Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the
quarterly period ended December 31, 2007
OR
o
|
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
GENERAL
FINANCE CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
|
32-0163571
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
39
East Union Street
Pasadena,
CA 91103
(Address
of Principal Executive Offices)
(626)
584-9722
(Registrant’s
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:
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
|
Accelerated
filer o
|
Non-accelerated
filer
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
State
the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date: 9,690,099 shares issued and outstanding as
of
January 31, 2008.
GENERAL
FINANCE CORPORATION
INDEX
TO FORM 10-Q
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
3
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
20
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
29
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
29
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
30
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
30
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
30
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
|
30
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
30
|
|
|
|
|
|
Item
5.
|
Other
Information
|
|
30
|
|
|
|
|
|
Item
6.
|
Exhibits
|
|
30
|
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)
|
|
Predecessor
|
|
Successor
(Note 1)
|
|
|
June
30,
|
|
June
30,
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Assets |
|
|
|
|
|
|
|
Cash
and cash equivalents, including $68,218 held in trust account at
June 30,
2007 (successor)
|
|
$
|
886
|
|
$
|
68,277
|
|
$
|
1,999
|
|
Trade
and other receivables, net of allowance for doubtful accounts of
$237
and $206 at June 30, 2007 and December 31, 2007,
respectively
|
|
|
13,322
|
|
|
—
|
|
|
18,649
|
|
Inventories
|
|
|
5,472
|
|
|
—
|
|
|
16,795
|
|
Prepaid
expenses
|
|
|
—
|
|
|
111
|
|
|
48
|
|
Total
current assets
|
|
|
19,680
|
|
|
68,388
|
|
|
37,491
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
receivables
|
|
|
1,364
|
|
|
—
|
|
|
1,565
|
|
Property,
plant and equipment, net
|
|
|
2,737
|
|
|
2
|
|
|
4,375
|
|
Container
for lease fleet, net
|
|
|
40,928
|
|
|
—
|
|
|
66,469
|
|
Intangible
assets, net
|
|
|
4,079
|
|
|
—
|
|
|
55,307
|
|
Deferred
tax assets
|
|
|
—
|
|
|
132
|
|
|
—
|
|
Other
assets (including $1,548 of deferred acquisition costs at June 30,
2007)
|
|
|
—
|
|
|
2,556
|
|
|
3
|
|
Total
non-current assets
|
|
|
49,108
|
|
|
2,690
|
|
|
127,719
|
|
Total
assets
|
|
$
|
68,788
|
|
$
|
71,078
|
|
$
|
165,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Trade
payables and accrued liabilities
|
|
$
|
8,641
|
|
$
|
893
|
|
$
|
19,919
|
|
Current
portion of long-term debt and obligations, including borrowings from
related party of $2,350 at June 30, 2007 (successor)
|
|
|
10,359
|
|
|
2,350
|
|
|
4,149
|
|
Income
tax payable
|
|
|
245
|
|
|
177
|
|
|
132
|
|
Employee
benefits
|
|
|
1,614
|
|
|
12
|
|
|
1,064
|
|
Deferred
underwriting fees
|
|
|
—
|
|
|
1,380
|
|
|
—
|
|
Total
current liabilities
|
|
|
20,859
|
|
|
4,812
|
|
|
25,264
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and obligations, net of current portion
|
|
|
33,811
|
|
|
—
|
|
|
65,085
|
|
Deferred
tax liabilities
|
|
|
881
|
|
|
—
|
|
|
101
|
|
Employee
benefits and other non-current liabilities
|
|
|
197
|
|
|
—
|
|
|
1,544
|
|
Common
stock, subject to possible conversion
|
|
|
—
|
|
|
13,339
|
|
|
—
|
|
Total
non-current liabilities
|
|
|
34,889
|
|
|
13,339
|
|
|
66,730
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
—
|
|
|
—
|
|
|
8,433
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.0001 par value: 1,000,000 shares authorized; no shares
outstanding (successor)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common
stock, $.0001 par value: 100,000,000 shares authorized; 10,500,000
shares
