Form 10-Q
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2010
OR
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o |
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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 001-32845
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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32-0163571 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
39 East Union Street
Pasadena, CA 91103
(Address of Principal Executive Offices)
(626) 584-9722
(Registrants Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
o
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Accelerated filer o
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Non-accelerated filer
o
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Smaller reporting
company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act):
Yes o No þ
State the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 22,013,299 shares outstanding as of October 29, 2010.
GENERAL FINANCE CORPORATION
INDEX TO FORM 10-Q
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
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June 30, 2010 |
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September 30, 2010 |
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(Unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
4,786 |
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$ |
229 |
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Trade and other receivables, net of
allowance for doubtful accounts of $2,328
and $2,143 at June 30, 2010 and September
30, 2010, respectively |
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25,667 |
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24,338 |
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Income taxes receivable |
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1,071 |
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1,081 |
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Subscription receivables |
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1,211 |
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Inventories |
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19,063 |
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23,475 |
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Prepaid expenses and other |
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2,206 |
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1,859 |
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Lease receivables |
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1,782 |
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2,275 |
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Property, plant and equipment, net |
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10,182 |
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10,961 |
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Lease fleet, net |
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188,410 |
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198,903 |
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Goodwill |
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67,919 |
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71,836 |
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Intangible assets, net |
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24,583 |
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26,500 |
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Total assets |
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$ |
346,880 |
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$ |
361,457 |
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Liabilities |
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Trade payables and accrued liabilities |
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$ |
25,246 |
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$ |
26,915 |
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Unearned revenue and advance payments |
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9,468 |
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9,001 |
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Senior and other debt |
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186,183 |
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190,456 |
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Deferred tax liabilities |
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13,409 |
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14,132 |
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Total liabilities |
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234,306 |
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240,504 |
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Commitments and contingencies (Note 8) |
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Redeemable noncontrolling interest (Note 8) |
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10,840 |
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12,004 |
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Stockholders equity |
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Cumulative preferred stock, $.0001 par
value: 1,000,000 shares authorized; 26,000
shares issued and outstanding (in series)
and liquidation value ($1,438) at June 30,
2010 and September 30, 2010 |
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1,395 |
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1,395 |
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Common stock, $.0001 par value: 100,000,000
shares authorized; 22,023,299 and 22,013,299
shares outstanding at June 30, 2010 and
September 30, 2010, respectively |
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2 |
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2 |
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Additional paid-in capital |
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111,783 |
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111,898 |
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Subscription receivables |
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(100 |
) |
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(85 |
) |
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Accumulated other comprehensive income (loss) |
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(1,571 |
) |
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4,892 |
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Accumulated deficit |
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(9,775 |
) |
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(9,153 |
) |
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Total stockholders equity |
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101,734 |
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108,949 |
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Total liabilities and stockholders equity |
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$ |
346,880 |
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$ |
361,457 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
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Quarter Ended September 30, |
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2009 |
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2010 |
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Revenues |
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Sales |
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$ |
16,613 |
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$ |
23,389 |
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Leasing |
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18,606 |
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20,076 |
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35,219 |
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43,465 |
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Costs and expenses |
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Cost of sales (exclusive of the items shown separately below) |
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12,525 |
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17,610 |
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Direct costs of leasing operations |
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6,182 |
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7,498 |
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Selling and general expenses |
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9,180 |
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10,015 |
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Depreciation and amortization |
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5,257 |
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4,672 |
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Operating income |
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2,075 |
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3,670 |
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Interest income |
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59 |
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105 |
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Interest expense |
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(3,707 |
) |
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(4,281 |
) |
Foreign currency exchange gain and other |
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2,593 |
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2,427 |
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(1,055 |
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(1,749 |
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Income before provision for income taxes |
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1,020 |
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1,921 |
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Provision for income taxes |
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372 |
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726 |
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Net income |
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648 |
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1,195 |
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Noncontrolling interest |
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(573 |
) |
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(573 |
) |
Preferred stock dividends |
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(41 |
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(43 |
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Net income attributable to common stockholders |
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$ |
34 |
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$ |
579 |
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Net income per common share: |
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Basic |
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$ |
0.00 |
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$ |
0.03 |
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Diluted |
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0.00 |
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0.03 |
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Weighted average shares outstanding: |
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Basic |
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17,826,052 |
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22,013,299 |
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Diluted |
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17,826,052 |
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22,025,352 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss)
(In thousands, except share and share data)
(Unaudited)
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Additional |
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Other |
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Total |
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Cumulative Preferred Stock |
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Common Stock |
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Paid-In |
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Subscription |
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Comprehensive |
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Accumulated |
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Stockholders |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Receivables |
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Income (Loss) |
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Deficit |
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Equity |
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Balance at June 30, 2010 |
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26,000 |
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$ |
1,395 |
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22,023,299 |
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$ |
2 |
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$ |
111,783 |
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$ |
(100 |
) |
|
$ |
(1,571 |
) |
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$ |
(9,775 |
) |
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$ |
101,734 |
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Cancellation of subscription
receivables |
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(10,000 |
) |
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(15 |
) |
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15 |
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Share-based compensation |
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173 |
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|
173 |
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Preferred stock dividends |
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(43 |
) |
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(43 |
) |
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Net income |
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|
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|
1,195 |
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|
1,195 |
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Noncontrolling interest |
|
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|
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|
|
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|
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|
|
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|
(573 |
) |
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(573 |
) |
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Cumulative translation adjustment |
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6,463 |
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6,463 |
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Total comprehensive income |
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7,085 |
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|
Balance at September 30, 2010 |
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|
26,000 |
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|
$ |
1,395 |
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|
|
22,013,299 |
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|
$ |
2 |
|
|
$ |
111,898 |
|
|
$ |
(85 |
) |
|
$ |
4,892 |
|
|
$ |
(9,153 |
) |
|
$ |
108,949 |
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Quarter Ended September 30, |
|
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|
2009 |
|
|
2010 |
|
Net cash provided by operating activities (Note 9) |
|
$ |
5,720 |
|
|
$ |
3,702 |
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|
|
|
|
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|
|
|
|
|
|
Cash flows from investing activities: |
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Proceeds from sales of property, plant and equipment |
|
|
30 |
|
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|
43 |
|
Purchases of property, plant and equipment |
|
|
(329 |
) |
|
|
(681 |
) |
Proceeds from sales of lease fleet |
|
|
6,015 |
|
|
|
5,345 |
|
Purchases of lease fleet |
|
|
(6,550 |
) |
|
|
(6,059 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(834 |
) |
|
|
(1,352 |
) |
|
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|
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Cash flows from financing activities: |
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|
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Repayments on capital leasing activities |
|
|
(243 |
) |
|
|
(39 |
) |
Repayments on senior and other debt borrowings, net |
|
|
(7,869 |
) |
|
|
(5,369 |
) |
Deferred financing costs |
|
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|
|
|
|
(1,276 |
) |
Preferred stock dividends |
|
|
(41 |
) |
|
|
(43 |
) |
|
|
|
|
|
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|
Net cash used by financing activities |
|
|
(8,153 |
) |
|
|
(6,727 |
) |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Net decrease in cash |
|
|
(3,267 |
) |
|
|
(4,377 |
) |
|
|
|
|
|
|
|
|
|
Cash and equivalents at beginning of period |
|
|
3,346 |
|
|
|
4,786 |
|
|
|
|
|
|
|
|
|
|
The effect of foreign currency translation on cash |
|
|
(50 |
) |
|
|
(180 |
) |
|
|
|
|
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|
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|
Cash and equivalents at end of period |
|
$ |
29 |
|
|
$ |
229 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Business Operations
Organization
General Finance Corporation (GFN) was incorporated in Delaware in October 2005. References
to the Company in these Notes are to GFN and its consolidated subsidiaries. These subsidiaries
include GFN U.S. Australasia Holdings, Inc., a Delaware corporation (GFN U.S.); GFN North America
Corp., a Delaware corporation (GFNNA); GFN Mobile Storage Inc., a Delaware corporation (GFNMS);
GFN Australasia Holdings Pty Ltd., an Australian corporation (GFN Holdings); GFN Australasia
Finance Pty Ltd, an Australian corporation (GFN Finance); RWA Holdings Pty Limited (RWA), an
Australian corporation, and its subsidiaries (collectively, Royal Wolf); and Pac-Van, Inc., an
Indiana corporation (combined with GFNMS, Pac-Van).
Acquisition of Royal Wolf
On September 13, 2007 (September 14 in Australia), the Company completed the acquisition of
Royal Wolf through the acquisition of all of the outstanding shares of RWA. Based upon the actual
exchange rate of one Australian dollar to $0.8407 U.S. dollar realized in connection with payments
made upon completion of the acquisition, the purchase price paid to the sellers for the RWA shares
was $64.3 million. The Company paid the purchase price by a combination of cash, the issuance to
Bison Capital Australia, L.P., (Bison Capital), one of the sellers, of shares of common stock of
GFN U.S. and the issuance of a note to Bison Capital. As a result of this structure, the Company
owns 86.2% of the outstanding capital stock of GFN U.S. and Bison Capital owns 13.8% of the
outstanding capital stock of GFN U.S.
Royal Wolf leases and sells storage containers, portable container buildings and freight
containers in Australia and New Zealand, which is considered geographically by the Company to be
the Asia-Pacific area.
Acquisition of Pac-Van
On October 1, 2008, the Company completed its acquisition of Pac-Van through a merger with
Mobile Office Acquisition Corp. (MOAC), the parent of Pac-Van, and the Companys wholly-owned
subsidiary formed in July 2008, GFNNA. The Company, in addition to assuming Pac-Vans senior and
other debt, paid the purchase price to the stockholders of MOAC by a combination of cash, GFN
restricted common stock and a 20-month subordinated promissory note.
Pac-Van leases and sells modular buildings, mobile offices and storage containers in the
United States.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
conformity with United States generally accepted accounting principles (U.S. GAAP) applicable to
interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (which include all significant normal and recurring
adjustments) necessary to present fairly the financial position, results of operations and cash
flows for all periods presented have been made. The accompanying results of operations are not
necessarily indicative of the operating results that may be expected for the entire fiscal year
ending June 30, 2011. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and accompanying notes thereto of the
Company, which are included in the Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 2010 filed with the Securities and Exchange Commission (SEC).
Certain reclassifications have been made to conform to the current period presentation.
Unless otherwise indicated, references to FY 2010 and FY 2011 are to the quarter ended
September 30, 2009 and 2010, respectively.
7
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Foreign Currency Translation
The Companys functional currency for its operations in the Asia-Pacific area is the local
currency, which is primarily the Australian (AUS) dollar. All adjustments resulting from the
translation of the accompanying consolidated financial statements from the functional currency into
reporting currency are recorded as a component of stockholders equity in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 830, Foreign
Currency Matters. All assets and liabilities are translated at the rates in effect at the balance
sheet dates; and revenues, expenses, gains and losses are translated using the average exchange
rates during the periods. Transactions in foreign currencies are translated at the foreign exchange
rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies at the balance sheet date are translated to the functional currency at the
foreign exchange rate prevailing at that date. Foreign exchange differences arising on translation
are recognized in the statement of operations. Non-monetary assets and liabilities that are
measured in terms of historical cost in a foreign currency are translated using the exchange rate
at the date of the transaction. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to the functional currency at foreign
exchange rates prevailing at the dates the fair value was determined.
Segment Information
FASB ASC Topic 280, Segment Reporting, establishes standards for the way companies report
information about operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major customers. Based on
the provisions of FASB ASC Topic 280 and the manner in which the chief operating decision maker
analyzes the business, the Company has determined it has two separately reportable geographic and
operating segments, North America (Pac-Van, including corporate headquarters) and the Asia-Pacific
area (Royal Wolf).
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost or market (net realizable value). Inventories
consist primarily of containers, modular buildings and mobile offices held for sale or lease and
are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
September 30, 2010 |
|
Finished goods |
|
$ |
18,840 |
|
|
$ |
23,053 |
|
Work in progress |
|
|
223 |
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
$ |
19,063 |
|
|
$ |
23,475 |
|
|
|
|
|
|
|
|
Derivative Financial Instruments
The Company may use derivative financial instruments to hedge its exposure to foreign currency
and interest rate risks arising from operating, financing and investing activities. The Company
does not hold or issue derivative financial instruments for trading purposes. However, derivatives
that do not qualify for hedge accounting are accounted for as trading instruments. Derivative
financial instruments are recognized initially at fair value. Subsequent to initial recognition,
derivative financial instruments are stated at fair value. The gain or loss on remeasurement to
fair value is recognized immediately in the statement of operations.
