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 September 30, 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 November 13,
1998 was 8,141,361 shares.
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997
Consolidated Condensed Income Statements
Three and nine month periods ended September 30, 1998 and 1997
Consolidated Condensed Statements of Cash Flows
Nine month periods ended September 30, 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>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents........................... $45,854 $16,569
Accounts receivable................................. 19,247 16,318
Investment in direct finance leases-net............. 91,452 24,269
Investment in operating leases-net.................. 593,076 527,025
Property and equipment-net.......................... 4,660 3,545
Goodwill............................................ 14,890 2,072
Other assets........................................ 24,042 6,933
----------- -----------
TOTAL ASSETS..................................... $793,221 $596,731
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable-equipment purchases................ $29,483 $17,143
Accrued and other liabilities....................... 27,612 17,605
Recourse debt....................................... 319,986 269,591
Nonrecourse debt.................................... 321,513 202,259
Deferred income taxes............................... 15,301 13,546
----------- -----------
TOTAL LIABILITIES................................ 713,895 520,144
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, authorized 20,000,000 shares; shares
outstanding: 8,141,361 and 8,181,800............ 38,846 38,625
Retained earnings................................... 40,650 37,852
Accumulated translation adjustment.................. (170) 110
----------- -----------
TOTAL SHAREHOLDERS' EQUITY....................... 79,326 76,587
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $793,221 $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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Operating lease revenue............. $75,632 $57,365 $215,526 $154,744
Earned lease income................. 2,440 1,024 3,423 2,466
Other............................... (733) 67 1,468 4,072
--------- --------- --------- ---------
TOTAL REVENUES.................. 77,339 58,456 220,417 161,282
--------- --------- --------- ---------
COSTS AND EXPENSES:
Depreciation - operating leases..... 57,429 38,803 155,026 109,365
Selling, general and administrative. 6,288 4,998 17,436 13,415
Interest............................ 11,018 8,210 30,183 21,851
Other............................... 7,427 455 9,177 1,164
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES........ 82,162 52,466 211,822 145,795
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES...... (4,823) 5,990 8,595 15,487
PROVISION FOR INCOME TAXES............. (1,933) 2,505 3,693 6,484
--------- --------- --------- ---------
NET INCOME (LOSS)...................... ($2,890) $3,485 $4,902 $9,003
========= ========= ========= =========
NET (LOSS) INCOME PER COMMON SHARE .... ($0.35) $0.43 $0.60 $1.10
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON
SHARE - ASSUMING DILUTION........... ($0.35) $0.41 $0.57 $1.09
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES......... 8,245 8,162 8,219 8,181
========= ========= ========= =========
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES............... 8,245 10,426 8,596 10,493
========= ========= ========= =========
</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
September 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................. $195,928 $90,653
--------- ---------
INVESTING ACTIVITIES:
Cost of equipment acquired for lease..................... (275,965) (166,549)
Cash received on disposition of equipment................ 16,103 --
Cash received over revenue recognized on leases.......... (623) 38,483
Cash paid for acquisition, net of cash received.......... (12,899) (8,898)
Property and equipment purchases......................... (1,258) (775)
--------- ---------
Net cash used for investing activities................... (274,642) (137,739)
--------- ---------
FINANCING ACTIVITIES:
Borrowings:
Nonrecourse............................................ 194,094 104,007
Recourse............................................... 620,986 198,522
Repayments:
Nonrecourse............................................ (130,795) (72,377)
Recourse............................................... (573,816) (170,183)
Issuance of common stock................................. 772 650
Purchase of outstanding common stock..................... (2,656) (1,263)
--------- ---------
Net cash provided by financing activities................ 108,585 59,356
--------- ---------
IMPACT OF EXCHANGE RATE
CHANGES ON CASH.......................................... (585) (150)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS..................... 29,286 12,120
CASH AND CASH EQUIVALENTS:
Beginning of period...................................... 16,569 6,888
--------- ---------
End of period............................................ $45,855 $19,008
========= =========
</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 three and nine month periods ended September 30,
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 September 30, 1998 and December 31,
1997, $7,051,000 and $3,964,000, respectively, of such amount was
restricted solely for repayment of the debt securities of Leasing Solutions
Receivables II, Inc., Leasing Solutions Receivables III, Inc. and Leasing
Solutions Receivables IV, Inc., the Company's wholly-owned subsidiaries,
issued in private placements in 1998 and 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, 1998, and December 31, 1997, are shown
below (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ----------
<S> <C> <C>
Direct finance leases:
Minimum lease payments receivable......... $96,687 $22,857
Estimated unguaranteed residual values.... 9,435 4,345
Initial direct costs - net................ 75 33
Unearned lease income (14,745) (2,966)
----------- ----------
Investment in direct finance leases - net.. $91,452 $24,269
=========== ==========
Operating leases:
Equipment under operating leases.......... $948,872 $783,784
Initial direct costs - net................ 8,312 7,540
Accumulated depreciation.................. (363,847) (264,071)
Allowance for doubtful accounts........... (261) (228)
----------- ----------
Investment in operating leases - net....... $593,076 $527,025
=========== ==========
</TABLE>
Most of the increase in investment in leases was financed
with nonrecourse and recourse debt.