and 9,690,099 shares outstanding at June 30, 2007 and December 31,
2007,
respectively (successor)
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Class
D and common stock (predecessor)
|
|
|
12,187
|
|
|
—
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
—
|
|
|
51,777
|
|
|
60,065
|
|
Accumulated
other comprehensive income
|
|
|
862
|
|
|
—
|
|
|
849
|
|
Retained
earnings (accumulated deficit)
|
|
|
(9
|
)
|
|
1,149
|
|
|
3,868
|
|
|
|
|
13,040
|
|
|
52,927
|
|
|
64,783
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
68,788
|
|
$
|
71,078
|
|
$
|
165,210
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(In
thousands, except share and per share data)
(Unaudited)
|
|
Predecessor
|
|
Successor
(Note 1)
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Sales
of containers
|
|
$
|
12,682
|
|
$
|
22,198
|
|
Leasing
of containers
|
|
|
5,358
|
|
|
7,654
|
|
|
|
|
18,040
|
|
|
29,852
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
10,605
|
|
|
18,454
|
|
Leasing,
selling and general expenses
|
|
|
7,390
|
|
|
5,897
|
|
Depreciation
and amortization
|
|
|
818
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(773
|
)
|
|
3,256
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
37
|
|
|
128
|
|
Interest expense
|
|
|
(1,044
|
)
|
|
(1,585
|
)
|
Foreign
currency exchange gain and other
|
|
|
49
|
|
|
61
|
|
|
|
|
(958
|
)
|
|
(1,396
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes and minority
interest
|
|
|
(1,731
|
)
|
|
1,860
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
468
|
|
|
606
|
|
Minority
interest
|
|
|
—
|
|
|
57
|
|
Net
income (loss)
|
|
$
|
(2,199
|
)
|
$
|
1,197
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
0.12
|
|
Diluted
|
|
|
|
|
|
0.09
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
9,690,099
|
|
Diluted
|
|
|
|
|
|
13,167,347
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(In
thousands, except share and per share data)
(Unaudited)
|
|
Predecessor
|
|
Successor
(Note
1)
|
|
|
|
Six
Months
|
|
Period
from
|
|
Six
Months
|
|
|
|
Ended
|
|
July
1 to
|
|
Ended
|
|
|
|
December
31,
|
|
September
13,
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales
of containers
|
|
$
|
23,308
|
|
$
|
10,944
|
|
$
|
25,476
|
|
Leasing
of containers
|
|
|
10,234
|
|
|
4,915
|
|
|
8,775
|
|
|
|
|
33,542
|
|
|
15,859
|
|
|
34,251
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
20,381
|
|
|
9,466
|
|
|
21,401
|
|
Leasing,
selling and general expenses
|
|
|
11,440
|
|
|
4,210
|
|
|
7,122
|
|
Depreciation
and amortization
|
|
|
1,524
|
|
|
653
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
197
|
|
|
1,530
|
|
|
3,145
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39
|
|
|
14
|
|
|
1,103
|
|
Interest expense
|
|
|
(1,815
|
)
|
|
(947
|
)
|
|
(1,959
|
)
|
Foreign
currency exchange gain (loss) and other
|
|
|
47
|
|
|
(129
|
)
|
|
2,105
|
|
|
|
|
(1,729
|
)
|
|
(1,062
|
)
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes and minority
interest
|
|
|
(1,532
|
)
|
|
468
|
|
|
4,394
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
617
|
|
|
180
|
|
|
1,461
|
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
214
|
|
Net
income
|
|
$
|
(2,149
|
)
|
$
|
288
|
|
$
|
2,719
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
$
|
0.27
|
|
Diluted
|
|
|
|
|
|
|
|
|
0.20
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
10,020,222
|
|
Diluted
|
|
|
|
|
|
|
|
|
13,473,160
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statement of Stockholders’ Equity
(In
thousands, except share and per share data)
(Unaudited)
Successor
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-In
|
|
Other
Comprehensive
|
|
Retained
|
|
Total
Stockholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2007
|
|
|
10,500,000
|
|
$
|
1
|
|
$
|
51,777
|
|
$
|
—
|
|
$
|
1,149
|
|
$
|
52,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of common stock subject to possible conversion
|
|
|
—
|
|
|
—
|
|
|
12,858
|
|
|
—
|
|
|
—
|
|
|