8
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
Useful Life |
|
|
June 30, 2010 |
|
|
September 30, 2010 |
|
Land |
|
|
|
|
|
$ |
1,599 |
|
|
$ |
1,696 |
|
Building |
|
|
40 years |
|
|
|
247 |
|
|
|
262 |
|
Transportation and plant equipment (including capital lease assets) |
|
|
3 10 years |
|
|
|
11,407 |
|
|
|
13,114 |
|
Furniture, fixtures and office equipment |
|
|
3 10 years |
|
|
|
2,865 |
|
|
|
3,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,118 |
|
|
|
18,075 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(5,936 |
) |
|
|
(7,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,182 |
|
|
$ |
10,961 |
|
|
|
|
|
|
|
|
|
|
|
|
Lease Fleet
The Company has a fleet of storage containers, mobile offices, modular buildings and steps
that it primarily leases to customers under operating lease agreements with varying terms. The
lease fleet (or lease or rental equipment) is recorded at cost and depreciated on the straight-line
basis over the estimated useful life (5 20 years), after the date the units are put in service,
and are depreciated down to their estimated residual values (up to 70% of cost). In the opinion of
management, estimated residual values are at or below net realizable values. The Company
periodically reviews these depreciation policies in light of various factors, including the
practices of the larger competitors in the industry, and its own historical experience.
Units in the lease fleet are also available for sale. The cost of sales of a unit in the
lease fleet is recognized at the carrying amount at the date of sale.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recorded for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities at the balance sheet date
multiplied by the applicable tax rates. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded
for the amount of income tax payable or refundable for the period increased or decreased by the
change in deferred tax assets and liabilities during the period.
The Company files U.S. Federal tax returns, multiple U.S. state (and state franchise) tax
returns and Australian and New Zealand tax returns. For U.S. Federal tax purposes, all periods
subsequent to June 30, 2008 are subject to examination by the U.S. Internal Revenue Service
(IRS). The Company believes that its income tax filing positions and deductions would be
sustained on audit and does not anticipate any adjustments that would result in a material change.
Therefore, no reserves for uncertain income tax positions have been recorded. In addition, the
Company does not anticipate that the total amount of unrecognized tax benefit related to any
particular tax position will change significantly within the next 12 months.
The Companys policy for recording interest and penalties, if any, will be to record such
items as a component of income taxes.
9
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net Income per Common Share
Basic net income per common share is computed by dividing net income attributable to common
stockholders by the weighted-average number of shares of common stock outstanding during the
periods. Diluted net income per common share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of the Company. The
potential dilutive securities the Company has outstanding are warrants and stock options. The
following is a reconciliation of weighted average shares outstanding used in calculating earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
Basic |
|
|
17,826,052 |
|
|
|
22,013,299 |
|
Assumed exercise of warrants |
|
|
|
|
|
|
|
|
Assumed exercise of stock options |
|
|
|
|
|
|
12,053 |
|
|
|
|
|
|
|
|
Diluted |
|
|
17,826,052 |
|
|
|
22,025,352 |
|
|
|
|
|
|
|
|
Potential common stock equivalents (consisting of units, warrants and stock options) totaling
8,290,840 and 5,479,140 for FY 2009 and FY 2010, respectively, have been excluded from the
computation of diluted earnings per share because the effect is anti-dilutive.
Recently Issued and Adopted Accounting Pronouncements
Effective July 1, 2009, the FASB ASC became the single official source of authoritative,
nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was eliminated and the ASC became
the only level of authoritative U.S. GAAP, other than guidance issued by the SEC. The Companys
accounting policies were not affected by the conversion to ASC. However, references to specific
accounting standards in the notes to our consolidated financial statements have been changed to
refer to the appropriate section of the ASC.
Note 3. Equity Transactions
Warrants Issued in IPO
In connection with its initial public offering (IPO), the Company sold to the representative
of the underwriters for $100 an option to purchase 750,000 units for $10.00 per unit. Each unit
consisted of one share of common stock and one warrant and each warrant entitles the holder to
purchase from the Company one share of common stock at an exercise price of $7.20. This option may
be exercised on a cashless basis and expires on April 5, 2011.
Cumulative Preferred Stock
The Company is conducting private placements of Series A 12.5% Cumulative Preferred Stock, par
value $0.0001 per share and liquidation preference of $50 per share (Series A Preferred Stock);
and Series B 8% Cumulative Preferred Stock, par value of $0.0001 per share and liquidation value of
$1,000 per share (Series B Preferred Stock). The Series B Preferred Stock is offered primarily
in connection with business combinations.
The Series A Preferred Stock and the Series B Preferred Stock are referred to collectively as the
Cumulative Preferred Stock.
The Cumulative Preferred Stock is not convertible into GFN common stock, has no voting rights,
except as required by Delaware law, and is not redeemable prior to February 1, 2014; at which time
it may be redeemed at any time, in whole or in part, at the Companys option. Holders of the
Cumulative Preferred Stock are entitled to receive, when declared by the Companys Board of
Directors, annual dividends payable quarterly in arrears on the 31st day of January,
July and October of each year and the 30th day of April of each year. In the event of
any liquidation or winding up of the Company, the holders of the Cumulative Preferred Stock will
have preference to holders of common stock; with the holders of the Series A Preferred Stock having
preference over holders of the Series B Preferred Stock. The Company has agreed to register for
public trading the Cumulative Preferred Stock no later than one year from issuance.
As of September 30, 2010, since issuance, dividends paid or payable totaled $259,000 and
$14,000 for the Series A Preferred Stock and Series B Preferred Stock, respectively. The
characterization of dividends to the recipients for Federal income tax purposes is made based upon
the earnings and profits of the Company, as defined by the Internal Revenue Code.
Rights Offering
On June 25, 2010, the Company completed a rights offering to stockholders of record as of May
14, 2010. The offering entitled holders of the rights to purchase units at $1.50 per unit, with
each unit consisting of one share of GFN common stock and a three-year warrant to purchase 0.5
additional shares of GFN common stock at an exercise price of $4.00 per share. The Companys
rights offering resulted in, after deducting direct offering costs and subscription receivables,
net proceeds of $5,908,000.
10
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In FY 2011, subscription receivables for 10,000 units were cancelled and, as a result, the
Company now reports that it sold a total of 4,187,247 shares of common stock and 4,187,247 warrants
to acquire an additional 2,095,623 shares of common stock at an exercise price of $4.00 per share.
As of September 30, 2010, subscription receivables for 56,666 units totaled $85,000.
The Company used $4,800,000 of the net proceeds from the rights offering in the refinancing at
Pac-Van in FY 2011 (see Note 4).
Note 4. Senior and Other Debt
The following is a discussion of the Companys significant senior and other debt.
Royal Wolf Senior Credit Facility and Subordinated Notes
Royal Wolf has a senior credit facility, as amended, with Australia and New Zealand Banking
Group Limited (ANZ). The facility is subject to annual reviews by ANZ and is secured by
substantially all of the assets of the Companys Australian and New Zealand subsidiaries. The
aggregate ANZ facility is comprised of various sub-facilities, not all of which provide additional
borrowing availability. As of September 30, 2010, based upon the exchange rate of one Australian
dollar to $0.9701 U.S. dollar and one New Zealand dollar to $0.7616 Australian dollar, borrowings
and availability under the ANZ credit facility totaled $80,890,000 (AUS$83,383,000) and $3,345,000
(AUS$3,448,000), respectively. Principal payments during the year ended June 30, 2010 were
required to be a minimum of AUS$1,250,000 per quarter, with an installment equal to 80% of Free
Cash Flow, as defined, paid within 60 days from June 30, 2010. The minimum principal payments
increase to AUS$1,500,000 ($1,455,000) per quarter during the year ending June 30, 2011 and vary
throughout the scheduled maturity date of September 14, 2012. Approximately $54,376,000
(AUS$56,052,000) and $10,102,000 (AUS$10,413,000) of the borrowings under the ANZ credit facility
at September 30, 2010 bear interest at ANZs prime rate, plus 3.15% per annum and 4.15% per annum,
respectively; with the remaining borrowings bearing interest at varying rates. As of September 30,
2010, the weighted-average interest rate was 9.5%; which includes the effect of interest rate swap
contracts and options (caps).
The ANZ senior credit facility is subject to certain covenants, including compliance with
specified consolidated senior and total interest coverage and senior and total debt ratios, as
defined, for each financial quarter based on earnings before interest, income taxes, depreciation
and amortization and other non-operating costs (EBITDA), as defined, on a year-to-date or
trailing twelve-month (TTM) basis; and restrictions on the payment of dividends, loans and
payments to affiliates and granting of new security interests on the assets of any of the entities
who are parties to the senior credit facility. A change of control in any of GFN Holdings or its
direct and indirect subsidiaries without the prior written consent of ANZ constitutes an event of
default under the facility. The ANZ senior credit facility further provides, among other things,
that the $5,500,000 due Bison Capital (see below) must be paid by a capital infusion from GFN, that
at least 50% of the amounts owed under the Bison Notes be hedged by Royal Wolf for foreign currency
exchange risks and that capital expenditures of property, plant and equipment over $1,940,000
(AUS$2,000,000) in the year ending June 30, 2011 be approved by ANZ.
On September 13, 2007, in conjunction with the closing of the acquisition of Royal Wolf, the
Company entered into a securities purchase agreement with Bison Capital, pursuant to which the
Company issued and sold to Bison Capital, at par, a secured senior subordinated promissory note in
the principal amount of $16,816,000 (the Bison Note). Pursuant to the securities purchase
agreement, the Company issued to Bison Capital warrants to purchase 500,000 shares of common stock
of GFN. The warrants issued to Bison Capital represent the right to purchase 500,000 shares of
GFNs common stock at an initial exercise price of $8.00 per share, subject to adjustment for stock
splits and stock dividends. Unexercised warrants will expire September 13, 2014. The Bison Note
bears interest at the annual rate of 13.5%, payable quarterly in arrears, and matures on March 13,
2013. The Company may extend the maturity date by one year, provided that it is not then in
default. The Company may prepay the Bison Note at a declining price of 101% of par prior to
September 13, 2011 and 100% of par thereafter. The maturity of the Bison Note may be accelerated
upon an event of default or upon a change of control of GFN Finance or any of its subsidiaries.
Payment of the Bison Note is secured by a lien on all or substantially all of the assets of GFN
Finance and its subsidiaries, subordinated and subject to the intercreditor agreement with ANZ. If,
during the 66-month period ending on the scheduled maturity date, GFNs common stock has not traded
above $10 per share for any 20 consecutive trading days on which the average daily trading volume
was at least 30,000 shares (ignoring any daily trading volume above 100,000 shares), upon demand by
Bison Capital, the Company will pay Bison Capital on the scheduled maturity date a premium of
$1,000,000, less any gains realized by Bison Capital from any prior sale of the warrants and
warrant shares. This premium is also payable upon any acceleration of the Bison Note due to an
event of default or change of control of GFN Finance or any of its subsidiaries. As a condition to
receiving this premium, Bison Capital must surrender for cancellation any remaining warrants and
warrant shares.
11
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On May 1, 2008, the Company issued and sold to Bison Capital a second secured senior
subordinated promissory note in the principal amount of $5,500,000 on terms comparable to the
original Bison Note, except that the maturity of this second note is July 1, 2011 and must be paid
by a capital infusion from GFN (see above). Collectively, these two notes are referred to as the
Bison Notes. At September 30, 2010, the principal balance of the Bison Notes was $21,736,000.
The Bison Notes have covenants that require the maintenance of minimum EBITDA levels, as defined,
and a total debt ratio based on a TTM EBITDA basis; as well as restrictions on capital
expenditures.
Pac-Van Senior Credit Facility
Prior to July 16, 2010, Pac-Van had a senior credit facility, as amended, with a syndicate of
four financial institutions led by Bank of America, N.A. (BOA), as administrative and collateral
agent, and a $25,000,000 senior subordinated secured note payable to SPV Capital Funding, L.L.C.