4. ACQUISITIONS
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. 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 transaction was accounted for as a
purchase. In addition, the Company assumed the office leases of the seller
and 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.
In July 1998, the Company acquired substantially all of the stock of
Bayshore Leasing ("Bayshore"), a Canadian company specializing in the
origination, processing and administration of transactions with respect to
equipment with an original purchase price typically under $20,000 (Cdn.).
The purchase price was approximately $16,400,000, $14,000,000 of which was
paid in cash at closing with the proceeds of a borrowing from a money center
bank. The loan matures in October 2002, bears interest, at the election of
the Company, at the Bank's prime rate (8.5% at September 30, 1998), or LIBOR
(5.3% at September 30, 1998) plus 200 basis points, with interest payable
monthly, and requires principal payments of 16 equal quarterly instalments
of $875,000, beginning in January 1999. The balance of the purchase price
was represented by promissory notes of the Company due in June 1999. In
connection with the transaction, the Company acquired tangible assets
(primarily leases) with a total value of $67,469,000, assumed recourse and
nonrecourse debt of $64,283,000, and recorded goodwill of $13,214,000. The
transaction was accounted for as a purchase. In addition, the office leases
of the Bayshore remained in place and Bayshore retained its 51 employees.
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 and nine month periods ended September 30, 1997 have 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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator - net income (loss)
available to common shareholders... ($2,890) $3,485 $4,902 $9,003
Effect of dilutive securities -
convertible debt (net of tax)....... -- 828 -- 2,484
--------- --------- --------- ---------
($2,890) $4,313 $4,902 $11,487
========= ========= ========= =========
Denominator for basic net income
per share - weighted average
shares outstanding.................. 8,245 8,162 8,219 8,181
Effect of dilutive securities:
employee stock options.............. -- 205 377 253
convertible debt.................... -- 2,059 -- 2,059
--------- --------- --------- ---------
Denominator for diluted net income
per share - adjusted weighted
average shares outstanding and
assumed conversion of dilutive
securities...,...................... 8,245 10,426 8,596 10,493
========= ========= ========= =========
Net income (loss) per share - basic.. ($0.35) $0.43 $0.60 $1.10
========= ========= ========= =========
Net income (loss) per share -
diluted.............................. ($0.35) $0.41 $0.57 $1.09
========= ========= ========= =========
</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 and nine month periods ended
September 30, 1998, comprehensive income (loss) was $(3,340,000) and
$4,622,000, respectively, compared to $3,185,000 and $8,553,000,
respectively, for the comparable periods in 1997. 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 SFAS 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 year ended
December 31, 1998.
6. RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
7. LEGAL MATTERS
On November 11, 1998, the Company was served with a Complaint filed as a
class action in United States District Court for the Northern District of
California, alleging violations of the Securities Exchange Act of 1934.
The class action was commenced on behalf of persons who purchased the
common stock of the Company during the period between July 23, 1998 and
November 9, 1998, inclusive. The Plaintiffs seek unspecified monetary
damages and their costs and expenses incurred in the action. The action is
in its very early stages, and the Company has not yet begun the evaluation
of the allegations and claims made in the Complaint. The Company has not
yet answered or otherwise responded to the Complaint.
On November 23, 1998, the Company was served with a complaint filed as a
class action in the United States District Court for the Northern District
of California on behalf of persons who purchased the Company's 6.875%
convertible notes due 2003 during the period between July 23, 1998 and
November 9, 1998, inclusive. The Complaint alleges violation of the
Securities Exchange Act of 1934. The Plaintiffs seek unspecified monetary
damages and their costs and expenses incurred in the action. The action is
in its very early stages, and the Company has not yet begun the evaluation
of the allegations and claims made in the Complaint. The Company has not
yet answered or otherwise responded to the Complaint.
8. BORROWING FACILITIES
The Company is presently in breach of certain obligations under certain of
its borrowing facilities, although no events of default have been declared,
and no notice of acceleration has been given the Company, by the lenders.
Management is actively engaged in discussions with the lenders and has
proposed arrangements to resolve the breaches. See "Status of Debt
Financing Arrangements" in Management's Discussion and Analysis of
Financial Conditions and Results of Operations, Item 2 hereof, for a
further description of the breaches.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
1998.
Results of Operations
Total revenues increased $18,883,000, or 32%, to $77,339,000, and $59,135,000,
or 37%, to $220,417,000, for the three and nine month periods ended September
30, 1998, respectively, compared with the corresponding prior year periods.
The increase in total revenues is primarily due to an increase in operating
lease revenues and is offset, in part, by losses on sales of equipment that
was previously on lease. Operating lease revenue increased $18,365,000, or
32%, to $75,632,000, and $61,272,000, or 40%, to $215,917,000 for the three
and nine months ended September 30, 1998, respectively, compared with
$57,267,000 and $154,645,000, respectively, for the same periods one year ago.
