UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
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 April 30,
1998 was 8,205,313 shares.
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
March 31, 1998 and December 31, 1997
Consolidated Condensed Income Statements
Three month periods ended March 31, 1998 and 1997
Consolidated Condensed Statements of Cash Flows
Three month periods ended March 31, 1998 and 1997
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
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
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents........................... $19,049 $16,569
Accounts receivable................................. 21,920 16,318
Investment in direct finance leases-net............. 22,819 24,269
Investment in operating leases-net.................. 565,845 527,025
Property and equipment-net.......................... 3,781 3,545
Other assets........................................ 16,369 9,005
----------- -----------
TOTAL ASSETS..................................... $649,783 $596,731
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable-equipment purchases................ $33,646 $17,143
Accrued and other liabilities....................... 19,868 17,605
Recourse debt....................................... 311,523 269,591
Nonrecourse debt.................................... 188,742 202,259
Deferred income taxes............................... 15,086 13,546
----------- -----------
TOTAL LIABILITIES................................ 568,865 520,144
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, authorized 20,000,000 shares; shares
outstanding: 8,205,313 and 8,181,800............ 38,897 38,625
Retained earnings................................... 41,477 37,852
Accumulated translation adjustment.................. 544 110
----------- -----------
TOTAL SHAREHOLDERS' EQUITY....................... 80,918 76,587
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $649,783 $596,731
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES:
Operating lease revenue............. $66,370 $44,615
Earned lease income................. 532 355
Other............................... 54 1,959
--------- ---------
TOTAL REVENUES.................. 66,956 46,929
--------- ---------
COSTS AND EXPENSES:
Depreciation - operating leases..... 45,939 32,245
Selling, general and administrative. 5,419 3,812
Interest............................ 9,111 6,219
Other............................... 238 315
--------- ---------
TOTAL COSTS AND EXPENSES........ 60,707 42,591
--------- ---------
INCOME BEFORE INCOME TAXES............. 6,249 4,338
PROVISION FOR INCOME TAXES............. 2,624 1,813
--------- ---------
NET INCOME............................. $3,625 $2,525
========= =========
NET INCOME PER COMMON SHARE ........... $0.44 $0.31
========= =========
NET INCOME PER COMMON
SHARE - ASSUMING DILUTION............ $0.42 $0.30
========= =========
WEIGHTED AVERAGE COMMON SHARES......... 8,196 8,198
========= =========
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES............... 10,613 8,450
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................. $73,791 $49,756
--------- ---------
INVESTING ACTIVITIES:
Cost of equipment acquired for lease..................... (101,664) (83,386)
Cash received over revenue recognized on leases.......... 2,103 14,700
Property and equipment purchases......................... (607) (600)
--------- ---------
Net cash used for investing activities................... (100,168) (69,286)
--------- ---------
FINANCING ACTIVITIES:
Borrowings:
Nonrecourse............................................ 25,463 21,545
Recourse............................................... 189,630 75,518
Repayments:
Nonrecourse............................................ (38,980) (24,195)
Recourse............................................... (147,698) (40,894)
Issuance of common stock................................. 272 520
--------- ---------
Net cash provided by financing activities................ 28,687 32,494
--------- ---------
Net cash provided by financing activities................ 76,830 32,494
IMPACT OF EXCHANGE RATE
CHANGES ON CASH.......................................... 170 (213)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS..................... 2,480 12,751
--------- ---------
CASH AND CASH EQUIVALENTS:
Beginning of period...................................... 16,569 6,888
--------- ---------
End of period............................................ $19,049 $19,639
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
<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, 1997.