(SPV). On July 16, 2010, the Company entered into several agreements relating to: (a) a new
$85,000,000 senior secured revolving credit facility at Pac-Van with a syndicate led by PNC Bank,
National Association (PNC) and including Wells Fargo Bank, National Association and Union Bank,
N.A. (UB) (the PNC Credit Facility); and (b) a new $15,000,000 senior subordinated note with
Laminar Direct Capital, L.L.C. (Laminar) issued by GFN (the Laminar Note). Borrowings under
the PNC Credit Facility and proceeds from both the issuance of the Laminar Note and the Companys
rights offering completed on June 25, 2010 (see Note 3) were used to prepay in full all borrowings
under the BOA credit facility and the $25,000,000 senior subordinated secured note payable to SPV.
Under the terms of the PNC Credit Facility, Pac-Van may borrow up to $85,000,000, subject to
the terms of a borrowing base, as defined, and will accrue interest, at Pac-Vans option, either at
the prime rate plus 2.75%, or the Eurodollar rate plus 3.75%. The PNC Credit Facility also
provides for the issuance of irrevocable standby letters of credit in amounts totaling up to
$5,000,000, contains certain financial covenants (which are less restrictive than those under the
BOA credit facility), including fixed charge coverage ratios, senior leverage ratios and lease
fleet utilization ratios; and also includes customary negative and other covenants, including
events of default relating to a change of control, as defined, at GFN, GFNNA (which has guaranteed
the repayment of all outstanding borrowings and obligations of the PNC Credit Facility) and Pac-Van
or upon the cessation of involvement of Ronald F. Valenta as a director or officer in the
operations and management of GFN, GFNNA or Pac-Van.
The PNC Credit Facility matures on January 16, 2013, at which time all amounts borrowed must
be repaid, but Pac-Van has the right to prepay loans in whole or in part at any time, provided that
Pac-Van will be required to pay PNC a prepayment fee of $700,000 if it prepays the loans in full
prior to July 16, 2011 and to pay PNC a prepayment fee of $350,000 if it prepays the loans in full
after July 16, 2011 but prior to July 16, 2012. At September 30, 2010, borrowings under the PNC
Credit Facility totaled $72,511,000, and the weighted-average interest rate was 4.0%.
The repayment of borrowings under the PNC Credit Facility is secured by substantially all of
the assets of Pac-Van and by a limited guaranty by Ronald F. Valenta and Lydia D. Valenta (the
Valenta Limited Guaranty). Pursuant to the Valenta Limited Guaranty, the Valentas guaranteed
$10,000,000 of borrowings from July 16, 2010 until June 30, 2011, $8,000,000 of borrowings from
July 1, 2011 until June 30, 2012 and $6,000,000 of borrowings from July 1, 2012 until January 16,
2013. The amounts guaranteed by the Valentas will only be reduced if no event of default has
occurred under the PNC Credit Facility and if Pac-Van has delivered to PNC the certificates
necessary to demonstrate compliance by Pac-Van with the financial covenants at the date of each
scheduled reduction. In consideration for entering into the Valenta Limited Guaranty, Pac-Van will
pay the Valentas a fee equal to 1.2% of the lower of outstanding borrowings or the guaranty amount.
A guarantee fee of $120,000 for the first year was paid at or near the closing of the PNC Credit
Facility and, commencing with the first anniversary from the closing date, the guaranty fee will be
paid in advance at a rate of 0.3% per quarter, so long as Pac-Van remains in compliance with the
covenants of the PNC Credit Facility. In addition, the Valentas entered into a pledge and security
agreement for the benefit of PNC whereby the Valentas pledged a deposit account maintained by PNC,
and all interest accrued thereon, to secure the repayment of all loans and the performance of all
obligations under the PNC Credit Facility.
Laminar Note
The $15,000,000 Laminar Note accrues interest at the floating rate of LIBOR plus 10.0% per
annum, provided that LIBOR shall be not less than 3.0%, and is payable monthly in arrears
commencing on August 1, 2010. The Laminar Note matures on July 16, 2013, at which time all amounts
borrowed must be repaid; but it may be prepaid by GFN in part or in full at any time before the
maturity date without penalty and by Pac-Van, upon prior written notice, subject to the terms of
the intercreditor agreement among Pac-Van, GFNNA, PNC and Laminar.
12
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Laminar Note contains certain financial covenants, including a consolidated funded
indebtedness-to-consolidated EBITDA
leverage ratio, a minimum consolidated EBITDA covenant for the four most recently completed
calendar quarters of not less than $28,000,000; and customary negative and other covenants,
including events of default relating to a change of control, as defined, at GFN, GFNNA and Pac-Van
(both of which have guaranteed the repayment of all outstanding borrowings and obligations of the
Laminar Note) and covenants which limit the ability of GFNNA and Pac-Van to sell assets, enter into
acquisitions and incur additional indebtedness. In addition, the terms of the Laminar Note
prohibit GFNNA and Pac-Van from extending the maturity of the PNC Credit Facility to a date later
than April 16, 2013, increasing the maximum indebtedness above $93,500,000 without the prior
written consent of Laminar, entering into interest rate increases for indebtedness and from
undertaking certain other actions.
Other
The Company has a credit agreement at GFN, as amended, with UB for a $1,000,000 credit
facility. Borrowings or advances under this facility bear interest at UBs Reference Rate (which
approximates the prime rate) and are due and payable at the earlier of 60 days from the advance
date or the facility maturity date of March 31, 2011. The facility is guaranteed by GFN U.S. and
requires the maintenance of certain quarterly and year-end financial reporting covenants. As of
September 30, 2010, there were no borrowings outstanding under the UB credit facility.
Other debt totaled $319,000 at September 30, 2010.
Loan Covenant Compliance
The economic downturn in the U.S., particularly in the construction-related industries, and
the global economy in general have adversely affected the Companys operating results. To offset
this adverse effect, the Company undertook cost-reduction and other measures to reduce its
indebtedness and continue complying with the financial loan covenants of its senior lenders. The
Company during the fourth quarter of the fiscal year ended June 30, 2010 amended its senior credit
agreements at Royal Wolf to, among other things, extend required principal payments during the
fiscal year ending June 30, 2011 and establish financial covenants at the ANZ credit facility at
less restrictive levels. In FY 2011, Pac-Van refinanced the BOA senior credit facility and
subordinated note due SPV (see above). This refinancing also resulted in the establishment of less
restrictive covenants through a new senior credit facility led by PNC and, at September 30, 2010,
the Company was in compliance with the financial covenants under its senior credit facilities and
senior subordinated notes. There is no assurance that the senior lenders would consent to an
amendment or waiver in the event of noncompliance; or that such consent would not be conditioned
upon the receipt of a cash payment, revised principal payout terms, increased interest rates, or
restrictions in the expansion of the credit facilities, or that our senior lenders would not
exercise rights that would be available to them, including, among other things, demanding payment
of outstanding borrowings.
Note 5. Financial Instruments
Fair Value Measurements
The Company adopted what is now codified as FASB ASC Topic 820, Fair Value Measurements and
Disclosures, effective July 1, 2008. FASB ASC Topic 820 defines fair value as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability. As a
basis for considering such assumptions, FASB ASC Topic 820 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value, as follows:
Level 1 Observable inputs such as quoted prices in active markets for identical assets or
liabilities;
Level 2 Observable inputs, other than Level 1 inputs in active markets, that are observable
either directly or indirectly; and
Level 3 Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
Exposure to credit, interest rate and currency risks arises in the normal course of the
Companys business. The Company may use derivative financial instruments to hedge exposure to
fluctuations in foreign exchange rates and interest rates. The Companys swap contracts and
options (caps) and forward-exchange contracts are not traded on a market exchange; therefore, the
fair values are determined using valuation models that include assumptions about yield curve at the
reporting dates as well as counter-party credit risk. The Company has consistently applied these
calculation techniques to all periods presented.
13
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Derivative instruments measured at fair value and their classification on the consolidated
balances sheets and consolidated statements of operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative - Fair Value (Level 2) |
|
Type of Derivative |
|
|
|
|
|
June 30, |
|
|
September 30, |
|
Contract |
|
Balance Sheet Classification |
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap Contracts and
Options (Caps) |
|
|
Trade payables and accrued liabilities |
|
|
$ |
(1,222 |
) |
|
$ |
(1,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward-Exchange
Contracts |
|
|
Trade and other receivables |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward-Exchange
Contracts |
|
|
Trade payables and accrued liabilities |
|
|
|
|
|
|
|
(648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Type of Derivative |
|
Statement of Operations |
|
|
Quarter Ended September 30, |
|
Contract |
|
Classification |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap Contracts and
Options (Caps) |
|
|
Unrealized gain included in interest expense |
|
|
$ |
141 |
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Contracts |
|
|
Foreign currency exchange gain
(loss) and other |
|
|
|
209 |
|
|
|
(865 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
Under the provisions of FASB ASC Topic 825, Financial Instruments, the carrying value of the
Companys financial instruments, which include cash and cash equivalents, net receivables, trade
payables and accrued liabilities, borrowings under the senior credit facilities, the subordinated
notes, interest rate swap and forward exchange contracts and commercial bills; approximate fair
value due to current market conditions, maturity dates and other factors.
Interest Rate Swap Contracts
The Companys exposure to market risk for changes in interest rates relates primarily to its
long-term debt obligations. The Companys policy is to manage its interest expense by using a mix
of fixed and variable rate debt.
To manage this mix in a cost-efficient manner, the Company enters into interest rate swaps and
interest rate options, in which the Company agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. These swaps and options are designated to hedge changes in the interest
rate of a portion of the ANZ outstanding borrowings. The Company believes that financial
instruments designated as interest rate hedges are highly effective. However, documentation of
such, as required by FASB ASC Topic 815, Derivatives and Hedging, does not exist. Therefore, all
movements in the fair values of these hedges are reported in the statement of operations in the
period in which fair values change.
14
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Companys interest rate swap and option (cap) contracts are not traded on a market
exchange; therefore, the fair values are determined using valuation models which include
assumptions about the interest rate yield curve at the reporting dates (Level 2 fair value
measurement). As of June 30, 2010 and September 30, 2010, there were four open interest rate swap
contracts and three open interest rate option (cap) contracts, as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
September 30, 2010 |
|
|
|
Notional Amount |
|
|
Fair Value |
|
|
Notional Amount |
|
|
Fair Value |
|
Swap |
|
$ |
14,136 |
|
|
$ |
(669 |
) |
|
$ |
16,007 |
|
|
$ |
(600 |
) |
Swap |
|
|
1,713 |
|
|
|
(118 |
) |
|
|
1,940 |
|
|
|
(110 |
) |
Swap |
|
|
4,320 |
|
|
|
(277 |
) |
|
|
4,892 |
|
|
|
(257 |
) |
Swap |
|
|
3,091 |
|
|
|
(171 |
) |
|
|
3,277 |
|
|
|
(156 |
) |
Option (Cap) |
|
|
10,280 |
|
|
|
13 |
|
|
|
11,641 |
|
|
|
9 |
|
Option (Cap) |
|
|
1,852 |
|
|
|
1 |
|
|
|
2,097 |
|
|
|
1 |
|
Option (Cap) |
|
|
1,325 |
|
|
|
(1 |
) |
|
|
1,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,717 |
|
|
$ |
(1,222 |
) |
|
$ |
41,258 |
|
|
$ |
(1,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Risk
The Company has transactional currency exposures. Such exposure arises from sales or purchases
in currencies other than the functional currency. The currency giving rise to this risk is
primarily U.S. dollars. Royal Wolf has a bank account denominated in U.S. dollars into which a
small number of customers pay their debts. This is a natural hedge against fluctuations in the
exchange rate. The funds are then used to pay suppliers, avoiding the need to convert to Australian
dollars. Royal Wolf uses forward currency contracts and options to eliminate the currency
exposures on the majority of its transactions denominated in foreign currencies, either by
transaction if the amount is significant, or on a general cash flow hedge basis. The forward
currency contracts and options are always in the same currency as the hedged item. The Company
believes that financial instruments designated as foreign currency hedges are highly effective.
However documentation of such as required by ASC Topic 815 does not exist. Therefore, all movements
in the fair values of these hedges are reported in the statement of operations in the period in
which fair values change.