The increase in operating lease revenue in the third quarter and first nine
months of 1998 reflects a higher average investment in operating leases,
resulting from increases in operating leases originated by the Company in the
United States, Europe and Canada, compared to the same period in 1997.
Earned lease income increased $1,416,000, or 138%, to $2,440,000, and
$957,000, or 39%, to $3,423,000 for the three and nine month periods ended
September 30, 1998, respectively, compared with $1,024,000 and $2,466,000,
respectively, for the comparable periods in 1997. The increases in earned
lease income are primarily the result of the Company's acquisition of Bayshore
Leasing in the third quarter of 1998 (see footnote 4 - "ACQUISITIONS" in the
accompanying financial statements). Bayshore Leasing specializes in financing
equipment with an acquisition cost of less than $20,000 (cdn), predominantly
on terms that qualify for treatment as direct finance leases.
The increases in revenue noted above were partially offset by a decrease in
other income. For the third quarter of 1998, the Company recorded a loss of
$733,000, primarily related to losses on sale of equipment previously on
lease. This result compared to other income of $165,000 for the same quarter
in 1997. Other income for the first nine months of 1998 decreased $3,094,000
or 74%, to $1,077,000 from $4,171,000 for the same period in 1997. The
decrease in other income for the nine month period was primarily the result of
a decrease in gains on sales of equipment on leases, together with the third
quarter loss on sale of such equipment noted above.
Depreciation expense for operating leases increased $18,626,000, or 48%, to
$57,429,000 and $45,661,000, or 47%, to $155,026,000 for the three and nine
month periods ended September 30, 1998, respectively, compared with
$38,803,000 and $109,365,000, respectively, in the same periods one year ago.
The increases are primarily due to increases in the operating lease base,
resulting from increases in operating leases originated by the Company in the
United States, Canada and Europe over the past year or acquired as part of the
Canadian acquisition described above.
Selling, general and administrative expenses increased $1,290,000, or 26%, to
$6,288,000 and $4,021,000, or 30%, to $17,436,000 for the three and nine month
periods ended September 30, 1998, respectively, compared with $4,998,000 and
$13,415,000, respectively, for the comparable periods in 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
acquisitions described above, expansion of the Company's European operations
and continued growth in the United States. In addition, selling, general and
administrative expenses for the quarter and nine months ended September 30,
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 efforts resulting in the
continued growth of the operating lease portfolio in the United States.
Interest expense increased $2,808,000, or 34%, to $11,018,000 and $8,332,000,
or 38%, to $30,183,000 for the three and nine month periods ended September
30, 1998, respectively, compared with $8,210,000 and $21,851,000,
respectively, for the corresponding periods 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, offset, in part, by a decrease in the Company's average
borrowing rate.
Other expenses for the quarter ended September 30, 1998 increased $6,972,000
to $7,427,000 from $455,000 for the same quarter in 1997. For the nine month
period ended September 30, 1998, other expenses increased $8,013,000 to
$9,177,000 from $1,164,000 for same period last year. The increase in other
expenses for both the quarter and nine month period ended September 30, 1998
is primarily due to provisions of approximately $6,300,000 with respect to the
revaluation of equipment that had previously been leased, and to provide an
impairment reserve for a specific exposure related to an installment buyout of
equipment by one customer, in the third quarter of 1998. As a result of the
charges recorded in the third quarter of 1998, the Company has adjusted its
estimates of residual values with respect to equipment on short-term (less
than 30 months) leases which will result in higher depreciation charges in
future periods.
The provision (credit) for income taxes was $(1,933,000) and $3,693,000 for
the three and nine month periods ended September 30, 1998, respectively,
representing decreases of $4,438,000, or 177%, and $2,791,000, or 43%,
respectively, from $2,505,000 and $6,484,000, respectively, for the comparable
periods in 1997. The decrease is primarily attributable to a corresponding
decrease in pre-tax income in the third quarter and nine months ended
September 30, 1998, compared to the same periods one year earlier. In
addition, the Company's effective tax rate increased to 43% for the nine month
period ended September 30, 1998, from 42% for the same period in 1997.
The Company reported a net loss of $2,890,000, or $.35 per share, for the
third quarter of 1998, compared to net income of $3,485,000, or $.41 per
share, for the same period one year ago, representing a decrease of
$6,375,000, or 183%. Net income decreased $4,101,000, or 46%, to $4,902,000,
or $.57 per share, for the nine month period ended September 30, 1998,
compared with $9,003,000, or $1.09 per share, for the corresponding period one
year earlier.
Liquidity and Capital Resources
The Company generated cash flow from operations of $195,028,000 during the
first nine months of 1998, compared to net income of $4,902,000 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
$155,026,000, and the combined net 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
$36,000,000. Investing activities, which are primarily related to investments
in equipment for lease, used $275,542,000 during the period. Financing
activities generated $108,585,000 from $815,080,000 in new borrowings of
recourse and nonrecourse debt and $772,000 from the Company's issuance of
common stock upon exercise of options, reduced by $704,611,000 used to repay
recourse and nonrecourse borrowings and $2,656,000 used to repurchase common
stock. In addition, exchange rate changes had the impact of reducing cash and
cash equivalents during the period by $586,000. The net result of the above
activity for the quarter ended September 30, 1998 was an increase in cash and
cash equivalents of $29,285,000.