12,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of common stock into cash
|
|
|
(809,901
|
)
|
|
—
|
|
|
(6,042
|
)
|
|
—
|
|
|
—
|
|
|
(6,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants
|
|
|
—
|
|
|
—
|
|
|
1,309
|
|
|
—
|
|
|
—
|
|
|
1,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
—
|
|
|
—
|
|
|
76
|
|
|
—
|
|
|
—
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,719
|
|
|
2,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
849
|
|
|
—
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
9,690,099
|
|
$
|
1
|
|
$
|
60,065
|
|
$
|
849
|
|
$
|
3,868
|
|
$
|
64,783
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(Unaudited)
|
|
|
Predecessor
|
|
|
Successor
(Note
1)
|
|
|
|
|
Six
Months
|
|
|
Period
from
|
|
|
Six
Months
|
|
|
|
|
Ended
|
|
|
July
1 to
|
|
|
Ended
|
|
|
|
|
December
31,
|
|
|
September
13,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Net
cash provided (used) by operating activities
|
|
$
|
4,385
|
|
$
|
4,294
|
|
$
|
(6,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
41
|
|
|
28
|
|
|
16
|
|
Acquisitions
(including deferred financing costs ), net of
cash
acquired
|
|
|
—
|
|
|
—
|
|
|
(70,953
|
)
|
Purchases of
property, plant and equipment
|
|
|
(337
|
)
|
|
—
|
|
|
(114
|
)
|
Purchases
of container lease fleet
|
|
|
(9,151
|
)
|
|
(3,106
|
)
|
|
(3,806
|
)
|
Purchases
of intangible assets
|
|
|
(449
|
)
|
|
—
|
|
|
(15
|
)
|
Payment
of deferred purchase consideration
|
|
|
(151
|
)
|
|
—
|
|
|
—
|
|
Net
cash used by investing activities
|
|
|
(10,047
|
)
|
|
(3,078
|
)
|
|
(74,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Leasing activities
|
|
|
(216
|
)
|
|
(7,921
|
)
|
|
61
|
|
Proceeds
from long-term borrowings
|
|
|
6,670
|
|
|
1,124
|
|
|
14,446
|
|
Proceeds
from issuances of capital
|
|
|
—
|
|
|
4,990
|
|
|
—
|
|
Payments
to converting stockholders; including interest income, net
|
|
|
—
|
|
|
—
|
|
|
(6,426
|
)
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
8,278
|
|
Repayment
of borrowings from related party
|
|
|
—
|
|
|
—
|
|
|
(2,350
|
)
|
Net
cash provided (used) by financing activities
|
|
|
6,454
|
|
|
(1,807
|
)
|
|
14,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash
|
|
|
792
|
|
|
(591
|
)
|
|
(67,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
567
|
|
|
886
|
|
|
68,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(875
|
)
|
|
(5
|
)
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
484
|
|
$
|
290
|
|
$
|
1,999
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
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 2005 to effect a
business combination with one or more operating businesses. From inception
through September 13, 2007, GFN had no business or operations. 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 Australasia Holdings Pty Ltd., an
Australian corporation (“GFN Holdings”); GFN Australasia Finance Pty Ltd, an
Australian corporation (“GFN Finance”); and, as of September 13, 2007, RWA
Holdings Pty Limited (“RWA”), an Australian corporation, and its subsidiaries
(collectively, “Royal Wolf”). In September 2007, the Company changed
its fiscal year to June 30 from December 31.
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 U.S. dollar to $0.8407
Australian dollar realized in connection with payments made upon completion
of the acquisition, the purchase price for RWA shares was $64.3 million,
including deposits of $1,005,000 previously paid by us in connection with the
acquisition. The Company paid the purchase price, less the deposits,
by a combination of cash in the amount of $44.7 million plus the issuance to
Bison Capital Australia, L.P., (“Bison Capital”), one of the sellers, of shares
of common stock of GFN U.S., constituting 13.8% of the outstanding capital
stock
of GFN U.S. following the issuance. 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 on GFN U.S. GFN U.S. through
its indirect subsidiary GFN Finance owns all of the outstanding capital stock
of
Royal Wolf.
