UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBERfor the fiscal year ended December 31, 1997.1998.
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
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LEASING SOLUTIONS, INC
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)INC.
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(Name of registrant as specified in its charter)
California 77-0116801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ten10 Almaden Boulevard, Suite 1500, San Jose, California 95113
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (408) 995-6565
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Preferred Stock Rights with respect to Common Stock New York Stock Exchange
6 7/8% Convertible Subordinated Notes New York Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
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 [_][X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [_] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average bid and asked prices of
such stock as of March 20, 1998,May 31, 1999, was $179,662,000.$8,806,483. As of such date, 8,202,1008,288,454
shares of the registrant's Common Stock were outstanding.
Portions of the registrant's Proxy Statement for theits 1999 Annual Meeting of
Shareholders to be held on May 21, 1998, to be filed pursuant to Section 14 of the Securities Exchange Act
of 1934, are incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
PART I
ITEM 1. BUSINESS
INTRODUCTIONIntroduction
Leasing Solutions, Inc. (the "Company" or "LSI") is a full-service global
leasing company that specializes, since 1986, has
specialized in leasing information processing and communications equipment,
principally to large, creditworthy customers, both U.S. and foreign. The
Company's leasing activities arehave been conducted primarily through vendor
programs and strategic alliances with equipment manufacturers, value-added
resellers ("VARs")(VARs) and systems integrators. LSI's focus ishas been on operating
leases because such leases provide the opportunity for the Company to
realize the full benefit of residuals received upon remarketing the equipment to
the original customer at the end of the initial lease term.leases. The Company expanded its operations to Western Europe in early 1996 and
to Canada in early 1997 and mid 1998 through acquisitions of existing leasing
companies. As described below, recent events, commencing in late 1998, have
forced the Company to materially modify, and materially reduce the volume of,
its historical business.
To date, the Company has purchased approximately $1.3$1.7 billion of equipment
for lease to its customers, and has in place over 700more than 800 master lease
agreements with corporate customers. Although the Company has leased and will continue to lease a variety
of information processing and communications equipment, it estimates that,
during 1997,1998, desktop and laptop computers represented approximately 84%79% of its
Dollar Volume (Dollar Volume represents the total purchase price of equipment
placed under lease with customers).
The Company's vendor programs generally involve equipment purchase and lease
marketing arrangements with manufacturers, VARs and systems integrators
(collectively "vendors"). LSI has existing vendor relationships in the United
States with Vanstar Corporation, Fujitsu PC Corporation and HAL Computer
Systems, Inc. The Company also has strategic alliances with Leasing Group, Inc.
in the U.S. and with Schroder Leasing Limited in Western Europe. These companies
will make available so-called "small ticket" lease financing to the Company's
vendors in those respective geographic regions and will refer to the Company
leasing opportunities with customers that fit the Company's typical lease
financing profile. Through additional strategic alliances, the Company is in a
position to offer asset management services to its customers and will receive
refurbishment services and remarketing assistance for certain of its equipment
that has reached the remarketing phase.
The Company believes that the value of its equipment, and particularly
equipment used in client/server network environments, is greatestimportant to the
original customer due to the tendency forbecause the equipment to becomeoften becomes "embedded" in the
customer's mission critical operations. Therefore, the Company seeks to maximize
the amount of equipment that is remarketed in place to the original customer, in
order to realize the considerably higher residual values that may result from such
remarketing, as compared to equipment sold or leased to a third party.
CUSTOMERSRecent Update
Due to recent events that have materially and adversely affected the
Company's business and ability to continue its operations as conducted in the
past, in the first quarter of 1999, the Company changed its lease pricing
structure, making it unlikely that it will finance new operating leases for the
foreseeable future. The Company also substantially reduced its sales staff in
the first quarter of 1999, to take into account the reduced sales resources it
will require to conduct its anticipated lease financing activities. Although no
assurances of success can be given, in order to attempt to enhance its
remarketing results (see "Leasing and Sales Activities - Remarketing"), the
Company has moved several employees to its remarketing group and is in the
process of expanding its remarketing activities and related marketing channels.
In the first quarter of 1999, in its European operations, the Company also
suspended new lease financing activity, and is focusing on maximizing the
residual return on its European portfolio. The Company's Canadian subsidiary
has been evaluating the new and growing area of web based "small-ticket" lease
financing; however, the evaluation is significantly limited because its access
to debt financing has been adversely affected by the Company's results of
operations and defaults under its credit lines. The outcome of this small-ticket
project will depend on the ability of the Company to continue operations. (See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition ["MD&A"] - Liquidity and Capital Resources - Status of Debt Financing
Arrangements" and "Leasing and Sales Activities - Refocusing of Business and
Financing Activities.")
Customers
The Company currently has in place over 700more than 800 master lease agreements
with corporate customers. The services and support provided by the Company to its
customers includes custom lease payment streams and structures, short-term
leasing, technology refresh leases, trial leases, asset swaps and trade-ins,
upgrade and add-on financing, renewal and remarketing, personalized invoicing
and asset management and reporting.
The Company's typical customers arehistorically have been
large, creditworthy corporations and partnerships that require several million
dollars of equipment per year and are repeat customers. RepeatIn the past, repeat
business generated through existing relationships ishas been an important source
of revenue for the Company. As of December 31, 1997, over1998, more than 90% of the
lessees with whom the Company has a master lease agreement, have more than one
lease supplement in place with the Company.
Additionally, once the Company has a
master lease agreement with a customer, its ability to lease other
manufacturers' products to that customer is enhanced.
1
The ten largest customers of the Company during 1998, measured by Dollar
Volume, during
1997 are listed alphabetically below. The total Dollar Volume associated with
these customers represented approximately 83%75% of the Company's total new lease
originations for 1997.1998.
Aetna Life Insurance Monsanto
Deere & Company MotorolaLockheed Martin
Eastman Chemical Northern TelecomMotorola
Ernst & Young LLP Northern Telecom
First Plus Financial Office Depot
INDOPCO State of California
Honeywell Xerox
From 1995 through 19971998 (and in 1997)1998), approximately 78%60% of the Company's
total lease transactions (based on Dollar Volume) were with customers whose
credit ratings, or the credit ratings of their parent companies, were Baa or
better, as rated by Moody's Investor Services, or with customers who were not
rated but possess a credit profile equivalent to a Moody's Baa rating. While LSI
believes that its business is not dependent on any single customer, during 1997, Ernst &
Young, and Xerox accounted for 19% and 11%, respectively, of its revenues. In
the event any of the customers listed above, and particularly1998,
Ernst & Young LLP and Northern Telecom (which representedaccounted for 28% and 12%, of its
revenues, respectively, and approximately 19%16% and 15%19%, respectively, of the
Company's Dollar Volume in 19971998. Given the existing and 20% and 9%, respectively, ofproposed changes in the
Company's net book value at December 31, 1997) ceases to lease additional
equipment, or materially reducesbusiness activities (see "Leasing and Sales Activities - Refocusing of
Business and Financing Activities"), it is not presently expected that the
amountCompany will be leasing substantial Dollar Volumes of equipment it leases, from the
Companyto these
customers in the future, and such reduction in lease volume is not replaced by
other existing or new customers, the Company's operating results could be
materially adversely affected. See1999. (See "Factors That May Affect Future Operating Results" below.
In April 1997, the Company's vendor relationship with Dell Computer was
terminated by Dell when Dell formed a joint venture with Newcourt FinancialResults.")
Leasing and began using the joint venture for lease financing to its customers. However, as
a result of LSI's strong relationship with its Dell lease customers, LSI
successfully retained over 95% (based on master lease agreements) of its
existing Dell lessees. Consequently, the termination of the Dell relationship
did not materially adversely impact volume or revenues in 1997. In fact, the
Dollar Volume of equipment purchased from Dell in 1997 for lease to the
Company's customers, even after the termination of the Dell vendor relationship
in April, was approximately $145,000,000.
LEASING AND SALES ACTIVITIESSales Activities
Strategic Programs
APrior to 1998, a majority of LSI's business by Dollar Volume for 1997 washas been
generated through vendor programs. The programs with equipment vendors have
generally involveinvolved equipment purchasing and lease marketing arrangements. The programs generally have terms
of one year or two years. Certain of such agreements are extended automatically
for one year terms, unless they are terminated by either party upon the
expiration of the then existing term with prior written notice ranging from 90
to 180 days.
Customers introduced to the Company through its vendor programs typically
acquireacquired equipment from several manufacturers, which resultsresulted in additional
lease volume to the Company from "non-vendor"''non-vendor'' manufacturers. This non-vendor
equipment, along with the vendor's equipment, is typically has been part of a
client/server network environment and remains in place along with the vendor's
equipment.environment. Examples of such equipment include printers,
networking routers and switches, and disk drives.
A substantial majority of the transactions entered into under a typical vendor programprograms are
direct leases. Under these direct leases, lessees enter into master lease
agreements directly with the Company, rather than with the vendor. The master
lease agreement sets forth the basic terms and conditions under which the
Company will lease equipment to the lessee. The lease of specific equipment is
documented with a simple supplement to the master lease agreement, thereby
avoiding the necessity of negotiating a new master lease agreement each time the
lessee desires to acquire additional equipment. Such a lease structure also
makes it convenient for the lessee to acquire add-ons and/or upgrades to
equipment it has leased from the Company and for the Company to finance such
add-ons and upgrades. In 1997,1998 these direct lease agreements accounted for over
90% of the Company's lease volume, as measured by Dollar Volume.
Under a typical vendor program, LSI worksworked with the lessee and the vendor's
sales personnel to help structure the initial lease. The Company finances the
lease, purchasespurchased the
related equipment chosen by the lessee and administersadministered the lease (including
billing and collecting). See "Remarketing" below.
In June 1997,1998, the only vendor program of any significance to LSI established awas with
Vanstar Corporation. New leases entered into in 1998 pursuant to that program
represented approximately 18% of the Dollar Volume of new leases during the
year. Substantially all of the balance of the Dollar Volume of new leases
during 1998 was with lessees with which LSI had an existing relationship and
master lease agreement, and most of these new leases were developed under the
Company's vendor program with Vanstar Corporation, a VARDell Computer that typically sells network systems to corporations, including large users of
information processing and communications equipment. Vanstar is a $2 billion
provider, annually, of equipment and services for computer networks and
technology infrastructure. Although no assurances can be given, the Company
anticipates generating significant lease volumeterminated in the future with Vanstar. The
equipment acquired by the Company from Vanstar is similar to those products
historically provided through its other vendor programs.
In September 1997, the Company and Fujitsu PC Company, a wholly-owned
subsidiary of Fujitsu, a $37 billion worldwide IT conglomerate, entered into a
vendor agreement under which the Company is to provide leasing and asset
management services in support of Fujitsu's marketing to large corporate
accounts. The program contemplates global financing opportunities in the U.S.,
Canada and Western Europe.
In February 1998, LSI entered into an additional strategic agreement with HAL
Computer Systems, Inc., a manufacturer of computer systems. Under the terms of
the agreement, the Company is to provide account planning and field-based sales
support to HAL, as well as a leasing facility for use principally with HAL's
marketing of products and services to HAL's corporate customers.
In June 1997, the Company also entered into an operating agreement with
Leasing Group, Inc., a privately-held leasing services provider. Under the terms
of the agreement, the Company is to provide field-based sales support and lease
financing for large corporate customers of select vendors with whom LGI has
exclusive relationships, including CompUSA and NEC America. Furthermore, the
agreement contemplates that LGI may provide small-ticket leasing services to
certain vendors of LSI.
Asset Management
In January 1998, the Company entered into a Marketing Agreement with Apsylog,
Inc., a leading provider of help desk and asset management software. This
arrangement permits the Company to expand the scope of services it offers to
prospective and existing customers to include extensive tracking of and
reporting on the total lifecycle costs associated with the information
processing and communication systems installed at the customer. The Company
believes that the ability to offer such capabilities will increase the Company's
competitive position in the lease financing marketplace and increase customer
satisfaction with its services, thereby potentially increasing the number of
assets placed on lease with the Company's customers.
2
Development Activities
The Company's objective is to leverage its existing customer relationships,
funding sources, regional leasing and support staff and back office operations
support organization by systematically adding new vendor programs, and
expanding the scope of its existing programs, including, as applicable,
increasing the geographic coverage of such relationships outside the United
States. See "International Expansion." This objective is addressed by a
dedicated Marketing and Business Development group responsible for securing
vendor and program agreements and related program development activity.
The Company believes that one of its major strengths is its ability and
willingness to customize its programs to meet the vendor's specific marketing
and financial objectives. The Company believes that this ability to customize
its programs and its willingness to make a capital investment in the equipment
it acquires makes it an attractive lease financing source for vendors
considering a lease financing program.
Once an agreement for a vendor program is established, the Company's
implementation process with the vendor's organization commences. This extensive
process involves presentations and training sessions at various levels and in
various locations throughout the country in which the program is to be
implemented. These training programs familiarize the Company's sales employees
with the vendor's products, customer base and methods of doing business, and the
vendor's sales employees with the lease financing opportunities offered by the
Company which they may make available to their existing and prospective
customers.April 1997.
Additionally, the Company works closely with the vendors to develop
printedgenerated approximately 22% of its new lease
originations from its direct sales collateral and internet-based training, marketing and reporting
tools to maximize efficiency and customer service. Recognizing that, with the
addition of each new vendor program, the Company incurs significant incremental
costs in the implementation process, the Company intends to continue to be
selective in establishing additional programs and relationships in the future.force.
2
Products Leased
The information processing and communications equipment that the Company presently purchaseshas
purchased for lease includes communication controllers, database machines,
desktop and laptop computers, display stations, file servers, printers, tape and
disk products, and network routers and automatic switches. The Company believes
that the majority of the equipment acquired by the Company since 1994 is
utilized in client/server network environments.
Desktop and laptop computers represented approximately 84%79% of the equipment
purchased by the Company, as measured by Dollar Volume, in 1997.1998. Approximately
55%44% of its Dollar Volume for 19971998 was composed of equipment, principally desktop
and laptop computers, purchased from Dell.
Lease Terms and Conditions
Substantially allA majority of the Company's lease transactions arehave been net leases with a
specified non-cancelable lease term. These non-cancelable leases have a "hell-
or-high-water" provision which requires the lessee to make all lease payments
under all circumstances. A net lease requires the lessee to make the full lease
payment and pay any other expenses associated with the use of equipment, such as
maintenance, casualty and liability insurance, sales or use taxes and personal
property taxes. The lessee also has the responsibility of obtaining the
additional items required under a net lease, such as maintenance and insurance.
However, many of the Company's more creditworthy customers are permitted to self
insure against equipment losses.
The Company offershistorically offered financing for both operating leases and
direct finance leases.leases (see, however, "Leasing and Sales Activities - Refocusing
of Business and Financing Activities"). The vast majority of the leases the
Company entersentered into havehad a lease term of from two to four years. These leases are eitherwere
principally operating leases or
direct finance leases. Generally leases having a term of three years or
less are classified as operating leases and leases having a term greater than
three years are classified as direct finance leases. Although the Company is principally
engaged in the business of writing operating leases, it has in the past entered
into direct finance leases for material amounts of equipment and expects to do
so again in the future, particularly in its European operations. See "MD&A -- Lease
Accounting" for a further discussion of such leases.
3
Under certain of the Company's vendor programs, the Company offersoffered the vendor's customers
"technology refresh" leases. These leases typically havehad a 24 or 36 month36-month original
term with an option permitting the lessee to exchange the equipment subject to
the lease for new equipment on or after a designated date. Upon exercising the
option, the term of the lease iswould be extended so that its balance iswould be
equal to the 2424- to 36 month36-month original term of the lease. The "technology
refresh" option permits the lessee to upgrade its equipment on specified terms
and provides an opportunity for the lease to be extended.
Remarketing
The results of the remarketing process ultimately determine the degree of
profitability of a lease transaction. The Company's remarketing strategy is to
keep its equipment installed in place at the end of the initial lease term.
Typically, remarketing equipment in place produces substantially better residual
returns than equipment sold or leased to a third party.party at the end of the term of
the original lease. Prior to the expiration of the original lease term, the
Company initiates the remarketing process for the related equipment. (See
"Leasing and Sales Activities - Refocusing of Business and Financing
Activities," for a discussion of the Company's new and proposed remarketing
activities and initiatives.)
The Company is ableattempts to maximize its revenues and residual return by
focusing its efforts on keeping the equipment in place at the end of the initial
lease term byby: (1) re-leasing it to the initial lessee for a specified term,term; (2)
renting the equipment to the initial lessee on a month-to-month basis,basis; or (3)
selling the equipment to the initial lessee. If the Company is unsuccessful in
keeping the equipment in place, it will attempt to sell or lease the equipment
to a different customer, or sell the equipment to equipment brokers or dealers.
Although, cumulatively for its history, the Company has historically been successful in remarketingable
to remarket in place a majority of its equipment (as measured by Dollar Volume) of its equipment
coming off lease, no assurances can be given that the Company's past successes
in remarketing its equipment in place will be repeated in the future, primarily
because the Company has little history with respect to remarketing desktop andor laptop
computers, which make up a substantial and growing percentage of the Company's equipment
portfolio.
However,portfolio at the end of 1998. Since late 1998, the Company believes thathas received lower
than expected
3
remarketing proceeds, because the residualmarket value of the equipment it leases
to its customers that is used in client/server networks, including desktop and
laptop computers, is enhanced due tocame off
lease, as a percentage of original equipment cost, was significantly lower
than the "embedded" natureCompany had historically experienced. In addition, the percentage of
products in such
networks and the resulting tendency for such equipment to remain(as measured by Dollar Volume) remarketed in place afterhas decreased
from the end ofpercentage historically experienced by the original lease term. SeeCompany. (See "Factors
That May Affect Future Operating Results" below.
The Company has dedicated significant resources, through both its
headquarters and field offices, to support its remarketing effort. The Company's
sales personnel are provided incentives to remarket its equipment.
In August 1997, the Company entered into a service and remarketing
agreement with Micro Exchange Corporation, one of the largest independent
remarketing and servicing centers for name brand personal computer products
in the U.S. The agreement enhances the Company's existing remarketing
capabilities by providing increased remarketing opportunities through
additional channels of distribution, including retail channels. Micro
Exchange also provides return processing, computer repair and refurbishment
services under the agreement.
The Company's historical experience in estimating residual values may not be
applicable to most of the information processing and communications equipment
that the Company has recently purchased for lease. The initial lease
terms of the leases to which any material amount of such equipment is subject
have not yet expired and, as a result, the Company does not yet have meaningful
remarketing experience with respect to such equipment. Therefore, the Company's
historical experience in estimating residual values may not be applicable to
such equipment. Accordingly, for that reason and others, the Company's
historical remarketing experience is not necessarily indicative of future
performance and no assurances can be given that the Company will be able to
achieve remarketing results in the future that are comparable to its historical
remarketing results.
4
)
Default and Loss Experience
The cumulative default and loss experience of the Company with respect to
lease payments under the leases in its portfolio as of December 31, 1998, 1997
1996
and 19951996 is set forth below.
CUMULATIVE DEFAULT AND LOSS EXPERIENCECumulative Default and Loss Experience
(Dollars in thousands)
FROM INCEPTION THROUGH
------------------------------------------------------------------------------
DECEMBERFrom inception through
--------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 DECEMBERDecember 31, 1996
DECEMBER 31, 1995-------------------------- -------------------------- ------------------------
------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL
AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS AMOUNT ACQUISITIONSPercent of Percent of Percent of
Total Total Total
Amount Acquisitions Amount Acquisitions Amount Acquisitions
----------- ------------- -------------------- ------------- --------- -------------
Total Acquisitions (1)............. $1,672,000 $1,224,000 $917,900
$635,558========== ========== ========
Cumulative Gross Defaults (2)(4)... $ 8,751 0.5% $ 2,292 0.2% $ 1,846 0.2%
$ 1,526 0.2%
Cumulative Recoveries (3).......... $ 1,256 0.1% $ 1,221 0.1% $ 989 0.1 904 0.1
--------0.1%
---------- --- ---------- --- -------- ---
Net Losses......................... $ 7,495 0.4% $ 1,071 0.1% $ 857 0.1%
$ 622 0.1%
================== === ========== === ======== ===
_____________
(1) Total Acquisitions represents the total cost (aggregate purchase price of
the equipment) to the Company since inception in 1986 through and including
the date set forth above.
(2) Cumulative Gross Defaults represents the total defaults of all lessees
experienced by the Company since inception in 1986 through and including the
date set forth above, measured as the aggregate of the Company's net book
value in such lease and any recorded receivable on such lease at the date of
default.
(3) Cumulative Recoveries represents the total recoveries with respect to
defaults of all lessees since inception of the Company in 1986 through and
including the date set forth above.
(4) A lessee is deemed to be in default when it fails to meet its obligations to
make monthly rental payments under its lease, and fails to cure such breach,
pursuant to the terms of the lease, and the Company declares the lessee in
"default" by written notice to the lessee.
5
Process ControlTwo lessees of the Company, which leased from the Company equipment with a
combined original equipment cost of approximately $6,459,000, have filed for
protection under applicable bankruptcy laws, one in late 1998 and Administrative Systemsthe other in
early 1999. The Company expects it will take at least another six months to
determine the actual extent of the losses it will suffer as a result of such
filings. The Company has developed an administration system and controls which featurerecorded a seriesloss of checks and balances. The Company's system and controls are designedapproximately $5,000,000 related to
protect against entering into lease transactions that may have undesirable
economics or unacceptable levels of risk, without impeding the flow of business
activity or preventing its sales organization from being creative and responsive
to the needs of vendors and customers.
The Company's sales offices are organized into four regions, each of which is
managed bythese leases. As a Regional Manager located in one of the region's sales offices. Each
of the sales offices are staffed with a District Manager ("DM") and at least one
Contract Administrator who work with the sales personnel of the companies for
which the Company provides customer lease financing services to offer lease
financing solutions to the sales customers. The Company also has an assistant DM
in several of its offices.
Once the Company commits to a lease transaction, its Contract Administrators
initiate a process of systematically preparing and gathering relevant lease
information and lease documentation. The contract administrators are also
responsible for monitoring the documentation throughresult, the Company's home office
documentationdefault and review process. Prior to the Company entering into any lease
agreement, each transactionloss experience for 1998 is
evaluated based on the Company's pre-determined
standards regarding residual values, lease structure, lease documentation and
customer credit. The Company approves, and delivers documentation to its
customers, in most instances, in lesshigher than two business days after a request for
approval of the transactionit has been submitted to the Company's headquarters by
one of its field sales personnel.
The Company utilizes an Investment Committee to review the residual values it
will use to price standard transactions. The Investment Committee also must
approve the pricing, including residual values, for all transactions involving
$5 million or more in aggregate purchase price of equipment if the pricing
parameters are outside previously approved guidelines. The Investment Committee
is composed of the Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, Vice President - Contract Administration, Vice President -
Treasurer, Vice President - Remarketing and Controller of the Company. In
addition, aggregate customer exposures from $2 - 5 million in aggregate
purchase price require the approval of certain officers of the Company.prior years.