The Company also has certain U.S. dollar-denominated debt at Royal Wolf, including
intercompany borrowings, which are remeasured at each financial reporting date with the impact of
the remeasurement being recorded in our consolidated statements of operations. Unrealized gains
and losses resulting from such remeasurement due to changes in the Australian exchange rate to the
U.S. dollar could have significant impact in the Companys reported results of operations, as well
as any realized gains and losses from the payments on such U.S. dollar-denominated debt and
intercompany borrowings. In FY 2010 and FY 2011, net unrealized and realized foreign exchange
gains totaled $2,250,000 and $128,000, and $3,262,000 and $27,000, respectively.
Note 6. Related Party Transactions
The Company has utilized certain accounting, administrative and secretarial services from
affiliates of officers; as well as office space provided by an affiliate of Ronald F. Valenta, a
director and the chief executive officer of the Company.
Effective January 31, 2008, the Company entered into a lease with an affiliate of Mr. Valenta
for its new corporate headquarters in Pasadena, California. The rent is $7,393 per month, effective
March 1, 2009, plus allocated charges for common area maintenance, real property taxes and
insurance, for approximately 3,000 square feet of office space. The term of the lease is five
years, with two five-year renewal options, and the rent is adjusted yearly based on the consumer
price index. Rental payments were $28,000 and in both FY 2010 and FY 2011, respectively.
Effective October 1, 2008, the Company entered into a services agreement through June 30, 2009
(the Termination Date) with an affiliate of Mr. Valenta for certain accounting, administrative
and secretarial services to be provided at the corporate offices and for certain operational,
technical, sales and marketing services to be provided directly to the Companys operating
subsidiaries. Charges for services rendered at the corporate offices will be, until further
notice, at $7,000 per month and charges for services rendered to the Companys subsidiaries will
vary depending on the scope of services provided. The services agreement provides for, among other
things, mutual modifications to the scope of services and rates charged and automatically renews
for successive one-year terms, unless terminated in writing by either party not less than 30 days
prior to the Termination Date. Total charges to the Company for services rendered under this
agreement totaled $29,000 ($21,000 at the corporate office and $8,000 at the operating
subsidiaries) in FY 2010 and $46,000 ($21,000 at the corporate office and $25,000 at the operating
subsidiaries) in FY 2011.
15
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7. Stock Option Plans
On August 29, 2006, the Board of Directors of the Company adopted the General Finance
Corporation 2006 Stock Option Plan (2006 Plan), which was approved and amended by stockholders on
June 14, 2007 and December 11, 2008, respectively. Options granted and outstanding under the 2006
Plan are either incentive stock options under Section 422 of the Internal Revenue Code of 1986, as
amended, or so-called non-qualified options that are not intended to meet incentive stock option
requirements. All options
granted do not have a term in excess of ten years, and the exercise price of any option is not
less than the fair market value of the Companys common stock on the date of grant. After the
adoption by the Board of Directors and upon the approval of the 2009 Stock Incentive Plan by the
stockholders (see below), the Company suspended any further grants under the 2006 Plan.
On September 21, 2009, the Board of Directors of the Company adopted the 2009 Stock Incentive
Plan (2009 Plan), which was approved by the stockholders at the Companys annual meeting on
December 10, 2009. The 2009 Plan is an omnibus incentive plan permitting a variety of equity
programs designed to provide flexibility in implementing equity and cash awards, including
incentive stock options, nonqualified stock options, restricted stock grants, restricted stock
units, stock appreciation rights, performance stock, performance units and other stock-based
awards. Participants in the 2009 Plan may be granted any one of the equity awards or any
combination of them, as determined by the Board of Directors or the Compensation Committee. Upon
the approval of the 2009 Plan by the stockholders, the Company suspended further grants under the
2006 Plan (see above). Any stock options which are forfeited under the 2006 Plan will become
available for grant under the 2009 Plan, but the total number of shares available under the 2006
Plan and the 2009 Plan will not exceed the 2,500,000 shares reserved for grant under the 2006 Plan.
Unless terminated earlier at the discretion of the Board of Directors, the 2009 Plan will
terminate September 21, 2019.
The 2006 Plan and the 2009 Plan are referred to collectively as the Stock Incentive Plan.
There have been no grants or awards of restricted stock, restricted stock units, stock
appreciation rights, performance stock or performance units under the Stock Incentive Plan. All
grants to-date consist of incentive and non-qualified stock options that vest over a period of up
to five years (time-based options) and non-qualified stock options that vest over varying periods
that are dependent on the attainment of certain defined EBITDA and other targets for FY 2011 and
subsequent fiscal years (performance-based options).
On July 14, 2010 (July 2010 Grant), the Company granted options to three non-employees to
purchase 40,000 shares of common stock at an exercise price of equal to the closing market value of
the Companys common stock as of date, or $1.22 per share, with a vesting period of three years.
On September 15, 2010 (September 2010 Grant), the Company granted options to three officers
of GFN and 12 key employees of Pac-Van and Royal Wolf to purchase 298,000 shares of common stock at
an exercise price equal to the closing market price of the Companys common stock as of that date,
or $1.06 per share. The options under the September 2010 Grant vest over four years, subject to
performance conditions based on achieving cumulative EBITDA and indebtedness targets for the fiscal
years ending June 30, 2011 2013.
The fair value of the stock options granted under the Stock Incentive Plan was determined by
using the Black-Scholes option-pricing model. The range of the fair value of the stock options
granted (other than to non-employees) and the assumptions used are as follows:
|
|
|
|
|
Fair value of stock option |
|
|
$0.81 - $3.94 |
|
|
|
|
|
|
|
|
|
|
|
Assumptions used: |
|
|
|
|
Risk-free interest rate |
|
|
1.99% - 4.8% |
|
Expected life (in years) |
|
|
7.5 |
|
Expected volatility |
|
|
26.5% - 82.5% |
|
Expected dividends |
|
|
|
|
|
|
|
|
|
At September 30, 2010, the weighted-average fair value of the stock options granted to
non-employees was $1.07, determined using the Black-Scholes option-pricing model using the
following assumptions: A risk-free interest rate of 2.4% 2.5%, an expected life of 9.3 9.8
years, an expected volatility of 83.0%, and no expected dividend.
16
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of the Companys stock option activity and related information as of and for FY 2011
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
Number of |
|
|
Average |
|
|
Remaining |
|
|
|
Options |
|
|
Exercise |
|
|
Contractual |
|
|
|
(Shares) |
|
|
Price |
|
|
Term (Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
1,254,910 |
|
|
$ |
6.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
338,000 |
|
|
|
1.08 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(195,340 |
) |
|
|
3.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
1,397,570 |
|
|
$ |
5.75 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
September 30, 2010 |
|
|
1,379,638 |
|
|
$ |
5.74 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010 |
|
|
462,360 |
|
|
$ |
7.86 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, outstanding time-based options and performance-based options totaled
819,550 and 578,020, respectively. Also at that date, the Companys market price for its common
stock was $1.30 per share, which was at or below the exercise prices of the majority of the
outstanding stock options. As a result, the intrinsic value of the outstanding stock options at
that date was only $76,000.
Share-based compensation of $2,324,000 related to stock options has been recognized in the
statement of operations, with a corresponding benefit to additional paid-in capital, from inception
through September 30, 2010. At that date, there remains $1,631,000 of unrecognized compensation
expense to be recorded on a straight-line basis over the remaining weighted-average vesting period
of 2.5 years.
A deduction is not allowed for U.S. income tax purposes with respect to non-qualified options
granted in the United States until the stock options are exercised or, with respect to incentive
stock options issued in the United States, unless the optionee makes a disqualifying disposition of
the underlying shares. The amount of any deduction will be the difference between the fair value of
the Companys common stock and the exercise price at the date of exercise. Accordingly, there is a
deferred tax asset recorded for the U.S. tax effect of the financial statement expense recorded
related to stock option grants in the United States. The tax effect of the U.S. income tax
deduction in excess of the financial statement expense, if any, will be recorded as an increase to
additional paid-in capital.
Note 8. Commitments and Contingencies
Put and Call Options
In conjunction with the closing of the acquisition of Royal Wolf, the Company entered into a
shareholders agreement with Bison Capital. The shareholders agreement was amended on September 21,
2009 and provides that, at any time after July 1, 2011, Bison Capital may require the Company to
purchase from Bison Capital all of its 13.8% outstanding capital stock of GFN U.S. The purchase
price for the capital stock (which is payable in cash or, if mutually agreeable to both the Company
and Bison Capital, paid in GFN common stock or some combination thereof) is the greater of the
following:
(i) the amount equal to Bison Capitals ownership percentage in GFN U.S. (13.8%) multiplied
by the result of 8.25 multiplied by the sum of Royal Wolfs EBITDA for a twelve-month determination
period, as defined, plus all administrative expense payments or reimbursements made by Royal Wolf
to the Company during such period; minus the net debt of Royal Wolf, as defined; or
(ii) the amount equal to the Bison Capitals ownership percentage in GFN U.S. multiplied by
the result of the GFN trading multiple, as defined, multiplied by Royal Wolfs EBITDA for the
determination period; minus the net debt of Royal Wolf; or
(iii) the greater of (1) $12,850,000 or (2) Bison Capitals ownership percentage in GFN U.S.
(or 13.8%) multiplied by the result of 8.25 multiplied by the sum of Royal Wolfs TTM EBITDA
measured at the end of each fiscal quarter through June 30, 2011, as defined.
Also under the shareholders agreement, the Company had the option, at anytime prior to
September 13, 2010, to cause Bison Capital to sell and transfer its 13.8% outstanding capital stock
of GFN U.S. to the Company for a purchase price equal to the product of 2.75 and Bison Capitals
cost in the GFN U.S. capital stock. Subsequent to July 1, 2012, the Companys call option purchase
price is similar to (i) and (ii) of the Bison Capital put option, except the EBITDA multiple is
8.75.
17
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company accounts for Bison Capitals put option as a non-freestanding financial instrument
classified in temporary equity, pursuant to the requirements of SEC Accounting Series Release
(ASR) No. 268, Presentation in Financial Statements of Redeemable Preferred Stock. In
accordance with the guidelines of ASR No. 268, the redemption value of the put option has been
reflected as redeemable noncontrolling interest with, prior to July 1, 2009, the corresponding
adjustment to additional paid-in capital determined after the attribution of the net income or loss
of Royal Wolf to noncontrolling interest. Effective July 1, 2009, the Company adopted the
provisions of a pronouncement issued in December 2007 on what is now codified as FASB ASC Topics
805, Business Combinations, and 810, Consolidation. In connection with the adoption of the
provisions in these Topics, the Company now accretes the redemption value of the put option over
the period from July 1, 2009 through June 30, 2011 with the corresponding adjustment to net income
or loss attributable to noncontrolling interest.
Preferred Supply Agreement
In connection with a Business Sale Agreement dated November 14, 2007 with GE SeaCo Australia
Pty Ltd. and GE SeaCo SRL (collectively GE SeaCo), Royal Wolf entered in a preferred supply
agreement with GE SeaCo. Under the preferred supply agreement, GE SeaCo has agreed to sell to Royal
Wolf, and Royal Wolf has agreed to purchase, all of GE SeaCos containers that GE SeaCo determines
to sell, up to a maximum of 5,000 containers each year. The purchase price for the containers will
be based on their condition and is specified in the agreement, subject to annual adjustment. In
addition, Royal Wolf received a right of first refusal to purchase any additional containers that
GE SeaCo desires to sell in Australia, New Zealand and Papua New Guinea. Either party may terminate
the agreement upon no less than 90 days prior notice at any time after November 15, 2012.
Other Matters
The Company is not involved in any material lawsuits or claims arising out of the normal
course of business. The nature of its business is such that disputes can occasionally arise with
employees, vendors (including suppliers and subcontractors), and customers over warranties,
contract specifications and contract interpretations among other things. The Company assesses these
matters on a case-by-case basis as they arise. Reserves are established, as required, based on its
assessment of its exposure. The Company has insurance policies to cover general liability and
workers compensation related claims. In the opinion of management, the ultimate amount of liability
not covered by insurance under pending litigation and claims, if any, will not have a material
adverse effect on our financial position, operating results or cash flows.