The balance sheet at December 31, 1997 has been derived from the
audited financial statements included in the Annual Report on Form
10-K. The results for the interim period ended March 31, 1998 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 March 31, 1998 and
December 31, 1997, $4,496,000 and $3,429,000, respectively, of
such amount was restricted solely for repayment of the debt
securities of Leasing Solutions Receivables II, Inc. and Leasing
Solutions Receivables III, Inc., 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 March 31, 1998, and December 31, 1997,
are shown below (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Direct finance leases:
Minimum lease payments receivable.......... $21,914 $22,857
Estimated unguaranteed residual values..... 3,836 4,345
Initial direct costs - net................. 43 33
Unearned lease income (2,974) (2,966)
----------- -----------
Investment in direct finance leases - net... $22,819 $24,269
=========== ===========
Operating leases:
Equipment under operating leases........... $846,400 $783,784
Initial direct costs - net................. 7,226 7,540
Accumulated depreciation................... (287,538) (264,071)
Allowance for doubtful accounts............ (243) (228)
----------- -----------
Investment in operating leases - net........ $565,845 $527,025
=========== ===========
</TABLE>
A substantial portion of the increase in investment in leases was
financed with nonrecourse and recourse debt.
4. ACQUISITION
In April 1997, the Company acquired substantially all of the
assets, including lease portfolio and related equipment, of Scott
Capital, a Canadian company engaged primarily in leasing personal
computers. The net purchase price was $8,898,000 in cash and the
transaction was accounted for as a purchase. In connection with
the transaction, the Company acquired tangible assets (primarily
leases) with a total value of $34,836,000, assumed recourse and
nonrecourse debt of $28,258,000, and recorded goodwill of
$2,320,000. The acquisition of assets was accounted for as a
purchase. In addition, the Company assumed the office leases of
the seller and has hired its 19 employees. The results of the
Canadian operation have been included in the Company's operations
from April 1997, the month of acquisition
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
("FASB")adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). SFAS 128 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.
The Company adopted SFAS 128 in the fourth quarter of fiscal 1997
and earnings per share (EPS) data for the quarter ended March 31,
1997 has been restated to conform with SFAS 128. The following
table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Numerator - net income available
to common shareholders................... $3,625 $2,525
Effect of dilutive securities
- convertible debt (net of tax).......... 788 --
----------- -----------
$4,413 $2,525
=========== ===========
Denominator for basic net income per share -
weighted average shares outstanding...... 8,196 8,198
Effect of dilutive securities:
employee stock options................... 358 252
convertible debt......................... 2,059 --
----------- -----------
Denominator for diluted net income per
share - adjusted weighted average shares
outstanding and assumed conversion of
dilutive securities...................... 10,613 8,450
=========== ===========
Net income per share - basic $0.44 $0.31
=========== ===========
Net income per share - diluted $0.42 $0.30
=========== ===========
</TABLE>
In the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" which requires an enterprise to
report, by major components and as a single total, the change in
net assets during the period from nonowner sources. For the three
months ended March 31, 1998 and 1997, comprehensive income was
$3,877,000 and $2,401,000, respectively. The difference between
net income and comprehensive income arises due to changes in
accumulated translation adjustment.
In June 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards 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. SFAS
131 will be effective for the Company's Annual Report on Form 10-K
for the full year ended December 31, 1998.
6. RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform
to the current period presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1998.
Results of Operations
Total revenues increased $20,027,000, or 43%, to $66,956,000 for the
three month period ended March 31, 1998, compared with the
corresponding prior year period. The increase in total revenues is
primarily due to an increase in operating lease revenues offset, in
part, by a decrease in gains on sales of assets. Operating lease
revenue increased $21,755,000 or 49% to $66,370,000 for the three
months ended March 31, 1998, compared with $44,615,000 for the same
period one year ago. The increase in operating lease revenue
reflects a higher average investment in operating leases, resulting
from increases in operating leases originated by the Company over the
past year. The first quarter increase in revenue was also due, in
part, to the acquisition of the assets, principally a lease
portfolio, of a Canadian leasing company in April 1997.
Depreciation expense for operating leases increased $13,694,000, or
42%, to $45,939,000 for the three month period ended March 31, 1998,
compared with $32,245,000 in the same period one year ago. The
increase is primarily due to an increase in the operating lease base,
resulting from increases in operating leases originated by the
Company in the United States and Europe over the past year or
acquired as part of the acquisition described above.