The
Company now leases and sells portable storage containers, portable container
buildings and freight containers in Australia. All references to events or
activities (other than equity-related) which occurred prior to the completion
of
the acquisition on September 13, 2007 (September 14 in Australia) relate to
Royal Wolf, as the predecessor company (the “Predecessor”). All references to
events or activities (other than equity-related) which occurred after the
completion of the acquisition on September 13, 2007 (September 14 in Australia)
relate to the Company, as the successor company (the
“Successor”).
The
total
purchase price, including the Company’s transaction costs of approximately $1.7
million, a non-compete agreement of $2.5 million (prior to tax
benefit) and deferred financing costs of $1.2 million; has been allocated
to tangible and intangible assets acquired and liabilities assumed based on
their estimated fair market values as of September 13, 2007, as follows (in
thousands):
|
|
September
13, 2007
|
|
Fair
value of the net tangible assets acquired and liabilities
assumed:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
290
|
|
$
|
|
|
Trade
and other receivables
|
|
|
11,930
|
|
|
|
|
Inventories
(primarily containers)
|
|
|
9,224
|
|
|
|
|
Lease
receivables
|
|
|
1,452
|
|
|
|
|
Property,
plant and equipment
|
|
|
4,345
|
|
|
|
|
Container
for lease fleet
|
|
|
51,362
|
|
|
|
|
Other
assets
|
|
|
586
|
|
|
|
|
Trade
and other payables
|
|
|
(14,991
|
)
|
|
|
|
Income
tax payable
|
|
|
(178
|
)
|
|
|
|
Other
current liabilities
|
|
|
(974
|
)
|
|
|
|
Long-term
debt and obligations
|
|
|
(37,868
|
)
|
|
|
|
Total
net tangible assets acquired and liabilities assumed
|
|
|
|
|
$
|
25,178
|
|
|
|
|
|
|
|
|
|
Fair
value of intangible assets acquired:
|
|
|
|
|
|
|
|
Customer
lists
|
|
|
21,722
|
|
|
|
|
Non-compete
agreement
|
|
|
3,139
|
|
|
|
|
Software
and other (including deferred financing costs of $1,187)
|
|
|
1,478
|
|
|
|
|
Goodwill
|
|
|
18,142
|
|
|
|
|
Total
intangible assets acquired
|
|
|
|
|
|
44,481
|
|
Total
purchase consideration
|
|
|
|
|
$
|
69,659
|
|
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
accompanying unaudited condensed consolidated statements of operations of
“Successor” only reflect the operating results of the Company following the date
of acquisition of Royal Wolf and do not reflect the operating results of
Royal Wolf prior to the acquisition. The following pro forma unaudited
information for the three and six months ended December 31, 2006 and for the
six
months ended December 31, 2007 assumes the acquisition of Royal Wolf occurred
on
October 1, 2006, July 1, 2006 and July 1, 2007, respectively (in
thousands):
|
|
|
Three
months ended
December
31,
|
|
|
Six
months ended
December
31,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
Revenues
|
|
$
|
18,040
|
|
$
|
33,542
|
|
$
|
50,110
|
|
Net
income (loss)
|
|
$
|
(1,308
|
)
|
$
|
(1,630
|
)
|
$
|
2,066
|
|
Pro
forma net income (loss) per share -
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
$
|
(0.17
|
)
|
$
|
0.21
|
|
Diluted
|
|
|
(0.14
|
)
|
|
(0.17
|
)
|
|
0.15
|
|
The
pro
forma results are not necessarily indicative of the results that may have
actually occurred had the acquisition taken place on the dates noted, or
the future financial position or operating results of the Company or Royal
Wolf. The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable. The pro forma adjustments
include adjustments for reduced interest income and increased interest expense,
as well as increased depreciation and amortization expense as a result of the
application of the purchase method of accounting based on the fair values set
forth above.
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 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 year ending June 30,
2008.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes thereto of
the
Company and Royal Wolf, which are included in the Company’s Transition
Report on Form 10-K for the six months ended June 30, 2007 filed with the
Securities and Exchange Commission (SEC).
Certain
reclassifications have been made to conform to the current period
presentation.