International ExpansionOperations
Commencing in early 1996, the Company embarked on a planplanned to increase its geographic
coverage for vendor programs by expanding its lease financing activities outside the United States.
The first step in this international expansion was into Western Europe, and was
accomplished in April 1996 with the acquisition of a small independent leasing
company in the United Kingdom. This
company focused on leasing information processing equipment. Since that time,
theThe Company has also opened leasing offices in
Germany, France, Belgium, and Thethe Netherlands, and hashad the ability to provide
leasing services in Spain and Italy.
In Marchseveral other European countries. Due to recent events, in
December 1998, the Company's UK subsidiary entered into a strategic alliance
with Schroder Leasing Limited pursuantEuropean lenders informed the Company that they
were no longer willing to which Schroder will provide
small-ticketfinance the Company's new lease financing toactivities
in Europe. Accordingly, in December 1998, the Company's customers in Western Europe and
the Company's European operations will providesuspended new
lease financing to the large
corporate customers of Schroderactivity, and, certain of its customers. Although no
assurances can be given, the Company anticipates entering into other new vendor
relationships covering Western Europe in the future.second quarter of 1999, terminated most of
their sales personnel, and will focus on maximizing the residual return on their
existing lease portfolio.
4
In April 1997, the Company continued its expansion through the acquisition
of a lease portfolio and related operations from a Canadian company engaged
primarily in computer leasing. The acquisition was made by a newly formed
Canadian subsidiary of the Company, Leasing Solutions (Canada) Inc. The acquired
portfolio iswas comprised of information processing and communications equipment
primarily
leased (principally under operating leases) to investment grade companies and
Canadian governmental entities. In July 1998, the Company acquired, through its
existing Canadian subsidiary, another Canadian company, specializing in small-
ticket lease financing. Its portfolio consisted of different types of
equipment, including information processing and communications equipment, leased
under direct finance leases primarily to small businesses. The Canadian
operation hasoperations have offices in fourseveral Canadian cities, with headquarters in the
Toronto area. In the future, the Company may participate in additional international
markets, particularly Latin America(See "Dependence on Availability of Financing" and the Pacific Rim, as may be necessary to
meet the demands of existing and prospective vendors and customers."Small-ticket
Operations".)
Financing
The Company's historical financing strategy has been to obtain
substantially all of its required long-term borrowings from the proceeds of
sales of nonrecourse, secured debt securities in the public and private debt
securities markets through "securitizations", or by other similar secured
financings. From time to time,
the Company will obtain long-term financing for one or more leases with a single
customer. Prior to securitizing its leases, the Company financeshas financed its
acquisitionacquisitions of equipment on a short-term basis through secured "warehouse"
lines of credit until such time as its portfolio of equipment iswas of sufficient
size to permit it to efficiently finance the portfolio on a long-term basis.
Payments under the Company's borrowings and the maturities of its long-term
borrowings are
typically have been structured to match the payments due under the
leases securing the borrowings. Although the Company has not done so to date, it may engage in
hedging transactions, pursuant to the hedging strategy approved by its Board of
Directors, in order to
6
protect itself, when necessary, against increases in interest rates prior to
obtaining fixed rate, long-term financing for its equipment. The Company
recently expanded its operations to Western Europe and Canada, and has obtained
lines of credit to finance its leasing activities in those countries. See(See "MD&A --Liquidity-- Liquidity and Capital
Resources" and "Factors That May Affect Future Operating Results" below.Results.")
Nonrecourse Debt. TheFinancing. Historically, the credit standing of the Company's
customers allowshas allowed the Company to obtain long-term financing for most of its
leases on a nonrecourse basis. However, the Company, may, from time to time, obtainhas
obtained such financing on a recourse basis, ifwhen the Company believes thatbelieved the rates
and other terms offered for recourse financing justifyjustified such an arrangement.
Under such nonrecourse loans, the Company typically borrowsborrowed an amount equal to
the committed lease payments under the financed lease, discounted at a fixed
interest rate. The lender is entitled to receive the monthly lease payments
under the financed lease in repayment of the loan, and takeshas a security interest
in the related equipment and those lease payments. The Company retainsretained
ownership of such equipment. Interest rates under this type of financing
reflectreflected the financial condition of the lessees, the term of the leases, the
amount of the loan, and the nature and manufacturer of the equipment.
Historically, suchSuch nonrecourse loans have generally provided between 85% and 90% (between 80%
and 85% in Europe) of the funds necessary to acquire equipment. The Company
normally obtainsobtained the balance of the acquisition cost, commonly known in the leasing
industry as the "equity investment""equity" investment in the equipment, from the proceeds of
recourse, and occasionally nonrecourse, financings by the Company, from its
internally generated funds, or from the proceeds of sales of convertible debt, or
its Common Stock.
The Company is not liable for the repayment of nonrecourse loans unless the
Company breaches certain limited representations and warranties in the loan
agreements.agreements or fails to pay to the lender any of the lease payments it receives
that serve as collateral for the loan. The lender assumes the credit risk of
each lease financed with recoursenonrecourse debt, and its only recourse, upon a default
under a lease, is against the lessee and such equipment. Because the Company's
ability to obtain nonrecourse lease financing from lenders depends on the credit
standing of its lessees, the Company targetshas historically targeted large,
creditworthy customers. See(See "Customers" above.
The Company utilizes the public and private debt securities markets, through
securitizations, to provide a substantial portion of the nonrecourse debt it
required. The utilization of securitizations has reduced the Company's effective
interest cost for its nonrecourse debt. The Company expects to obtain most of
its long-term debt requirements in the future from the proceeds of sales of such
debt or similar securities in the public and private debt markets. See "Factors
That May Affect Future Operating Results" and "MD&A -- Liquidity and Capital
Resources."
In order to manage certain expected tax liabilities in its foreign
obligations, the Company may, from time to time, finance leases generated in
foreign countries by selling the related lease receivable. Under such
arrangements, the Company would grant a security interest in the underlying
equipment, rather than sell it, and thus retain its interest in the anticipated
remarketing proceeds from the equipment.)
Recourse Financing. TheHistorically, the other significant source of
financing for equipment acquisitions by the Company ishas been recourse
borrowings, both long-term and short-
term.short-term. This type of financing has been used
principally to "warehouse" portfolios of leases and the related equipment on a
short-term basis, until the Company iswas in a position to efficiently finance the
portfolio on a long-term, nonrecourse basis. In addition, when the Company
financesfinanced its equity investment in leased equipment with lenders, it often doeshas
done so on a recourse basis. The Company has a
commitment from a syndicate of banks to provide a recourse, short-term line of
credit to the Company which will allow it to finance, at favorable rates, a
portion of its equity investment in leases. However, no assurances can be given
that this line of credit will be put in place. See(See "Factors That May Affect Future Operating
Results" and "MD&A -- Liquidity and Capital Resources.")
5
The loans available to the Company under recourse arrangements are
typically secured by the financed equipment and the monthly lease payments due
under the related lease. Upon default by a lessee under a lease covering
equipment financed through recourse borrowings, the financial institution
providing the financing can and will seek recourse from the Company for the
balance due on such financing.
7
COMPETITIONRecent Events Affecting Financing Availability. Presently, the Company has
significant payment defaults on virtually all of its lines of credit and other
financing arrangements. Although the Company has entered into forbearance
agreements with its lenders, under which the lenders will not exercise any
remedies against the Company or their collateral during the terms of the
agreements, as a result of these defaults and the Company's recent results of
operations, the Company's ability to borrow funds to provide equipment lease
financing, particularly for equity investments in leases, is very limited.
Under the forbearance agreements, as amended and extended, the lenders have
agreed to forbear until October 15, 1999, from exercising remedies which they
would otherwise be permitted to exercise as a result of those defaults. The
extended agreements do not provide for any additional borrowing availability.
The terms of the extended forbearance agreements continue to impose substantial
reporting and cash allocation obligations, and also include standard
representations, warranties and covenants. In the event the Company were to
breach any of these obligations under any of the forbearance agreements, and
fail to cure such breach within a specified period of time, each of its lenders
would have the right to exercise the remedies under their respective credit
agreements. Additionally, unless all of the agreements are extended at the end
of the forbearance period, each of the lenders will have the right to exercise
their remedies at that time.
The bank facility for the Company's Canadian operations expired August 28,
1999. Although the bank continues to permit the Company to borrow under the
facility, at reduced availability levels, no assurances can be given that the
bank will permit such additional borrowings in the future. The Canadian
operations has discontinued providing new operating lease financing, and has
obtained long-term financing for its small ticket operations by selling off its
small ticket leases, from time to time, to another leasing company.
On July 30, 1999, the Company and its European subsidiary entered into an
agreement with its European lending syndicate extending the maturity date of its
European credit agreement to December 31, 2000. In the event the European
subsidiary were to breach any of its obligations under the extended agreement,
and fail to cure such breach within a specified period of time, the lenders
would have the right to exercise their remedies under the credit agreement. The
extended agreement does not provide for additional borrowing availability. (See
"Dependency on Availability of Financing" and "MD&A - Liquidity and Capital
Resources - Status of Debt Financing Arrangements.")
Competition
The Company competeshas historically competed in the information processing and
communications equipment leasing marketplaces with other independent leasing
companies, captive lessors and bank affiliated lessors. The Company's business
ishas been highly competitive, both with respect to obtaining and maintaining
vendor program arrangements and providing lease financing to end-user customers.
TheIn the U.S., the Company competescompeted directly in the U.S. with various independent leasing
companies, such as Comdisco, Newcourt Financial and G.E. Capital, certain bank
affiliated lessors, such as Leasetec,Leastec, and certain captive or "semi-captive"
leasing companies, such as IBM Credit Corporation, Dell Financial Services and
Compaq Capital. ManyIn Europe, Dell Financial Services and Compaq Capital have been
highly competitive. The main competitors in Canada have also been Newcourt
Credit Group, MFP Technologies, Inc., and G.E. Technology/Services.
Historically, most of the Company's competitors have had substantially greater
resources and capital and longer operating histories.
A substantial number ofHistorically, the Company's competitors are significantly larger,
and have substantially greater resources, than the Company. The Company's
relatively limited amount of capital places it at a disadvantage in relation to
its larger competitors, particularly in connection with financing lease
transactions involving large dollar volumes of equipment where the cost of the
equipment substantially exceeds the amount of debt available for such financing.
See "Factors That May Affect Future Operating Results."
The Company believes it competeshas competed on the basis of price,
responsiveness to customer needs, flexibility in structuring lease transactions,
relationships with its vendors VARs and systems integrators and knowledge of the products they distribute.
The Company has found it most effective to compete on the basis of providing a
high level of customer service, and by structuring custom programs and arrangements,
and lease transactions that meet the needs of all parties. Thethe vendors and the customers.
6
Given the Company's current financial position and resources, it can no
longer compete effectively in the operating lease financing business in which it
has competed in the past. Accordingly, the Company also believes that its cost of capital is comparable to thatpresently anticipating
changing the focus of its larger competitors,lease financing activities to the small-ticket, direct
finance lease market, in which the lessees are primarily due to its financing strategysmall businesses. (See
"Leasing and Sales Activities - Refocusing of utilizing the
publicBusiness and private debt securities markets to finance its lease receivables.
Other important elements that affect the Company's competitiveness are the high
degree of knowledge and competence of its key employees, specifically relating
to information processing and communications equipment and operating lease
financing.
EMPLOYEESFinancing
Activities.")
Employees
- ----------
As of December 31, 1997,1998, the Company had 159266 employees, 2334 of whom were
located in its regional or field offices in the United States, 45124 of whom arewere
located in its European and Canadian offices, and 91108 of whom were located in
its San Jose, California home office. In the first and second quarters of 1999,
the Company and its European operations terminated approximately 55 employees
and reassigned approximately 30 employees. The majority of the terminations
were of sales personnel, and the majority of the reassignments were to the
Company's remarketing activities. The Company intendsdoes not expect to hire a substantial
number of additionalany
personnel during 1998. However, there1999 except to replace key personnel. There can be no
assurance that the Company will be able to attract attract/and or retain personnel with
the experience and expertise necessary to meet its presently anticipated
operating requirements. See(See "Factors That May Affect Future Operating Results"
below.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
POTENTIAL REDUCTION IN RESIDUAL VALUES OF LEASED EQUIPMENT.and "Management of Growth and Operations.")
Refocusing of Business and Financing Activities
As a result of the Company's experience with remarketing a substantial
amount of equipment that had come off lease in the second half of 1998 and early
1999, several significant changes in the Company's business and financing
activities have occurred. The Company had a pre-tax loss of $4,823,000 in the
third quarter of 1998 and a pre-tax loss of $75,078,000 in the fourth quarter of
1998. These losses are primarily related to the effects of lower than expected
remarketing proceeds from the large amount of equipment that came to the end of
its initial term in 1998. Because a larger than expected percentage of the
equipment was returned to the Company at or shortly after the initial term, the
remarketing proceeds realized from that equipment, as a percentage of its
original equipment cost, were significantly less than the Company had
historically been able to achieve. The events of 1998 have caused the Company
to begin the implementation of a number of new remarketing strategies that
depend less on the initial lessee to generate remarketing proceeds. These
strategies include direct retail sales and online sales of returned equipment.
Due to the Company's remarketing experience in the third and fourth
quarters of 1998, the Company made a change in the estimate of the residual
value of the majority of its operating lease portfolio. This change in
accounting estimate resulted in additional depreciation expense of approximately
$15,000,000 for equipment under operating leases during the fourth quarter of
1998. In addition, the change in accounting estimate will result in a more rapid
depreciation of equipment under operating leases in the future; this will
materially reduce the profitability of the Company's operating lease portfolio
over the next several years.
The losses experienced by the Company in the third and fourth quarters of
1998, defaults under its lending arrangements and the severe reduction in the
Company's borrowing capacity since the fourth quarter of 1998 have caused the
Company to stop entering into new operating leases in the U.S. and Europe and
severely limited such activity in Canada. The Company intends to focus on direct
finance, small-ticket leasing because it requires less financial resources and
has a more predictable financial result than the operating lease business, which
depends on remarketing results to achieve a profit. The Company's experience
with direct finance, small-ticket leasing is limited to its Canadian small-
ticket operations acquired in July 1998. That business leased approximately
$25,000,000 (by Dollar Volume) of equipment in the last half of 1998.
The direct finance, small-ticket lease business, while having far less
residual risk than the operating lease business, has other risks. The committed
rental payments of the lessees, which are typically less creditworthy than the
Company's historical customer base must still be financed. Lease origination
and lease servicing for the direct finance, small-ticket lease business are
substantially different from the large corporate customer leasing environment in
which the Company has historically been involved. Lease origination, billing and
collecting activities for small-ticket leases require greater resources and, as
a result, costs for such functions will represent a greater percentage of the
related equipment cost.
7
For the Company to be successful in direct finance, small-ticket financing
activities, it will need to obtain and maintain debt financing for the leased
equipment at competitive rates; convert its Canadian web-based product to
perform online credit scoring and approval of U.S. companies; streamline its
billing and collecting processes to be more effective than its historical
performance; and enhance its web-based product to interface through the web
directly with vendors. There can be no assurances that the Company will be
successful in any or all of those tasks.
Factors That May Affect Future Operating Results
Ability of Company to Continue Operations. The Company is in default with
respect to both its payment obligations and certain other covenants, under
virtually all of its credit and loan agreements. On May 25, 1999, the Company
entered into forbearance agreements with its secured lenders. Under the
forbearance agreements, the lenders have agreed to forbear until October 15,
1999, from exercising remedies which they would otherwise be permitted to
exercise as a result of those defaults. (See "MD&A - Liquidity and Capital
Resources - Status of Debt Financing Arrangements.")
The Company is also in default under the Indenture with respect to its
$71,875,000 in aggregate principal amount of convertible subordinated notes as a
result of its failure to make an interest payment on the notes in April 1999.
Because the notes, which are unsecured, are subordinated to senior secured debt,
which is presently in default, the noteholders are effectively contractually
prohibited, under the Indenture, from demanding or retaining any payment of
principal or interest on the notes. (See "Status of Debt Financing
Arrangements")
The Company also has a material amount of past due trade obligations
outstanding to several trade creditors, many of which are demanding payment.
The Company is not in a position to pay all of such outstanding amounts at the
present time, and is in the process of negotiating extended payment arrangements
with many of those creditors. However, no assurances can be given that it will
be able to reach an agreement with respect to such arrangements with all or any
of those creditors.
The Company and two of its former officers are defendants in securities law
class action lawsuits filed on behalf of a specified class of the holders of the
Company's common stock and its convertible subordinated notes. (See "Item 3 -
Legal Proceedings.") The complaints seek unspecified monetary damages.
Although the Company does have directors and officers liability insurance
coverage in the aggregate amount of $20,000,000, which may be available to
reimburse the Company for its expenses in defending and settling such lawsuits
and any damages that may be awarded to the plaintiffs in such lawsuits, there
can be no assurances that the Company would not be obligated, as a result of a
settlement or an unfavorable court decision in either case, to pay amounts to
the plaintiffs in excess of such insurance coverage or in addition to any
payments made by the insurance companies.
Under the forbearance agreement, the Company expects to cover its operating
expenses from the sales proceeds related to encumbered leased assets and limited
firm term rents. If the forbearance agreements with the lenders are not
extended beyond October 15, 1999, or if the Company breaches any of its
obligations under the forbearance agreements, whether in their present form or
if extended, the Company does not presently have, nor does it expect to have in
the near future, sufficient cash flows to pay for operating expenses.
The Company believes that its historical focus on providing operating lease
financing to large corporations is no longer appropriate, due principally to
changes in the information processing and communications marketplace and related
equipment values, and the unavailability to the Company, for the foreseeable
future, of substantial amounts of debt or other financing, at reasonable rates,
to cover the purchase price of equipment for lease, particularly the "equity"
portion of that investment. There can be no assurances that the Company will be
able to successfully implement a change from operating lease financing to small
ticket leasing. (See "Leasing and Sales Activities - Refocusing of Business and
Financing Activities.")
In the event the Company is not able to adequately respond to the
operational or financial issues discussed above, and particularly if any of its
lenders or trade creditors attempt to exercise remedies against the Company, it
will likely be necessary for the Company to: (1) terminate any new lease
financing operations and run off its lease and equipment portfolio, by billing
and collecting rental payments and remarketing the equipment when the related
lease
8
comes to the end of its term, assuming (for which no assurances can be given)
its lenders will permit it to do so and provide financing to meet its operating
expenses; (2) attempt to sell the Company or all or substantially all of its
assets; or (3) file for protection under the Federal Bankruptcy Act.
The Company intends to propose that the holders of a substantial portion of
its secured debt convert a portion of the amounts owed to them by the Company to
common stock of the Company, and that the holders of its convertible
subordinated notes convert the entire principal amount of, and accrued interest
on, such notes to common stock of the Company. The Company believes that such a
reorganization, if successfully implemented, could result in a capital structure
for the Company that reduces its future expense and cash flow obligations. Such
a capital structure might allow it to pursue new business opportunities or to
sell the Company. The Company is currently in negotiations for such a
reorganization with the holders of its debt, with the goal of completing such
negotiations by the fourth quarter of 1999. No assurances can be given that the
Company's lenders will agree to any such reorganization or that, if they did and
the reorganization was implemented, the Company would be successful in
implementing a new business strategy, or selling the Company or all or some of
its assets at a price that would provide a return to its shareholders
Compliance with New York Stock Exchange Listing Requirements. The
Company's common stock is listed on the New York Stock Exchange ("NYSE").
However, in order to continue to be listed on the NYSE, a company must continue
to meet certain financial and stock price criteria. The Company has been
notified by the NYSE that it does not comply with the proposed continued listing
criteria of the NYSE and that its common stock may face delisting from the NYSE.
Although no assurance can be given, the Company is working with the NYSE in an
effort to maintain the listing of its common stock on the NYSE. Failure to
succeed in regaining compliance with the proposed continued listing criteria
within any period set by the NYSE, or to meet any milestones within that period
required by the NYSE, will result in delisting.
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 companyCompany estimates a residual
value for the leased equipment based on guidelines established by the Company's
Investment Committee. However, as is typical of all 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, mayhave adversely affectaffected the market
value of such equipment on lease, and thus its residual value. WhileUntil recently,
the Company's experienceCompany has generally has resulted inexperienced aggregate realized residual values for its
equipment in excess of the initial estimated residual values for such equipment, a decreaseequipment.
However, recent decreases in the market value of such equipment at a rate
greater than expected by the Company, whether due principally to rapid technological
obsolescence and price decreases, or
other factors, wouldhas adversely affectaffected the residual values of
suchits equipment.
In addition, since earlyduring the period 1993 through 1997, the Company has entered into
several new vendor programs and arrangements that have produced substantial lease
volume. The Company estimates that, during this period,from 1996, desktop and laptop computers
have represented approximately 85%more than 90% of its Dollar Volume. TheUntil the latter part of
1998, the initial lease terms of most of the leases, to which most of such equipment is
subject haveto, had not yet expired in any significant volume. During the third and
as a result,fourth quarters of 1998, the Company does
8
not yet have remarketing experience with respect to such equipment.
Additionally, thefirst significant number of desktop and laptop
computer leases came to end of firm term. Due to the rapid technology
obsolescence of information processing and communication equipment, purchased asrecent
decreases in the manufacturers' prices of desktop and laptop computers led to a
resultnew valuation of such new programsthe residual value of the Company's operating lease portfolio.
In addition, due to the continued pricing and arrangements is a different type oftechnological changes in the
information processing and communications equipment than equipment for whichindustry, the Company has
significantCompany's
remarketing experience. Therefore, the company's historical
experience in estimating residual valuesto date may not be applicable to such desktops
and laptop computers, andindicative of the Company's historicalfuture
remarketing experience is not
necessarily indicative of future performance.
9
The Company obtains the maximum residual value on its equipment by remarketing
it "in-place""in place" to its end-user customer, whether by extension of the lease term,
month-to-month extensions, or sale. To date,Until the latter half of 1998, the Company
hashad been relatively successful in its abilityremarketing equipment in place. However, the
decreases in prices for desktop and laptop computers occurring in 1998 have had
the effect of creating an incentive for an end-user to remarketreplace the Company's
equipment, in-place. Inrather than to extend an existing lease, even if the eventend user is
offered a substantially reduced rental rate. When desktop or laptop computers
are returned to the Company at the end of the lease term, or if 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 is substantially reduced and, in most cases, will be
substantially reduced.result in a book
loss to the Company. No assurances can be given that a substantial amount of
suchthe equipment leased by the Company will be remarketed in-place.
Accordingly, therein place or that, if
remarketed in place, the Company will be able to recover the book value of such
equipment through remarketing.
In 1998, the Company booked charges of approximately $53,400,000 resulting
from decreased residual values of its equipment. These charges were comprised
of $15,800,000 with respect to losses incurred on sale of equipment and write
down of the book value of equipment that had come off-lease in 1998,
approximately $14,500,000 of additional depreciation charges related to
decreased estimates of residual values of its 24- and 36-month leases, the
creation of reserves of $18,100,000 against specific leases in the Company's
operating lease portfolio that were deemed to be impaired, and $5,000,000 of
additional depreciation related to two lessees who defaulted.