The financing necessary to support the Company's leasing activities has
principally been provided from nonrecourse and recourse debt. Historically,
the Company has obtained recourse and nonrecourse borrowings from money center
banks, regional banks, insurance companies, finance companies and financial
intermediaries.
The Company's debt financing activities have historically provided
approximately 85% to 90% of the purchase price of the equipment purchased
by the Company for lease to its customers. In the Company's European
operations, the percentage is generally in the range of 80% to 85%. The
10% to 15% (15% to 20% in Europe) balance of the purchase price (the
Company's "equity" investment in equipment) has generally been financed
by cash flow from the Company's operations, recourse debt, or common
stock or convertible debt sold by the Company. Historically, debt
financing for all or a portion of the Company's "equity" investment in
equipment purchased for lease to others has not been readily available in
the marketplace and, when available, often required an interest rate
materially higher than is required by the Company's conventional debt
financing.
As has been the case historically, the Company's cash flow from
operations will only be sufficient for the Company to finance a
relatively small percentage of its projected equity investment
requirements. As a result of the Company's loss for the quarter ended
September 30, 1998, and the related adjustments to book values of certain
of its equipment portfolios, no assurances can be given that the Company
will be able to finance its projected equity investment requirements
through recourse debt or the sale of common stock or convertible debt.
If the Company is unable to obtain its projected equity investment
requirements through such sources or other sources, it will be forced to
substantially curtail its lease financing activities, which may
materially adversely affect its results of operations and financial
condition. Although the Company may sell certain of its operations or
other assets in order to finance its equity investment requirements
through the end of 1999, no assurances can be given that any such sale or
sales can be accomplished any earlier than the first quarter of 1999, or
at all, or that, if accomplished, they will raise all of the Company's
equity investment requirements for that period. Even if such borrowings
are obtained, they are likely to involve relatively higher interest rates
and fees than the Company has historically paid with respect to such
borrowings. See "Status of Debt Financing Arrangements" below.
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 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.
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 $230,000,000 at September 30,
1998. A brief description of each of those facilities follows.
(1) $175,000,000 revolving warehouse facility syndicated with
eleven banks, expiring December 1998. At September 30, 1998,
$75,312,000, with a weighted average interest rate of 6.9% 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 September 30, 1998) or LIBOR (5.3% at
September 30, 1998) plus 120 basis points.
(2) $15,000,000 revolving warehouse facility (none outstanding at
September 30, 1998; $15,000,000 outstanding at November 15,
1998) with three banks, with borrowings available through June
1999, and repayments due 240 days after borrowing. Borrowings
bear interest at LIBOR (5.3% at September 30, 1998) plus 150
basis points.
(3) $25,000,000 revolving facility ($24,800,000 outstanding at
September 30, 1998) with three banks, expiring December 1998.
Borrowings bear interest at the bank's prime rate (8.5% at
September 30, 1998) plus 95 basis points.
The Company also has a $15,000,000 revolving recourse facility
($15,000,000 outstanding at September 30, 1998), which has expired, with
one bank (the "Receivables Line"). Borrowings bear interest at the
bank's prime rate (8.5% at September 30, 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 significant customers of the Company.
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 (L30,000,000 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 ( 5.3 % at September 30,
1998) plus 145 basis points. There was approximately $49,192,000
outstanding under this facility at September 30, 1998. The line expires
in December 1998.
The Company's Canadian operations maintain a three-tiered recourse credit
facility with a Canadian bank, with borrowing availability through August
1999, 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.
Borrowings under this facility bear interest, at the borrower's election,
at the Canadian prime rate (7.25% at September 30, 1998) plus 25 basis
points or Canadian dollar LIBOR (5.43% at September 30, 1998) plus 135
basis points. There was $9,935,000 outstanding under this facility, with
a weighted average interest rate of 6.96%, at September 30, 1998.
The second tier is an approximately $4,200,000 ($6,000,000 Canadian)
revolving facility with repayments due 90 days after each borrowing.
Borrowings under this facility bear interest, at the subsidiary's
election, at the Canadian prime rate ( 7.25% at September 30, 1998) plus
25 basis points or Canadian dollar LIBOR ( 5.43% at September 30, 1998)
plus 135 basis points. There was $2,929,000 outstanding under this
facility, with a weighted average interest rate of 6.75%, at September
30, 1998.
The third tier is 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
(7.25% at September 30, 1998) plus 150 basis points. There was
$1,117,000 outstanding under this facility, with a weighted average
interest rate of 8.75%, at September 30, 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 September 30, 1998, the Company has refinanced
approximately $98,476,000 of borrowings under its other short-term
facilities through this facility. At September 30, 1998, $20,001,000 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 $50,000,000 commercial paper-
backed conduit, nonrecourse line of credit provided by an affiliate of a
money center bank. This is a revolving facility expiring in March 1999.