Selling, general and administrative expenses increased $1,607,000, or
42%, to $5,419,000 for the three month period ended March 31, 1998,
compared with $3,812,000 for the first quarter of 1997. The increase
is primarily attributable to increased compensation and benefit costs
associated with an increase in the number of employees, as a result
of the acquisition described above, expansion of the Company's
European operations as well as continued growth in the United States.
In addition, selling, general and administrative expenses for the
quarter ended March 31, 1998 included increases in travel expenses
and occupancy, fixed asset depreciation and telecommunication costs
when compared to the same period of 1997. Generally, these increases
are attributable to expansion of the Company's international
operations as well as the continued growth of the operating lease
portfolio in the United States.
Interest expense increased $2,892,000, or 47%, to $9,111,000 for the
three month period ended March 31, 1998, compared with $6,219,000 for
the corresponding period in 1997. 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 $2,624,000 for the three month
period ended March 31, 1998, representing an increase of $811,000, or
45%, over $1,813,000 for the first quarter of 1997. The increase is
attributable to a corresponding increase in pre-tax income in the
first quarter of 1998 compared to the same period one year earlier.
The Company's effective tax rate was 42% for the three month periods
ended March 31, 1998 and 1997.
Net income increased $1,100,000, or 44%, to $3,625,000 for the three
month period ended March 31, 1998, compared with $2,525,000 for the
corresponding period one year earlier. The increase in net income
was principally a result of the increase in the components of total
revenues, reduced by the increases in the components of total costs,
specifically described above. Diluted earnings per share for the
first quarter of 1998 increased 40% to $.42 from $.30 for the
comparable period in 1997.
Liquidity and Capital Resources
The Company's debt financing activities typically provide
approximately 85% to 90% of the purchase price of the equipment
purchased by the Company for lease to its customers. The 15% to 20%
balance of the purchase price (the Company's "equity" investment in
equipment) must generally be financed by cash flow from its
operations, or recourse debt, or common stock or convertible debt
sold by the Company.
The Company generated cash flow from operations of $73,791,000 during
first quarter of 1998, compared to net income of $3,625,000 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 $45,310,000, and the combined effect of other
sources and uses of cash from operations, including resulting changes
in accounts receivable, accounts payable, deferred income taxes, and
other assets and liabilities, totaling $24,856,000. Investing
activities, which are primarily related to investments in equipment
for lease, used $101,168,000 during the period. Financing activities
generated $28,687,000 from $215,093,000 in new borrowings of recourse
and nonrecourse debt and $272,000 from the Company's issuance of
common stock upon exercise of options, reduced by $186,678,000 used
to repay recourse and nonrecourse borrowings. In addition, the
impact of exchange rate changes on cash and cash equivalents during
the period was $170,000. The net result of the above activity for
the quarter ended March 31, 1998 was an increase in cash and cash
equivalents of $2,480,000.
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 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. This public debt public offering and prior public offerings of
the Company's Common Stock were made principally to raise "equity"
for the Company's purchase of equipment for lease to its customers.
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.
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 short-term, revolving recourse
facilities in the United States totaled $227,000,000 at March 31,
1998. A brief description of each of those facilities follows.
(1) $175,000,000 revolving facility syndicated with eleven
banks, expiring October 1998. At March 31, 1998,
$142,917,000, with a weighted average interest rate of 7.2%
per annum, was outstanding under the facility. Borrowings
bear an interest rate, at the Company's option, of the
agent bank's prime rate (8.5% at March 31, 1998) or LIBOR
(5.69% at March 31, 1998) plus 120 basis points.
(2) $15,000,000 revolving facility ($41,000 outstanding at
March 31, 1998) with one bank, with borrowings available
through June 1998, and repayments due 240 days after
borrowing. Borrowings bear interest at LIBOR (5.69% at
March 31, 1998) plus 150 basis points.
(3) $22,000,000 revolving facility ($15,700,000 outstanding at
March 31, 1998) with one bank, expiring October 1998.
Borrowings bear interest at the bank's prime rate (8.5% at
March 31, 1998) plus 95 basis points.