There can be no assurances that the Company's estimated residual values for
equipment, even as revised, 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.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's future
quarterly operating results may fluctuate. The company's quarterly resultsDependence on Availability of operations are susceptible to fluctuations for a number of reasons, including,
without limitation, any reduction of expected residual values related to the
equipment the Company leases. Quarterly operating results could also fluctuate
as a result of the sale by the Company of equipment in its lease portfolio, at
the expiration of a lease term or prior to such expiration, to the lessee or to
a third party or the sale of the stream of monthly rental payments under its
leases to a third party. Such sales of equipment or lease receivables may have
the effect of increasing revenues and net income during the quarter in which the
sale occurs, and reducing revenues and net income otherwise expected in
subsequent quarters. See "Potential Reduction in Residual Values of Leased
Equipment" above and "MD&A -- Lease Accounting" and "MD&A -- Results of
Operations for the Three Years Ended December 31, 1997."
DEPENDENCE ON AVAILABILITY OF FINANCING.Financing. The operating lease business on
which the Company focuseshas historically focused 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.cost. The Company's
equity investment is
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 ishas typically been financed
with the proceeds of long-term, nonrecourse debt. In addition, the Company has
typically financesfinanced 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
itsany business strategy, particularly to provide operating lease financing, and to
sustaincontinue its growthoperations is dependent, in substantial part, on its ability to
obtain recourse and nonrecourse debt capital,financing, both short-term and long-term,
and, to the extent it will continue to offer operating lease financing, to raise
additional debt or equity
capital to meet its equity investment requirements in the
future. Although, to
date,However, in order for the Company hasto be successful in implementing its
new business focus, it will be necessary for the Company to obtain and maintain
borrowing capacity to finance new lease originations that do not require the
Company to put any material amount of equity in those new leases.
Although, until the end of 1998, the Company had 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 to finance its proposed new
business focus [see: Small Ticket Operation] 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 even direct finance leases. (See "Small-ticket Operations"
below.) The Company's recent payment defaults with its equity investments.lenders and its recent
results of operations have substantially limited the Company's ability to obtain
the additional financing the Company will require to operate its business, even
as reduced and refocused. (See "Leasing and Sales Activities - Refocusing of
Business and Financing Activities.")
Under the terms of the Company's present forbearance agreements with its
lenders, the Company has no capacity to finance the debt portion of its historic
operating lease financing business and renewals of leases upon expiration of
their original term. If those forbearance agreements are not extended on
October 15, 1999, when they are to expire, it is extremely unlikely that the
Company will be able to obtain new debt financing, in the near term. If the
Company is unable to obtain any of its required debt financing, the Company will
not be able to provide any new lease financing and it will be required to cease
any new lease financing activity and liquidate its equipment portfolio,
10
over time, by collecting lease payments on that equipment and remarketing the
equipment when it comes to the end of the term of its lease or sell the
equipment in one or more portfolio sales. The Company will be capable of
engaging in such a "run-off" liquidation only if its lenders allow it to engage
in that activity and provide cash to the Company to permit it to meet its
ongoing obligations. No assurances can be given that the Company's lenders would
permit such a run-off liquidation or that, even if they did, the Company would
be able to implement it with sufficient remarketing success to ensure the
retirement of its debt obligations. If the Company were unableforced to obtain any portionsell its
equipment portfolio, rather than engage in a run-off liquidation, it is unlikely
that such sale would produce sufficient proceeds to pay off all 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. SeeCompany's
obligations. (See "MD&A --- Liquidity and Capital Resources"Resources," particularly "Status
of Debt Financing Arrangements," and "Business -- Financing."Reductions in Residual Values," INTEREST RATE RISK.above.)
Interest Rate Risk. The Company's equipment leases arehave been 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 financeshas
historically financed 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 future
period ofby changes in interest rates or that the costs of hedgingCompany's lenders will not
exceedincrease the benefits. Seeinterest rates on borrowings under the Company's lines of credit,
if any of those lines of credit were to be renewed.
The Company's U.S. lenders have waived the right to default interest under
existing lines of credit through the termination date of the forbearance
agreements with the lenders. In several cases, the lender has instituted a base
borrowing rate that is higher than previously required. However, there can be
no assurances that the lenders will not demand the Company to pay interest on
the outstanding principal amount on its lines of credit at the default rate
(generally 2% to 3% over the current interest rate) as a condition to extend the
terms of the forbearance agreements beyond the extension date of October 15,
1999. The imposition of such additional interest costs would have an adverse
effect on the Company's results of operations and financial condition.
Furthermore, the Company's present financial condition will not allow it to
borrow, for the foreseeable future, either short-term or long-term, at the
favorable interest rates it experienced in the past. Accordingly, the Company's
margins on a substantial portion of its existing lease portfolio will be
materially reduced. (See "MD&A - Liquidity and Capital Resources.Resources," 9
DEPENDENCE ON MAJOR CUSTOMERS.particularly
"Status of Debt Financing Arrangements.")
Dependence on Major Customers. The companyCompany has two customers, Ernst &
Young LLP and Xerox,Northern Telecom, which accounted for 19%28% and 11%12%, respectively,
of 19971998 revenues. In addition, Ernst & Young LLP and Northern Telecom
represented 19%16% and 15%19%, respectively, of the Company's Dollar Volume in 1997 and 20 % and 9%,
respectively, of the1998.
The Company's net book value at December 31, 1997. The
Company'soutstanding lease agreements with these customers presentlyErnst & Young LLP and Northern
Telecom expire between now and
late 2000.over the next one to two years. In the event any of these customers,that Ernst & Young
LLP or Northern Telecom, or any of the Company's other major customers, ceasescease to
lease additional equipment or materially reducesreduce the amount of equipment it leasesthey
lease from the Company in the future, the Company's operating results and
financial condition could be materially adversely affected. MANAGEMENT OF GROWTH.Because of the
Company's current financial situation, it is not in a position to lease
substantial amounts of equipment to any customer or to replace any significant
business it has lost as a result of such financial situation, whether from major
customers, other existing customers or new customers. (See "MD&A - Liquidity and
Capital Resources - Status of Debt Financing Arrangements.") 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 and Operations. In the past five years, the Company
has financed a significantly greater number of leases than it had in the priorfirst
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$125,000,000 at December 31, 1994 to $551 millionmore than $700,000,000 at December 31,
1997.1998. In light of this growth, the historical performance of the Company's
lease portfolio may beis of limited relevance in predicting future lease portfolio
performance. Any credit or
11
other problems, including the recovery of the Company's estimated residual
values on its leased equipment, associated with the large number of leases
financed in recent years, will not becomeonly became apparent until sometime in the future.latter half of 1998.
In order to support the anticipated growth of its business, the Company has
addedhired a
substantial number of new personnel sincefrom the beginning of 19951996 through late
1998. In the process of implementing its expansion goals (See "Global
Expansion" and expects to add a substantial number"Small-ticket Operations," below), in 1997 and 1998 the Company
acquired three separate foreign leasing operations, with an aggregate of
additional personnel during 1998.approximately 90 employees, and their own software systems. The Company is absorbing, and will continue to absorb in the future,has
absorbed the effects of additional personnel costs and the implementation and
integration of new software systems necessary to manage such growth.
TheGiven its recent financial difficulties, the Company's future operating
results and ability to realize the residual values in its lease portfolio will
depend on its ability to attract, hireretain and retainreplace skilled employees, as
needed, 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. Because of those financial difficulties, the ability of the Company
to retain or replace key employees has been materially adversely affected. The
Company's inability to manage growthits operations effectively, should it
occur, or to attract and
retain the personnel it requires,required, could have a material adverse effect on the
Company's results of operations and its ability to continue in operations.
GLOBAL EXPANSION.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, 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.Canada, in the
small-ticket leasing business. (See "Small-ticket Operations", below).
International activities pose certain risks not faced by leasing companies
that limit themselves to the United States lease financing activities. Fluctuations
in the value of foreign currencies relative to the U.S. dollar, for example,
have had, and could adverselyfurther have, an impact on the Company's results of its
international operations. International activities could also could be adversely
affected by factors beyond the CompanyCompany's control, including the introduction of
the Euro in certain countries 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-bordercross-
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.transactions.
The information processingCompany's European and communications equipment leasing
business is characterized by significant competition.Canadian operations are not presently financing
new operating leases, due principally to the Company's inability to obtain
additional debt and transaction "equity" financing from its lenders. The
Company competes with
leasing companies, both captive and independent, commercial banks and other
financial institutions with respecthas limited capabilities in Canada 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 tofinance 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."
YEARsmall-ticket business.
Year 2000. As the yearYear 2000 approaches, a critical issue has emerged for all
companies, including the Company, with respectas 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.values before, at, and after midnight, December 31, 1999. In brief, many
existing
application software products in the marketplace were designed toapplications and hardware with embedded logic only accommodate a two-digittwo-
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 systems willproducts would be able to process
accurately.
In late 1998 the Company undertook a preliminary review of equipment in its
portfolio to determine whether such equipment and, as a result, its use and
market value would be materially adversely affected by the "Year 2000"
conversion. The Company has, fordirectly or indirectly, obtained representations
from the manufacturers of virtually all the equipment it leases that the
equipment is or will be Year 2000 compliant, with the use of a software "patch"
to be provided at no expense by such manufacturer. 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 are accurate.
12
The Company commenced a more detailed review of equipment in its portfolio
during the second quarter of 1999. It presently plans to complete that review
in the fourth quarter of 1999. 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 leases, and include
a so-called "hell-and-high water" provision, requiring the lessee to continue to
make payments under the leases, even if the equipment subject to the leases 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 may cease making lease payments during the balance of the
term of the lease and 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 would not be able to recover its estimated residual
value in such equipment. (See "Reduction in Residual Value," above.)
For several months the Company has 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 and adversely affected by this so-called "Year 2000"the Year 2000 conversion. In that
review, the Company has identified certain software applications as being
"critical applications""mission critical" applications used in daily operations. Such applications
include lease management, accounting, and financial reporting systems, as well as
spreadsheet programs.systems. The
Company has inquired of, and generally obtained the assurancesassurance of the providers
of such software with respect to it being Year 2002000 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 retained consultants to test the
software and systems used by its U.S. operations. That testing was completed in
May 1999 and did not reveal any significant Year 2000 compliance problems. The
Company presently expects to have the software and systems of its Canadian
operations testing completed in the fourth quarter of 1999. With respect to the
software and systems of its European operations, given the present run-off mode
of those operations, the Company does not plan to retain consultants to provide
such testing, but rather will rely on the assurance with respect to Year 2000
compliance provided by the vendors of the software and systems, which are fairly
new. However, no assurances can be given that such review by the Company or
such testing have uncovered or will uncover every potential adverse effect of
the Year 2000 conversion in connection with any of such software or systems.
TheIn late 1998 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 materiallymaterial adverse
effect on the Company or its operations. Accordingly, itoperations, as a result of the year 2000
conversion. The Company presently expects to complete such review by September
1999. As the review is too early fornot complete, the Company is unable to be ableconclude as to
predict
whether suchany software or systems of such parties may have such effect.an adverse effect on
the Company. As part of this review, the Company will attemptis attempting to obtain
assurances in writing from each of such
parties,party, 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
partiesparty or that it will be able to obtain, on a timely basis or at all,
the information from such partieseach party necessary for the Company to determine whether
itthe company or its operations may be materially adversely affected by the software or
systems of such parties.
The Company will maintain onmaintains an ongoing effort to recognizeidentify and evaluate potential
exposuresexposure 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 estimatequantify the total cost to it of recognizing, evaluationevaluating, and
addressing any such exposure. The Company's Board of Directors has approved a
budget of approximately $600,000, to recognize and evaluate any such exposures.
10The Company expended approximately $250,000 and $200,000 on those efforts in
1998 and in the first six months of 1999, respectively. A majority of such
costs 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. No amounts have been budgeted or set aside to cover any costs
necessary to respond to, or provide contingency planning for, any Year 2000
conversion exposures that may be identified or discovered, through the Company's
efforts, nor has the Company implemented any contingency planning to deal with
any such exposure it may identify. Furthermore, the biggest risk to the Company
with respect to Year 2000 compliance issues, that one or more of its lessees
will delay making, or cease making, lease payments, either because its leased
equipment that is not Year 2000 compliant or because software or systems on
13
which it is relying are not Year 2000 compliant. Any delay or cessation of
lease payments would have a material adverse effect on the Company's financial
condition and results of operations.
Small-ticket Operations. In July 1998, the Company acquired Bayshore
Leasing, a Canadian company engaged in small-ticket lease financing. The
acquired company specializes in high volume origination, processing and
administration of lease transactions, typically involving less than $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 provide a small-ticket leasing capability to its U.S.
customers, through a web-based lease financing system recently made operational
in Canada. Unless the Company is able to find a vehicle or source to finance
its existing and projected small-ticket operations, it will not be able to
expand or continue such operations.
The Company's current management team has had limited experience in
managing a high volume, people intensive small-ticket operation with 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
problems it faces in managing its existing business. (See "Management of Growth
and Operations," 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.
"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
anticipated 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
recover its investment in its foreign operations, the impact on the Company of
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, the ability of the Company to
manage its operations, the willingness of the Company's lenders to extend their
forbearance agreements with the Company and provide financing to cover the
Company's operational expenses, the ability of the Company to meet its
obligations under forbearance agreements with its lenders, the willingness of
the Company's lenders and holders of its convertible subordinated notes to enter
into agreements with the Company to restructure its debt, the willingness of the
Company's lenders to forbear from exercising remedies against the Company, and
the ability of the Company to successfully implement web-based, small-ticket
lease financing activities in Canada and the U.S. 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.
ITEM 2. PROPERTIES
The Company's home office is located in leased space at 10 Almaden
Boulevard,
Suite 1500, San Jose, California 95113. The Company also leases office space for
its regional offices in the Atlanta, Boston, Chicago, Dallas, New York and Los
Angeles metropolitan areas. The aggregate monthly rent under the Company's U.S.
office leases,
14
with respect to an aggregate of approximately 28,50034,800 square feet, was
approximately $50,000$65,000 as of December 31, 1997.1998. The Company also leases office
space in Europe and Canada. The aggregate monthly rent under the Company's
European and Canadian office leases, with respect to an aggregatea total area of approximately 7,10029,800
square feet, was approximately $18,000 and $7,000,
respectively,aggregated $37,000, as of December 31, 1997.1998.
ITEM 3. LEGAL PROCEEDINGS
TheOther than as described below, the Company is not involved in any material
legal proceedings, and is not aware of any pending or threatened legal
proceedings, that wouldan unfavorable outcome in which could have a material adverse
effect upon its financial condition or results of operations.
In the fourth quarter of 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, 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 only recently begun the evaluation of the
allegations and claims made in the complaint. The Company has not yet answered
or otherwise responded to the complaint.
In the fourth quarter of 1998, the Company was also 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 only recently begun the evaluation of the allegations and
claims made in the complaint. The Company has not yet answered or otherwise
responded to the complaint.
In the first quarter of 1999, the Company was served a complaint, filed in
the United States Bankruptcy Court in Delaware, by Memorex Telex Corporation
("MTC"), the debtor in a Chapter 11 proceeding. The complaint alleges that the
Company failed to pay MTC a portion of residual payments to which the Company
was entitled, relating to residual sharing arrangements between the parties,
arising out of equipment leased by the Company (other than to the State of
California) that was purchased from MTC. The Complaint does not specify any
amount of damages. The Company has answered the complaint and filed a cross
complaint against MTC on related matters, the amount of claims under which are,
in the Company's judgment, likely to be in excess of the amount of MTC's claims
against the Company.
In the second quarter of 1999, CompUSA Inc. filed an action against the
Company in the state court located in Dallas, Texas, alleging that the Company
had failed to pay CompUSA for certain hardware and software subject to leases
entered into between the Company and H.J. Meyers & Co., Inc., a broker-dealer
now in liquidation. In the complaint, CompUSA alleges that the Company is
obligated to pay CompUSA approximately $740,000 for such hardware and software.
The Company has filed an answer to the complaint, in which it denied owing any
sums to CompUSA, and intends to vigorously defend the action.
In the third quarter of 1999, the Company received in the mail a complaint,
filed in the U.S. District Court in the Eastern District of North Carolina,
alleging that the Company owed certain sums to MTX, Inc., a company with which
the Company has had business dealings. The complaint alleges that the Company
owes MTX approximately $1,235,000 for maintenance payments with respect to
equipment leased by the Company to the State of California, $30,000 for
remarketing fees, and $460,000 representing equipment purchased by the Company
from Memorex Telex Corporation, the right to payment of which was allegedly
assigned to MTX. The Company presently believes that it has claims against MTX,
in an amount in excess of any amounts it may owe MTX and expects to file a
cross-complaint against MTX for those amounts.
15
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holderssecurity holders of the Company
during the fourth quarter of 1997.
111998.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
DIVIDEND POLICYDividend Policy
The Company has never paid a dividend to its shareholders and does not
anticipate paying a dividend in the foreseeable future, as the Company's Board
of Directors intends to retain any earnings for use in the business. OneSeveral of
the agreements with respect to the Company's secured bank lines of credit
includesinclude a covenant which prohibits the Company from paying dividends in any year
in excess of 25% of its net income for that year. Any future determination
concerning the payment of dividends will depend upon any such dividend
restrictions, the Company's financial condition, the Company's results of
operations, and such other factors as the Board of Directors deems relevant.
PRICE RANGE OF COMMON STOCKPrice Range of Common Stock
On November 14, 1997, the Company's Common Stockcommon stock began trading on the New
York Stock Exchange ("NYSE") under the symbol LSN. Prior to November 1997, the
Company's Common Stockcommon stock was quoted on the NasdaqNASDAQ National Market, under the
symbol LSSI. The following table sets forth, for the periods indicated, the
high and low sales prices of the Common Stockcommon stock as reported on the NYSENASDAQ and Nasdaq National
Market.the
NYSE.
High Low
----------- -----------
1996
1996
First Quarter............................................................................. $15.620Quarter............................................................................ $ 15.620 $12.500
Second Quarter............................................................................Quarter........................................................................... 17.250 12.375
Third Quarter.............................................................................Quarter............................................................................ 30.250 13.000
Fourth Quarter............................................................................Quarter........................................................................... 35.500 23.750
1997
First Quarter............................................................................. $32.500Quarter............................................................................ $ 32.500 $16.125
Second Quarter............................................................................Quarter........................................................................... 19.500 6.750
Third Quarter.............................................................................Quarter............................................................................ 19.125 14.750
Fourth Quarter............................................................................Quarter........................................................................... 24.750 18.000
1998
First Quarter............................................................................ $ 28.625 $21.500
Second Quarter........................................................................... 30.250 25.750
Third Quarter............................................................................ 34.375 21.500
Fourth Quarter........................................................................... 27.375 3.625
As of December 31, 1997,1998, there were approximately 155160 shareholders of
record of the Company's Common Stock.
12common stock.
1999
First Quarter............................................................................ $5.438 $2.188
Second Quarter........................................................................... 2.250 .563
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBERYears Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993------------- ------------ ------------ ------------ ------------
------------
(In thousands, except per share data)
INCOME STATEMENT DATA:Income Statement Data:
Revenues:
Operating lease revenue............. $292,709 $217,781 $141,838 $77,317 $55,319
$43,871
Earned lease income................. 6,427 2,924 2,091 2,885 4,256
6,603
Interest income..................... 397 219 393 462 327
239
Other............................... 119 4,319 274 12 185
105-------- -------- -------- ------- -------
-------
Total revenues...................... 299,652 225,243 144,596 80,676 60,087
50,818
-------- -------- --------------- ------- -------
Costs and expenses:
Depreciation - operating leases.....charges:
Operating leases................. 237,646 151,659 96,256 51,164 37,781
29,830Impairment....................... 18,106 -- -- -- --
Defaults......................... 5,022 -- -- -- --
Goodwill impairment................. 10,001 -- -- -- --
Selling, general and administrative
expenses...........................administrative. 33,035 18,874 12,300 8,584 7,294
7,435
Interest expense....................Interest............................ 42,697 30,067 19,018 10,428 6,523
7,701Inventory write down / loss on
sale of equipment.............. 15,823 -- -- -- --
Other............................... 3,805 2,046 1,100 641 837
391
-------- -------- --------------- ------- -------
Total costs and expenses............ 366,135 202,646 128,674 70,817 52,435
45,357-------- -------- -------- ------- -------
-------
Income (loss) before income taxes...........taxes.... (66,483) 22,597 15,922 9,859 7,652
5,461
Provision (benefit) for income taxes...........taxes. (10,375) 9,536 6,549 3,931 3,060
2,242-------- -------- -------- ------- -------
-------
Net income...........................income (loss).................... $(56,108) $ 13,061 $ 9,373 $ 5,928 $ 4,592
$ 3,219
======== ======== =============== ======= =======
Net income per share -
assuming dilution ...................(fully diluted). $(6.84) $1.55 $1.16 $.93 $.75
$.66
======== ======== =============== ======= =======
Shares used in computing per share
amounts............................. 8,203 10,444 8,077 6,373 6,096
4,884
======== ======== =============== ======= =======
AT DECEMBERAt December 31,
------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993
--------- --------- --------- --------- ----------------------- --------------- --------------- --------------- ---------------
Balance Sheet Data:
Investment in leases.......................leases.................... $641,356 $551,294 $376,960 $208,483 $124,621
$ 93,891
Total assets...............................assets............................ 746,795 596,731 407,291 224,102 141,364
100,715
Recourse debt..............................debt........................... 341,776 269,591 182,739 71,681 9,897
7,503
Nonrecourse debt...........................debt........................ 329,300 202,259 138,919 93,354 89,594
68,878
Shareholders' equity.......................equity.................... 18,755 76,587 63,556 30,912 24,438 11,099
1318
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE BUSINESSThe Business
Leasing Solutions, Inc. (the "Company"''Company'') ishas been in the business of
leasing information processing and communications equipment, principally to
large, creditworthy customers, until 1998, primarily through vendor programs and
strategic alliances with equipment manufacturers, value-added resellers and
systems integrators. The Company's focus isHistorically, the Company has focused on operating leases because such leases provide the
opportunity for the Company to realize the full benefit of residuals received
upon remarketing the equipment to the original customer at the end of the
initial lease term.leases.
To date, the Company has purchased approximately $1.3$1.7 billion of equipment.equipment for
lease to its customers. Beginning in 1996 and continuing into 1997 and 1998, the
Company expanded its operations to Western Europe and Canada through
acquisitions of existing leasing companies.
LEASE ACCOUNTING
Since 1990,companies, or lease portfolios, and related
operations. Due to recent events that have materially and adversely affected
the Company's business and financing arrangements, the Company has been forced
to change its focus on operating leases and its entire business operations. (See
"Business - Introduction," above.)
Lease Accounting
Historically, the Company has principally engaged in two types of lease
transactions which, in accordance with Statement of Financial Accounting
Standards No. 13 ("SFAS 13"), "Accounting for Leases",Leases," are classified as
operating leases or direct finance leases. The allocation of income among
accounting periods within a lease term will vary depending upon the lease
classification, as described below.