Through September 30, 1998, the Company has financed approximately
$103,693,000 of borrowings under this facility. At September 30, 1998,
the Company had $31,612,000 outstanding under this facility, at a
weighted average interest rate of 7.3%.
The Company's Canadian operations maintain 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 borrower's election, at Canadian
prime rate (6.5% at September 30, 1998) plus 25 basis points or Canadian
dollar LIBOR ( 5.43% at September 30, 1998) plus 135 basis points. There
were no borrowings outstanding under this facility at September 30, 1998.
In June 1998, the Company completed its first commercial paper offering.
The commercial paper is supported by a letter of credit issued by a money
center bank. The letter of credit is backed by a $60,000,000 liquidity
line of credit, with four banks, which expires in June 1999 (the "CP
Line"). The commercial paper is rated A-1 by Standard & Poors and P-1 by
Moody's Investors Service. The Company may borrow the net present value
of the periodic rental payments of the leases financed with the proceeds
of the commercial paper, plus up to 7% of the Company's equity in the
related equipment, the sum of which may not exceed 95% of the original
cost of the equipment. At September 30, 1998, an aggregate of
$27,483,000, with a weighted average interest rate of 5.6%, was
outstanding under the issued commercial paper. Under the terms of the
agreement, the Company may roll over the outstanding commercial paper as
it becomes due (generally from 30 to 90 days after issuance) at market
rates for such debt.
In June 1998, the Company obtained a $25,000,000, 90-day revolving,
recourse line of credit from a financial affiliate of a major investment
bank. Borrowings under the line bear interest at the rate of one month
LIBOR (5.3% at September 30, 1998), plus 1.25%, per annum. The Company's
obligations under the line are secured by its interest in the residuals
from a portfolio of leased equipment. The line was put into place to
provide interim financing prior to the completion of a planned
securitization offering by the Company, to be managed by the investment
bank. Although the portion of the proposed securitization related to the
refinancing of the then existing debt on the portfolio of equipment and
related leases securing the Company's obligations under the
securitization was completed in late September 1998 (see description of
this transaction below), the portion of such securitization intended to
finance the Company's equity investment in such equipment and, in the
process, the necessary funds to repay the $23,000,000 balance on this
line of credit was not completed, principally due to then recent changes
in the market for such debt, resulting in a substantial reduction in
availability in such market. As a result, the expiration of such line
has been extended until November 30, 1998.
In September 1998, the Company completed the private sale, through a
wholly-owned subsidiary of the Company, of $123,000,000 of equipment
asset-backed notes, a so-called "securitization." The weighted average
interest rate on the three classes of notes issued in the transaction was
5.63%. The transaction was supported by a note insurance policy issued
by a monoline insurer and was rated AAA by both Standard & Poors and
Moody's Investor Services.
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 gross 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. In June 1998, the Company financed its residual interest in a
lease portfolio, pursuant to an arrangement accounted for as a sale,
through a leasing affiliate of a money center bank. The transaction
generated gross proceeds of $18,270,000, a portion of which was used to
repay certain 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 $146,864,000
($3,735,000 of which is recourse), with a weighted average interest rate
of 7.1% per annum, remained outstanding under all such arrangements as of
September 30, 1998.
See Note 4 of Notes to Consolidated Financial Statements, above, for a
discussion of the Company's borrowings used to acquire Bayshore Leasing.
The agreements for most of the facilities described above contain
covenants regarding leverage, interest coverage, minimum net worth and
profitability and a limitation on the payment of dividends. As a result
of its loss in the quarter ended September 30, 1998, the Company was in
breach of its profitability covenant under many of its borrowing
agreements. However, the Company obtained a waiver of such breach from
the requisite number of lenders under each of those agreements.
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, other than
with respect to its equity investment, are typically structured to match
the payments due under the leases securing the borrowings.
Status of Debt Financing Arrangements
The Company's principal warehouse lines of credit in the United States and in
Europe, and two other substantial lines under which an aggregate principal
amount of $48,000,000 is outstanding, expire between November 30, 1998 and
December 31, 1998. If any one of these lines is not renewed and another line
or lines is not substituted for the expired line, the Company will be
obligated to immediately pay all amounts under that line. The Company cannot
presently meet any such payment obligation and does not expect to be able to
do so in the near future. If the Company fails to timely meet any such
obligation, it will face the same risks of events of default and inability to
finance its operations described below. Although the lenders under such lines
have given no assurances that such lines will be renewed or the terms on which
they would agree to any such renewal, the Company believes it is likely that
it will reach an agreement with the lenders under each of such lines to extend
the respective line; provided that extensions of each of the warehouse lines
may involve reduced borrowing capacity under that line. However, the Company
believes one or more of such lenders is likely to require amendments to the
economic provisions of such lines that are less advantageous than the terms of
the Company's current financings, thereby reducing the Company's future
results. Furthermore, in order to obtain one or more of such extensions,
certain of such lenders may require the Company to agree to sell a portion of
its operations or other assets in order to pay down all or a portion of its
obligations under such line.