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
Company’s functional currency for its operations in Australia is the
Australian (“AUS”) dollar. All adjustments resulting from the translation of the
accompanying consolidated financial statements from the functional currency
into
the United States (“U.S.”) dollar reporting currency are recorded as a component
of stockholders’ equity in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 52,
Foreign Currency Translation
. 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 period. 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.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Cash
Equivalents
The
Company considers highly liquid investments with maturities of three months
or
less, when purchased, to be cash equivalents.
Derivative
Financial Instruments
Derivative
financial instruments consist of warrants issued as part of the Initial Public
Offering (“IPO”), a purchase option that was sold to the representative of the
underwriters (Note 3) and warrants issued in connection with a senior
subordinated promissory note with Bison Capital (Note 5). Based on Emerging
Issues Task Force Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the
issuance of the warrants and the sale of the purchase option were reported
in
stockholders’ equity and, accordingly, there is no impact on the Company’s
financial position or results of operations; except for the $100 in proceeds
from the sale of the purchase option and the discounting of the senior
subordinated promissory note for the fair market value of the warrants issued
to
Bison Capital. Subsequent changes in the fair value will not be recognized
as
long as the warrants and purchase option continue to be classified as equity
instruments. At the date of issuance, the Company determined the purchase option
and the warrants issued to Bison Capital had a fair market value of
approximately $641,000 and $1,309,000, respectively, using the Black-Scholes
pricing model.
The
Company may use derivative financial instruments to hedge its exposure to
foreign exchange 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.
Accounting
for Stock Options
For
the
issuances of stock options, the Company follows the fair value provisions of
SFAS No. 123R,
Share-Based Payment
(“No.
123R”). SFAS No. 123R 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.
Property,
Plant and Equipment
Owned
assets
Property,
plant and equipment are stated at cost, less accumulated depreciation and
impairment losses (see below). The cost of self-constructed assets includes
the
cost of materials, direct labor, the initial estimate, where relevant, of the
costs of dismantling and removing the items and restoring the site on which
they
are located, and an appropriate allocation of production overhead, where
applicable.
Capital
leases
Leases
under which the substantially all the risks and benefits incidental to ownership
of the leased item are assumed by the Company are classified as capital leases.
Other leases are classified as operating leases. A lease asset and a lease
liability equal to the present value of the minimum lease payments, or the
fair
value of the leased item, whichever is the lower, are capitalized and recorded
at the inception of the lease. Lease payments are apportioned between the
finance charges and reduction of the lease liability so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance charges
are
charged directly to the statement of operations. Capitalized leased assets
are
depreciated over the shorter of the estimated useful life of the asset or the
lease term.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating
leases
Payments
made under operating leases are expensed on a straight-line basis over the
term
of the lease, except where an alternative basis is more representative of the
pattern of benefits to be derived from the leased property. Where leases have
fixed rate increases, these increases are accrued and amortized over the entire
lease period, yielding a constant periodic expense for the entire term of the
lease.
Depreciation
Depreciation
is charged to the statement of operations on a straight line basis over the
estimated useful lives of each part of an item of property, plant and equipment.
The residual value, the useful life and the depreciation method applied to
an
asset are reassessed at least annually.
Container
for Lease Fleet
The
Company has a lease fleet of shipping containers that it leases to
customers under operating lease agreements with varying terms. Depreciation
is
provided using the straight-line method over the respective unit’s estimated
useful life, after the date the unit is put in service, and are depreciated
down
to their estimated residual values. In the opinion of management, estimated
residual values do not cause carrying values to exceed net realizable value.
The
Company continues to evaluate these depreciation policies as more information
becomes available from other comparable sources and its own historical
experience.
Costs
incurred on lease fleet containers subsequent to initial acquisition are
capitalized when it is probable that future economic benefits in excess of
the
originally assessed performance of the asset will flow to the Company in future
years; otherwise, they are expensed as incurred.
Containers
in the lease fleet are available for sale, and are transferred to inventory
prior to sale. Cost of sales of a container in the lease fleet is recognized
at
the carrying amount at the date of disposal.
Intangible
Assets
Goodwill
All
business combinations are accounted for by applying the purchase method.
Goodwill represents the difference between the cost of the acquisition and
the
fair value of the net identifiable assets acquired. Goodwill is stated at cost
less any accumulated impairment losses.