Note 9. Cash Flows from Operating Activities and Other Financial Information
The following table provides a detail of cash flows from operating activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
648 |
|
|
$ |
1,195 |
|
Adjustments to reconcile net loss to cash flows from operating activities: |
|
|
|
|
|
|
|
|
Gain on sales and disposals of property, plant and equipment |
|
|
|
|
|
|
(8 |
) |
Gain on sales of lease fleet |
|
|
(1,745 |
) |
|
|
(1,442 |
) |
Unrealized foreign exchange gain |
|
|
(2,250 |
) |
|
|
(3,262 |
) |
Unrealized loss (gain) on forward exchange contracts |
|
|
(209 |
) |
|
|
865 |
|
Unrealized gain on interest rate swaps and options |
|
|
(141 |
) |
|
|
(250 |
) |
Depreciation and amortization |
|
|
5,257 |
|
|
|
4,672 |
|
Amortization of deferred financing costs |
|
|
81 |
|
|
|
349 |
|
Accretion of interest |
|
|
60 |
|
|
|
60 |
|
Share-based compensation expense |
|
|
246 |
|
|
|
173 |
|
Deferred income taxes |
|
|
333 |
|
|
|
665 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade, subscription and other receivables, net |
|
|
6,636 |
|
|
|
4,562 |
|
Inventories |
|
|
3,419 |
|
|
|
(2,203 |
) |
Prepaid expenses and other |
|
|
(1,579 |
) |
|
|
325 |
|
|
|
|
|
|
|
|
|
|
Trade payables, accrued liabilities and other deferred credits |
|
|
(5,166 |
) |
|
|
(2,034 |
) |
Income taxes |
|
|
130 |
|
|
|
35 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
5,720 |
|
|
$ |
3,702 |
|
|
|
|
|
|
|
|
18
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 10. Segment Reporting
The tables below represent the Companys revenues from external customers, operating income,
interest income and expense, share-based compensation expense, depreciation and amortization,
expenditures for additions to long-lived assets (consisting of lease fleet and property, plant and
equipment) and long-lived assets; as attributed to its two geographic (and operating) segments (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
North America: |
|
|
|
|
|
|
|
|
Sales |
|
$ |
4,474 |
|
|
$ |
5,578 |
|
Leasing |
|
|
9,953 |
|
|
|
9,457 |
|
|
|
|
|
|
|
|
|
|
|
14,427 |
|
|
|
15,035 |
|
|
|
|
|
|
|
|
Asia-Pacific: |
|
|
|
|
|
|
|
|
Sales |
|
|
12,139 |
|
|
|
17,811 |
|
Leasing |
|
|
8,653 |
|
|
|
10,619 |
|
|
|
|
|
|
|
|
|
|
|
20,792 |
|
|
|
28,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,219 |
|
|
$ |
43,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
North America |
|
$ |
1,771 |
|
|
$ |
1,024 |
|
Asia-Pacific |
|
|
304 |
|
|
|
2,646 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,075 |
|
|
$ |
3,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
|
|
Asia-Pacific |
|
|
59 |
|
|
|
105 |
|
|
|
|
|
|
|
|
Total |
|
$ |
59 |
|
|
$ |
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
North America |
|
$ |
1,330 |
|
|
$ |
1,570 |
|
Asia-Pacific |
|
|
2,377 |
|
|
|
2,711 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,707 |
|
|
$ |
4,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
North America |
|
$ |
138 |
|
|
$ |
140 |
|
Asia-Pacific |
|
|
108 |
|
|
|
33 |
|
|
|
|
|
|
|
|
Total |
|
$ |
246 |
|
|
$ |
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
North America |
|
$ |
1,448 |
|
|
$ |
1,438 |
|
Asia-Pacific |
|
|
3,809 |
|
|
|
3,234 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,257 |
|
|
$ |
4,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
|
|
|
|
|
|
North America |
|
$ |
1,959 |
|
|
$ |
855 |
|
Asia-Pacific |
|
|
4,920 |
|
|
|
5,885 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,879 |
|
|
$ |
6,740 |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2010 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
North America |
|
$ |
108,064 |
|
|
$ |
106,999 |
|
Asia-Pacific |
|
|
90,528 |
|
|
|
102,865 |
|
|
|
|
|
|
|
|
Total |
|
$ |
198,592 |
|
|
$ |
209,864 |
|
|
|
|
|
|
|
|
Intersegment net revenues totaled $429,000 during FY 2011.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read
together with the consolidated financial statements and the accompanying notes thereto, which are
included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 filed with the
Securities and Exchange Commission (SEC); as well as the condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections about future events.
These forward-looking statements are subject to known and unknown risks, uncertainties and
assumptions about us that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as may, should, could, would,
expect, plan, anticipate, believe, estimate, continue, or the negative of such terms or
other similar expressions. Risk factors that might cause or contribute to such a discrepancy
include, but are not limited to, those described in our Annual Report on Form 10-K for the year
ended June 30, 2010 and other SEC filings. We maintain a web site at
www.generalfinance.com that makes available, through a link to the SECs EDGAR system website,
our filings that we have made with the SEC.
References to we, us, our or the Company refer to General Finance Corporation, a
Delaware corporation (GFN), and its direct and indirect subsidiaries, including, GFN Mobile
Storage Inc., a Delaware corporation (GFNMS), GFN North America Corp., a Delaware corporation
(GFNNA), and its subsidiary Pac-Van, Inc., an Indiana corporation (which, combined with GFNMS, is
referred to herein as Pac-Van), GFN U.S. Australasia Holdings, Inc., a Delaware corporation (GFN
U.S), its subsidiary GFN Australasia Holdings Pty Limited, an Australian corporation (GFN
Holdings), its subsidiary GFN Australasia Finance Pty Limited, an Australian corporation (GFN
Finance), and its subsidiary RWA Holdings Pty Limited, an Australian corporation (RWA), and its
subsidiaries. GFN Holdings and its subsidiaries are collectively referred to herein as Royal
Wolf.
Background and Overview
We incorporated in Delaware on October 14, 2005 and completed our initial public offering (the
IPO) in April 2006.
On September 13, 2007 (September 14 in Australia), we acquired Royal Wolf by purchasing the
outstanding shares of RWA. The purchase price paid to the former shareholders of RWA was $64.3
million, which consisted of cash, the issuance to Bison Capital Australia, L.P., (Bison Capital),
one of the sellers, of shares of common stock of GFN U.S. and the issuance of a note to Bison
Capital. Following the acquisition, we own 86.2% of the outstanding capital stock of GFN U.S. and
Bison Capital owns 13.8% of the outstanding capital stock of GFN U.S. Royal Wolf leases and sells
storage containers, portable container buildings and freight containers in Australia and New
Zealand, which is considered geographically by the Company to be the Asia-Pacific area.
On October 1, 2008, we acquired Pac-Van through a merger with Mobile Office Acquisition Corp.
(MOAC), the parent of Pac-Van, and our wholly-owned subsidiary formed in July 2008, GFNNA. In
addition to assuming Pac-Vans senior and other debt, we paid $46.5 million to the stockholders of
MOAC by a combination of cash, GFN restricted common stock and a 20-month subordinated promissory
note. Pac-Van leases and sells modular buildings, mobile offices and storage containers in the
United States.
The economic downturn in the United States, particularly in the construction -related
industries, and the global economy in general has had an adverse impact on the Companys operating
results. We responded by reducing indebtedness, personnel costs, capital expenditures,
discretionary spending and curtailing acquisition activity. We continuously monitor our performance
and customer demand levels by identifying and applying best practices to make our business more
efficient. Accordingly, we may continue to reduce headcount or employee compensation in the areas
in which we believe we can achieve greater efficiencies without affecting customer service or our
sales efforts. While this is our approach for the foreseeable future, our long-term strategy and
business plan is to acquire and operate rental services and specialty finance businesses in North
America, Europe and the Asia-Pacific area.
Our two operating subsidiaries, Royal Wolf and Pac-Van, lease and sell storage container
products, modular buildings and mobile offices through eighteen customer service centers (CSCs)
in Australia, six CSCs in New Zealand and twenty-six branch locations across eighteen states in the
United States. As of September 30, 2010, we had 229 and 187 employees and 27,437 and 10,782 lease
fleet units in the Asia-Pacific area and United States, respectively. We do business in two
distinct, but related industries, modular space and mobile storage, which we collectively refer to
as the portable services industry. Our revenue mix was approximately 54% sales and 46% leasing
during the quarter ended September 30, 2010.
20
Our products include the following:
Modular Space
Modular Buildings. Also known as manufactured buildings, modular buildings provide customers
with additional space and are often modified to customer specifications. Modular buildings range in
size from 1,000 to more than 30,000 square feet and may be highly customized.
Mobile Offices and Portable Container Buildings. Also known as trailers or construction
trailers, mobile offices are re-locatable units with aluminum or wood exteriors on wood (or steel)
frames on a steel carriage fitted with axles, allowing for an assortment of add-ons to provide
comfortable and convenient temporary space solutions. We also offer portable container buildings,
ground level offices (GLOs), or office containers (which are either modified or
specifically-manufactured shipping containers that are used as mobile offices), and in-plant units,
which are manufactured structures that provide self-contained office space with maximum design
flexibility.
Mobile Storage
Storage Containers. Storage containers consist of new and used shipping containers that
provide a flexible, low cost alternative to warehousing, while offering greater security,
convenience, and immediate accessibility. Our storage products include general purpose dry storage
containers, refrigerated containers and specialty containers in a range of standard and modified
sizes, designs and storage capacities. Specialty containers include blast-resistant units, hoarding
units and hazardous-waste units. We also offer storage vans, also known as storage trailers or
dock-height trailers.
Freight Containers. Freight containers are specifically designed for transport of products by
road and rail. Our freight container products include curtain-side, refrigerated and bulk cargo
containers, together with a range of standard and industry-specific dry freight containers.
Quarter Ended September 30, 2010 (QE FY 2011) Compared to Quarter September 30, 2009 (QE FY
2010)
The following compares our QE FY 2011 results of operations with our QE FY 2010 results of
operations.
Revenues. Revenues increased approximately 24% to $43.5 million in QE FY 2011 from $35.2 in QE
FY 2010. This included an increase of $0.6 million, or 4%, in revenues at Pac-Van and a
$7.7 million increase, or 37%, in revenues at Royal Wolf. The translation effect of the average
currency exchange rate, driven by the strengthening in the Australian dollar to the U.S. dollar in
QE FY 2011 versus QE FY 2010, caused a portion of the increase in total revenues at Royal Wolf
which otherwise would have shown an increase of 30%. Since the second half of our fiscal year ended
June 30, 2009 (FY 2009), the economic downturn in both our geographic segments resulted in a
significant reduction in our overall business, particularly in the construction-related sector in
the United States and in the mining and defense and transportation sectors in the Asia-Pacific
area. In QE FY 2011, when compared to QE FY 2010, revenues in these sectors decreased by $1.1
million in the United States, while the Asia-Pacific area improved by $2.7 million. Sales and
leasing revenues represented 54% and 46% of total revenues in QE FY 2011 and 47% and 53% of total
revenues in QE FY 2010, respectively.
Sales during QE FY 2011 amounted to $23.4 million, compared to $16.6 million during QE FY
2010; representing an increase of $6.8 million, or 41%. This included an increase of $1.1 million,
or 24%, in sales at Pac-Van and a $5.7 million increase, or 47%, in sales at Royal Wolf. The
translation effect of the average currency exchange rate, driven by the strengthening in the
Australian dollar to the U.S. dollar in QE FY 2011 versus QE FY 2010, caused a portion of the
increase in total revenues at Royal Wolf which otherwise would have shown an increase of 42%. In
QE FY 2011, sales in the Asia-Pacific area increased $2.2 million in our national accounts group
(or non-retail operations), primarily because of the enhanced activity in the mining and defense
and transportation sectors; and increased $3.5 million in our CSC retail operations from QE FY
2010. In the United States, the higher sales revenues in QE FY 2011 over QE FY 2010 was due to
modular building sales (primarily to projects for educational and health care facilities) and the
related services for delivery and installation increasing by $2.2 million; offset somewhat by
reduced sales in containers and mobile offices.
The $2.2 million revenue increase at Royal Wolf in the national accounts group resulted from a
$1.1 million increase unit sales, a $0.9 million increase due to higher prices and a favorable
foreign exchange rate effect of $0.2 million. This increase included the sales of 44 mining
container units (versus six units in QE FY 2010) that remained in inventory as a result of a
cancelled leasing order in FY 2009. There are 81 of these units available for sale at September
30, 2010, at a cost of approximately $19,000 each, which we anticipate selling in the range of
$20,000 to 22,000 per unit.