Direct Finance Leases. Direct finance leases transfer substantially all
benefits and risks of equipment ownership to the lessee. A lease is a direct
finance lease if the collectibility of lease payments is reasonably certain and
it meets one of the following criteria: (1) the lease transfers ownership of the
equipment to the lessee by the end of the lease term; (2) the lease contains a
bargain purchase option; (3) the lease term at inception is at least 75% of the
estimated economic life of the leased equipment; or (4) the present value of the
minimum lease payments is at least 90% of the fair value of the leased equipment
at inception of the lease.
Direct finance leases are recorded as "Investment in direct finance leases"
upon acceptance of the equipment by the customer. At the inception of the lease,
unearned lease income represents the amount by which the gross lease payments
receivable plus estimated residual value exceeds the equipment cost. Unearned
lease income is recognized, using the interest method, as earned lease income
over the lease term.
Operating Leases. All lease contracts, which do not meet the criteria of
direct finance leases, are accounted for as operating leases. Monthly lease
payments are recorded as operating lease revenues. Leased equipment is recorded,
at the Company's cost, as "Investment in operating leases" and depreciated on a
straight-line basis over the lease term to the estimated residual value at the
expiration of the lease term. The residual value of an item of leased equipment
is its fair market value at the expiration of the lease. Residual values are
estimated at the inception of the lease and reviewed quarterly over the term of
the lease. Estimated residual values of leased equipment may be adjusted
downward, if necessary.adjusted.
Decreases in estimated residual values are made as the
changeany decline in residual
value becomes apparent, and are reflected over the remaining term of the lease
by increased depreciation expense for operating leases or by decreased earned
lease income for direct finance leases. During the third and fourth quarters of
1998, the Company decreased its estimates of residual values related to
substantially all of its portfolio of computer equipment under operating leases.
As a result, the Company incurred substantial charges to depreciation expense
for the fourth quarter of 1998. The impact of the change in estimated residual
values on depreciation expense is discussed in more detail below.
When equipment is sold, the net proceeds realized in excess of the
estimated residual value are generally recorded as a "Operating Lease Revenue","Other Revenue," or the
amount by which the estimated residual value exceeds the net proceeds is
recorded as a loss. Seeloss under "Other Expenses." (See "Business-Leasing and Sales
Activities-Remarketing.") When
19
equipment is re-leased, the Company continues to depreciate the equipment in
accordance with the Company's then current estimate of its residual value, and
the monthly lease payments are recorded as revenue when billed.
Substantially all of the leases into which the Company enters into are
noncancelable transactions under which the obligorlessee must make all scheduled
payments, maintain the equipment, accept the risk of loss of such equipment and
pay all equipment related taxes. See(See "Business --- Leasing and Sales Activities -
-- Lease Terms and Conditions."
14
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER)
Results of Operations for the Three Years Ended December 31, 19971998
Net Income.Income (Loss). For the year ended December 31, 1998, the Company's
operations resulted in a net loss of $56,108,000, or a change of $69,169,000,
compared to net income of $13,061,000 in 1997. The operating loss primarily
resulted from: losses on sales of equipment returned at the end of leases;
reserves provided to adjust the value of equipment previously returned at the
end of a lease that remained in inventory at year end; acceleration of
depreciation expense associated with the adjustment of the Company's estimate of
residual values of equipment on lease; impairment reserves provided against
specific leases in the operating lease portfolio; additional depreciation
related to assets under lease to two companies that filed for bankruptcy;
impairment of goodwill; and increased general expenses incurred in relation to
the Company's bank negotiations and financial restructuring. The net loss for
1998 represented $6.90 on a per share basis, compared to net income per share of
$1.55 for 1997. Net income for the year ended December 31, 1997 was $13,061,000
and represented an increase of $3,688,000, or 39%, over net income of $9,373,000
in 1996. Net income per share for 1997 increased 34% to $1.55, compared to $1.16
one year earlier. Net income in 1996 increased $3,445,000, or 58%, over
$5,928,000 for the same period in 1995. The increasesincrease in earnings in 1997 and
1996 werewas primarily the result of
increases in operating lease and other revenues that outpaced increases in costs
and expenses.
Revenues. Revenues for the year ended December 31, 19971998 increased
$80,647,000,$74,409,000, or 56%33%, to $299,652,000 from $225,243,000 over $144,596,000 one year earlier.
Revenues for 19961997 represented an increase of $63,920,000,$80,647,000, or 79%56%, over
$80,676,000$144,596,000 for the same period in 1995.1996. The increase in revenues in both
periods is primarily the result of increases in operating lease revenues which
comprised 97%98%, 98%97% and 96%98% of total revenue in 1998, 1997, 1996 and 1995,1996,
respectively.
Operating lease revenue grew to $217,781,000$292,709,000 for the year ended December
31, 1998, representing an increase of $74,928,000, or 34%, over $217,781,000 in
1997. In 1997, representingoperating lease revenue of $217,781,000 represented an increase
of $75,943,000, or 54%, over $141,838,000 in 1996. In 1996, operating lease revenue of $141,838,000
represented an increase of $64,521,000, or 83%, over $77,317,000 in 1995. The increase in operating
lease revenue for 19971998 and 19961997 reflects a higher average investment in
operating leases, resulting from increases in operating leases originated or
acquired by the Company over the three yearthree-year period.
Earned lease income derived from direct finance leases for 19971998 increased
$833,000,$3,503,000, or 40%120%, to $2,924,000,$6,427,000, compared to $2,091,000$2,924,000 one year earlier.
The increase in earned lease income in 1998 was primarily due to the acquisition
of Bayshore Leasing, a Canadian small-ticket, direct finance lessor, in July of
1998. In 1997, earned lease revenue reflectsincreased $833,000, or 40%, to $2,924,000
from $2,091,000 in 1996. The increase in earned lease revenue reflected an
increase in direct finance leases resulting from the Canadian acquisition in
1997, offset, in part, by outstanding direct finance leases being paid down.
In
1996, earned leaseOther revenue represented a decrease of $794,000,in 1998 decreased $4,200,000, or 27%97%, to $119,000, from
$2,885,000 in 1995.$4,319,000 for the same period one year earlier. The decrease in 1996other income
is primarily due to losses recognized on the sale of equipment returned from
customers at the end of leases. Offsetting the losses on sales of returned
equipment was a resultgain of outstanding direct
finance leases being paid down and fewer new direct finance leases being
originated, due principally to$1,604,000, resulting from the Company's focus on operating leases.sale of a portfolio of
leased equipment in June 1998. Other revenue of $4,319,000 in 1997 represented
an increase of $4,045,000, over $274,000 in 1996. The increase in other revenue
primarily reflects the net gain
on sale of two lease portfolios in 1997.1997 which resulted in aggregate
gains of $4,408,000.
Depreciation - Operating Leases. Depreciation expense primarily relates to
equipment under operating leases. For the year ended December 31, 1997,1998,
depreciation expense of $151,659,000$237,646,000 represented an increase of $85,987,000, or
57%, over $151,659,000 in 1997. The increase in depreciation expense in 1998 is
primarily due to an increase in the operating lease base resulting from
increases in operating leases originated by the Company and the effect of a
change in the estimated residual values of leased equipment. In 1997,
depreciation expense
20
increased $55,403,000, or 58%, over $96,256,000 in 1996. In 1996, depreciation expense increased
$45,092,000, or 88%, over $51,164,000 in 1995. The increasesincrease in
depreciation for both 1997 and 1996 arewas principally the result of increasesan increase in the operating
lease base caused by increasesresulting from an increase in operating leases originated or acquired
by the Company.
Historically, the Company's estimate of the residual value of leased
equipment has been based on an estimate of the percentage of equipment
remarketed "in place" to the original lessee, estimates of the expected rent
collected beyond the initial term of a lease ("renewal rent"), and an expected
sales value upon the return of the equipment by the customer. During the third
and fourth quarters of 1998, the Company overbegan to experience a significant
decrease in the threepercentage of equipment remarketed in place to the original
lessee. As a result of the experience in the third quarter with the percentage
of equipment remarketed in place to the original lessee, the expected amount of
sales proceeds and renewal rent to be realized on 24 and 36-month leases, in the
fourth quarter of 1998, the Company decreased its estimates of residual values
related to most of its leased equipment. The effect of the change in estimated
residual values was to increase depreciation expense from the date of
implementation of the change through the remaining term of a lease. The impact
on depreciation expense of changes in residual estimates was approximately
$14,500,000 in the fourth quarter of 1998.
Depreciation expense as a percentage of operating lease revenue was 81% for
the year period.ended December 31, 1998, compared to 70% and 68%, respectively, for the
years ended December 31, 1997 and 1996. The increase in 1998 reflects the
impact on depreciation expense of the change in estimated residual values
implemented in the third and fourth quarters of 1998. Depreciation expense
represented 120% of operating lease revenue in the fourth quarter of 1998.
Currently, the Company expects this ratio to decline from the level of the
fourth quarter of 1998 as the existing lease portfolio runs off; however, on an
ongoing basis, this ratio is expected to exceed the historical levels
experienced in 1997 and 1996.
The Company believes that cash flows from its leases are adequate to
recover the recorded investment at December 31, 1998. However, cash flows for
many leases are not expected to be adequate to also cover interest and
administrative costs and return a profit to the Company.
Depreciation - Impairment . Impairment for the year ended December 31,
1998 was $18,106,000 for specific leases in the operating portfolio deemed to be
impaired, based on estimated cash flows from the equipment as compared to the
current book value of the equipment. No similar charges were incurred in prior
years. (See "Note 4 to Consolidated Financial Statements.")
Depreciation - Defaults. The Company recorded additional depreciation of
$5,022,000 as a result of early cancellation of lease contracts with two
companies that filed for bankruptcy in 1998. There were no similar charges in
the prior years. This charge consists of approximately $164,000 due to the write
off of the outstanding accounts receivable balance and the loss of the residual
value of approximately $4,858,000.
Goodwill Impairment. In 1998, the Company wrote off approximately
$10,000,000 in goodwill associated with the acquisition of Bayshore Leasing
based on an analysis of future operating lease income, residual income,
depreciation expense, interest expense and other expenses. There were no
similar charges in prior years.
Selling, General and Administrative Expenses.Administrative. Selling, general and administrative
("SG&A)&A") expenses for the year ended December 31, 19971998 increased $6,574,000,$14,161,000, or
53%75%, to $18,874,000,$33,035,000, compared to $12,300,000$18,874,000 for the same period one year
earlier. The increase in SG&A expenses in 19961998 is primarily due to increased
personnel costs associated with the overall growth in international leasing
activities, particularly increases in personnel in the European and Canadian
sales, lease contract administration, information systems areas to support such
growth, and the Bayshore acquisition. In addition, the Company experienced
increases in legal and professional fees, aggregating $3,020,000, related to the
Company's negotiations with banks and restructuring of the Company's financing
arrangements. SG&A expenses in 1997 represented an increase of $3,716,000,$6,574,000, or
43%53%, over $8,584,000$12,300,000 in 1995.1996. The increase for both years, is1997 was due to increased
personnel costs and compensation associated with the overall growth in leasing
activities, particularly increases in personnel in sales, lease contract
administration, and information systems areas to support such growth, and an
increase in discretionary year endyear-end bonuses from the prior year. In addition, a
substantial increase in personnel in 1997 and 1996, resulting from the Company's expansion
to Canada and to Europe respectively, was a significant contributor to the increase in SG&A
expenses in bothexpenses. The 1998 and
21
1997 and 1996. The 1997 and 1996 SG&A expenses were also significantly affected by increases in travel costs
associated with increased leasing activity and the expansion of the Company's
foreign operations in Europe and Canada, and increased occupancy costs resulting
from an expansion of the Company's headquarters and the expansion of the
Company's foreign operations in Canada and the United Kingdom.operations.
Interest Expense. Interest expense increased $11,049,000,$12,630,000, or 58%42%, to
$30,067,000$42,697,000, for the year ended December 31, 1997.1998. The increase in 1998 from
$30,067,000 in 1997 is primarily due to higher average recourse and nonrecourse
debt balances, related to higher average investment in leases. In 1996,1997, interest
expense of $19,018,000$30,067,000 represented an increase of $8,590,000,$11,049,000, or 82%58%, over
$10,428,000$19,018,000 in 1995.1996. The increases in 1997 and 1996 were due to higher recourse and
nonrecourse debt outstanding, related to the higher average investment in
leases.
Inventory Write Down / Loss on Sale of Equipment. Reflects the write down
of approximately $15,823,000 from the book value of equipment that came off
lease and was sold or remained in inventory at the end of 1998. There were no
similar charges in prior years.
Other Expenses.Expense. Other expenses increased $946,000,$1,759,000, or 86%, to $3,805,000,
from $2,046,000 in 1997 over $1,100,000 in 1996.1997. This increase is primarily the result of costs
related to development of infrastructure in the Company's remarketing
organization and
amortization of goodwill related to acquisitions.the acquisitions of Bayshore Leasing
Corporation, and increased remarketing expenses.
Income Taxes. Provisions (benefit) for income taxes were 42.2%(15.6)%, 41.1%42.2%
and 39.9%41.1% of income (loss) before income taxes for 1998, 1997, and 1996,
respectively. The benefit for income taxes for 1998 resulted from the years 1997, 1996Company's
loss. The benefit tax rate is less than statutory federal rate due to net
operating loss carryforwards and 1995,
respectively.a valuation allowance to reduce certain assets
to zero. The increase in the effective tax rates during the three years
ended December 31,from 1996 to 1997 relates
primarily to the Company's international expansion and changes in the geographic
distribution of the Company's income to states with higher tax rates.
Status of Debt Financing Arrangements
On May 25, 1999, the Company concluded negotiations for 80-day forbearance
agreements with its secured lenders. Under the terms of the agreements, the
lenders had agreed to forbear until August 15, 1999 from exercising remedies
which they would otherwise be permitted to exercise as a result of the Company's
defaults under its loan agreements with those lenders. This agreement was
subsequently extended to October 15, 1999. All debt instruments described below
under "Liquidity and Capital Resources" with expired dates come under the
forbearance agreements.
The terms and conditions of the forbearance agreements impose substantial
reporting and cash allocation obligations and other covenants, as well as
representations, warranties and covenants standard in forbearance agreements.
In the event the Company were to breach any of these obligations under any of
the forbearance agreements, and, with respect to most breaches, fail to cure
such breaches within a specified period of time, all of its lenders would have
the right to exercise the remedies under their respective loan agreements.
Additionally, unless all of the forbearance agreements are extended at the end
of the forbearance period, the lenders will have the right to exercise their
remedies at that time.
The agreements for most of the facilities described below 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 several of its borrowing agreements. The Company obtained a
waiver of such breach from the requisite number of lenders under each of those
agreements. As a result of payment defaults under most of its lines of credit
and financing arrangements, and its substantial loss in its fourth quarter of
1998, resulting in the Company being in breach of several of its financial
covenants, defaults have occurred under those lines of credit and financing
arrangements. Under the forbearance agreements, the lenders have agreed to
forbear until October 15, 1999, from exercising remedies which they would
otherwise be permitted to exercise as a result of those defaults. The extended
agreements do not provide for any additional borrowing availability.
22
LIQUIDITY AND CAPITAL RESOURCES
The bank facility for the Company's Canadian operations expired August 28,
1999. Although the bank continues to permit the Company to borrow under the
facility, at reduced availability levels, no assurances can be given that the
bank will permit such additional borrowings in the future. The Canadian
operations has discontinued providing new operating lease financing, and has
obtained long-term financing for its small ticket operations by selling off its
small ticket leases, from time to time, to another leasing company.
On July 30, 1999, the Company and its European subsidiary entered into an
agreement with its European lending syndicate extending the maturity date of its
European credit agreement to December 31, 2000. In the event the European
subsidiary were to breach any of its obligations under the extended agreement,
and fail to cure such breach within a specified period of time, the lenders
would have the right to exercise their remedies under the credit agreement. The
extended agreement does not provide for additional borrowing availability.
Borrowings under the below-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.
Liquidity and Capital Resources
See "Factors That May Affect Future Operating Results - Ability of Company
to Continue Operations and Dependence on Availability of Financing" for a
discussion of the Company's present liquidity position, risks that such
liquidity position will become more difficult and the limitations on
availability of financing to the Company.
The Company generated cash flow from operations of $209,949,000 during
1998, compared to net loss of $56,108,000 for the same period. Cash flow from
operations was higher than the net loss primarily as a result of non-cash
expenses, such as depreciation, amortization and impairment charges, of
$287,370,000, and the combined effect of other sources and uses of cash from
operations, including those resulting from changes in accounts receivable,
accounts payable, deferred income taxes, and other assets and liabilities,
totaling $21,373,000. Investing activities, which are primarily related to
investments in equipment for lease, used $363,264,000 during the period.
Financing activities generated $173,785,000 from $1,363,173,000 in new
borrowings of recourse and nonrecourse debt and $1,414,000 from the Company's
issuance of common stock upon exercise of options, reduced by $1,158,778,000
used to repay recourse and nonrecourse borrowings and $2,655,000 to repurchase
shares of common stock. The net result of the above activity for 1998 was an
increase in cash and cash equivalents of $20,659,000.
Debt financing activitieshas typically provideprovided approximately 85% to 90% of the
purchase price of the equipment purchased by the Company for lease to its
customers. For the Company's European operations, the percentage has been in
the range of 80% to 85%. The 10% to 15% balance (15% to 20% balancein Europe) of the
purchase price (the Company's "equity" investment in equipment) must generally
be financed by cash flow from its operations, or recourseadditional debt orif available,
common stock, or convertible debt sold by the Company. As a result of the
recent payment defaults under most of the Company's lines of credit or other
borrowing arrangements, on May 25, 1999, the Company entered into an 80-day
forbearance agreement with its secured lenders. The Company generatedCompany's ability to
finance its leasing activities during the forbearance period and for the
foreseeable future will be severely limited. (See "Status of Debt Financing
Arrangements," below.)
As has been the case historically, the Company's cash flow from operations
of $190,442,000 during 1997,
compared to net income of $13,061,000will only be sufficient for the same period. Cash flow from
operations was higher than net income primarily asCompany to finance a relatively small percentage
of its projected equity investment requirements. As a result of non-cash
expenses, such as depreciationthe Company's
losses for its third and amortization,fourth quarters of $153,243,000,1998 and the combined effectrelated adjustments to
book values of other sourcescertain of its equipment portfolios, and usesthe status of cash from operations, including
resulting changes in accounts receivable, accounts payable, deferred income
taxes, and other assets and liabilities, totaling $24,138,000. Investing
activities, which are primarily relatedits
financing arrangements, the Company is unlikely to investments in equipment for lease,
used $302,776,000 duringbe able to finance any
significant portion of any equity investment requirements through recourse debt
or the period. Financing activities generated $122,068,000
from $662,506,000 in new borrowings of recourse and nonrecourse debt and
$1,397,000 from the Company's issuancesale of common stock upon exercise of options
reduced by $540,572,000 used to repay recourse and nonrecourse borrowings and
$1,263,000 to repurchase shares of Common Stock. The netor convertible debt. As a result, of the above
activity for 1997 was an increase in cash and cash equivalents of $9,681,000.
In February 1996, the Company closed a public stock offering in which it sold
1,800,000 shareshas
determined not to finance additional operating leases for the foreseeable
future. (See "Status of the Company's Common Stock. The Company received net
proceeds of approximately $22,540,000 from the offering.Debt Financing Arrangements" below.)
23
In October 1996, the Company closed a public debt offering for $71,875,000
of convertible subordinated notes.Convertible Subordinated Notes (the "Convertible Notes"). The notesConvertible
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 notesConvertible Notes bear interest at a rate of 6.875%
per annum and are convertible into Common Stockshares of 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 notesConvertible Notes beginning in October 1999. These
equityThis public debt
offering and debtprior 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 necessaryDue to support the Company's leasing activities has
principally been provided from nonrecourse and recourse borrowings.
Historically,default on its payment obligations on
most of its secured debt, the Company has obtained recourseis prohibited, under the Indenture for the
Convertible Notes, from making the April 1999 interest payment on the
Convertible Notes. Although no assurances of success can be given, it is likely
that the Company will propose to the holders of the Convertible Notes a non-cash
alternative to payment of principal and/or interest on the notes, most likely in
the form of the conversion of the principal balance of, and nonrecourse borrowings from
money center banks, regional banks, insurance companies, finance companies and
financial intermediaries.
Prioraccrued interest on,
the notes to common stock of the Company.
Historically, prior to the permanent financing of its leases, interim
financing has been obtained through short-term, secured, recourse facilities.
The Company's available credit under these short-term, revolving recourse facilities
in the United States totaled $205,000,000$200,000,000 at December 31, 1997.1998 ($175,000,000 at
March 31, 1999). A brief description of each of those facilities follows.
(1) $175,000,000 revolving warehouse facility syndicated with eleven
banks, expiring
October 29, 1998.expired July 15, 1999. At December 31, 1997, $129,393,000,1998, $89,173,000 with
a weighted average interest rate of 7.3% per annum,7.01%, was outstanding under thisthe
facility. Borrowings under the facility bear an interest rate, at the
Company's option, of the agent bank's prime rate
(8.5%(7.75% at December 31, 1997)1998) or LIBOR (5.72%(5.2% at December 31, 1997)1998)
plus 120 basis points.
(2) $15,000,000$25,000,000 revolving facility with one bank, with borrowings
available through April 30, 1998, and repayments due 240 days after
borrowing. Borrowings under the facility bear interest at LIBOR (5.72%
at December 31, 1997) plus 150 basis points. There were no outstanding
borrowings under this facility at December 31, 1997.
(3) $15,000,000 revolving facility ($11,000,00024,800,000 outstanding at December
31, 1997)1998) with one bank, expiring October 15, 1998.three banks. Borrowings under
the facility bear interest at the bank's
prime (8.5%rate (7.75% at December 31, 1997) plus
95 basis points.
16
1998). This line matured December
30, 1998 and additional borrowings are not available.
The Company also has a $15,000,000 revolving recourse facility ($15,000,00013,536,000
outstanding at December 31, 1997)1998), expiringwhich expired on October 15, 1998, with one
bank. Borrowings under the facility bear interest at the bank's prime rate (8.5%(7.75% at December 31,
1997)1998). The proceeds of borrowings underbalance remains outstanding past the expiration date as the Company
is in default on 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.facility.
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((Pounds)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
3.05% over 2-month LIBOR plus 145 basis points.(9.51% at December 31, 1998). There was $19,737,000approximately
$44,587,000 outstanding under this facility at December 31, 1997.1998. The maturity
of the line expires in November 1998.has been extended as part of the forbearance agreement. No
additional borrowings are available under the line.