Other
intangible assets
Other
intangible assets that are acquired by the Company (primarily customer backlog,
which is amortized over 6 to 10 years) are stated at cost less accumulated
amortization and impairment losses.
Subsequent
expenditures
Subsequent
expenditures on capitalized intangible assets are capitalized only when it
increases the future economic benefits of the specific asset to which it
relates. All other expenditures are expensed as incurred.
Amortization
and impairment
Amortization
is charged to the statement of operations on the straight-line basis over the
estimated useful lives of intangible assets unless such lives are indefinite.
Goodwill and intangible assets with an indefinite useful life are systematically
tested for impairment annually at each balance sheet date. Impairment losses,
if
incurred, are recognized in the statement of operations.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Inventories
Inventories
are stated at the lower of cost or market (net realizable value). Net realizable
value is the estimated selling price in the ordinary course of business.
Expenses of marketing, selling and distribution to customers, as well as costs
of completion are estimated and are deducted from the estimated selling price
to
establish net realizable value. Costs are assigned to individual items of stock
on the basis of specific identification and include expenditures incurred in
acquiring the inventories and bringing them to their existing condition and
location. Inventories consist of primarily containers held for sale or lease
and
are comprised of the following (in thousands):
|
|
Predecessor
|
|
Successor
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
4,113
|
|
$
|
12,896
|
|
Work
in progress
|
|
|
1,359
|
|
|
3,899
|
|
|
|
$
|
5,472
|
|
$
|
16,795
|
|
Employee
benefits
Defined
contribution pension plan
Obligations
for contributions to a defined contribution pension plan for Royal
Wolf are recognized as an expense in the statement of operations as
incurred.
Long-term
service benefits
The
Company’s net obligation in respect of long-term service benefits for Royal
Wolf is the amount of future benefit that employees have earned in return
for their service in the current and prior periods. The obligation is calculated
using expected future increases in wage and salary rates including related
costs
and expected settlement dates, and is discounted using the rates attached to
the
Commonwealth of Australia Government bonds at the balance sheet date which
have
maturity dates approximating to the terms of the Company’s
obligations.
Income
Taxes
The
Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes.
Accordingly, 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.
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. (“FIN”) 48,
Accounting for Uncertainty in Income Taxes,
an
interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109 and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Company adopted
the
provisions of FIN 48 on January 1, 2007. FIN 48 contains a two-step approach
to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that
it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement.
The
Company files U.S. Federal tax returns, California franchise tax returns and
Australian tax returns. The Company has identified its U.S. Federal
tax return as its “major” tax jurisdiction. For the U.S. Federal return,
all periods are subject to tax examination by the U.S. Internal Revenue Service
(“IRS”). The Company does not currently have any ongoing tax examinations
with the IRS. The Company believes that its income tax filing
positions and deductions will be sustained on audit and do not anticipate any
adjustments that will result in a material change to its financial
position. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to FIN 48. In addition, the Company did not record a
cumulative effect adjustment related to the adoption of FIN 48 and 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.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company’s policy for recording interest and penalties, if any, associated
with audits will be to record such items as a component of income before
taxes.
Net
Income per Common Share
Basic
net
income per share is computed by dividing net income by the weighted-average
number of shares of common stock outstanding during the periods. Diluted net
income per 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 (see Notes 3 and 9). The following
is
a reconciliation of weighted average shares outstanding used in calculating
net
income per share:
|
|
Quarter
Ended
|
|
Six
Months Ended
|
|
|
|
December
31, 2007
|
|
Basic
|
|
|
9,690,099
|
|
|
10,020,222
|
|
Assumed
exercise of warrants
|
|
|
3,433,003
|
|
|
3,408,761
|
|
Assumed exercise
of stock options
|
|
|
44,245
|
|
|
44,177
|
|
Diluted
|
|
|
13,167,347
|
|
|
13,473,160
|
|
Interest
Interest
expense consists of interest payable on borrowings (including capital
lease obligations) calculated using the effective interest method, the
amortization of deferred financing costs and gains and losses on hedging
instruments that are recognized in the statement of operations.