The Company also has a $15,000,000 revolving recourse facility
($10,703,000 outstanding at March 31, 1998), expiring October 1998,
with one bank. Borrowings bear interest at the bank's prime rate
(8.5% at March 31, 1998). The proceeds of borrowings under this line
may be used only to fund certain accounts payable to two of the
Company's vendors resulting from the purchase of equipment for lease
to specified significant customers of the Company.
The agreements for the facilities described above contain covenants
regarding leverage, interest coverage, minimum net worth and
profitability and a limitation on the payment of dividends.
In November 1997, the Company's subsidiary in the United Kingdom
entered into a revolving recourse line of credit with availability of
approximately $50,000,000 (30,000,000 British pounds) from a
syndicate of three banks to provide short-term financing for leasing
activities in Europe. The Company has guaranteed the subsidiary's
obligations under the line. Borrowings under the facility may be
made in a number of European currencies and bear interest at LIBOR
(5.69% at March 31, 1998) plus 145 basis points. There was
approximately $33,274,000 outstanding under this facility at March
31, 1998. The line expires in November 1998.
The Company's Canadian subsidiary maintains a three-tiered recourse
credit facility with a Canadian bank, with borrowing availability
through August 1998, to provide short-term financing for leasing
activities in Canada. The Company has guaranteed the subsidiary's
obligations under the line. The first tier is an approximately
$10,500,000 ($15,000,000 Canadian) revolving facility with repayments
due 180 days after each borrowing. Borrowing under this facility
bear interest at the Canadian prime rate ( 6.0% at March 31, 1998)
plus 25 basis points or Canadian dollar LIBOR (4.75% at March 31,
1998) plus 135 basis points. There was $9,782,000 outstanding under
this facility with a weighted average interest rate of 6.75% at March
31, 1998.
The second tier is an approximately $4,200,000 ($6,000,000 Canadian)
revolving facility with repayments due 90 days after each borrowing.
Borrowing under this facility bear interest at the Canadian prime
rate ( 6.0% at March 31, 1998) plus 25 basis points or Canadian
dollar LIBOR ( 4.75% at March 31, 1998) plus 135 basis points. There
was $2,914,000 outstanding under this facility with a weighted
average interest rate of 6.75% at March 31, 1998.
The third tier is has an approximately $2,100,000 ($3,000,000
Canadian) revolving facility with repayments due 364 days after each
borrowing. Borrowing under this facility bear interest at the
Canadian prime rate (6.0% at March 31, 1998) plus 150 basis points.
There was $342,000 outstanding under this facility with a weighted
average interest rate of 8.0% at March 31, 1998.
The Company maintains a $100,000,000, nonrecourse revolving facility
with an affiliate of a money center bank. This revolving facility
expires in March 1999, and borrowings under the facility bear
interest at a rate of 125 to 200 basis points over average life
treasuries at the time of borrowing. Through March 31, 1998, the
Company has refinanced approximately $93,176,000 of borrowings under
its other short-term facilities through this facility. At March 31,
1998, $23,611,000 was outstanding under this facility at a weighted
average interest rate of 7.3%.
In January 1997, the Company's, through one of its wholly-owned
subsidiaries in the United States, obtained long-term financing for
the Company's leasing activities through a $100,000,000 commercial
paper-backed conduit, nonrecourse line of credit provided by an
affiliate of a money center bank. This is a revolving facility
expiring April 1998. Through March 31, 1998, the Company has
financed approximately $103,693,000 of borrowings under this
facility. At March 31, 1998, the Company had $56,455,000 outstanding
under this facility, at a weighted average interest rate of 7.2%.
The Company's Canadian subsidiary maintains a revolving recourse line
of credit of $10,500,000 ($15,000,000 Canadian) with a Canadian
financial institution, with borrowing available through February
1999, to provide long-term financing for its leasing activities. The
Company has guaranteed the subsidiary's obligations under the line.