The Company's Canadian subsidiary maintainsoperations maintain a three-tiered recourse credit
facility with a Canadian bank. The Company has guaranteed the subsidiary's
obligations under the facility. This facility expired on August 28, 1999, but
the bank withcontinues to permit borrowing under each tier of the facility up to the
reduced availability through August 1998,set on September 8, 1999. No assurances can be made that
the bank will continue to provide short-term financing for leasing activitiespermit such borrowings in Canada.the future. The facility is
as follows:
(1) The first tier is an approximately $10,500,000$9,774,000 ($15,000,000 Canadian)
revolving facility with repayments due 180 days after each
borrowing. BorrowingBorrowings under this facility bearwere bearing interest, at
the borrower's election, at the Canadian prime rate (6.0%(6.75% at
December 31, 1997)1998) plus 25 basis points, or Canadian dollar LIBOR
(4.75%(4.97% at December 31, 1997)1998) plus 135 basis points, or the Bankers'
Acceptances rate (4.99% at December 31, 1998) plus a stamping fee of
135 basis points. ThereAt December 31, 1998, there was $9,579,000$7,715,000
($11,806,000 Canadian) outstanding under this facility, with a
weighted average interest rate of 6.75%.
24
Effective January 12, 1999, the borrowing availability for the first
tier was reduced to approximately $7,842,000 ($12,000,000 Canadian)
and borrowings under the facility now bear interest at December 31, 1997.Canadian
prime rate plus 75 basis points. Bankers' Acceptances, LIBOR loans
and LIBOR rate were removed. Although the facility expired on August
28, 1999, effective September 8, 1999, the borrowing availability on
this tier was reduced to $5,864,000 ($9,000,000 Canadian). No
changes were made to borrowing rates.
(2) The second tier is an approximately $4,200,000$3,921,000 ($6,000,000 Canadian)
revolving facility with repayments due 90 days after each borrowing.
BorrowingBorrowings under this facility were bearing interest, at the
borrower's election, at the Canadian prime rate (6.75% at December
31, 1998) plus 25 basis points or Canadian dollar LIBOR (4.97% at
December 31, 1998) plus 135 basis points, or the Bankers'
Acceptances rate (4.99% at December 31, 1998) plus a stamping fee of
135 basis points. At December 31, 1998, there was $1,573,000
($2,408,000 Canadian) outstanding under this facility, with a
weighted average interest rate of 7.0%.
Effective January 12, 1999, the borrowings under the second tier
facility bear interest at Canadian prime rate plus 75 basis points.
Bankers' Acceptances, LIBOR loans and LIBOR rate were removed.
Although the facility expired on August 28, 1999, effective
September 8, 1999, the second tier borrowing availability on this
tier was reduced to $2,281,000 ($3,500,000 Canadian). No changes
were made to borrowing rates.
(3) The third tier is an approximately $1,960,000 ($3,000,000 Canadian)
revolving facility. Borrowings under this facility bear interest at
the Canadian prime rate (6.0%(6.75% at December 31, 1997)1998) plus 25150 basis
points or Canadian dollar LIBOR (4.75% atpoints. At December 31, 1997) plus
135 basis points. There1998, there was $227,000$87,000 ($134,000 Canadian)
outstanding under this facility, at December
31, 1997.
Thewith a weighted average interest
rate of 8.25%.
Although the facility expired on August 28, 1999, effective
September 8, 1999, the third tier is has an approximately $2,100,000borrowing availability on this
tier was reduced to $847,000 ($3,000,0001,300,000 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 December
31, 1997) plus 150 basis points. There was $1,680,000 outstanding under this
facility at December 31, 1997.. No changes were
made to borrowing rates.
The Company maintainsmaintained a $100,000,000, nonrecourse revolving facility with
an affiliate of a money center bank. This revolving facility expiresexpired in March 1999, and1999. The
interest rate on borrowings under the facility bear interest at a rate ofis 125 to 200 basis points over
average life treasuries"T-Note Proxy Rate" at the time of borrowing. Through
December 31, 1997, the Company has refinanced approximately $93,176,000 of
borrowings under its other short-term facilities through this facility. At December 31,
1997, $28,183,0001998, $14,187,000 was outstanding under this facility at a weighted average
interest rate of 7.3%7.28%.
In January 1997,1998, the Company's,Company, 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$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 April 1998. To date, the Company has financed
approximately $103,693,000 of borrowings under this facility.expired in March 1999. At December 31, 1997,1998, the Company had $66,909,000$27,121,000
outstanding under this facility, at a weighted average interest rate of 7.2%7.27%.
The Company's Canadian Subsidiary maintainsoperations maintained a revolving recourse line of
credit of $10,500,000approximately $9,774,000 ($15,000,000 Canadian) with a Canadian
financial institution, with borrowing available through February, 1999, to provide short-term financing
for its leasing activities. Borrowing1999.
Borrowings under this facility bear interest at the
Subsidiary's election, at Canadian prime rate (6.0 %(6.75% at
December 31, 1997)1998) plus 25 basis points or Canadian dollar LIBOR (4.75 %(4.97% at
December 31, 1997)1998) plus 135 basis points. There werewas no amounts outstanding balance
under this facility at December 31, 1997.1998. Effective February 16, 1999, the line
of credit increased to $22,873,000 ($35,000,000 Canadian), with borrowing
available through April 15, 1999. The Canadian dollar LIBOR borrowing rate
option was removed. Interest is at prime rate plus 50 basis points.
In June 1998, the Company completed a commercial paper offering supported
by a letter of credit issued by a money center bank. The letter of credit was
backed by a $60,000,000 liquidity line of credit with four banks (the "CP
Line"). As a result of the Company's defaults under the CP Line, commercial
paper may no longer be issued under the Line. At December 31, 1998, an
aggregate of $31,006,000, with a weighted average interest rate of 5.6%, was
outstanding under the line.
25
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 bear interest at the rate of one month LIBOR (6.91% at December 31,
1998), plus 1.25%. At December 31, 1998, there was $23,000,000 outstanding
under the line. The Company's obligations under the line are secured indirectly
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 on such market. Pursuant to the terms of the Company's forbearance
agreement, the maturity of the borrowing was extended to October 15, 1999.
In September 1998, the Company completed the private sale, through a
wholly-owned subsidiary, 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. At December 31,
1998, there was $119,334,000 outstanding under the securitization.
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 17
of a major life insurance company. The transaction generated gross
proceeds of $8,500,000, a portion of which. werewhich was used to repay certain
subordinated debt of the Company which was owed to the same financing source.
Occasionally,In June 1998, the Company will obtainfinanced 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.
The Company's Canadian subsidiary obtains long-term nonrecoursenon-recourse financing
for
individual significant lease transactions at the time, or shortly after, it purchases the related
equipment. AnAt December 31, 1998, an aggregate of $118,267,000approximately $57,953,000
($11,100,000 of
which is recourse)82,790,000 Canadian), with a weighted average interest rate of 8.0%6.15% per
annum, remained outstanding under all such arrangementslong-term arrangements. The Canadian
subsidiary has borrowing availability for such long-term financing, of
$9,774,000 ($15,000,000 Canadian), with a Canadian financial institution. This
availability will expire on October 31, 1999, to the extent not used before that
date.
The Company's Canadian operations maintained a long-term non-recourse
concurrent lease financing facility with a Canadian public securitization trust
vehicle. The total program amount was approximately $52,500,000 ($75,000,000
Canadian) or such greater amount as ofthe parties may have agreed upon in writing
or such lesser amount as the borrower may have determined by written notice to
the lender. At December 31, 1997.1998, $52,843,000 ($75,490,000 Canadian) was
outstanding under this facility, with a weighted average interest rate of 5.59%.
The facility expired on October 15, 1998, and, subsequent to that date, no
further borrowing could be made under the facility.
The Company's debt financing activities typically provideCanadian subsidiary has promissory notes outstanding to the
sellers of Bayshore Leasing Corporation given as partial consideration for the
purchase of Bayshore. Principal and interest (compounding, based on Canadian
prime rate which was 6.75% at December 31, 1998) were due and payable on July 1,
1999. Interest increases to Canadian prime rate plus 500 basis points if the
promissory notes were not paid by July 1, 1999. At December 31, 1998, the total
balance outstanding, including accrued interest, was approximately 85% to
90%$4,338,000
($6,197,000 Canadian). At the time of the purchase priceacquisition, each of the equipment purchased bypayees on
the notes entered into a Subordination Agreement with the U.S. bank providing
the financing for the acquisition. The Company is presently in default on its
payment obligations to the bank with respect to such financing. The
subordination agreement prevents the Company's Canadian subsidiary from making
any payments on the promissory notes, the
26
noteholders from retaining any such payments, and the noteholders from
exercising any of their remedies with respect to the notes, in each case, so
long as the Company is in default on its payment obligations with respect to
such financing.
See "Note 8" of "Notes to Consolidated Financial Statements" 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, recourse debt, or common stock or convertible debt sold by the
Company. Debt financing for all or a
portiondiscussion of the Company's equity investment
is not readily available in the marketplace and may require an interest rate
materially higher than is required byborrowings used to acquire Bayshore Leasing.
Based on 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 anticipated to
provide adequate capital to fund the Company's operations, including
acquisitions and financings under its vendor programs, for the next twelve
months. Although no assurances can be given,situation, the Company expects to be ablehave
significant operating losses for 1999. A mismatch exists between future minimum
lease payments and future maturities of non-recourse and recourse debts. The
Company will attempt to renew or timely replaceresolve the mismatch through negotiations with its
existing and recently expired lines of credit, to
continue to have access tolenders under 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 RESULTSforbearance agreements.
Potential Fluctuations in Quarterly Operating Results
The Company's future quarterly operating results and the market price of
its common 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 common stock. Any such
adverse impact could be greater if any such shortfall occurs near the time of
any material decrease in any widely followed stock index or in the market price
of the stock of one or more public equipment leasing companies or major
customers or vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it has leased to its customers or of sales
of the lease receivables under the leases with its customers. Such sales of
equipment or lease receivables, which are an ordinary but not predictable part
of the Company's business, willwould 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,However, any such sale maycould result in the reduction
of revenue, and net income, otherwise expected in subsequent quarters, as the
Company willwould not receive lease revenue from the sold equipment in those
quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding or
preceding quarters are not necessarily meaningful and that such results for one
quarter should not be relied upon as an indication of future performance.
18
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
effectFor a discussion of thecertain Year 2000 conversion matters potentially
affecting the Company and its response to those matters. (See "Item 1 - Factors
That May Affect Future Operating results - Year 2000.")
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in connection with anythe fair value of such software or
systems.
The Company has only recently commenced a review of whetherderivatives are recorded each period in the software and
systems of the vendors, financing sources, customers, equipment manufacturers or
distributorscurrent
earnings or other parties with which it deals may,comprehensive income, depending on whether a derivative is
designed as part of a result of the Year
2000 conversion,have a material adverse effect on the Company or its operations.
Accordingly,hedge transaction and, if it is, too earlythe type of hedge
transaction. This statement is effective for the Company to be able to predict whether such
software or systems of such parties may have such effect. As partfor its fiscal year
ending December 31, 2001. The Company believes that the adoption 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 andstatement 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 ashave 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 fromsignificant impact on 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 June 1997, SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130) and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), were issued. SFAS 130 requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the applicable period from nonowner sources. SFAS 131 establishes annual
and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas, and major
customers. The effect of adoption of these statements will be limited to the
form and content of the Company's disclosures and will not impact the Company's consolidated financial
position, results of operations or cash flows.
Both
statements are effective for fiscal years beginning after27
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk related to fluctuations in interest
rates and in foreign currency exchange rates:
Interest Rate Exposure
The Company maintains a number of credit facilities with various lending
institutions with significant balances that fluctuate with "Prime" and "LIBOR"
rates as stipulated in the loan agreements. At December 15, 1997,
with earlier adoption permitted.
"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 that31, 1998, the Company
expects, believeshas a total of $671,076,000 in recourse and non-recourse debt, out of which
$196,394,000 are variable rate debt. Based on these significant balances, a
change in interest rates could have a material impact on the financial condition
of the Company. However an increase of 10% from the effective interest rates at
December 31, 1998 would have resulted in an interest expense increase of
approximately $1,600,000 or anticipates will0.5% of 1998 costs and expenses.
Foreign Currency Exchange Rate Exposure
The Company's exposure to market risk due to fluctuations in foreign currency
exchange rates relates primarily to the intercompany balances with its Canadian
and U.K. subsidiaries. Transaction gains or may occurlosses have not been significant in
the future,
including, without limitation, with respect topast, and there is no hedging activity on pound sterling, Canadian dollar,
mark or other currencies. The Company believes it would not experience a
material foreign exchange loss based on a hypothetical 10% adverse change in the
exchange rate of the pound sterling, or Canadian dollar, against the U.S.
dollar. Consequently, the Company does not expect that a reduction in the value
of amounts denominated in foreign currencies resulting from a sudden or
significant fluctuations in foreign exchange rates would have a material impact
on the Company's financial position, results of operations or cash flows.
Notwithstanding the foregoing analysis of the direct effects of interest rate
and foreign currency exchange rate fluctuations on the value of certain of the
Company's obligations and amounts, the indirect effects of such fluctuations
could have a material effect on the Company's business, financial condition and
results of operations. For example, international demand and competition for the Company's
lease financingfinancial services andis affected by foreign currency exchange rates. In
addition, interest rate fluctuations may affect the products to be leased by the Company,
the continued availability to the Company of adequate financing to support its
global expansion activities, risks and uncertainties of doing business in Europe
and Canada and other foreign countries, the abilitybuying patterns of the
Company to
recover its investment in equipment through remarketing,Company's customers. Furthermore, interest rate and currency exchange rate
fluctuations have broad influence on the abilitygeneral condition of the Company to enter into new strategic relationshipsU.S. foreign
and extended existing
strategic relationships,global economics, which could materially adversely affect the performance of its 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 "Business-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.
19
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The Company's consolidated financial statements at December 31, 19971998 and
19961997 and for each of the three years in the period ended December 31, 19971998 and
the Independent Auditors' Report thereon are contained on pages F-1 through F-17F-20
of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Incorporated by reference from the section entitled "Election of Directors"
in the Registrant's Notice and Proxy Statement to be filed, pursuant to Section
14 of the Securities Exchange Act of 1934, with the Securities and Exchange
Commission in connection with the Registrant's 1999 Annual Meeting of
Shareholders to
be held on May 21, 1998.Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section entitled "Executive Compensation
and Other Information" in the Registrant's Notice and Proxy Statement to be
filed, pursuant to Section 14 of the Securities Exchange Act of 1934, with the
Securities and Exchange Commission in connection with the Registrant's 1999
Annual Meeting of Shareholders to be held on May 21, 1998.Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the section entitled "Security Ownership of
Management and Principal Shareholders" in the Registrant's Notice and Proxy
Statement to be filed, pursuant to Section 14 of the Securities Exchange Act of
1934, with the Securities and Exchange Commission in connection with the
Registrant's 1999 Annual Meeting of Shareholders to be held on May 21, 1998.Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Not Applicable
2029
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE,
AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS:
DESCRIPTION Page
- --------------------------------------Financial Statements:
---------------------
Description Page
- ------------------------------------------------------------------------- ----
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 F-2
Consolidated Statements of Operations - Years ended December 31,
1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996 F-2
Consolidated Income Statements - Years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
(2) FINANCIAL STATEMENT SCHEDULE:Financial Statement Schedule:
----------------------------
DESCRIPTION Page
- -------------------------------------- ----
Schedule II Valuation and Qualifying Accounts F-17
Description Page
- ------------------------------------------------------------------------- ----
Schedule II Valuation and Qualifying Accounts F-23
(3) EXHIBITS:Exhibits: The following exhibits are filed herewith:
--------
EXHIBIT NO. DOCUMENTExhibit No. Document
- ---------------------------- --------
3.1(1)(10)3.1(10) Articles of Incorporation of the Company, as amended to date.
3.11(14) Certificate of Amendment of Articles of Incorporation
3.2(1) By-Laws of the Company.
10.30(1) Form of Master Lease Agreement of the Company and form of supplement thereto.
10.31(8)* Employee Bonus Program, as amended.
10.32(8)* Deferred Income Plan, as amended.
10.33(1)* 1986 Stock Option Plan and form of Incentive Stock Option Agreement.
10.35(1) Stock Purchase Agreement, dated June 19, 1986, between Hal J Krauter and the Company.
10.36(1) Stock Purchase Agreement, dated July 17, 1986, between Louis R. Adimare and the Company.
10.37(1) Stock Purchase Agreement, dated August 11, 1987, between Louis R. Adimare and the Company.
10.39(1) Lease Agreement, dated June 18, 1988, between Almaden Tower Partners and the Company for offices at 10 Almaden Blvd.,
San Jose, California, as amended.
10.39.1(2) Lease Amendment, dated June 28, 1993, between Almaden Tower Partners and the Company.
10.39.2(9) Lease Amendment, dated February 28, 1997, between Almaden Tower Partners and the Company.
10.54(3)* 1994 Employee Stock Purchase Plan.
21
10.56(6) Warehousing Loan and Security Agreement, dated as of May 31, 1994, between NationsBanc Leasing Corporation and the
Company ("NationsBanc Agreement").
10.56.1(6) Amendment to NationsBanc Agreement, dated October 3, 1994.
10.56.2(7) Amendment to NationsBanc Agreement, dated April 30, 1995.
10.56.3(7) Amendment to NationsBanc Agreement, dated August 6, 1995.
10.56.4(12) Amendment to NationsBanc Agreement, dated February 29, 1996.
10.61(5)* 1995 Stock Option and Incentive Plan.
10.62(7) Marketing Agreement, dated June 1, 1995, between Dell Products, L.P. and the Company.
10.68(11) Lease Receivables Purchase Agreement, dated as of March 27, 1996, among CXC Incorporated, as Purchaser, Citicorp North
America, Inc., as Agent, and Leasing Solutions, Inc., as Seller and the Collection Agent.
30
10.69(12) Credit Agreement and Security Agreement between Leasing Solutions, Inc. and Wells Fargo Bank, National Association,
dated May 30, 1996. ("Wells Fargo Bank Agreement")
10.73(9) Third Amendment to Wells Fargo Bank Agreement, dated October 15, 1997.
10.74(9) Agreement, dated December 1, 1997, between Dell Computer Corporation and the Company.
10.75(9) Amended and Restated Warehousing Credit Agreement, dated October 31, 1997, between CoreStates Bank, N.A. ("CoreStates")
and the Company ("CoreStates Agreement").
10.76(9) First Amendment to CoreStates Agreement, dated November 18, 1997.
10.77(10) Indenture, dated as of October 9, 1996, with respect to 6 7/8% Convertible Subordinated Notes due 2003, between Bankers
Trust Company, as Trustee, and the Company.
10.78(9) Consolidated, Amended and Restated Revolving Loan Agreement, dated May 2, 1997, between the Company and Silicon Valley
Bank and related Security Agreement.
10.79(9) Contribution Agreement and Sale and Servicing Agreement, dated as of June 30, 1997, among the Company, Leasing Solutions
Receivables III, Inc. and MetLife Capital Corporation ("MetLife"), and related Remarketing Agreement, dated as of June
30, 1997, between the Company and MetLife.
10.80(9) Guaranty Agreement, dated as of August 29, 1997, between the Company and The Bank of Nova Scotia ("ScotiaBank"), as it
relates to that certain Credit Agreement and Security Agreement, dated as of August 29, 1997, among Leasing Solutions
(Canada) Inc., as Borrower, and ScotiaBank.
10.81(9) Credit Agreement, dated as of August 29, 1997, between Leasing Solutions (Canada) Inc., as Borrower, and ScotiaBank and
related Security Agreement.
10.82(9) Guaranty Agreement, dated as of October 8, 1997, between the Company and CoreStates as it relates to that certain Credit
Agreement, dated as of October 8, 1997, between Leasing Solutions International Ltd and CoreStates.
10.83(9) Credit Agreement, dated as of October 8, 1997, among Leasing Solutions International Ltd and CoreStates and related
Subordinated Floating Charge and related Security Assignment.
10.84(9) Guaranty Agreement, dated December 10, 1997, between the Company and The Mutual Life Assurance Company of Canada ("Mutual
Life") as it relates to that certain Loan Agreement, dated December 10, 1997, between the Company and Mutual Life and
related Security Agreement.
10.85(9) Loan Agreement, dated December 10, 1997, between the Company and Mutual Life and related Security Agreement.
10.86(13) Credit Agreement, dated as of January 22, 1997, between the Company and Citicorp North America, Inc.
10.87(14) Interim Warehouse and Security Agreement, dated as of June 22, 1998, between Prudential Securities Credit Corporation
and the Company
10.88(14) Letter of Credit and Reimbursement Agreement, Security Agreement and Issuing and Paying Agent Agreement, dated June 10,
1998, between Fleet Bank, N.A., as agent, and the Company
10.89(14) Sale and Servicing Agreement and Remarketing Agreement, dated as of June 30, 1998, between Nationsbanc Leasing
Corporation and the Company
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
and Report on Schedule, Deloitte & Touche LLP
24.1 Power of Attorney (See page 2433 of this Annualannual Report on Form 10-K).
27.1 Current Financial Data Schedule for the fiscal year ending December 31, 1997
27.2 Restated Financial Data Schedule, including columns, for the three prior quarterly periods ending March 31,
1997, June 30, 19971998.
1996 and September 30, 1997,1996, and for the prior fiscal year ending December 31, 1996.
27.3 Restated Financial Data Schedule, including columns, for the three prior quarterly periods ending March 31,
1996, June 30, 1996 and September 30, 1996, and the prior fiscal years ending December 31, 1995 and December
31, 1994.1995.
31
(1) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-57944), as amended, originally filed with the
Securities and Exchange Commission on February 5, 1993, which Exhibit is
incorporated herein by this reference.
(2) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. No. 33-74540), as amended, originally filed with the
Securities and Exchange Commission on January 28, 1994, which Exhibit is
incorporated herein by this reference.
(3) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 33-85746), filed with the Securities and
Exchange Commission on October 28, 1994, which Exhibit is incorporated by
this reference.
(4) Previously filed as an Exhibit to LRSI's Registration Statement on Form S-3
(Registration No. 33-74394), as amended, filed with the Securities and
Exchange Commission on April 4, 1994, or LRSI's Form 8-K Current Report,
dated April 7, 1994, or LRSI's Form 8-K Current Report, dated December 15,
1994, filed with the Securities and Exchange Commission, which Exhibit is
incorporated herein by this reference.
(5) Previously filed as an Exhibit to the Company's Proxy Statement in
connection with its 1995 Annual Meeting of Shareholders.
(6) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1994, which Exhibit is incorporated
herein by this reference.
22
(7) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1
(Registration No. 333-00740), as amended, originally filed with the
Securities and Exchange Commission on January 29, 1996, which Exhibit is
incorporated herein by this reference.
(8) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1996, which Exhibit is incorporated
herein by this reference.
(9) Filed as an Exhibit to this Annual Report on Form 10-K, by amendment.
(10) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3 (Registration No. 333-12355), as amended, originally filed with
the Securities and Exchange Commission on September 20, 1996, which Exhibit
is incorporated herein by this reference.
(11) Previously filed as an Exhibit to the Company's Quarterly Report for the
quarterly period ending March 31, 1996.
(12) Previously filed as an Exhibit to the Company's Quarterly Report for the
quarterly period ending June 30, 1996.
(13) Previously filed as an Exhibit to the Company's Quarterly Report for the
quarterly period ending March 31, 1997.
(14) Previously filed as an Exhibit to the Company's Quarterly Report for the
quarterly period ending June 30, 1998
* Executive compensation plan or arrangement.