The agent bank under the Company's principal warehouse line of credit in the
United States is in the process of reviewing the collateral and the Company's
compliance with the terms of the line and has informed the Company that it may
not permit additional borrowings under the line until it has determined that
the lenders under the line have the requisite amount of eligible collateral
for the aggregate amount outstanding under the line and that the Company is in
compliance with its other obligations under the line. The same bank is agent
under the Company's European warehouse line, under which availability has been
curtailed while the agent considers the Company's proposal to correct certain
technical legal and business defects relating to the perfection of the
lenders' security interests in the collateral for the line. If the agent does
not permit it to borrow under the line, it is likely that the Company will not
be able to timely meet its obligations under certain of its other borrowing
arrangements, even if it were to curtail its operations, thus putting the
Company in default under those lines.
The Company recently determined that it was in breach of covenants under its
$15,000,000 Receivables Line. The Company informed the lender of the
circumstances causing such breach and proposed to the lender an arrangement
pursuant to which the lender would be given substitute collateral for the
Company's obligations under the line, in return for the lender agreeing to
permit the Company to repay a material portion of the outstanding amount
under the line over a several month period. The lender has agreed to
forebear, until December 4, 1998, from treating the breaches as a default
under the line. The lender has stated that it will examine the proposed
substitute collateral and consider the other terms of the Company's proposed
arrangement, without giving any assurances that it will agree to the
Company's proposed terms or not treat the breaches as a default on December
4, 1998, when the forbearance expires. Although the Company believes it is
likely that it will be able to reach an agreement with the lender so as to
avoid an event of default under the line, if it does not reach such
agreement by December 4th, and an event of default occurs under the line and
the Company's obligations under the line are accelerated, an event of
default under virtually all of the Company's significant lines of credit and
other borrowings will be deemed to have occurred. Such an occurrence would
prevent the Company, unless it obtains a waiver of each of such event of
defaults (with respect to which it can give no assurances), from being able
to continue to borrow the funds necessary to finance its operations. See
"Factors That May Affect Future Operating Results - Dependence on
Availability of Financing."
On November 20, 1998, the Company had insufficient funds, in the aggregate
amount of approximately $2,300,000, to be able to make full payments of
amounts due on one of its lines of credit, the CP line, and on two of its
other borrowings. The failure to make an aggregate of approximately
$1,300,000 of the payments on such borrowings will not become an event of
default unless the payments are not made by November 30, 1998, at the
earliest. The failure to make the other payment on the line of credit
constitutes an event of default under that line. Although no assurances can
be given, the Company expects to cure this event of default in the near future
by either paying to the lenders the approximately $1,000,000 short-fall under
the borrowing base for the line or adding leases to the borrowing base with an
aggregate value of at least $1,000,000. The Company also has a short-fall of
approximately $4,600,000 on the borrowing base under its principal United
States warehouse line, but believes it presently has a combination of
available cash and additional eligible leases to include in the borrowing base
in order to bring the Company back into compliance under the line. As noted
above, if an event of default occurs under any of these lines and the line is
accelerated, an event of default under all of the Company's significant lines
of credit and other borrowings will be deemed to have occurred. The Company
has not received a notice of acceleration under any of the above-described
lines.
In addition to the issue of availability under its principal warehouse line,
the Company is in immediate need of additional debt financing for its
operations, in substantial part due to the growth of its business,
particularly in Europe. Two of the Company's lenders have expressed a
preliminary willingness to provide such financing and are in the process of
engaging in the diligence necessary to be able to provide such financing.
Although the Company believes that the financing request to such sources,
aggregating less than $10,000,000, is likely to provide sufficient cash for
the Company to fund its existing operations for at least 90 days without
having to curtail any of those operations, no assurances can be given that
such financing will be provided on a timely basis or in the aggregate amounts
required, or at all. If such financing is not provided on a timely basis at
or near the aggregate amount requested, it is likely that the Company will not
be able to timely meet certain of its obligations under certain of its
borrowing arrangements, even if it were to curtail its operations, thus
putting the Company in default under those lines. If such financing is
provided, the Company believes it is likely to include less advantageous
terms than the terms of the Company's current financings, thereby reducing the
Company's future results.
Subject to the uncertainties discussed above, the Company believes it will
have adequate cash flow from operations and existing and prospective
collateral, in the form of lease payments on the leases in its portfolio and
residuals from the equipment subject to such leases, to support additional
financing sufficient for it to meet its obligations under its existing and
such additional financing arrangements. The Company is in the process of
providing information concerning its cash flow and existing and prospective
collateral which it believes should be adequate to give its lenders a
reasonable level of comfort with respect to the Company's ability to meet
those obligations. Accordingly, if the Company's lenders continue to finance
its short-term cash requirements, the Company believes it will be able to
avoid defaulting on its borrowing obligations and curtailing its operations,
thus giving it time to sell such of its operations or other assets, or engage
in other strategic transactions, as may be necessary to fund its longer term
financing requirements.