21
The $3.5 million revenue increase at Royal Wolf in the retail operations resulted from a $1.0
million increase in unit sales, a $1.3 million increase due to higher prices and a favorable
foreign exchange rate effect of $1.2 million. The higher sales revenues were primarily due to
increased demand in our CSCs in Western Australia and the Northern Territory because of increased
activities in the oil exploration and defense sectors in those regions.
Leasing revenues during QE FY 2011 totaled $20.1 million, as compared to $18.6 million during
QE FY 2010, representing an increase of $1.5 million, or 8%. Leasing revenues decreased at Pac-Van
by $0.5 million, or 5%, and increased by $2.0 million, or 23%, at Royal Wolf. The translation
effect of the average currency exchange rate, driven by the strengthening in the Australian dollar
to the U.S. dollar in QE FY 2011 versus QE FY 2010, caused a portion of the increase in total
revenues at Royal Wolf which otherwise would have shown an increase of 13%. The favorable foreign
exchange rate effect at Royal Wolf in QE FY 2011 totaled $0.8 million ($0.7 million and $0.1
million in our retail business and national accounts group, respectively) from QE FY 2010.
At Royal Wolf, average utilization in the retail operations was 86% during QE FY 2011, as
compared to 76% during QE FY 2010; and average utilization in the national accounts group
operations was 72% during QE FY 2011, as compared to 64% during QE FY 2010. Overall average
utilization at Royal Wolf was 82% in QE FY 2011 and 71% in QE FY 2010. The average monthly lease
rate of containers in both QE FY 2011 and QE FY 2010 for Royal Wolf was AUS$152. We believe the
primary reason we were able to both increase our overall average utilization and maintain our
composite monthly lease rate between the periods at Royal Wolf was because of our position as the
only national company in the mobile storage industry in Australia and New Zealand. However, we
continually review each local market in which we do business to determine if local factors justify
increases or decreases in lease rates and the effect these changes would have on utilization and
revenues.
At Pac-Van, average utilization rates were 81%, 66% and 73% and monthly lease rates were $97,
$222 and $857 for containers, mobile offices and modular units, respectively, during QE FY 2011; as
compared to 74%, 63% and 75% and $97, $243 and $965 for containers, mobile offices and modular
units in QE FY 2010, respectively. The lower monthly lease rates resulted from lower demand and
increased competition, particularly in the construction-related industry in which Pac-Van has
currently over 30% of its business and historically has had over 40%. Pac-Van is required to
maintain a minimum composite utilization rate, as defined, of over 60% at each quarter end. At
September 30, 2010, the composite utilization rate was 72%.
The average value of the Australian dollar against the U.S. dollar strengthened during QE FY
2011 as compared to QE FY 2010. The average currency exchange rate of one Australian dollar during
QE FY 2011 was $0.90286 U.S. dollar compared to $0.83244 U.S. dollar during QE FY 2011. This
fluctuation in foreign currency exchange rates resulted in an increase to our total revenues at
Royal Wolf of $2.2 million in QE FY 2011 when compared to QE FY 2010.
Cost of Sales. Cost of sales (which is the cost related to our sales revenues only and
exclusive of the line items discussed below) increased by a net $5.1 million to $17.6 million
during QE FY 2011 from $12.5 million during QE FY 2010, which was proportionate with the increase
in sales of $6.8 million. Our gross profit percentage from sales revenues during both periods was
25%.
Direct Costs of Leasing Operations and Selling and General Expenses. Direct costs of leasing
operations (which excludes depreciation and amortization) and selling and general expenses
aggregately increased, by $2.1 million, to $17.5 million during QE FY 2011 from $15.4 million
during QE FY 2010. However, as a percentage of revenues, these operating expenses decreased to 40%
in QE FY 2011 from 44% in QE FY 2010, reflecting our cost-cutting measures implemented during the
second half of FY 2009. This cost cutting involved: (1) salaries and related payroll costs as a
result of staff reductions and lower bonuses, (2) less discretionary spending and (3) better
control of our professional costs.
In general, with respect to our operating segments, Pac-Vans operating expenses as a
percentage of revenues are higher than Royal Wolfs percentage as: (1) Royal Wolfs mix of QE FY
2011 sales to leasing revenue at 63% is higher than the 37% at Pac-Van, (2) Pac-Van has an office
modular fleet which is a lower margin product line; and (3) Pac-Van has less density in its retail
markets.
Depreciation and Amortization. Depreciation and amortization decreased by $0.6 million to
$4.7 million during QE FY 2011 from $5.3 million during QE FY 2010. The decrease was primarily due
to an adjustment of $0.5 million in QE FY 2010 related to the amortization period of certain
intangible assets that were recorded in connection with our acquisition of Royal Wolf in September
2007.
22
Interest Expense. Interest expense of $4.3 million in QE FY 2011 was $0.6 million higher than
the $3.7 million in QE FY 2010. This was comprised of an increase of $0.3 million at both Royal
Wolf and in the United States. Royal Wolfs weighted-average interest rate (without the effect of the interest
rate swap and option contracts) was 11.2% in QE FY 2011, as compared to 10.0% in QE FY 2010; and
the weighted-average rate in the United States was 6.0% in QE FY 2011, as compared to 5.2% in QE FY 2010.
Foreign Currency Exchange. We have certain U.S. dollar-denominated debt at Royal Wolf,
including intercompany borrowings, which are remeasured at each financial reporting date with the
impact of the remeasurement being recorded in our consolidated statements of operations. Unrealized
gains and losses resulting from such remeasurement due to changes in the Australian exchange rate
to the U.S. dollar could have a significant impact in our reported results of operations, as well
as any realized gains and losses from the payments on such U.S. dollar-denominated debt and
intercompany borrowings. As noted above, the average value of the U.S. dollar against the
Australian dollar weakened during QE FY 2011 as compared to QE FY 2010 and from June 30, 2010 to
September 30, 2010. The currency exchange rate of one Australian dollar at June 30, 2010 was
$0.8567 U.S. dollar compared to $0.9701 U.S. dollar at September 30, 2010. In QE FY 2011, net
unrealized and realized foreign exchange gains totaled $3.3 million and $27,000, respectively, and
net unrealized losses on forward currency exchange contracts totaled $0.9 million. In QE FY 2010,
net unrealized and realized foreign exchange gains totaled $2.3 million and $0.1 million,
respectively, and net unrealized gains on forward currency exchange contracts totaled $0.2 million
in QE FY 2010.
Income Taxes. Our effective income tax rate was 37.8% and 36.5% during QE FY 2011 and QE FY
2010, respectively. The effective rate in both periods is greater than the U.S. federal rate of
34% primarily because of state income taxes from the filing of tax returns in multiple U.S. states
and because a portion of the depreciation and amortization on the fixed and intangible assets
recorded in the Pac-Van acquisition is not deductible for U.S. federal income tax purposes, offset
somewhat by the favorable income tax impact of the amortization of goodwill acquired in
acquisitions made in the Asia-Pacific area, which is deductible for U.S. income tax reporting
purposes. At June 30, 2010, we had a U.S. federal net operating loss carryforward of approximately
$46.7 million, which expires if unused during our fiscal years ending June 30, 2020 2030.
Noncontrolling Interest. Noncontrolling interest, which represents Bison Capitals 13.8%
interest in Royal Wolf, was a charge of $0.6 million in both QE FY 2011 and QE FY 2010. As
discussed in Note 8 of Notes to Consolidated Financial Statements, we commenced accreting the
redemption value of the Bison Capital put option over the period from July 1, 2009 through June 30,
2011.
Net Income Attributable to Common Stockholders. We had net income attributable to common
stockholders of $0.6 million in QE FY 2011, as compared to $34,000 in QE FY 2010, primarily as a
result of increased profitability in the Asia-Pacific area, offset somewhat by higher interest
expense.
Measures not in Accordance with Generally Accepted Accounting Principles in the United States
(U.S. GAAP)
Earnings before interest, income taxes, impairment, depreciation and amortization and other
non-operating costs and income (EBITDA) and adjusted EBITDA are supplemental measures of our
performance that are not required by, or presented in accordance with U.S. GAAP. These measures are
not measurements of our financial performance under U.S. GAAP and should not be considered as
alternatives to net income, income from operations or any other performance measures derived in
accordance with U.S. GAAP or as an alternative to cash flow from operating, investing or financing
activities as a measure of liquidity.
Adjusted EBITDA is a non-U.S. GAAP measure. We calculate adjusted EBITDA to eliminate the
impact of certain items we do not consider to be indicative of the performance of our ongoing
operations. You are encouraged to evaluate each adjustment and whether you consider each to be
appropriate. In addition, in evaluating adjusted EBITDA, you should be aware that in the future, we
may incur expenses similar to the adjustments in the presentation of adjusted EBITDA. Our
presentation of adjusted EBITDA should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items. We present adjusted EBITDA because we
consider it to be an important supplemental measure of our performance and because we believe it is
frequently used by securities analysts, investors and other interested parties in the evaluation of
companies in our industry, many of which present EBITDA and a form of our adjusted EBITDA when
reporting their results. Adjusted EBITDA has limitations as an analytical tool, and should not be
considered in isolation, or as a substitute for analysis of our results as reported under U.S.
GAAP. Because of these limitations, adjusted EBITDA should not be considered as a measure of
discretionary cash available to us to invest in the growth of our business or to reduce our
indebtedness. We compensate for these limitations by relying primarily on our U.S. GAAP results and
using adjusted EBITDA only supplementally. The following table shows our adjusted EBITDA and the
reconciliation from net income (loss) (in thousands):
23
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
Net income |
|
$ |
648 |
|
|
$ |
1,195 |
|
Add (deduct) |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
372 |
|
|
|
726 |
|
Foreign currency exchange gain and other |
|
|
(2,593 |
) |
|
|
(2,427 |
) |
Interest expense |
|
|
3,707 |
|
|
|
4,281 |
|
Interest income |
|
|
(59 |
) |
|
|
(105 |
) |
Depreciation and amortization |
|
|
5,257 |
|
|
|
4,672 |
|
Share-based compensation expense |
|
|
246 |
|
|
|
173 |
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
7,578 |
|
|
$ |
8,515 |
|
|
|
|
|
|
|
|
Our business is capital intensive, so from an operating level we focus primarily on EBITDA and
adjusted EBITDA to measure our results. These measures provide us with a means to track internally
generated cash from which we can fund our interest expense and fleet growth objectives. In managing
our business, we regularly compare our adjusted EBITDA margins on a monthly basis. As capital is
invested in our established branch locations, we achieve higher adjusted EBITDA margins on that
capital than we achieve on capital invested to establish a new branch (or CSC), because our fixed
costs are already in place in connection with the established branches. The fixed costs are those
associated with yard and delivery equipment, as well as advertising, sales, marketing and office
expenses. With a new market or branch, we must first fund and absorb the start-up costs for setting
up the new branch facility, hiring and developing the management and sales team and developing our
marketing and advertising programs. A new branch will have low adjusted EBITDA margins in its early
years until the number of units on rent increases. Because of our higher
operating margins on incremental lease revenue, which we realize on a branch-by-branch basis when,
the branch achieves leasing revenues sufficient to cover the branchs fixed costs, leasing revenues
in excess of the break-even amount produces large increases in profitability. Conversely, absent
significant growth in leasing revenues, the adjusted EBITDA margin at a branch will remain
relatively flat on a period by period comparative basis.
Liquidity and Financial Condition
Each of our two operating units, Royal Wolf and Pac Van, fund their operations substantially
through secured bank credit facilities that require compliance with various covenants. These
covenants require them to, among other things, maintain certain levels of interest coverage, EBITDA
(as defined), unit utilization rate and overall leverage. In addition, we have certain obligations
and subordinated notes payable to Bison Capital (with our purchase of Royal Wolf) and a
subordinated note payable by GFN to Laminar Direct Capital, L.L.C. (Laminar), that was issued in
connection with the refinancing at Pac-Van in QE FY 2011 (see below). We also have a $1.0 million
credit facility with Union Bank at GFN under which no borrowings were outstanding as of September
30, 2010.
