(1) $17,280,000 in facilities with one bank, expiring August 1998. At September
30, 1997, $14,224,000 was outstanding under this facility. Borrowings under the
facility bear interest at one of the following rates, at the election of the
Borrower, prime plus 25 basis points: LIBOR plus 135 basis points: or bankers
acceptances plus 135 basis points.
(2) $10,800,000 facility with one bank, expiring November 1998. At September 30,
1997, there were no amounts outstanding under this facility. Borrowings under
the facility bear interest at one of the following rates, at the election of the
borrower, prime plus 25 basis points: LIBOR plus 135 basis points: or bankers
acceptances plus 135 basis points.
The Company has guaranteed the obligations of its Canadian subsidiary under
these lines.
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. Debt financing
for the Company's equity investment is not readily available in the marketplace
and may require 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.
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. In October
1997, the Company's European subsidiary put in place its first European
borrowing facility, a revolving line of credit, with initial availability of
10,000,000 pounds sterling. At October 31, 1997, approximately 7,400,000
pounds sterling was outstanding under this line. The line is provided by a
United States financial institution, currently lending to the Company, which
will act as agent on the line. It is expected that two European financial
institutions will join the line, adding 20,000,000 pounds sterling in
availability, prior to the end of the fourth quarter of 1997. The Company has
guaranteed the obligations of its European subsidiary under the line.
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
nonrecourse), 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.
9
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
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 leases to its customers. Such sales of equipment,
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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company issued and sold $71,875,000 of convertible subordinated notes, in
October 1996, in a public offering subject to its Registration Statement,
dated September 20, 1996, as amended. That Registration Statement and the
Prospectus, dated October 3, 1996, which is a part of it (the "Prospectus"),
include a section entitled "Risk Factors," which describes certain factors
that may affect future operating results of the Company. That section is
hereby incorporated by reference in this Report. Those factors should be
considered carefully in evaluating an investment in the Company's Common Stock
and convertible debt. You may obtain a copy of the Prospectus by request to
the Company's Investor Relations Department by phone, at (408) 995-6565, or via
the Internet at www.lsileasing.com, or by mail at Leasing Solutions, Inc., 10
Almaden Boulevard, Suite 1500, San Jose, California 95113.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this Report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, including, without
limitation, 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, the ability of the Company to enter into new
strategic alliances and extend existing alliances, the ability of the Company to
manage its growth, risks and uncertainties of doing business in Europe and
Canada and in other foreign countries, the ability of the Company to recover
its investment in equipment through remarketing, and other risks or
uncertainties detailed in the Company's Securities and Exchange Commission
filings, including the Prospectus.
10
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit No. Document
----------- --------
27 Financial Data Schedule
11
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEASING SOLUTIONS, INC.
By: /s/ Hal J Krauter
-----------------
Hal J Krauter
President and Chief Executive Officer
By: /s/ Steven L. Yeffa
-------------------
Steven L. Yeffa
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
DATE: November 14, 1997
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LEASING SOLUTIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,466
<SECURITIES> 0
<RECEIVABLES> 17,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,493
<DEPRECIATION> 0
<TOTAL-ASSETS> 532,388
<CURRENT-LIABILITIES> 22,486
<BONDS> 0
0
0
<COMMON> 37,974
<OTHER-SE> 33,606
<TOTAL-LIABILITY-AND-EQUITY> 532,388
<SALES> 161,282
<TOTAL-REVENUES> 161,282
<CGS> 109,365
<TOTAL-COSTS> 109,365
<OTHER-EXPENSES> 13,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,851
<INCOME-PRETAX> 15,487
<INCOME-TAX> 6,484
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,003
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