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
Reductions in Residual Values. 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 (except as described
below with respect to short-term leases) 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, over the last five years, the Company has entered into
several new vendor 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's financial results for its quarter ended September 30, 1998,
reflects a substantial adjustment to the book value of certain of the
equipment in its portfolio subject to leases with original terms of less than
36 months ("short-term leases"). This adjustment resulted from the recent
expiration of short-term leases, principally with one lessee and with respect
to computer equipment that the Company has not leased to any other lessee,
that the Company purchased from another lessor, in this case a systems
integrator. Due, in part, to the Company having virtually no opportunity to
remarket the equipment in-place to the lessee, it was returned at the
expiration of the leases, at which point the market value of the equipment was
less than its book value. As a result of this experience, the Company has
determined that equipment subject to short-term leases may be more difficult
to remarket in-place than its other portfolio equipment. Accordingly, the
Company has adjusted its estimates of residual values with respect to
equipment on short-term leases which will result in higher depreciation
charges in future periods.
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, other
than as described above with respect to short-term leases, the Company
has been relatively successful in its ability to remarket equipment in-
place. However, the recent decreases in prices for desktop and laptop
computers may have the effect of creating an incentive for an end-user to
replace the Company's equipment, rather than to extend an existing lease,
even if the end user is offered a substantially reduced rental rate. In
the event desktop or laptop computers are returned to the Company at the
end of the lease term or the Company is forced to remarket such equipment
by extending the related lease at a substantially reduced rental rate or
selling such equipment to the lessee at less than its book value, the
Company's potential residual recovery from such equipment will be
substantially reduced and, in certain cases, will result in a book loss
to the Company. No assurances can be given that a substantial amount of
the equipment leased by the Company will be remarketed in-place or that,
if remarketed in-place, the Company will be able to recover the book
value of such equipment through such remarketing.
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% (15% to 20% in Europe) of the original equipment
cost, commonly known in the equipment leasing industry as an "equity"
investment. The Company's equity investment typically has been 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 typically has been 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 continue its operations is dependent, in
substantial 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, until recently, 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, 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," particularly "Status of Debt
Financing Arrangement," and "Reduction in Residual Values," above.
Interest Rate Risk. The Company's equipment leases are structured on
a fixed periodic (i.e., monthly or quarterly) 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 provide the opportunity, as
necessary, 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, that the costs of hedging will
not exceed the benefits, or that the Company's lenders will not increase
the interest rates on borrowings under the Company's lines of credit upon
their renewal. See "MD&A - Liquidity and Capital Resources,"
particularly "Status of Debt Financing Arrangements."
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 outstanding lease agreements with Ernst & Young and
Northern Telecom expire over the next three years. Most of the leases
with Xerox, by Dollar Volume of related equipment, expired by September
30, 1998. In the event that Ernst & Young or Northern Telecom, 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 and financial condition
could be materially adversely affected. In the event any of such
customers returns to the Company a material amount of the equipment it
has leased from the Company at the expiration of the term of the
respective lease or leases, the Company's operating results and financial
condition would be materially adversely affected. See "Reduction in
Residual Values," above.
Management of Growth. In the past five years, the Company has
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 and
the acquisition of its Canadian operations, the Company's investment in
leases grew from $125 million at December 31, 1994 to $685 million at
September 30, 1998. 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, including the recovery of the Company's estimated residual
values on its equipment, 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 growth of its business, the Company has added
a substantial number of new personnel since the beginning of 1995. In
the process of implementing its expansion goals (see "Global Expansion"
and "Small Ticket Operations", below), the Company has acquired three
separate leasing operations, with an aggregate of approximately 90
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 hire and retain skilled employees
and on the ability of its officers and key employees 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, or to hire 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 Spain and Finland.
In April 1997, the Company acquired the lease portfolio and operations of
a Canadian leasing company, with lease operations similar to the
Company's operations, and now conducts business throughout Canada. In
July 1998, the Company acquired a Canadian company, with operations
throughout Canada, in the so-called "small-ticket" leasing business (see
"Small Ticket Operations", below).
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
introduction of the Euro in Western Europe, 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 reviewed the equipment in its portfolio to determine
whether such equipment and, as a result, its use and market value may be
materially adversely affected by this so-called "Year 2000" conversion.
The Company has, directly or indirectly, obtained the representations of
the manufacturers of virtually all of such equipment that the equipment
is, or will be with the use of a software "patch" to be provided at no
expense by such manufacturer, Year 2000 compliant. Based solely on such
representations, the Company presently believes that it is likely that
only an immaterial amount, as measured by current book value, of the
equipment in its portfolio is not Year 2000 compliant. However, no
assurances can be given that the representations of each of such
manufacturers is accurate. The Company's leases generally include a
disclaimer with respect to the Company giving the lessee any
representations concerning the performance of the equipment subject to
such lease, and include a so-called "hell-and-high water" provision,
requiring the lessee to continue to make payments under the lease even if
the equipment subject to the lease does not perform as represented by its
manufacturer or at all. However, if any equipment leased by the Company
is not, or cannot be easily made, Year 2000 compliant, the lessee is
likely to return such equipment to the Company upon the expiration of its
lease and its fair market value is likely to be negligible, in which case
the Company will not be able to recover its estimated residual value in
such equipment. See "Reduction in Residual Value," above.