Borrowing under this facility bear interest, at the subsidiary's
election, at Canadian prime rate (6.0 % at March 31, 1998) plus 25
basis points or Canadian dollar LIBOR (4.75 % at March 31, 1998) plus
135 basis points. There was $4,748,000 outstanding under this
facility with a weighted average interest rate of 6.35% at March 31,
1998.
In June 1997, the Company, through one of its wholly-owned
subsidiaries in the United States, financed a portion of its residual
interest in a lease portfolio, pursuant to an arrangement accounted
for as a sale, through an affiliate of a major life insurance
company. The transaction generated proceeds of $8,500,000, a portion
of which was used to repay certain subordinated debt of the Company
owed to the same financing source.
Occasionally, the Company will obtain long-term financing for
individual significant lease transactions at the time, or shortly
after, it purchases the related equipment. An aggregate of
$127,903,000 ($19,227,000 of which is recourse), with a weighted
average interest rate of 7.4% per annum, remained outstanding under
all such arrangements as of March 31, 1998.
Debt financing for all or a portion of the Company's "equity"
investment in equipment purchased for lease to others 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.
Borrowings under the above-described facilities or transactions are
generally secured by the lease receivables financed under such
arrangements and the related equipment. 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 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 expected 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 and recently expired 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.
However, no assurances can be given as to the rates that the Company
may be required to pay under any of such financing arrangements.
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 preceding
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
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 85% 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, such as those experienced recently with respect
to desktop and laptop computers, 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 several new programs and arrangements that have produced
substantial lease volume. The Company estimates that during this
period, desktop and laptop computers represented approximately 85% of
its Dollar Volume. The initial lease terms of the leases to which
most of such equipment is subject have not yet expired and, as a
result, the Company does not yet have substantial remarketing
experience and accumulated historical data with respect to such
equipment. Additionally, the desktop and laptop computer equipment
purchased as a result of such new programs and arrangements is a
different type of information processing and communications equipment
than equipment for which the Company has significant remarketing
experience and accumulated historical data. Therefore, the company's
historical experience in estimating residual values may not be
applicable to such desktop and laptop computers, and the Company's
historical remarketing experience is not necessarily indicative of
future performance.
The Company obtains the maximum residual value on its equipment by
remarketing it "in-place" to its end-user customer, whether by
extension of the lease term, month-to-month extensions or sale. To
date, the Company has been relatively successful in its ability to
remarket equipment in-place. In the event desktop or laptop
computers are returned to the Company at the end of the lease term,
the Company's potential residual recovery from such equipment will be
substantially reduced. No assurances can be given that a substantial
amount of such equipment will be remarketed in-place.
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.
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 15% 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. 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 investment. 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."
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,
Ernst & Young and Xerox, which accounted for 19% and 11%,
respectively, of 1997 revenues. In addition, Ernst & Young and
Northern Telecom represented 19% and 15%, respectively, of the
Company's Dollar Volume in 1997 and 20% and 9%, respectively, of the
Company's net book value at December 31, 1997. The Company's lease
agreements with these customers expire over the next three years. In
the event any of these customers, 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, or
determines to return to the Company a material amount of the
equipment it has leased at the expiration of the term of the
respective lease, the Company's operating results and financial
condition could be materially adversely affected.
Management of Growth. In the past five 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 Company's investment in leases grew from $125 million at
December 31, 1994 to $551million at December 31, 1997. 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 remainder of 1998. In the process of
implementing its global expansion (see "Global Expansion" below), the
Company acquired leasing operations with an aggregate of
approximately 40 employees and their own software systems. The
Company is absorbing, and will continue to absorb in the future, the
effects of additional personnel costs and the implementation and
integration 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.
Global Expansion. In April 1996, the Company expanded its lease
financing activities to Western Europe by acquiring a small
independent leasing company in the United Kingdom. It now has sales
offices, and leasing activities, in Germany, France, Belgium and the
Netherlands, and the ability to finance leases for equipment in Italy
and Spain. In April 1997, the Company acquired the lease portfolio
and operations of a Canadian leasing company, and now conducts
operations throughout Canada. International activities pose certain
risks not faced by leasing companies that limit themselves to United
States lease financing activities. 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 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.