(i) Confidential treatment has been accorded certain information contained in
this exhibit.
(b) REPORTS ON FORMReports on Form 8-K
The Registrant did not file any reportsa report on Form 8-K during the quarteryear ended December
31, 1997.
231998.
32
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Hal J KrauterLouis R. Adimare and Steven L. Yeffa,John M. Greeley, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for him in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute of substitutes, may
lawfully do or cause to be done or by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
LEASING SOLUTIONS, INC.
By: /s/ Hal J KrauterLouis R. Adimare Dated: March 30, 1998September 23, 1999
-----------------------------
-------------------
Hal J KrauterLouis R. Adimare
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Registrant in the
capacities and on the dates indicated.
NAME TITLE DATEName Title Date
- ---------------------------------------- -------------------------------------------- ------------------------------------------------------------------- ------------------
/s/ Hal J KrauterLouis R. Adimare President, Chief Executive Officer, Chairman, March 30, 1998and September 23, 1999
- ----------------------------------------- and--------------------------------------- Director (Principal Executive Officer)
Hal J KrauterLouis R. Adimare
/s/ Steven L. YeffaJohn M. Greeley Vice President, Finance, Chief Operating Officer, September 23, 1999
- --------------------------------------- and Chief Financial March 30, 1998
- ----------------------------------------- Officer (Principal Financial
John M. Greeley Officer)
Steven L. Yeffa
/s/ Louis R. Adimare Director March 30, 1998
- -----------------------------------------
Louis R. Adimare
/s/ George L. Bragg Director March 30, 1998September 23, 1999
- --------------------------------------------------------------------------------
George L. Bragg
/s/ James C. Castle Director March 30, 1998September 23, 1999
- --------------------------------------------------------------------------------
James C. Castle
/s/ Hal J Krauter Director September 23, 1999
- ---------------------------------------
Hal J Krauter
/s/ Peter K. Nevitt Director March 30, 1998September 23, 1999
- --------------------------------------------------------------------------------
Peter K. Nevitt
2433
INDEPENDENT AUDITORS' REPORTIndependent Auditors' Report
To the Board of Directors and Shareholders of Leasing Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Leasing
Solutions, Inc. and subsidiaries as of December 31, 19971998 and 19961997, and the
related consolidated statements of operations and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997.1998. Our audits also included the financial statement
schedule listed in Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Leasing Solutions, Inc. and
subsidiaries at December 31, 19971998 and 1996,1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 19971998 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's losses from operations and default on its
outstanding debt raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, in November 1998 the
Company was served with two complaints filed as class actions alleging
violations of the Securities Act of 1934.
As discussed in Note 4 to the financial statements, in the third and fourth
quarters of 1998 the Company made changes in the estimate of the residual values
of the majority of its existing operating lease portfolio.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 23, 1998
F-1July 19, 1999
(September 8, 1999 as to paragraphs 8 through 10 of Note 1 and as to Note 7)
F 1
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 19971998 and 19961997
ASSETS
1998 1997
1996
--------------------- ------------------------- ----
Cash and cash equivalents............................................equivalents..................... $ 16,569,00033,534,000 $ 6,888,00012,875,000
Restricted cash and cash equivalents.......... 33,063,000 3,694,000
Accounts receivable..................................................receivable........................... 17,048,000 16,318,000
11,534,000Income tax refundable......................... 4,105,000 --
Investment in direct finance leases-net..............................leases-net....... 104,286,000 24,269,000 15,088,000
Investment in operating leases-net...................................leases-net............ 537,070,000 527,025,000 361,872,000
Property and equipment-net...........................................equipment-net.................... 5,081,000 3,545,000
2,338,000Goodwill - net................................ 4,513,000 2,072,000
Other assets......................................................... 9,005,000 9,571,000assets.................................. 8,095,000 6,933,000
------------ ------------
TOTAL ASSETS......................................................ASSETS............................... $746,795,000 $596,731,000 $407,291,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable-equipment purchases.................................payable.............................. $ 17,143,00025,559,000 $ 4,252,00017,143,000
Accrued and other liabilities........................................liabilities................. 29,657,000 17,605,000
9,497,000
Recourse debt........................................................debt................................. 341,776,000 269,591,000
182,739,000
Nonrecourse debt.....................................................debt.............................. 329,300,000 202,259,000 138,919,000
Deferred income taxes................................................taxes......................... 1,748,000 13,546,000 8,328,000
------------ ------------
TOTAL LIABILITIES.................................................LIABILITIES.......................... 728,040,000 520,144,000 343,735,000
------------ ------------
COMMITMENTS (Notes 7 and 9)............................................................. -- --
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares;shares authorized;
none outstandingoutstanding............................. -- --
Common stock, authorized 20,000,000 shares;60,000,000 shares authorized;
shares outstanding:
1998 - 8,163,967, 1997 - 8,181,800; 1996 - 8,170,836;....................................... 39,484,000 38,625,000
37,658,000
Retained earnings....................................................earnings (deficit)................... (20,356,000) 37,852,000
25,624,000
Accumulated translation adjustment...................................other comprehensive income(loss).. (373,000) 110,000 274,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY...........................................EQUITY.................... 18,755,000 76,587,000 63,556,000
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..............................................EQUITY....................... $746,795,000 $596,731,000 $407,291,000
============ ============
See Notes to Consolidated Financial Statements.
F-2F 2
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
STATEMENTS
YEARS ENDED DECEMBERYears ended December 31, 1998, 1997 and 1996 AND 1995
1998 1997 1996
1995
--------------- ---------------- ------------------ ---- ----
REVENUES
Operating lease revenue.........................revenue........................ $292,709,000 $217,781,000 $141,838,000
$77,317,000
Earned lease income.............................income............................ 6,427,000 2,924,000 2,091,000
2,885,000
Interest income.................................income................................ 397,000 219,000 393,000
462,000
Other...........................................Other.......................................... 119,000 4,319,000 274,000
12,000
------------ ------------ -----------------------
TOTAL REVENUES..................................REVENUES................................. 299,652,000 225,243,000 144,596,000
80,676,000
------------ ------------ -----------------------
COSTS AND EXPENSES
Depreciation - operating leases.................charges:
Operating leases............................ 237,646,000 151,659,000 96,256,000
51,164,000Impairment.................................. 18,106,000 -- --
Defaults.................................... 5,022,000 -- --
Goodwill impairment............................ 10,001,000 -- --
Selling, general and administrative.............administrative............ 33,035,000 18,874,000 12,300,000
8,584,000
Interest........................................Interest....................................... 42,697,000 30,067,000 19,018,000
10,428,000
Other...........................................Inventory write down / loss on sale of
equipment................................... 15,823,000 -- --
Other.......................................... 3,805,000 2,046,000 1,100,000
641,000
------------ ------------ -----------------------
TOTAL COSTS AND EXPENSES........................EXPENSES....................... 366,135,000 202,646,000 128,674,000
70,817,000
------------ ------------ -----------------------
INCOME (LOSS) BEFORE INCOME TAXES.........................TAXES................. (66,483,000) 22,597,000 15,922,000
9,859,000INCOME TAX PROVISION FOR INCOME TAXES.........................(BENEFIT).................... (10,375,000) 9,536,000 6,549,000
3,931,000
------------ ------------ -----------------------
NET INCOME.........................................INCOME (LOSS)................................. $(56,108,000) $ 13,061,000 $ 9,373,000
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments..................... (483,000) (164,000) 274,000
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS)....................... $(56,591,000) $ 5,928,00012,897,000 $ 9,647,000
============ ============ =======================
NET INCOME (LOSS) PER COMMON SHARE $ 1.60 $ 1.19 $ .95SHARE...................... $(6.84) $1.60 $1.19
============ ============ =======================
NET INCOME (LOSS) PER COMMON SHARE - ASSUMING DILUTION....................... $ 1.55 $ 1.16 $ .93FULLY DILUTED....... $(6.84) $1.55 $1.16
============ ============ =======================
WEIGHTED AVERAGE COMMON SHARES.....................SHARES.................... 8,203,000 8,182,000 7,854,000
6,223,000
============ ============ =======================
WEIGHTED AVERAGE COMMON AND EQUIVALENT SHARES......SHARES..... 8,203,000 10,444,000 8,077,000
6,373,000
============ ============ =======================
See Notes to Consolidated Financial Statements.
F-3F 3
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBERYears ended December 31, 1998, 1997 and 1996 AND 1995
COMMON STOCK ACCUMULATED
------------------------ RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTALCommon Stock
-------------------------
Other
Retained Comprehensive
Shares Amount Earnings Income Total
---------- ------------- ------------ -------------------------- -------------- -------------
BALANCES, January 1, 1995..................... 6,136,929 $14,115,000 $10,323,0001996.................... 6,263,930 $14,661,000 $ 16,251,000 $ -- $24,438,000
Issuance of common stock...................... 10,122 87,000 -- -- 87,000
Exercise of stock options..................... 116,879 190,000 -- -- 190,000
Tax benefit of stock option transactions...... -- 269,000 -- -- 269,000
Net income.................................... -- -- 5,928,000 -- 5,928,000
--------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1995................... 6,263,930 14,661,000 16,251,000 --$ 30,912,000
Issuance of common stock......................stock..................... 1,854,705 22,616,000 -- -- 22,616,000
Exercise of stock options.....................options.................... 52,201 221,000 -- -- 221,000
Tax benefit of stock option transactions......transactions..... -- 160,000 -- -- 160,000
Accumulated translation adjustment............adjustment........... -- -- -- $ 274,000 274,000
Net income....................................income................................... -- -- 9,373,000 -- 9,373,000
--------- ----------- ----------- ----------- ----------------------- ------------- ------------
BALANCES, December 31, 1996...................1996.................. 8,170,836 37,658,000 25,624,000 274,000 633,556,00063,556,000
Issuance of common stock......................stock..................... 9,750 104,000 104,000
Exercise of stock options.....................options.................... 91,214 793,000 -- -- 793,000
Tax benefit of stock option transactions......transactions..... -- 500,000 -- -- 500,000
Accumulated translation adjustment............adjustment........... -- -- -- (164,000) (164,000)
Repurchase of common stock....................stock................... (90,000) (430,000) (833,000) (1,263,000)
Net income....................................income................................... -- -- 13,061,000 -- 13,061,000
--------- ----------- ----------- ----------- ----------------------- ------------- ------------
BALANCES, December 31, 1997...................1997.................. 8,181,800 $38,625,000 $37,852,00038,625,000 37,852,000 110,000 76,587,000
Issuance of common stock..................... 26,428 184,000 184,000
Exercise of stock options.................... 72,139 811,000 811,000
Tax benefit of stock option transactions..... 419,000 419,000
Accumulated translation adjustment........... (483,000) (483,000)
Repurchase of common stock................... (116,400) (555,000) (2,100,000) (2,655,000)
Net loss..................................... -- -- (56,108,000) -- (56,108,000)
--------- ----------- ------------ ------------- ------------
BALANCES, December 31, 1998.................. 8,163,967 $39,484,000 $(20,356,000) $(373,000) $ 110,000 $76,587,00018,755,000
========= =========== =========== =========== ======================= ============= ============
See Notes to Consolidated Financial Statements.
F-4F 4
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBERYears ended December 31, 1998, 1997 and 1996 AND 1995
1998 1997 1996
1995
-------------------- ------------------- ---------------------- ---- ----
OPERATING ACTIVITIES
Net income...................................................income (loss)........................................... $ (56,108,000) $ 13,061,000 $ 9,373,000
$ 5,928,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, amortization and amortization...............................other non-cash charges...... 276,597,000 153,243,000 96,972,000 51,655,000
Provision for uncollectible amounts.........................amounts........................ 60,000 60,000 55,000
Goodwill................................................... 10,773,000 249,000 --
Deferred income taxes.......................................taxes...................................... (11,798,000) 5,218,000 5,954,000 1,415,000
Changes in assets and liabilities:
Accounts receivable....................................... (4,835,000) (4,756,000) (7,196,000)
(1,655,000)
Other assets.............................................. 2,728,000assets............................................. (24,415,000) 2,479,000 (8,914,000)
88,000
Accounts payable - equipment purchases....................payable......................................... 7,623,000 12,891,000 (15,381,000) 7,499,000
Accrued and other liabilities.............................liabilities............................ 12,052,000 7,997,000 2,730,000
1,982,000
--------------------------- ------------- -------------
Net cash provided by operating activities....................activities................... 209,949,000 190,442,000 83,593,000
66,912,000
--------------------------- ------------- -------------
INVESTING ACTIVITIES
Property and equipment purchases.............................purchases............................ (3,290,000) (2,336,000) (1,527,000) (921,000)
Cash received over revenue recognized........................recognized....................... 25,218,000 66,949,000 19,701,000 14,356,000
Cash paid for acquisition,acquisitions, net of cash received..............received............ (12,975,000) (8,895,000) (1,100,000) --
Cost of equipment acquired for lease.........................leases....................... (372,217,000) (358,494,000) (279,462,000)
(149,382,000)
--------------------------- ------------- -------------
Net cash used forin investing activities....................... (363,264,000) (302,776,000) (262,388,000)
(135,947,000)
--------------------------- ------------- -------------
FINANCING ACTIVITIES
Borrowings:
Nonrecourse................................................ 301,725,000 205,769,000 119,035,000
61,307,000
Recourse................................................... 1,061,448,000 456,737,000 445,760,000
105,597,000
Repayments:
Nonrecourse................................................ (170,194,000) (156,654,000) (75,821,000)
(57,547,000)
Recourse................................................... (988,584,000) (383,918,000) (334,702,000)
(43,813,000)(Increase) decrease in restricted cash and cash equivalents. (29,369,000) (265,000) 554,000
Issuance of common stock.....................................stock.................................... 1,414,000 1,397,000 22,997,000 277,000
Repurchase of common stockstock.................................. (2,655,000) (1,263,000) - ---
Repayment of capital lease obligations....................... -obligations...................... -- -- (143,000)
(69,000)
--------------------------- ------------- -------------
Net cash provided by financing activities.................... 122,068,000 177,126,000 65,752,000
-------------activities................... 173,785,000 121,803,000 177,680,000
-------------- ------------- -------------
IMPACT OF EXCHANGE RATE CHANGES ON CASH.....................................................CASH 189,000 (53,000) 134,000
--
--------------------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 9,681,000 (1,535,000) (3,283,000)EQUIVALENTS 20,659,000 9,416,000 (981,000)
CASH AND CASH EQUIVALENTS
Beginning of year.......................................... 6,888,000 8,423,000 11,706,000
-------------12,875,000 3,459,000 4,440,000
-------------- ------------- -------------
End of year................................................ $ 16,569,00033,534,000 $ 6,888,00012,875,000 $ 8,423,0003,459,000
============== ============= =============
=============SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest..................................... $ 41,904,000 $ 28,189,000 $ 17,639,000
Cash paid for income taxes................................. 4,327,000 3,882,000 1,947,000
F-5F 5
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESSThe Business
Leasing Solutions, Inc. (the "Company") was incorporated in California and
commenced operations in June 1986. The Company is a full-service, global leasing
company that specializeshas specialized in leasing
information processing and communications equipment, principally to large,
creditworthy customers, both U.S. and foreign, in a variety of industries.
Beginning in 1994, the Company formed threefour wholly owned subsidiaries, Leasing
Solutions Receivables, Inc., Leasing Solutions Receivables II, Inc., Leasing
Solutions Receivables III, Inc. and Leasing Solutions Receivables III,IV, Inc., as
special purpose corporations to issue debt securities collateralized by the
lease receivables and the underlying leased equipment. In April 1996, the Company
formed Leasing Solutions International, Ltd, a wholly ownedwholly-owned subsidiary of the
Company, which manages the Company's European leasing operations through ten
whollywholly-
owned subsidiaries based in Western Europe. In January 1997, the Company formed
Leasing Solutions (Canada) Inc., a wholly owned subsidiary, which manages the
Company's Canadian leasing operations. In July 1998, the Company acquired
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 (Canadian).
In December 1998, Bayshore Leasing was consolidated into Leasing Solutions
(Canada) Inc.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements the Company incurred a net loss of $56,108,000 during the year ended
December 31, 1998 and was in default on certain outstanding debt at December 31,
1998. These factors among others may indicate that the Company will be unable
to continue as a going concern for a reasonable period of time. The financial
statements do not include any adjustments relating to the recoverability of
assets and settlement of liabilities that might be necessary should the Company
be unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flows to meet
its obligations on a timely basis, to comply with the terms and covenants of its
financing arrangements, to obtain additional financing or refinancing as may be
required, and to ultimately attain successful operations. Management's plans
concerning these matters are described below.
In the first quarter of 1999, the Company changed its lease pricing
structure, making it unlikely that it will finance new operating leases for the
foreseeable future. The Company also substantially reduced its sales staff, in
the first quarter of 1999, to take into account the reduced sales resources it
will require, during 1999, to conduct its anticipated lease financing
activities. Although no assurances of success can be given, in order to attempt
to enhance its remarketing results, the Company has moved several employees to
its remarketing group and is in the process of expanding its remarketing
activities and related marketing channels. The Company also suspended new lease
activity, in the first quarter of 1999, in its European operations, and is
focusing on maximizing the residual return on its European portfolio. The
Company's Canadian subsidiary has been evaluating the new and growing area of
web based "small-ticket" lease financing; however, the evaluation is
significantly limited because its access to debt financing has been adversely
affected by the Company's results of operations and defaults under its credit
lines. The outcome of this small-ticket project will depend on the ability of
the Company to continue operations.
In the event the Company is not able to adequately respond to the
operational or financial issues discussed above, and particularly if any of its
lenders or trade creditors attempt to exercise remedies against the Company, it
will likely be necessary for the Company to: (1) terminate all new lease
financing operations and run off its lease and equipment portfolio, by billing
and collecting rental payments and remarketing the equipment when the related
lease comes to the end of its term, assuming (for which no assurances can be
given) its lenders will permit it to do so and provide financing to meet its
operating expenses; (2) attempt to sell the Company or all or substantially all
of its assets; or (3) file for protection under the Federal Bankruptcy Act.
Other than as described below, the Company is not involved in any material
legal proceedings, and is not aware of any pending or threatened legal
proceedings, that would have a material adverse effect upon its financial
condition or results of operations.
F 6
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 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, 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 only recently begun the evaluation of the allegations and claims
made in the complaint. The Company has not yet answered or otherwise responded
to the complaint.
In November 1998, the Company was also 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 only recently begun the evaluation of the allegations and claims
made in the complaint. The Company has not yet answered or otherwise responded
to the complaint.
The agreements for most of the facilities described below 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 several of its borrowing agreements. The Company obtained a
waiver of such breach from the requisite number of lenders under each of those
agreements. As a result of payment defaults under most of its lines of credit
and financing arrangements, and its substantial loss in its fourth quarter of
1998, resulting in the Company being in breach of several of its financial
covenants, defaults have occurred under those lines of credit and financing
arrangements. Under the forbearance agreements, the lenders have agreed to
forbear until August 15, 1999, from exercising remedies which they would
otherwise be permitted to exercise as a result of those defaults. Under the
terms of an extension of these agreements, which took effect on August 16, 1999,
the U.S. lenders have agreed to forbear until October 15, 1999, from exercising
their rights and remedies as a result of the Company's defaults under its loan
agreements. The extended agreements do not provide for any additional borrowing
availability. The terms and conditions of the extended forbearance agreements
continue to impose substantial reporting and cash allocation obligations, and
also include standard representations, warranties and covenants. In the event
the Company were to breach any of these obligations under any of the forbearance
agreements, and fail to cure such breach within a specified period of time, each
of its lenders would have the right to exercise the remedies under their
respective credit agreements. Additionally, unless all of the agreements are
extended at the end of the forbearance period, each of the lenders will have the
right to exercise their remedies at that time.
The Company's Canadian financing facility with its bank expired on August
28, 1999 and on September 8, 1999, the borrowing availability with this bank was
reduced. The Company is currently negotiating an extension of this facility.
On July 30, 1999, the Company and its European subsidiary entered into an
agreement with its European lending syndicate extending the maturity date of its
European credit agreement to December 31, 2000. In the event the European
subsidiary were to breach any of its obligations under the extended agreement,
and fail to cure such breach within a specified period of time, the lenders
would have the right to exercise their remedies under the credit agreement. The
extended agreement does not provide for additional borrowing availability.
2. SIGNIFICANT ACCOUNTING POLICIESSignificant Accounting Policies
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Leasing Solutions
Receivables, Inc.. Leasing Solutions Receivables, Inc. II, Leasing Solutions
Receivables, Inc. III, Leasing Solutions International, Ltd, after elimination
of intercompanymaterial inter-company accounts and transactions.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues,
expenses, and expensesdisclosure of contingent assets and liabilities as of the dates
and for the periods presented.
F 7
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Such management estimates include the allowanceallowances for doubtful accounts receivable,default losses, residual values
and depreciable lives on leased equipment, certain accruals and the valuation
allowance for deferred tax assets. Actual results could differ from those
estimates.
Cash and cash equivalents - Cash equivalents are highly liquid debt
instruments with a remaining maturity of three months or less from date of
purchase by the Company. At December 31, 1998 and 1997, $33,063,000 and
1996, $3,694,000, and
$3,429,000, respectively, of such amount was restricted in connection with
certain debt securities issued by the Company and was not available for other
uses (see Note 7).uses.
Investment in direct finance leases - Lease contracts (whether financed with
recourse or nonrecoursenon-recourse debt) which meet the appropriate criteria specified in
Statement of Financial Accounting Standards (SFAS)("SFAS") No. 13, "Accounting for
Leases",Leases," are classified as direct finance leases. Direct finance leases are
recorded upon acceptance of the equipment by the customer. Original unearnedUnearned lease
income represents the excess of the gross lease receivable and estimated
residual value over the equipment cost. Unearned lease income is recognized as
revenue (earned lease income) over the lease term at a constant rate of return
on the net investment in the lease.
Investment in operating leases - Leases which do not meet the criteria of
direct finance leases are accounted for as operating leases. Leased equipment is
recorded at cost and depreciated over the lease term, to the estimated residual
value at the expiration of the lease term, generally on a straight-line basis.
Purchased portfolios of certain leases are depreciated on an accelerated method.
The Company reviews estimated net realizable values on a regular basis and adjustments are made as
necessary.
Initial direct costs incurred in originating leases are capitalized and
amortized over the original lease term.
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives, which range from three to
five years.
F-6
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Impairment of Long-Lived Assets and Assets To be Disposed Of - The Company
evaluates its long lived assets, and certain identifiable intangibles, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets, or intangibles, may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the carrying amount of
the assets that exceeds the fair market value of the assets. Fair market value
is determined using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed are
determined in a similar manner, except that fair market values are reduced to
the estimated disposal value.
Goodwill - Goodwill represents costs in excess of net assets of businesses
acquired. Goodwill is amortized over 15 years, using the straight-line method.
The carrying value of goodwill for each business unit is reviewed, if the facts
and circumstances, such as significant declines in sales, earnings, cashflows or
a material adverse change in the business climate, suggest that the carrying
value of goodwill may be impaired. The Company assesses the impairment by
comparing the carrying value of goodwill to estimated future results of
operations and cashflows at the appropriate business unit level.