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 the 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. 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. The Company has retained consultants to test such software
and systems in early 1999. However, no assurances can be given that such
review by the Company or such testing has uncovered or will uncover,
respectively, every potential adverse effect of the Year 2000 conversion
in connection with any of such software or systems.
The Company has 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. It is too early in that review 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 maintains 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 adequately estimate the total
cost to it of recognizing, evaluating and addressing any such exposures.
The Company's Board of Directors has approved a budget, involving
aggregate costs of approximately $600,000, with respect to the efforts of
the Company to recognize and evaluate any such exposures. A majority of
such costs, which will be incurred in 1999, must be expensed and,
accordingly, will adversely impact the Company's results of operations in
1999. No assurances can be given that such budget will be adequate to
recognize and evaluate all of the Company's Year 2000 conversion
exposures.
Small Ticket Operations. In July 1998, the Company acquired Bayshore
Leasing, a Canadian company engaged in so-called "small ticket" lease
financing. The acquired company specializes in high volume origination,
processing and administration of lease transactions, typically involving
under $20,000 of equipment, to small businesses. Although no assurances
can be given, particularly given the impact of recent events on the
Company's access to additional capital (see "MD&A - Liquidity and Capital
Resources - Status of Debt Financing Arrangements"), the Company hopes to
expand the existing "small ticket" operations in Canada and ultimately
provide a "small ticket" leasing capability to its U.S. customers.
The acquired Canadian company has been profitable and has an experienced
management team. However, the Company's management team has had limited
experience in managing a high volume, people intensive small ticket
operation with its relatively lower credit profile lessees. In addition,
there can be no assurances that the Company will be able to expand those
operations in Canada or begin providing small ticket financing
capabilities in the U.S. without exacerbating the potential problems it
faces in managing its overall business, including its historic lease
financing activities, and increasing the resultant risks (see "Management
of Growth", above). If the operations of the acquired company or the
possible expansion of the Company's small-ticket activities are not well
managed, the Company could suffer losses from its small-ticket
operations, which could have a material adverse affect on its results of
operations and financial condition.
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 and nine month
periods ended September 30, 1998, comprehensive income (loss) was
$3,340,000 and $4,622,000, respectively, compared to $3,185,000 and
$8,553,000, respectively, for the comparable periods in 1997. The
difference between net income and comprehensive income primarily 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 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 activities and expansion,
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 impact on the Company of any
changes in its depreciation practice, 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, particularly relating to
its global expansion and expansion into small-ticket leasing, 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
On November 11, 1998, the Company was served with a Complaint
filed as a class action in United States District Court for the
Northern District of California, alleging violations of the
Securities Exchange Act of 1934. The class action was commenced
on behalf of persons who purchased the common stock of the
Company during the period between July 23, 1998, and November 9,
1998, inclusive. The Plaintiffs seek unspecified monetary
damages and their costs and expenses incurred in the action.
The action is in its very early stages, and the Company has not
begun the evaluation of the allegations and claims made in the
Complaint. The Company has not yet answered or otherwise
responded to the Complaint.
On November 23, 1998, the Company was served with a complaint
filed as a class action in the United States District Court for the
Northern District of California on behalf of persons who purchased the
Company's 6.875% convertible notes due 2003 during the period between July
23, 1998 and November 9, 1998, inclusive. The Complaint alleges violation
of the Securities Exchange Act of 1934. The Plaintiffs seek unspecified
monetary damages and their costs and expenses incurred in the action. The
action is in its very early stages, and the Company has not yet begun the
evaluation of the allegations and claims made in the Complaint. The
Company has not yet answered or otherwise responded to the Complaint.
Item 2. Changes in Securities
None
Item 3. Defaults Under Senior Securities
The Company is presently in default of certain of its
obligations under certain of its borrowing facilities. See
"Status of Debt Financing Arrangements" in Management's
Discussion and Analysis of Financial Condition and Results of
Operation, Item 2 of Part I, Financial Information, for a
description of the defaults.
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>
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/ George L. Bragg
George L. Bragg
Chief Financial Officer
(Principal Financial Officer)
DATE: November 23, 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> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,854
<SECURITIES> 0
<RECEIVABLES> 19,247
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,660
<DEPRECIATION> 0
<TOTAL-ASSETS> 793,221
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 38,846
<OTHER-SE> 40,480
<TOTAL-LIABILITY-AND-EQUITY> 793,221
<SALES> 75,632
<TOTAL-REVENUES> 77,339
<CGS> 57,429
<TOTAL-COSTS> 57,429
<OTHER-EXPENSES> 6,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,018
<INCOME-PRETAX> (4,823)
<INCOME-TAX> (1,933)
<INCOME-CONTINUING> (2,890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,890)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
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