The economic downturn in the U.S., particularly in the construction-related industries, and
the global economy in general have adversely affected our operating results. To offset this
adverse effect, we undertook cost-reduction and other measures to reduce our indebtedness and
continue complying with the financial loan covenants of our senior lenders. During the fourth
quarter of the fiscal year ended June 30, 2010, we amended our senior credit agreements at Royal
Wolf to, among other things, extend required principal payments during the fiscal year ending June
30, 2011 and establish financial covenants at the Australia and New Zealand Banking Group Limited
(ANZ) senior credit facility at more favorable levels. In addition, on June 25, 2010 we
completed a rights offering for the issuance and sale of units at $1.50 each (with each unit
consisting of one share of GFN common stock and a three-year warrant to purchase 0.5 additional
shares of GFN common stock at an exercise price of $4.00 per share). We utilized $4,800,000 of the
approximately $5,900,000 net proceeds form the rights offering in the refinancing at Pac-Van in QE
FY 2011 (see below).
Prior to July 16, 2010, Pac-Van had a senior credit facility, as amended, with a syndicate of
four financial institutions led by Bank of America, N.A. (BOA), as administrative and collateral
agent, and a $25,000,000 senior subordinated secured note payable to SPV Capital Funding, L.L.C.
(SPV). On July 16, 2010, we entered into several agreements relating to: (a) a new $85,000,000
senior secured revolving credit facility at Pac-Van with a syndicate led by PNC Bank, National
Association (PNC) and including Wells Fargo Bank, National Association and Union Bank (the PNC
Credit Facility); and (b) a new $15,000,000 senior subordinated note with Laminar issued by GFN
(the Laminar Note). Borrowings under the PNC Credit Facility and proceeds from both the issuance
of the Laminar Note and our rights offering (see above) were used to prepay in full all borrowings
under the BOA credit facility and the $25,000,000 senior subordinated secured note payable to SPV.
This refinancing also resulted in the establishment of less restrictive covenants through the PNC
Credit Facility. The PNC Credit Facility matures on January 16, 2013 and the Laminar Note matures
on July 16, 2013.
24
Reference is made to Notes 3 and 4 of Notes to Condensed Consolidated Financial Statements for
more information regarding our rights offering and indebtedness.
These actions should allow us to be able to satisfy its long-term debt and other liquidity
requirements and to comply with our financial loan covenants for the foreseeable future. However,
if operating results worsen we may eventually be unable to comply with the covenants governing our
indebtedness; which may require waivers of covenant compliance, amendments to such agreements or
alternative borrowing arrangements. There is no assurance that the senior lenders would consent to
such an amendment or waiver in the event of noncompliance; or that such consent would not be
conditioned upon the receipt of a cash payment, revised principal payout terms, increased interest
rates, or restrictions in the expansion of the credit facilities. Nor is there any assurance that
senior lenders would not exercise rights that would be available to them, including, among other
things, demanding payment of outstanding borrowings.
As of September 30, 2010, our required principal and other obligations payments (including
Bison Capitals put option) for the twelve months ending September 30, 2011 and the subsequent
three twelve-month periods are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending September 30, |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
ANZ (a) |
|
$ |
24,219 |
|
|
$ |
55,012 |
|
|
$ |
636 |
|
|
$ |
619 |
|
Bison Capital subordinated notes |
|
|
5,500 |
|
|
|
|
|
|
|
16,236 |
|
|
|
|
|
Bison Capital put option |
|
|
12,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
PNC Credit Facility (b) |
|
|
|
|
|
|
|
|
|
|
72,511 |
|
|
|
|
|
Laminar Note (c) |
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
Other |
|
|
82 |
|
|
|
80 |
|
|
|
72 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,651 |
|
|
$ |
55,092 |
|
|
$ |
104,455 |
|
|
$ |
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the overdraft facilities totaling $4,183 as due within the next twelve months.
These should continually roll over and would be fully repaid at the maturity of the ANZ credit
facility in September 2012. |
|
(b) |
|
Scheduled to mature in January 2013. |
|
(c) |
|
Scheduled to mature in July 2013. |
As reflected above, unless conditions significantly change, a company-wide capital
restructuring will be required some time before or during our fiscal year ending June 30, 2013, as
most of the outstanding indebtedness matures during this period. In the foreseeable future,
however, we have three principal objectives with respect to our liquidity:
1. Reduce overall leverage in each operating entity by minimizing capital expenditures and
using operating cash flow to pay interest and reduce debt.
2. Operate the businesses to meet all loan covenant requirements.
3. Generate sufficient capital, either through operations or external sources, including debt
or equity, to meet loan maturities and the potential payment of the Bison Capital put option.
As a part of achieving these objectives, and depending on our operating performance, we may
require external financing in the foreseeable future to pay the $5.5 million due Bison Capital in
July 2011 and the Bison Capital put option exercisable in September 2011. This put option could be
paid, with Bison Capitals approval, by a combination of cash and common stock. While we believe
such external financing could be derived from various sources, including private individual or
institutional investors, there can be no assurance that we will be successful in raising the
required capital under favorable terms and conditions, if at all.
We currently do not pay a dividend on our common stock and do not intend on doing so in the
foreseeable future.
Cash Flow for QE FY 2011 Compared to QE FY 2010
Our leasing business is capital intensive, and we acquire leasing assets before they generate
revenues, cash flow and earnings. These leasing assets have very long useful lives and require
relatively minimal maintenance expenditures. Most of the capital we deploy into our leasing
business historically has been used to expand our operations geographically, to increase the number
of units available for lease at our retail locations and to add to the breadth of our product mix.
Our operations have generated annual cash flow that exceeds our reported earnings, which would
include, even in profitable periods, the deferral of income taxes caused by accelerated
depreciation that is used for tax accounting.
25
As we discussed above, our principal source of capital for operations consists of funds
available from the senior secured credit facility with ANZ and the PNC Credit Facility. We also
finance a smaller portion of capital requirements through finance leases and lease-purchase
contracts, have a $1.0 million line of credit with Union Bank and have
outstanding senior subordinated notes with Bison Capital and SPV. Supplemental information
pertaining to our combined sources and uses of cash is presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
5,720 |
|
|
$ |
3,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
$ |
(834 |
) |
|
$ |
(1,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
$ |
(8,153 |
) |
|
$ |
(6,727 |
) |
|
|
|
|
|
|
|
Operating activities. Our operations provided net cash flow of $3.7 million during QE FY 2011,
a decrease of $2.0 million from the $5.7 million provided during QE FY 2010. This was primarily
because cash flow from the management of operating assets and liabilities was $2.8 million less in
QE FY 2011 from QE FY 2010 due to increased inventory levels in the Asia-Pacific area, offset
somewhat by increased net income to $1.2 million in QE FY 2011from $0.6 million in QE FY 2010. In
both QE FY 2011 and QE FY 2010, operating cash flow was enhanced by over $5.0 million for non-cash
adjustments of depreciation and amortization on fixed and intangible assets; and was offset
somewhat for reductions of unrealized foreign exchange gains totaling $3.3 million and $2.3
million, respectively. Historically, our cash provided by operating activities is also enhanced by
the deferral of most income taxes due to the rapid tax depreciation rate of our assets and our
federal and state net operating loss carryforwards.
Investing Activities. Net cash used by investing activities was $1.4 million during QE FY
2011, as compared to $0.8 million used during QE FY 2010. Purchases of property, plant and
equipment, or rolling stock, were approximately $0.7 million in QE FY 2011 and $0.3 million in QE
FY 2010; and net capital expenditures of lease fleet (purchases, net of proceeds from sales of
lease fleet) were under $1.0 million during both periods. In the current economic environment, we
have been minimizing our capital expenditures, particularly in the United States, to reduce our
overall leverage and anticipate our near term investing activities will be primarily focused on
acquiring (a) specific types of units that are not in our fleet and are placed on-rent, (b)
technology and communication improvements for our telephone and computer systems and (c) delivery
equipment whereby we would derive improved customer service levels and cost savings. The amount of
cash that we use during any period in investing activities is almost entirely within managements
discretion. Other than a preferred supply agreement, which requires us to purchase up to 5,000
containers if offered to us, and the put and call options pertaining to Bison Capitals minority
interest of 13.8% in GFN U.S. (see Note 8 of Notes to Condensed Consolidated Financial Statements),
we have no significant long-term contracts or other arrangements pursuant to which we may be
required to purchase at a certain price or a minimum amount of goods or services.
Financing Activities. Net cash used by financing activities was $6.7 million during QE FY
2011, as compared to $8.2 million provided during QE FY 2010. In QE FY 2011, we reduced our
outstanding borrowings by $5.4 million, as compared to $7.9 million in QE FY 2010, and incurred
deferred financing costs of $1.3 million during the refinancing at Pac-Van in July 2010 (see Note 4
of Notes to Condensed Consolidated Financial Statements). Since the second half of our fiscal year
ended June 30, 2009, we have made debt reduction a principal objective.
Asset Management
Receivables and inventories (including foreign translation effect) were $24.3 million and
$23.5 million at September 30, 2010 and $25.7 million and $19.1 million at June 30, 2010,
respectively. Inventory levels have increased at September 30, 2010 from June 30, 2010, due
primarily to the improving economy in the Asia-Pacific area; but effective asset management remains
a significant focus, as we strive to continue to apply appropriate credit and collection controls
and reduce inventory levels to maintain and enhance cash flow and profitability. At September 30,
2010, days sales outstanding (DSO) in trade receivables were 46 days and 48 days for Royal Wolf
and Pac-Van, as compared to 43 days and 53 days at June 30, 2010, respectively.
The net book value of our total lease fleet increased (including foreign translation effect)
from $188.4 million at June 30, 2010 to $198.9 million at September 30, 2010. At September 30,
2010, we had 38,219 units (15,854 units in retail operations in Australia, 6,769 units in national
account group operations in Australia, 4,814 units in New Zealand, which are considered retail; and
10,782 units in the United States) in our lease fleet, as compared 37,862 units (15,945 units in
retail operations in Australia, 6,444 units in national account group operations in Australia,
4,538 units in New Zealand, which are considered retail; and 10,935 units in the United States) at
June 30, 2010. At those dates, 30,533 units (13,566 units in retail operations in Australia, 4,822
units in national account group operations in Australia, 4,361 units in New Zealand, which are
considered retail; and 7,784 units in the United States) and 29,735 units (12,997 units in retail
operations in Australia, 4,875 units in national account group operations in Australia, 3,954 units
in New Zealand, which are considered retail; and 7,909 units in the United States) were on lease,
respectively.
26
In the United States, the lease fleet was comprised of 3,659 containers, 6,136 mobile offices
and 987 modular units at September 30, 2010; and 3,800 containers, 6,144 mobile offices and 991
modular units at June 30, 2010. At those dates, in the United States, units on lease were
comprised of 2,997 containers, 4,079 mobile offices and 708 modular units; and 3,205 containers,
3,973 mobile offices and 731 modular units, respectively.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet transactions, arrangements, obligations or other
relationships with unconsolidated entities or others that are reasonably likely to have a material
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources.
Seasonality
Although demand from certain customer segments can be seasonal, our operations as a whole are
not seasonal to any significant extent. We experience a reduction in sales volumes at Royal Wolf
during Australias summer holiday break from mid-December to the end of January, followed by
February being a short working day month. However, this reduction in sales typically is
counterbalanced by the increased lease revenues derived from the removals or moving and storage
industry, which experiences its seasonal peak of personnel relocations during this same summer
holiday break. Demand from some of Pac-Vans customers can be seasonal, such as in the
construction industry, which tends to increase leasing activity in the first and fourth quarters;
while customers in the retail industry tend to lease more units in the second quarter.
Impact of Inflation
We believe that inflation has not had a material effect on our business. However, during
periods of rising prices and, in particular when the prices increase rapidly or to levels
significantly higher than normal, we may incur significant increases in our operating costs and may
not be able to pass price increases through to our customers in a timely manner, which could harm
our future results of operations.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we
re-evaluate all of our estimates. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may materially differ from these estimates
under different assumptions or conditions as additional information becomes available in future
periods. We believe the following are the more significant judgments and estimates used in the
preparation of our consolidated financial statements.
We are required to estimate the collectability of our trade receivables. Accordingly, we
maintain allowances for doubtful accounts for estimated losses that may result from the inability
of our customers to make required payments. On a recurring basis, we evaluate a variety of factors
in assessing the ultimate realization of these receivables, including the current credit-worthiness
of our customers, days outstanding trends, a review of historical collection results and a review
of specific past due receivables. If the financial conditions of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be
required, resulting in decreased net income. To date, uncollectible accounts have been within the
range of our expectations.