Income taxes - Income taxes are reported using the asset and liability
approach.
Net income per share - The Company was required to adopt SFAS 128 , "Earnings
Per Share," in the fourth quarter of 1997, and restated at that timeBasic earnings per share (EPS) data for prior periods to conform with SFAS 128. SFAS 128
requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of shares of common
stock of the Company ("Common Stock") outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if outstanding securities or
other contracts to issue Common Stock, including with respect to stock options,
were converted into Common Stock or exercised.
F 8
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-based compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Foreign currency translation. - Functional currencies for the Company's
foreign subsidiaries are the local currencies. The assets and liabilities of
foreign subsidiaries are translated at year endyear-end rates of exchange and revenues
and expenses are translated at the average rates of exchange for the year.
Gains and losses from translation are recorded directly into a separate
component of shareholders' equity.
Comprehensive Income (Loss). - In fiscal 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 changes in its net assets during
the period from non-owner sources. Statements of comprehensive income (loss)
for the years ended December 31, 1998, 1997, and 1996, have been included within
the Consolidated Statements of Operations. Cumulative comprehensive income
(loss) at December 31, 1998 and 1997 is comprised of after tax net income (loss)
from the Company's operations, and foreign currency translation gains (losses)
after tax.
Concentrations of credit risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents short-term investments and accounts receivable. The Company's leases are generally with
large, creditworthy lessees. Management believes that its credit evaluation,
approval and monitoring processes substantially mitigate potential credit risks.
There is a possibility that the credit risk is not limited to the accounts
receivable balance but also includes risk of loss on recovery of the Company's
investment in leased equipment, including the residual value of the equipment.
Recent Accounting PronouncementPronouncements - In June 1997,1998, the Financial Accounting
Standards Board adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130)133, "Accounting for Derivatives and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" (SFAS 131), were issued. SFAS 130Hedging
Activities," which requires that an enterprise report, by major componentsall derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in the current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. This statement, as a single total,amended, is
effective for the change inCompany for its net assets duringfiscal year ending December 31, 2001. The
Company believes the applicable period from nonowner sources.
SFAS 131 establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. The effect of adoption of these
statements will be limited to the form and content of the Company's disclosures
andthis statement will not have a significant
impact the Company'son its consolidated financial position, results of operations or cash
flows.
Both statements are effectiveIn 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 fiscal years
beginning after December 15, 1997,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 1998. As required by the
statement, all prior period EPS amounts presented have been restated to conform
with earlier adoption permitted.the provisions of SFAS 128. Common stock equivalents were not included in
the computation of diluted earnings per share when the Company reported a loss
because to do so would have been antidilutive for the periods presented.
Reclassifications - Certain items have been reclassified in the prior period
financial statements to conform to the 1997 presentation and1998 presentation. The reclassifications
had no effect on net income or shareholders' equity.
F-7F 9
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENT IN DIRECT FINANCE LEASESInvestment In Direct Finance Leases
Investment in direct finance leases represents equipment leased for up to five
years. The components of the net investment in direct finance leases, as of
December 31, are as follows:
1998 1997
1996
------------------- ---------------------- ----
Minimum lease payments receivable...........................................receivable....... $114,488,000 $22,857,000 $15,397,000
Estimated unguaranteed residual value.......................................value... 10,121,000 4,345,000 1,609,000
Initial direct costs - net..................................................net.............. 165,000 33,000 12,000
Unearned lease income.......................................................income................... (20,488,000) (2,966,000)
(1,930,000)
----------------------- -----------
Investment in direct finance leases-net.....................................leases-net. $104,286,000 $24,269,000
$15,088,000
======================= ===========
Interest rates implicit in the leases generally range from 5% to 22%15%.
4. INVESTMENT IN OPERATING LEASESInvestment In Operating Leases
Investment in operating leases primarily represents equipment leased for two
to three years. The components of the net investment in operating leases, as of
December 31, are as follows:
1998 1997
1996
------------------ ---------------------- ----
Equipment under operating leases.......................................leases......... $ 783,784,000971,653,000 $ 560,128,000783,784,000
Initial direct costs - net.............................................net............... 5,423,000 7,540,000
4,316,000
Accumulated depreciation...............................................depreciation................. (434,709,000) (264,071,000) (202,404,000)
Allowance for doubtful accounts........................................defaults................... (5,297,000) (228,000) (168,000)
------------- -------------
Investment in operating leases - net...................................net... $ 527,025,000537,070,000 $ 361,872,000527,025,000
============= =============
During the fourth quarter of 1998, the Company recorded a provision for
impairment (depreciation expense) of approximately $18,106,000, as a reduction
of the carrying value of its net investment in operating leases.
During the last three years, the Company has historically emphasized operating
leases with a term of 24 or 36-months, rather than direct finance leases. In
general, under the Company's operating leases, the present value of the monthly
lease payments will not pay back 100% of the purchase price of equipment,
whereas, the present value of the monthly lease payments under the Company's
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 re-
marketing process.
At the inception of each operating lease, the Company estimates a residual
value for the leased equipment. 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, recent
decreases in the manufacturers' prices of desktop and laptop computers have
adversely affected the market value of the equipment owned and leased by the
Company. Until recently, the Company's experience generally resulted in
aggregate realized residual values for its equipment equal to or in excess of
the initial estimated residual values.
During the third and fourth quarters of 1998, the first significant number of
desktop and laptop computer leases written two to three years ago reached the
end of their contract period. Due to the rapid technological obsolescence of
information processing and communications equipment, recent decreases in the
manufacturers' prices of desktop and laptop computers, and the resulting adverse
remarketing experience led the Company to reevaluate the recoverability of the
residual values assumed in the Company's operating lease portfolio.
The provision for impairment of approximately $18,106,000 was determined by
comparing the carrying value of the Company's operating lease portfolio, grouped
into lease pools by month of end of firm term, to the estimated undiscounted
future cash flows expected to be generated by such lease pools. For lease pools
where the carrying value exceeded the undiscounted future cashflows, a provision
for impairment was recognized. For such lease pools, the impairment was
calculated as the difference between the carrying value of the lease pool and
its fair market value. Fair market value was determined by discounting the
expected future cash flows from the impaired
F 10
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
lease pools by a discount rate of 10%, which was considered to be commensurate
with the risks involved in the related lease portfolios.
In addition, due to the events described above, the Company made a change in
the estimate of the residual values of equipment comprising the majority of its
operating lease portfolio. This change in accounting estimate resulted in
additional depreciation expense of $14,549,000 for equipment under operating
leases during the fourth quarter of 1998.
5. FUTURE MINIMUM LEASE PAYMENTSFuture Minimum Lease Payments
Future minimum lease payments to be received by the Company on direct finance
leases and noncancelablenon-cancelable operating leases, as of December 31, 1997,1998, are as
follows:
YEARS ENDING DECEMBERYears Ending December 31, DIRECTDirect
- ------------------------------------------------------------------------ FINANCE OPERATING
LEASES LEASES
---------------- ------------------------------------------ Finance Operating
Leases Leases
------ ------
1998.................................................................... $12,779,000 $222,702,000
1999.................................................................... 6,582,000 140,274,000
2000.................................................................... 2,279,000 41,381,000
2001.................................................................... 701,000 414,000
2002.................................................................... 413,000 354,000
Thereafter.............................................................. 103,000 324,000
-----------1999........................ $ 46,735,000 $243,445,000
2000........................ 33,720,000 133,950,000
2001........................ 19,000,000 34,202,000
2002........................ 9,353,000 325,000
2003........................ 4,844,000 105,000
Thereafter.................. 836,000 --
------------ TOTAL................................................................... $22,857,000 $405,449,000
===========------------
Total....................... $114,488,000 $412,027,000
============ ============
F-8
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. PROPERTY AND EQUIPMENTProperty and Equipment
Property and equipment, as of December 31, consist of:
1998 1997
1996
----------------- ---------------------- ----
Equipment and software..................................................software........ $ 7,974,000 $ 5,626,000
$ 3,691,000
Furniture...............................................................Furniture..................... 1,741,000 849,000 613,000
----------- -----------
Total...................................................................Total......................... 9,715,000 6,475,000
4,304,000
Accumulated depreciation................................................depreciation...... (4,634,000) (2,930,000) (1,966,000)
----------- -----------
Property and equipment - net............................................net.. $ 3,545,0005,081,000 $ 2,338,0003,545,000
=========== ===========
7. DEBT AND CREDIT FACILITIESDebt and Credit Facilities
The Company and its wholly-owned subsidiaries (collectively, the "Company"), utilize their lease receivables
and the underlying leased equipment as collateral to obtain debt financing, on
either a recourse or nonrecoursenon-recourse basis, for the acquisition of equipment for
lease. Principal and interest payments on the debt are generally due monthly in
amounts that are approximately equal to the total payments due from the lessee
under the leases that collateralizecollaterize the debt. Under recourse financing, in the
event of a default by a lessee, the lender has recourse against the lessee, the
equipment serving as collateral, and the Company. Under nonrecourse financing,
in the event of a default by a lessee, the lender generally only has recourse
against the lessee and the equipment serving as collateral, but not against the
Company's other assets.
Prior to 1994, the Company obtainedStatus of Debt Financing. All debt financing for its leasing activity
primarily from banks, insurance and finance companies, and financial
intermediaries. In 1994, the Company, through one of its subsidiaries, obtained
long-term, permanent financing for a substantial portion of its lease portfolio
through the issuance of nonrecourse debt securities. Such financing is generally
known as a securitization.
On an interim basis, prior to a portfolio of leases being permanently financed
under a securitization, or other long-term loan agreement, the Company finances
its lease transactions under short-term, recourse credit facilities currentlyinstruments described below with total availability of $205,000,000. The Company has the following such
short-term recourse facilities in place:
. a $175,000,000 revolving facility ($129,393,000 outstanding at December 31,
1997) syndicated with eleven banks, expiring October 29, 1998. Borrowingsexpired
dates come under the facility bear an interest rate, at the Company's option, of the
agent bank's prime rate (8.5% at December 31, 1997) or LIBOR (5.72% at
December 31, 1997) plus 120 basis points.
forbearance agreement (see Note 1). a $15,000,000 revolving facility (no amounts are outstanding at December 31,
1997) with one bank, with borrowing available through April 30, 1998, and
repayments due 240 days after each borrowing. Borrowings under the facility
bear interest at LIBOR (5.72% at December 31, 1997) plus 150 basis points.
. a $15,000,000 revolving facility with one bank ($11,000,000 outstanding at
December 31, 1997), expiring October 15, 1998. Borrowings under the facility
bear interest at prime (8.5% at December 31, 1997) plus 95 basis points.
F-9
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, the Company maintains a $15,000,000 revolving facility
($15,000,000 outstanding at December 31, 1997), expiring October 15, 1998, with
one bank. Borrowings under the facility bear interest at the bank's prime rate
(8.5% at December 31, 1997). The 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 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. Borrowings under the
facility may be made in a number of European currencies and bear interest at
LIBOR plus 145 basis points. There was $19,737,000 outstanding under this
facility at December 31, 1997.
The Company's Canadian subsidiary maintains three short-term, recourse lines
of credit as follows:
. An approximately $10,530,000 (15,000,000 Canadian) revolving facility with
one bank with borrowing available through August 28, 1998, and repayments due
180 days after each borrowing. Borrowing under this facility bear interest at
Canadian prime rate (6.0% at December 31, 1997) plus 25 basis points or
Canadian dollar LIBOR (4.75% at December 31, 1997) plus 135 basis points. At
December 31, 1997 there was $9,579,000 outstanding under this facility.
. An approximately $4,212,000 (6,000,000 Canadian) revolving facility with one
bank with borrowing available through August 28, 1998, and repayments due 90
days after each borrowing. Borrowing under this facility bear interest at
Canadian prime rate (6.0% at December 31, 1997) plus 25 basis points or
Canadian dollar LIBOR (4.75% at December 31, 1997) plus 135 basis points. At
December 31, 1997 there was $227,000 outstanding under this facility.
. An approximately $2,106,000 (3,000,000 Canadian) revolving facility with one
bank with borrowing available through August 28, 1998, and repayments due 364
days after each borrowing. Borrowing under this facility bear interest at
Canadian prime rate (6.0% at December 31, 1997) plus 150 basis points. At
December 31, 1997 there was $1,680,000 outstanding under this facility.
The Company, has a $100,000,000 nonrecourse lease receivables financing
facility with an affiliate of a money center bank. This is a revolving facility,
expiring 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 December 31, 1997, the Company has refinanced approximately
$93,176,000 of borrowings under its other short-term facilities through this
facility. At December 31, 1997, the Company had $28,183,000 outstanding under
this facility, at a weighted average interest rate of 7.39%.
In 1997, the company established a $100,000,000 commercial paper-backed
conduit, nonrecourse line of credit with an affiliate of a money center bank.
This is a revolving facility expiring April 1998, and borrowings under the
facility bear interest at a rate of 123 basis points over the bank's commercial
paper rate. To date, the Company has financed approximately $103,693,000 of
borrowings under this facility. At December 31, 1997, the Company had
$66,909,000 outstanding under this facility, at an average interest rate of
7.2%.
At December 31, 1997, $3,694,000 of cash was restricted in connection with the
two nonrecourse facilities described above and was not available for other uses.
The Company's Canadian Subsidiary maintains a revolving 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. Borrowing under this facility bear interest, at the
Subsidiary's election, at Canadian prime rate (6.0% at December 31, 1997) plus
25 basis points or Canadian dollar LIBOR (4.75% at December 31, 1997) plus 135
basis points. There were no amounts outstanding under this facility at December
31, 1997.
The Company maintains relationships with several other financial institutions
for additional recourse financing. At December 31, 1997 and 1996, the Company
had $11,100,000 and $11,395,000 (bearing interest at rates ranging from 7.0% to
10.3%) outstanding to such sources.
In order to issue nonrecourse, lease-backed debt securities to permanently
finance its lease transactions, one of the Subsidiaries filed a $150,000,000
shelf registration statement with the Securities and Exchange Commission in
January 1994. Securities issued under this registration are collateralized by
the lease receivables financed by such
F-10
securities and residual proceeds of the underlying equipment and are backed by
credit enhancement provided by a national bond guarantor. The Subsidiary had two
issuances under the shelf registration in 1994. The first was for $36,685,000,
issued in April 1994 at a coupon rate of 5.575%, and due through March 1998,
with $1,257,000 and zero (including accrued interest) outstanding at December
31, 1996. The second was for $37,499,000, issued in December 1994 at a coupon
rate of 8.075%, and due through October 1999, with $8,041,000 (including accrued
interest) outstanding at December 31, 1996. Both of the issues were repaid in
full during 1997.
In 1995, the Company issued $17,500,000 of nonrecourse subordinated debt at a
coupon rate of 9.71% due through May 1998. Borrowings under this arrangement are
to be repaid from expected residuals from portfolios of equipment subject to the
two public securitizations and are secured by the residual cash flows from such
portfolios. At December 31, 1996, the Company had $10,073,000 outstanding under
this arrangement. This note was paid in full during 1997.
The Company continues to maintain relationships with banks, insurance and
finance companies, and financial intermediaries as additional nonrecourse,
permanent financing sources. At December 31, 1997 and 1996, the Company had
$107,167,000 and $78,121,000, respectively, outstanding under arrangements with
sources at debt rates ranging from 7.0% to 9.7%.
Borrowings under the above facilities are generally secured by lease
receivables and the underlying equipment financed under the respective facility. The agreements for
most of the facilities described below 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 several
of its borrowing agreements. The company obtained a waiver of such breach from
the requisite number of lenders under each of those agreements. As a result of
payment defaults under most of
F 11
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
its lines of credit and financing arrangements, and its substantial loss in its
fourth quarter of 1998, resulting in the Company being in breach of several of
its financial covenants, defaults have occurred under those lines of credit and
financing arrangements. Under the terms of the Company's forbearance agreements
(see Note 1), the Company's lenders agreed to forbear from exercising any
remedies under their credit agreements with the Company until October 15, 1999.
Under the terms of an extension of these agreements, which took effect on
August 16, 1999, the U.S. lenders have agreed to forbear until October 15, 1999,
from exercising their rights and remedies as a result of the company's defaults
under its loan agreements. The extended agreements do not provide for any
additional borrowing availability. The terms and conditions of the extended
forbearance agreements continue to impose substantial reporting and cash
allocation obligations, and also include standard representations, warranties
and covenants. In the event the Company were to breach any of these obligations
under any of the forbearance agreements, and fail to cure such breach within a
specified period of time, each of its lenders would have the right to exercise
the remedies under their respective credit agreements. Additionally, unless all
of the agreements are extended at the end of the forbearance period, each of the
lenders will have the right to exercise their remedies at that time.
The Company's Canadian financing facility with its bank expired on August
28, 1999, and the Company is currently negotiating an extension of this
facility.
On April 1, 1999, the Company entered into a forbearance agreement with the
lenders under its European line of credit. On July 30, the Company and its
European subsidiary entered into an agreement with its European lending
syndicate extending the maturity date of its European credit agreement to
December 31, 2000. In the event the European subsidiary were to breach any of
its obligations under the extended agreement, and fail to cure such breach
within a specified period of time, the lenders would have the right to exercise
their remedies under the credit agreement. The extended agreement does not
provide for additional borrowing availability.
Recourse Debt
- -------------
United States
-------------
In October 1996, the Company closed a public debt offering for $71,875,000 of
convertible subordinated notes.Convertible Subordinated Notes. The notesNotes 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 notesNotes 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 notesNotes beginning in October 1999. At
December 31, 1997,1998, the Company had $71,875,000 outstanding under the notes.
Future maturitiesNotes.
Historically, prior to a portfolio of nonrecourse andleases being permanently financed under
a securitization, or other long-term loan agreement, the Company finances its
lease transactions under short-term, recourse debt are as follows:
YEARS ENDING DECEMBER 31 NONRECOURSE RECOURSE
- ------------------------- DEBT DEBT
------------------ -----------------
1998.................................................................... $117,104,000 $188,629,000
1999.................................................................... 68,936,000 6,825,000
2000.................................................................... 15,167,000 2,198,000
2001.................................................................... 634,000 --
2002.................................................................... 331,000 64,000
Thereafter.............................................................. 87,000 71,875,000
------------ ------------
Total................................................................ $202,259,000 $269,591,000
============ ============
Cash paid forcredit facilities currently with
total availability of $200,000,000. At December 31, 1998, the Company had the
following such short-term recourse facilities in place:
. A $175,000,000 revolving facility ($89,173,000 outstanding at December 31,
1998) syndicated with eleven banks, expired July 15, 1999. Borrowings under
the facility bear an interest in 1997, 1996 and 1995 was $28,189,000, $17,639,000, and
$10,294,000, respectively.
F-11rate of the agent bank's prime rate (7.75% at
December 31, 1998) or LIBOR (5.2% at December 31, 1998) plus 120 basis
points.
. A $25,000,000 revolving facility with three banks ($24,800,000 outstanding
at December 31, 1998) expired December 30, 1998. Borrowings under the
facility bear interest at prime (7.75% at December 31, 1998).
F 12
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, the Company maintains a $15,000,000 revolving facility
($13,536,000 outstanding at December 31, 1998), expired October 15, 1998, with
one bank. Borrowings under the facility bear interest at the bank's prime rate
(7.75% at December 31, 1998). The borrowings under this line were 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.
In June 1998, the Company completed a commercial paper offering supported
by a letter of credit issued by a money center bank. The letter of credit was
backed by a $60,000,000 liquidity line of credit with four banks (the "CP
Line"). As a result of the Company's defaults under the CP Line, commercial
paper may no longer be issued under the Line. At December 31, 1998, an
aggregate of $31,006,000, with a weighted average interest rate of 5.6%, was
outstanding under the line.
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 bear interest at the rate of one month LIBOR (6.91% at December 31,
1998) plus 1.25%. At December 31, 1998, there was $23,000,000 outstanding under
the line. The Company's obligations under the line are secured indirectly 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 of such market. Pursuant to the terms of the Company's forbearance
agreement, the maturity of the borrowing was extended to October 15, 1999.
Canada
------
As of December 31, 1998, the Company's Canadian subsidiary maintains a
three-tiered credit facility with a Canadian bank. This facility expired
on August 28, 1999 and the Company is currently negotiating an extension of
this facility. The facility is as follows:
. An approximately $9,774,000 ($15,000,000 Canadian) revolving facility,
and repayments due 180 days after each borrowing. Borrowing under this
facility bears interest at Canadian prime rate (6.75% at December 31,
1998) plus 25 basis points or Canadian dollar LIBOR (4.97% at December
31, 1998) plus 135 basis points or the Bankers' Acceptance rate (4.99%
as of December 31, 1998) plus 135 basis points. At December 31, 1998
there was $7,715,000 ($11,806,000 Canadian) outstanding under this
facility. Effective January 12, 1999, the borrowing availability for the
first tier was reduced to approximately $7,842,000 ($12,000,000
Canadian) and borrowings under the facility now bear interest at
Canadian prime rate plus 75 basis points. Bankers' Acceptances, LIBOR
loans and LIBOR rate were removed. Although the facility expired on
August 28, 1999, effective September 8, 1999, the borrowing availability
was reduced to $5,864,000 ($9,000,000 Canadian). No changes were made to
borrowing rates. The Company is currently negotiating an extension of
the facility.
. An approximately $3,921,000 ($6,000,000 Canadian) revolving facility
with one bank, with borrowing available through August 28, 1999, and
repayments due 90 days after each borrowing. Borrowing under this
facility bears interest at Canadian prime rate (6.75% at December 31,
1998) plus 25 basis points or Canadian dollar LIBOR (4.97% at December
31, 1998) plus 135 basis points. At December 31, 1998 there was
$1,573,000 ($2,408,000 Canadian) outstanding under this facility.
Effective January 12, 1999, the borrowings under the second tier
facility bear interest at Canadian prime rate plus 75 basis points.
Bankers' Acceptances, LIBOR loans and LIBOR rate were removed. Although
the facility expired on August 28, 1999, effective September 8, 1999,
the second tier
F 13
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
borrowing availability was reduced to $2,281,000 ($3,500,000 Canadian).
No changes were made to borrowing rates. The Company is currently
negotiating an extension of the facility.
. An approximately $1,960,000 ($3,000,000 Canadian) revolving facility
with one bank, and repayments due 364 days after each borrowing.
Borrowing under this facility bears interest at Canadian prime rate
(6.75% at December 31, 1998) plus 150 basis points. At December 31, 1998
there was $87,000 outstanding under this facility. Although the facility
expired on August 28, 1999, effective September 8, 1999, the third tier
borrowing availability was reduced to $847,000 ($1,300,000 Canadian). No
changes were made to borrowing rate. The Company is currently
negotiating an extension of the facility.
Europe
------
The Company's subsidiary in the United Kingdom entered into a revolving
recourse line of credit with availability of approximately $50,000,000
((Pounds)30,000,000) from a syndicate of three banks to provide short-term
financing for leasing activities in Europe expiring June 30, 1999 (see Note 1).