Competition. The information processing and communications
equipment leasing business is characterized by significant
competition. The Company competes with leasing companies, both
captive and independent, 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
and distributors 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 financings. See "Business -
Competition" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Year 2000. As the year 2000 approaches, a critical issue has
emerged for all companies, including the Company, with respect to
whether application software programs and operating systems utilized
by a company and the companies with which it does business can
accommodate this date value. In brief, many software products in the
marketplace only accommodate a two-digit date position which
represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99")
could be the maximum date value these products would be able to
process accurately.
The Company has, for several months, been engaged in a review of
the software and systems it uses in an effort to determine whether it
or its operations may be materially adversely affected by this so-
called "Year 2000" conversion. In that review, the Company has
identified certain software applications as being "critical
applications" used in daily operations. Such applications include
lease management, accounting and financial reporting systems, as well
as spreadsheet programs. The Company has inquired of, and generally
obtained the assurances of, the providers of such software with
respect to it being Year 2000 compliant. Based on its review, the
Company does not presently believe that Year 2000 compliance issues
with respect to its software and systems will materially adversely
affect the Company or its operations. However, no assurances can be
given that such review uncovered every potential adverse effect of
the Year 2000 conversion in connection with any of such software or
systems.
The Company has only recently commenced a review of whether the
software and systems of the vendors, financing sources, customers,
equipment manufacturers or distributors or other parties with which
it deals may, as a result of the Year 2000 conversion, have a
material adverse effect on the Company or its operations.
Accordingly, it is too early for the Company to be able to predict
whether such software or systems of such parties may have such
effect. As part of this review, the Company will attempt to obtain
assurances from each of such parties, whose dealings with the Company
are material to the Company or its operations, that such party does
not and will not utilize software or systems that may interface with
the Company, or are or will be important to the operations of such
party, that may cause problems to such party or the Company as a
result of the Year 2000 conversion. However, no assurances can be
given that the Company will be able to obtain such assurances from
each of such parties or that it will be able to obtain the
information from such parties necessary for the Company to determine
whether it may be materially adversely affected by the software or
systems of such parties.
The Company will maintain an ongoing effort to recognize and
evaluate potential exposures relating to the Year 2000 conversion
arising from its use of software supplied by other parties or its
dealings with other parties. At present, the Company cannot estimate
the total cost to it of recognizing, evaluating and addressing any
such exposures.
Recent Accounting Pronouncements
In the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" which requires an enterprise to
report, by major components and as a single total, the change in
net assets during the period from nonowner sources. For the three
months ended March 31, 1998 and 1997, comprehensive income was
$3,877,000 and $2,401,000, respectively. The difference between
net income and comprehensive income arises due to changes in
accumulated translation adjustment.
In June 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards 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. SFAS 131
will be effective for the Company's Annual Report on Form 10-K for
the full year ended December 31, 1998.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995
This report includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements
of historical facts, included in this report 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 to support its global expansion and activities, risks and
uncertainties of doing business in Europe and Canada and other
foreign countries, the ability of the Company to recover its
investment in equipment through remarketing, the ability of the
Company to enter into new strategic relationships and extend existing
strategic relationships, the performance of the Company's strategic
partners, and the ability of the Company to manage its growth, 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 risk factors described above under "Factors That May Affect
Future Operating Results", 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 and existing shareholders 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.
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
<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: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,049
<SECURITIES> 0
<RECEIVABLES> 21,920
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,781
<DEPRECIATION> 0
<TOTAL-ASSETS> 649,783
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 38,897
<OTHER-SE> 42,021
<TOTAL-LIABILITY-AND-EQUITY> 649,783
<SALES> 66,370
<TOTAL-REVENUES> 66,956
<CGS> 45,939
<TOTAL-COSTS> 45,939
<OTHER-EXPENSES> 5,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,111
<INCOME-PRETAX> 6,249
<INCOME-TAX> 2,624
<INCOME-CONTINUING> 3,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,625
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.42
</TABLE>