We lease and sell storage container products, modular buildings and mobile offices to our
customers. Leases to customers generally qualify as operating leases unless there is a bargain
purchase option at the end of the lease term. Revenue is recognized as earned in accordance with
the lease terms established by the lease agreements and when collectability is reasonably assured.
Revenue is recognized as earned in accordance with the lease terms established by the lease
agreements and when collectability is reasonably assured. Revenue from sales of equipment is
recognized upon delivery and when collectability is reasonably assured.
We have a fleet of storage containers, mobile offices, modular buildings and steps that we
lease to customers under operating lease agreements with varying terms. The lease fleet (or lease
or rental equipment) is recorded at cost and depreciated on the straight-line basis over the
estimated useful life (5 20 years), after the date the units are put in service, and are
depreciated down to their estimated residual values (up to 70% of cost). In our opinion, estimated
residual values are at or below net realizable values. We periodically review these depreciation
policies in light of various factors, including the practices of the larger competitors in the
industry, and our own historical experience.
27
For the issuances of stock options, we follow the fair value provisions of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718,
Compensation Stock Compensation. FASB ASC Topic 718 requires recognition of employee share-based
compensation expense in the statements of income over the vesting period based on the fair value of
the stock option at the grant date. The pricing model we use for determining fair values of the
purchase option is the Black-Scholes Pricing Model. Valuations derived from this model are subject
to ongoing internal and external verification and review. The model uses market-sourced inputs such
as interest rates, market prices and volatilities. Selection of these inputs involves managements
judgment and may impact net income. In particular, prior to July 1, 2009, we used volatility rates
based upon a sample of comparable companies our industry and we now use a volatility rate based on
the performance of our common stock; which yields a higher rate. In addition we use a risk-free
interest rate, which is the rate on U.S. Treasury instruments, for a security with a maturity that
approximates the estimated remaining expected term of the stock option.
We account for goodwill in accordance with FASB ASC Topic 350, Intangibles Goodwill and
Other. FASB ASC Topic 350 prohibits the amortization of goodwill and intangible assets with
indefinite lives and requires these assets be reviewed for impairment at least annually. We
operate two reportable and operating segments (Pac-Van and Royal Wolf). All of our goodwill was
allocated between these two reporting units. We perform an annual impairment test on goodwill at
June 30 using the two-step process required under FASB ASC Topic 350. The first step is a screen
for potential impairment, while the second step measures the amount of the impairment, if any.
At June 30, 2010, we performed the first step of the two-step impairment test and compared the
fair value of each reporting unit to its carrying value. In assessing the fair value of the
reporting units, we considered both the market approach and the income approach. Under the market
approach, the fair value of the reporting unit was determined on a weighted-average range of
multiples to adjusted EBITDA. Under the income approach, the fair value of the reporting unit was
based on the present value of estimated cash flows. The income approach was dependent on a number
of significant management assumptions, including estimated future revenue growth rates, gross
margins on sales, operating margins, capital expenditures and discount rates. Each approach was
given equal weight in arriving at the fair value of the reporting unit. If the carrying value of
the net assets of any reporting unit would have exceeded its fair value, a step-two impairment test
would have been performed. In a step-two test, we would be required to determine the implied fair
value of the goodwill and compare it to the carrying value of the goodwill. Generally, this would
involve allocating the fair value of the reporting unit to the respective assets and liabilities
(as if the reporting unit had been acquired in separate and individual business combination and the
fair value was the price paid to acquire it) with the excess of the fair value of the reporting
unit over the amounts assigned to their respective assets and liabilities being the implied fair
value of goodwill. It was determined that the fair value of the Royal Wolf reporting unit exceeded
the carrying values of the net assets at June 30, 2010. However, the fair value of the Pac-Van
reporting unit was less than the carrying values the net assets at June 30, 2010 and, therefore, we
performed a step-two impairment test for Pac-Van. In the step-two test for Pac-Van, the implied
value of its goodwill was less than the carrying value of goodwill, resulting in an impairment
charge of $7,633,000 at June 30, 2010. The Company had not recorded an impairment charge to
goodwill prior to June 30, 2010.
We would also consider performing impairment tests during an interim reporting period in which
significant events or changes in circumstances indicate that a permanent impairment may have
occurred. Some factors we consider important which could trigger such an impairment review include
(1) significant underperformance relative to historical, expected or projected future operating
results; (2) significant changes in the manner of our use of the acquired assets or the strategy
for our overall business; (3) significant changes during the period in our market capitalization
relative to net book value; and (4) significant negative industry or general economic trends. At
September 30, 2010, there were no significant changes in events or circumstances that were not
existing or considered since the last annual test at Royal Wolf or Pac-Van. However, if Pac-Vans
operating results worsen for the remainder of the current fiscal year, a potential step-one
impairment would most likely exist again at year-end. The range of the potential impairment would
vary depending on the range of valuation assumptions used and could be significant.
Intangible assets include those with indefinite (trademark and trade name), and finite
(primarily customer base and lists, non-compete agreements and deferred financing costs) useful
lives. Customer base and lists and non-compete agreements are amortized on the straight-line basis
over the expected period of benefit which range from one to ten years. Costs to obtaining long-term
financing are deferred and amortized over the term of the related debt using the straight-line
method. Amortizing the deferred financing costs using the straight-line method does not produce
significantly different results than that of the effective interest method. We review intangibles
(those assets resulting from acquisitions) at least annually for impairment or when events or
circumstances indicate these assets might be impaired. We test impairment using historical cash
flows and other relevant facts and circumstances as the primary basis for its estimates of future
cash flows. This process requires the use of estimates and assumptions, which are subject to a high
degree of judgment.
28
We determined that, as a result of changes in market conditions and other factors in the U.S.,
an impairment charge to the customer base acquired in the Pac-Van acquisition was required to be
recorded at both June 30, 2009 and June 30, 2010; and, as of June 30, 2010, to the trade name. To
be more in line with the expected revenue stream of the customer base, we recorded the June 30,
2009 impairment charge of $689,000 by revising the method of amortization from a straight-line to
an accelerated basis. The June 30, 2010 impairment charge to the customer base and trade name of
$329,000 and $190,000, respectively, was recorded pursuant to an evaluation, which determined that
the respective fair values were less than the carrying values. These impairment charges were
included as a part of depreciation and amortization.
In preparing our consolidated financial statements, we recognize income taxes in each of the
jurisdictions in which we operate. For each jurisdiction, we estimate the actual amount of taxes
currently payable or receivable as well as deferred tax assets and liabilities attributable to
temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance would be provided for those deferred tax assets for which it
is more likely than not that the related benefits will not be realized. In determining the amount
of the valuation allowance, we consider estimated future taxable income as well as feasible tax
planning strategies in each jurisdiction. If we determine that we will not realize all or a portion
of our deferred tax assets, we would increase our valuation allowance with a charge to income tax
expense or offset goodwill if the deferred tax asset was acquired in a business combination.
Conversely, if we determine that we will ultimately be able to realize all or a portion of the
related benefits for which a valuation allowance has been provided, all or a portion of the related
valuation allowance would be reduced with a credit to income tax expense except if the valuation
allowance was created in conjunction with a tax asset in a business combination.
Reference is made to Note 2 of Notes to Condensed Consolidated Financial Statements for a
further discussion of our significant accounting policies.
Impact of Recently Issued Accounting Pronouncements
Reference is made to Note 2 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements that could potentially impact us.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign exchanges and
other market-driven rates or prices. Exposure to interest rates and currency risks arises in the
normal course of our business and we may use derivative financial instruments to hedge exposure to
fluctuations in foreign exchange rates and interest rates. We believe we have no material market
risks to our operations, financial position or liquidity as a result of derivative activities,
including forward-exchange contracts.
Reference is made to Note 5 of Notes to Condensed Consolidated Financial Statements for a
discussion of financial instruments.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934,
as amended (Exchange Act), is recorded, processed, summarized and reported within the time
periods specified in accordance with SEC guidelines and that such information is
communicated to management, including our Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure based on the definition of disclosure
controls and procedures in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and
evaluating our disclosure controls and procedures, we recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and that our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls and procedures in
reaching that level of reasonable assurance.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure
controls and procedures, as required by Exchange Act Rule 13a-15(b), as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective at the reasonable
assurance level. There were no changes in our internal control over financial reporting during
the quarter ended September 30, 2010 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
In evaluating our forward-looking statements, readers should specifically consider risk
factors that may cause actual results to vary from those contained in the forward-looking
statements. Risk factors associated with our business are included, but not limited to, our Annual
Report on Form 10-K for the year ended June 30, 2010, as filed with the SEC on September 24, 2010
(Annual Report). There have been no material changes to the risk factors disclosed in our Annual
Report and other subsequent filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None that have not been previously reported.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index Attached.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Date: November 12, 2010 |
|
GENERAL FINANCE CORPORATION |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Ronald F. Valenta
Ronald F. Valenta
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Charles E. Barrantes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles E. Barrantes |
|
|
|
|
|
|
Chief Financial Officer |
|
|
31
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
|
|
10.1 |
|
|
Amendment and Release Agreement dated June 30, 2010 among GFN Australasia
Finance Pty Ltd and Bison Capital Australia L.P. (incorporated by reference to
Exhibit 10.1 of Registrants Form 8-K filed July 2, 2010) |
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10.2 |
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Revolving Credit and Security Agreement dated July 16, 2010 among PNC, Wells
Fargo, Union Bank, GFNA, Pac-Van and the Pac-Van Asset Trust (incorporated by
reference to Exhibit 10.1 of Registrants Form 8-K filed July 22, 2010) |
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10.3 |
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Guaranty and Suretyship Agreement dated July 16, 2010 among GFNA (incorporated
by reference to Exhibit 10.2 of Registrants Form 8-K filed July 22, 2010) |
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10.4 |
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Limited Guaranty dated July 16, 2010 by Ronald F. Valenta and Lydia D. Valenta
(incorporated by reference to Exhibit 10.3 of Registrants Form 8-K filed July
22, 2010) |
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10.5 |
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Pledge Agreement dated July 16, 2010 by GFNA (incorporated by reference to
Exhibit 10.4 of Registrants Form 8-K filed July 22, 2010) |
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10.6 |
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Patent, Trademark and Copyright Security Agreement dated July 16, 2010 by
Pac-Van, GFNA for the benefit of PNC Bank, National Association (PNC), as
administrative and collateral agent for the Lenders (incorporated by reference
to Exhibit 10.5 of Registrants Form 8-K filed July 22, 2010) |
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10.7 |
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Pledge and Security Agreement dated July 16, 2010 by Ronald F. Valenta and Lydia
D. Valenta for the benefit of PNC, as administrative and collateral agent for
the Lenders (incorporated by reference to Exhibit 10.6 of Registrants Form 8-K
filed July 22, 2010) |
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10.8 |
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Investment Agreement dated July 16, 2010 among GFN, Laminar Direct Capital,
L.L.C., as administrative agent and the other lenders from time to time party
hereto (Laminar) (incorporated by reference to Exhibit 10.7 of Registrants
Form 8-K filed July 22, 2010) |
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10.9 |
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Continuing Unconditional Guaranty dated July 16, 2010 by GFNA and Pac-Van for
the benefit of Laminar (incorporated by reference to Exhibit 10.8 of
Registrants Form 8-K filed July 22, 2010) |
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10.10 |
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Subordination and Intercreditor Agreement dated July 16, 2010 among Pac-Van,
GFNA, PNC and Laminar (incorporated by reference to Exhibit 10.9 of Registrants
Form 8-K filed July 22, 2010) |
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10.11 |
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Master Restructure and Debt Exchange Agreement dated July 16, 2010 among GFNA,
Pac-Van, Laminar and SPV Capital Funding, L.L.C., a Delaware limited liability
company (SPV) (incorporated by reference to Exhibit 10.10 of Registrants Form
8-K filed July 22, 2010) |
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10.12 |
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Subordination Agreement dated July 16, 2010 among Laminar, Pac-Van, GFNA and PNC
(incorporated by reference to Registrants Form 8-K filed July 22, 2010) |
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31.1 |
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Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) |
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31.2 |
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Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) |
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32.1 |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 |
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32.2 |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 |
32