Borrowings under the facility may be made in a number of European currencies and
bear interest at 3.05% over 2-month LIBOR (9.51% at December 31, 1998). There
was $44,587,000 outstanding under this facility at December 31, 1998.
Nonrecourse Debt
- ----------------
United States
-------------
The Company has a $100,000,000 nonrecourse lease receivables financing
facility with an affiliate of a money center bank expiring in March 1999.
Borrowings under the facility bear interest at a rate of 125 to 200 basis points
over average life treasuries at the time of borrowing. At December 31, 1998,
the Company had $14,187,000 outstanding under this facility, at a weighted
average interest rate of 7.28%.
In September 1998, the Company completed the private sale, through a
wholly-owned subsidiary, 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. This transaction
was accounted for as a borrowing, and at December 31, 1998, there was
$119,334,000 outstanding under the securitization.
In 1998, the company established a $50,000,000 commercial paper-backed
conduit, nonrecourse line of credit with an affiliate of a money center bank.
This is a revolving facility expiring March 1999, and borrowings under the
facility bear interest at a rate of 123 basis points over the bank's commercial
paper rate. At December 31, 1998, the Company had $27,121,000 outstanding under
this facility, at an average interest rate of 7.27%.
Canada
------
The Company's Canadian subsidiary has promissory notes outstanding to the
sellers of Bayshore Leasing Corporation given as partial consideration for the
purchase of Bayshore. Principal and interest (compounding, based on Canadian
prime rate which was 6.75% at December 31, 1998) were due and payable on July 1,
1999. Interest increased to Canadian prime rate plus 500 basis points, as the
promissory notes were not paid by July 1, 1999. At December 31, 1998, the total
balance outstanding, including accrued interest, was approximately $4,338,000
($6,197,000 Canadian). (See Note 8 of "Notes to Consolidated Financial
Statements" for a discussion of the Company's borrowings used to acquire
Bayshore Leasing.)
F 14
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's Canadian subsidiary obtains long-term non-recourse financing
for lease transactions at the time, or shortly after, it purchases the related
equipment. At December 31, 1998, an aggregate of approximately $57,953,000
($82,790,000 Canadian), with a weighted average interest rate of 6.15% per
annum, remained outstanding under all such long-term arrangements.
The Company's Canadian operations maintained a long-term non-recourse
concurrent lease financing facility with a Canadian public securitization trust
vehicle. The total program amount was approximately $52,500,000 ($75,000,000
Canadian), or such greater amount as the parties may have agreed upon in
writing, or such lesser amount as the borrower may have determined by written
notice to the lender. At December 31, 1998, $52,843,000 ($75,490,000 Canadian)
was outstanding under this facility, with a weighted average interest rate of
5.59%. The facility expired on October 15, 1998. No further amounts are to be
added.
Borrowings under the above facilities are generally secured by lease
receivables and the underlying equipment financed under the respective facility.
The agreements for the facilities contain covenants regarding leverage, interest
coverage, minimum net worth and profitability and a limitation on the payment of
dividends. No additional amounts can be borrowed under these facilities.
Original contractual future maturities of nonrecourse and recourse debt are as
follows:
Years Ending December 31, Nonrecourse Recourse
- ------------------------- Debt Debt
---- ----
1999...................... $176,550,000 $262,437,000
2000...................... 98,266,000 4,902,000
2001...................... 34,977,000 2,562,000
2002...................... 14,695,000 --
2003...................... 4,361,000 71,875,000
Thereafter................ 451,000 --
------------ ------------
Total.................. $329,300,000 $341,776,000
============ ============
Due to the defaults noted above, substantially all indebtedness is due
currently, subject to the forbearance agreements described above.
8. ACQUISITIONSAcquisitions
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 less than $20,000 (Canadian.). 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 December 31, 1998), or LIBOR (5.3% at December 31,
1998) plus 200 basis points, with interest payable monthly, and requires 16
equal quarterly principal payments of $875,000, beginning in January 1999.
Under the terms of the current forbearance agreement, all payment obligations
under this facility have been deferred until October 15, 1999. The balance of
the purchase price represented 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
Bayshore remained in place and Bayshore retained its 51 employees.
F 15
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The operating results of Bayshore Leasing have been included in the
consolidated statements of operations since the date of acquisition. Unaudited
proforma results of operations, assuming the acquisition had taken place on
January 1, 1997, would be as follows:
Proforma LSI
Fiscal Year 1998 Consolidated
- ---------------- ------------
Revenues.............................................. $303,515,000
Net loss.............................................. 54,972,000
Net loss per share (8,203,000 shares)................. 6.70
Total assets.......................................... 748,288,000
Fiscal Year 1997
- ----------------
Revenues.............................................. $229,623,000
Net income............................................ 11,713,000
Net income per share (8,182,000 shares)............... 1.43
Total assets.......................................... 576,132,000
The proforma results of operations assume goodwill associated with the
acquisition of Bayshore Leasing is amortized over a 15 year basis beginning
January 1, 1997.
In April 1997, the Company acquired the bsuiness and substantially all of the assets, including the
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 operationScott's
operations have been included in the Company's operations from April 1997, the
month of acquisition. Proforma financial information has not been presented, as
the impact on the Company's results of operations for 19961997 was not material.
The goodwill balance is comprised of the following at December 31:
1998 1997
---- ----
Goodwill, at cost......... $ 15,534,000 $2,321,000
Accumulated amortization.. (11,021,000) (249,000)
------------ ----------
Goodwill, net............. $ 4,513,000 $2,072,000
============ ==========
Goodwill represents costs in excess of net assets acquired of Bayshore Leasing
and 1997 is not
material.Scott Capital, both Canadian companies.
Due to events in the third and fourth quarter of 1998 that have materially and
adversely affected the Company's business and ability to continue operations as
conducted in the past (see Note 1), the Company conducted a review of the
recoverability of the carrying value of goodwill. As a result of this review,
the Company recorded goodwill amortization of $10,001,000 in excess of the
normal recurring annual charge of $772,000 during 1998. At December 31, 1998,
the remaining goodwill for Scott Leasing and Bayshore Leasing was written down
to $1,740,000 and $2,773,000, respectively.
In April 1996, the Company acquired all of the stock of a company located in
the United Kingdom and engaged in the equipment leasing business in a
transaction accounted for as a purchase. The purchase price in the acquisition was $1,100,000 in
cash. In connection with the transaction, the Company acquired tangible assets
(primarily leases) of $3,951,000 and assumed liabilities, primarily related
debt, of $2,851,000. Proforma financial information has not been presented, as
the impact of proforma adjustments on the Company's results of operations infor
1996 iswas not material.
F 16
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. COMMITMENTSCommitments
The Company leases its facilities under noncancelablevarious non-cancelable operating
leases expiring through 2002. Rent expense for 1998, 1997 and 1996 was
$1,332,000, $1,048,000, and 1995 was $1,048,000,
$606,000 and $377,000, respectively.
Future minimum annual rental payments for all operating leases are as follows:
YEARS ENDING DECEMBERYears Ending December 31 - ------------------------------------------------------------------Operating Leases
------------------------ ----------------
1998.............................................................. $1,041,000
1999.............................................................. 1,034,000
2000.............................................................. 872,000
2001.............................................................. 544,000
2002.............................................................. 177,0001999.................................... $1,233,000
2000.................................... 1,044,000
2001.................................... 675,000
2002.................................... 274,000
----------
Total.......................................................... $3,668,000Total................................ $3,226,000
==========
10. EMPLOYEE BENEFIT PLANEmployee Benefit Plan
The Company has a 401(k) plan which covers substantially all full-time
employees. The plan operates on a calendar year. All eligible employees are
permitted to make tax deferred contributions to the plan of up to 15% of their
annual compensation, subject to certain Internal Revenue Service limitations.
The Company provides matching contributions of employees' contributions up to
$1,000. Employee contributions, earnings thereon, and Company contributions are
vested immediately. In 1998, 1997, 1996 and 1995,1996, the Company contributed $98,000,
$90,000, $62,000 and $48,000,$62,000 respectively, to the plan.
F-12F 17
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. INCOME TAXESIncome Taxes
The provision for income taxes at December 31 consists of:
1998 1997 1996
1995
---------------- --------------- ------------------ ---- ----
Current:
Federal.......................................................Federal................. $ 480,000 $3,791,000 $ 681,000
$1,984,000
State.........................................................State................... 559,000 (109,000) (86,000)
532,000
Foreign.......................................................Foreign................. 384,000 636,000 --
--
---------------------- ---------- ----------
Total current..................................................current............ 1,423,000 4,318,000 595,000
2,516,000
---------- ---------- ----------
Deferred:
Federal.......................................................Federal................. (10,924,000) 3,620,000 5,641,000
1,236,000
State.........................................................State................... (1,892,000) 1,817,000 313,000
179,000
Foreign.......................................................Foreign................. 1,018,000 (219,000) --
--
---------------------- ---------- ----------
Total deferred.................................................deferred........... (11,798,000) 5,218,000 5,954,000
1,415,000
---------------------- ---------- ----------
Total provision................................................provision (benefit) $(10,375,000) $9,536,000 $6,549,000
$3,931,000
====================== ========== ==========
The cumulative items giving rise to deferred taxes at December 31 were as
follows:
1998 1997
1996
-------------------- ----------------------- ----
Deferred tax liability:assets:
Alternative minimum tax credits.... $ 7,022,000 $ 6,987,000
State income tax................... 147,000 1,309,000
Net operating loss carryforwards... 14,432,000 6,842,000
Other accruals..................... 635,000 290,000
Valuation allowance................ (13,009,000) --
------------ -----------
Total deferred tax assets............. 9,227,000 15,428,000
------------ -----------
Deferred tax liabilities:
Lease transactions treated
differently for tax and financial
reporting $(28,974,000) $(15,178,000)
------------ ------------
Deferred tax assets:
Alternative minimum tax credits....................................... 13,829,000 6,151,000
State income tax...................................................... 1,309,000 435,000
Other................................................................. 290,000 264,000reporting........................ (10,975,000) (28,974,000)
------------ ------------
Total deferred tax assets................................................ 15,428,000 6,850,000liabilities....... (10,975,000) (28,974,000)
------------ ------------
Net deferred tax liability...............................................liability........... $ (1,748,000) $(13,546,000) $ (8,328,000)
============ ============
The effective tax rate differs from the federal statutory income tax rate as
follows:
1998 1997 1996
1995
----------- ---------- ------------- ---- ----
Statutory rate.................................................................. 35.0%rate....................... (35.0)% 35.0% 35.0%
State taxes, net of federal effect..............................................effect... (2.6) 4.9 6.0
4.8
Other...........................................................................Valuation allowance.................. 19.5 -- --
Goodwill............................. 7.0 -- --
Other................................ (4.5) 2.3 0.1
0.1------ ---- ----
----
Total...........................................................................Total................................ (15.6)% 42.2% 41.1%
39.9%
========== ==== ====
Cash paid forRefundable income taxes of $4,105,000 at December 31, 1998 are included in
1997, 1996,other assets and 1995 was $3,882,000, $1,947,000,
and $2,687,000, respectively.
Refundable income taxes payable of $925,000 at December 31, 1997 are
included in other assets and income taxes payable of $883,000 at December 31, 1996 are included in
accrued and other liabilities in the consolidated balance sheet. F-13At December
31, 1998, the Company recorded a $13,009,000 valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized principally
due to the uncertainty of realizing future tax benefits from its net operating
loss carryforwards and other deferred tax assets.
F 18
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. SHAREHOLDERS' EQUITYShareholders' Equity
Stock Option Plans - The-The Company's stock option plans provide that incentive
and nonqualified stock options to purchase up to an aggregate of 2,240,0002,840,000
shares of the Common Stock of the Company may be granted to key contributors to
the Company, including officers, directors, employees and consultants. Options
are granted at the fair market value of the Common Stock on the date of grant,
as determined by the Board of Directors or a committee of the Board. Options
generally become exercisable ratably over three or four years and expire five or
ten years from the grant date.
At December 31, 1997, the Company had reserved 1,028,018 shares for issuance
under these plans.
Activity under the stock option plans is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------------------- ------------------Weighted
Number of Average
Shares Exercise Price
------ ------------
Outstanding, January 1, 1995.................................... 352,7021996 476,374 $ 4.78
Granted (weighted average fair value of $3.07)................. 259,725 8.34
Exercised...................................................... (116,879) 1.63
Canceled....................................................... (19,174) 6.68
--------- ------
Outstanding, December 31, 1995.................................. 476,374 7.42
Granted (weighted average fair value of $7.57)................... 251,850 14.52
Exercised......................................................Exercised....................................... (52,201) 4.23
Canceled.......................................................Canceled........................................ (29,913) 12.84
--------- ------
Outstanding, December 31, 1996..................................1996 646,110 10.19
Granted (weighted average fair value of $7.56)................... 527,175 17.10
Exercised......................................................Exercised....................................... (91,214) 8.43
Canceled.......................................................Canceled........................................ (80,979) 20.83
--------- ------
Outstanding, December 31, 1997 1,001,092 $13.4213.42
--------- ------
Granted (weighted average fair value of $12.97). 969,208 12.28
Exercised....................................... (72,139) 11.22
Canceled........................................ (711,667) 19.01
--------- ------
Outstanding, December 31, 1998 1,186,494 $ 9.27
========= ======
Additional information regarding options outstanding as of December 31,
19971998 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------- -----------------------------------
Weighted
Average
Remaining
Range of Number Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- ---------------------------- ------------- ---------------- ----------------- ---------------- -------------------------------- ----------- ------------ -------------- ----------- --------------
$5.250 - $5.250 541,094 9.96 $ 4.0005.25 -- $ --
5.625 - $6.500 165,000 7.33 5.87 48,000 6.50
7.250 - 7.250 900 1.10 7.25 25 7.25
7.750 268,834 5.70 $ 7.35 243,202 $ 7.42- 7.750 190,750 6.07 7.75 190,562 7.75
9.250 - 12.375 233,058 7.26 10.73 29,801 9.68
12.875 - 16.500 210,200 5.35 14.49 39,885 14.68
17.875 - 22.375 219,000 9.48 19.29 15,000 17.8819.500 133,750 6.86 13.17 59,000 12.63
22.500 - 28.750 70,000 9.41 24.06 625 28.7522.500 10,000 5.86 22.50 2,500 22.50
24.375 - 24.375 15,000 9.00 24.37 -- --
26.125 - 26.125 243,750 9.16 26.12 -- --
29.375 - 29.375 25,000 9.31 29.43 -- --
29.750 - 29.750 20,000 9.39 29.75 -- --
--------- ---- ------ ------- ------
4.0005.250 - 28.750 1,001,092 7.08 $13.42 328,51329.750 1,186,494 8.47 $ 9.029.27 300,087 $ 8.63
========= ==== ====== ======= ======
F 19
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 19971998 and 1996,1997, options to purchase 328,513300,087 and 265,000328,513 shares
were exercisable with a weighted average exercise price of $9.02$8.63 and $6.62,$9.02,
respectively. At December 31, 1997,1998, options for 26,926436,745 shares were available
for future grant under the stock option plans. F-14
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)As part of the 1999 U.S.
forbearance negotiations, the Company granted warrants for 350,000 shares in the
Company to purchase the Company's stock for $1.00 per share. Also in June 1999,
the Company re-priced its outstanding options to its employees to the then
current market price of $1.00 per share.
Stock Purchase Plan - In 1994, the shareholders of the Company approved the
1994 Employee Stock Purchase Plan (the "ESPP") under which 200,000 shares of the
Company's common stock were reserved for issuance. The ESPP permits virtually
all employees to purchase Common Stock, through payroll deductions, at the lower
of (a) 85% of the fair market value of the Common Stock on the first day of each
twelve-month12 month offering period, or (b) 85% of the fair market value of the Common
Stock on the applicable exercise date. Each offering period has two six-month
exercise periods with the last day of each exercise period being an exercise
date. During 1998, 1997, 1996 and 1995,1996, employees purchased 26,428, 9,750, 11,481 and 10,12211,481
shares, respectively, under the ESPP for a total purchase price of $185,000,
$104,000, $123,000 and $87,000,$123,000, respectively. At December 31, 1997,1998, the Company had
reserved 159,457133,029 shares for issuance under the ESPP.
Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board No. 25, Accounting"Accounting for Stock
Issued to Employees," and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting StandardsSFAS No. 123, "Accounting for Stock-
Based Compensation", (SFAS 123)Stock-Based Compensation," requires the
disclosure of pro formaproforma net income and earnings per share as if the Company had
adopted the fair value method as of the beginning of 1995. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
12 months following vesting; stock volatility, 99% in 1998, 58% in 1997, and 62%
in 1996, and 51% in 1995;1996; risk free interest rates, 4.4% in 1998, 5.7% in 1997, and 5.9% in 1996, and 6.5% in 1995;1996;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1998, 1997, 1996 and 19951996 awards had been
amortized to expense over the vesting period of the awards, pro formaproforma net loss
would have been $55,284,906 ($6.73 per share on a diluted basis) in 1998, net
income would have
beenof $12,184,000 ($1.49 per share on a diluted basis) in 1997, and net
income of $8,836,000 ($1.10 per share on a diluted basis) in 1996, and $5,647,000 ($.89 per share on a
diluted basis) in 1995.1996. However, the
impact of outstanding non-vested stock options granted prior to 1995 has been
excluded from the pro formaproforma calculation; accordingly, the 1998, 1997, and 1996
pro formaproforma adjustments are not indicative of future period pro formaproforma adjustments,
when the calculation will apply to all applicable stock options.
F 20
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. SIGNIFICANT CUSTOMERSIncome (Loss) Per Share
The following is a reconciliation of the numerators and denominators used
in computing income (loss) per share:
1998 1997 1996
-------------- ------------ -----------
Numerator - net income (loss) available to common shareholders................ $(56,108,000) $13,061,000 $9,373,000
Effect of dilutive securities - convertible debt (net of tax)................. -- 3,174,000 --
------------ ----------- ----------
Numerator for dilutive net income per share................................... $(56,108,000) $16,235,000 $9,373,000
============ =========== ==========
Denominator for basic net income per share - weighted average shares
outstanding.................................................................. 8,203,000 8,182,000 7,854,000
Effect of dilutive securities - employee stock options........................ -- 203,000 223,000
- convertible debt......................................................... -- 2,059,000 --
------------ ----------- ----------
Denominator for diluted net income per share - adjusted weighted average
shares outstanding and assumed conversion of dilutive securities............. 8,203,000 10,444,000 8,077,000
============ =========== ==========
Net income (loss) per share - basic........................................... $ (6.84) $ 1.60 $ 1.19
============ =========== ==========
Net income (loss) per share - diluted......................................... $ (6.84) $ 1.55 $ 1.16
============ =========== ==========
For the year ended December 31, 1998, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share for the year ended
December 31, 1998, as their effect would have been antidilutive. Such
outstanding securities consist of the following at December 31, 1998: options
to purchase 1,186,494 shares of common stock and approximately 2,059,000 shares
of common stock if the outstanding balance of $71,875,000 of convertible
subordinated notes was converted.
14. Significant Customers
Two customers accounted for 28% and 12% of the Company's revenues in 1998.
Two customers accounted for 19% and 11% of the Company's revenues in 1997.
Three customers accounted for 18%, 17% and 10% of the Company's revenues in
1996. Two customers accounted for 11% and 10% of the Company's revenues in
1995. There can be no assurance that loss of any of these customers would not
have a material adverse impact on the Company's results of operations.
14. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS15. Litigation
In addition to the matters described at Note 1, the Company is involved in
various other claims and legal actions. Management does not expect that the
outcome of these other claims and actions will have a material effect on the
Company's financial position or results of operations.
16. Estimated Fair Values of Financial Instruments
The following disclosure isdisclosures present the estimated fair value of the Company's
financial instruments. The valuation methods used by the Company are set forth
below.
F-15F 21
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The accuracy and usefulness of the fair value information disclosed herein is
limited by the following factors:
. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
. These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holding of a
particular financial asset.
. There are no disclosure requirements for lease contracts and various
significant assets and liabilities that are not considered to be financial
instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of the
Company.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, are as follows:
1998 1997
1996
------------------------------------------ ------------------------------------------------------------------------------- ------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------------- -------------------- -------------------- -------------------------- ---------- ------ ----------
Assets:
Cash and equivalents...........cash equivalents...... $ 66,597,000 $66,597,000 $ 16,569,000 $16,569,000 $ 6,888,00016,569,000
Liabilities:
Convertible subordinated notes. $ 6,888,000
Liabilities:71,875,000 18,148,000 $ 71,875,000 68,641,000
Recourse debt.................. $269,591,000 $270,690,000 $182,739,000 $183,905,000
Nonrecourse debt...............269,901,000 N/A 197,716,000 202,049,000
Non-recourse debt.............. 329,300,000 N/A 202,259,000 202,421,000 138,919,000 139,290,000
The following methodsAs of December 31, 1998 and assumptions were used by1997, the Company in computing
the estimated fair value in the above table:
Cash and equivalents - The carrying amounts of these financial instruments
werecash and cash
equivalents approximated their respective fair values and fair value of the
same asCompany's publicly traded Convertible Subordinated Notes was based on their
fair value.
Recourse and Nonrecourse Debt - Therespective market values. At December 31, 1998, the fair value of recourse and
nonrecoursenon-recourse debt is not estimable as the Company is unable to determine the
market interest rate at which financing would have been available at December
31, 1998. At December 31, 1997, the fair value of recourse and non-recourse
debt is based on the borrowing rates currently available to the Company for debt with
similar terms and average maturity.
F-16maturity at December 31, 1997.
17. Geographic Reporting
The Company operates in one segment: leasing information processing and
communications equipment, and follows the requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company's reportable segments under SFAS No. 131 are geographic areas. The
following presents operating information by geographic territory for fiscal
1998, 1997, and 1996:
U.S. Canada Europe Totals
---- ------ ------ ------
1998
Revenue $246,809 $ 25,161 $27,682 $299,652
Long-lived assets 416,621 135,982 88,753 641,356
1997
Revenue $204,362 $ 9,712 $11,169 $225,243
Long-lived assets 461,889 44,590 44,815 551,294
1996
Revenue $140,942 -- $ 3,654 $144,596
Long-lived assets 365,829 -- 10,796 376,625
F 22
ITEM 14(a) 2
SCHEDULE II
LEASING SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DESCRIPTION BALANCE AT CHARGED TODescription Balance at Charged to
- ----------- BEGINNING OF COSTS AND RECOVERIES END OF
PERIOD EXPENSES (DEDUCTIONS)Beginning of Costs and Recoveries End of
Period Expenses (Deductions)(1) PERIOD
------------- -----------Period
------ -------- --------------- ---------------
Allowance for uncollectible amounts:default losses:
Year ended December 31, 1995........................ $187,0001996.... $113,000 $ 55,000 -- $(74,000) $113,000$ 168,000
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Year ended December 31, 1996........................ $113,000 $55,0001997.... $168,000 $ 60,000 -- $168,000$ 228,000
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Year ended December 31, 1997........................ $168,000 $60,000 --1998.... $228,000 $5,082,000 $(13,000) $5,297,000
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___________
(1) To write off uncollectible amounts or reflect recovery of previously
written-off accounts.
F-17F 23