Interest
income is recognized in the statement of operations as it accrues and dividend
income is recognized in the statement of operations on the date the Company’s
right to receive payments is established.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements,
which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective in fiscal years beginning
after November 15, 2007. Management is currently evaluating the impact that
the
adoption of this statement may have on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities - including
an
amendment of FASB Statement No. 115.
, which
permits entities to choose to measure many financial instruments and certain
other items at fair value. Most of the provisions of this Statement apply only
to entities that elect the fair value option. However, the amendment
to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities,
applies
to all entities with available-for-sale and trading securities. SFAS
No. 159 is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No.
157,
Fair
Value Measurements.
Management does not believe that the adoption of SFAS No. 159 will have a
material effect on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business
Combinations,
and
SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements.
SFAS
No.
141R improves reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more complete,
comparable, and relevant information for investors and other users of financial
statements. SFAS No. 141R requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as
the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. SFAF No. 160 improves the relevance, comparability,
and transparency of financial information provided to investors by requiring
all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way—as equity in the consolidated financial statements. Moreover, SFAS No.
160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they
be
treated as equity transactions. The two statements are effective for fiscal
years beginning after December 15, 2008 and management
is currently evaluating the impact that the adoption of these statements may
have on the Company’s consolidated financial statements.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
SFAS 158 addresses the recognition of over-funded or under-funded status of
a defined benefit plan as an asset or liability on an entity's balance
sheet. This requirement is effective for fiscal
years beginning after December 15, 2006. The statement also requires
the funded status of a plan be measured as of the employer's fiscal year-end
balance sheet. The requirement is effective as of the beginning of a
fiscal year beginning after December 15, 2008. Management
does not believe that the adoption of SFAS No. 158 will have a material effect
on the Company’s consolidated financial statements.
Note
3.
Initial Public Offering (“IPO”)
On
April
10, 2006, the Company issued and sold 7,500,000 units (“Units”) in its IPO, and
on April 13, 2006, the Company issued and sold an additional 1,125,000 Units
that were subject to the underwriters’ over-allotment option. Each Unit consists
of one share of common stock and one warrant. Each warrant entitles the holder
to purchase from the Company one share of common stock at an exercise price
of
$6.00 commencing at the later of the completion of a business combination with
a
target business or one year from the effective date of the IPO (April 5, 2007)
and expiring April 5, 2010 (“Warrants”), assuming there is an effective
registration statement. The Warrants will be redeemable at a price of $.01
per
Warrant upon 30 days’ notice after the Warrants become exercisable, only in the
event that the last sale price of the common stock is at least $11.50 per share
for any 20 trading days within a 30 trading day period ending on the third
day
prior to the date on which notice of redemption is given.
The
IPO
price of each Unit was $8.00, and the gross proceeds of the IPO were $69,000,000
(including proceeds from the exercise of the over-allotment option). Of the
gross proceeds: (i) $65,000,000 was deposited into a trust account (the “Trust
Account”), which amount included $1,380,000 of deferred underwriting fees; (ii)
the underwriters received $3,450,000 as underwriting fees (excluding the
deferred underwriting fees); and (iii) the Company retained $550,000 for
offering expenses. In addition, the Company deposited into the Trust Account
the
$700,000 that it received from a private placement of 583,333 warrants to two
executive officers (one of whom is also a director) for $1.20 per warrant
immediately prior to the closing of the IPO. These warrants are identical to
the
Warrants issued in the IPO.
The
funds
in the Trust Account were distributed at the closing of the acquisition of
Royal
Wolf. We received approximately $60.8 million, of which we used $44.7 million
to
pay the purchase price for the RWA shares. Approximately $6.4 million ($7.93482
per share) of the funds in the Trust Account was paid to Public Stockholders
holding 809,901 shares that voted against the acquisition and, in accordance
with our certificate of incorporation, elected to receive cash in exchange
for
their shares, which have been cancelled. The remaining $1.3 million was paid
to
our IPO underwriters as deferred underwriting fees.
In
connection with the IPO, the Company sold to the representative of the
underwriters for $100 an option to purchase 750,000 units for $10.00 per Unit.
These units are identical to the Units issued in the IPO except that the
warrants included in the units have an exercise price of $7.20. This option
may
be exercised on a cashless basis. This option expires April 5,
2011.
Note
4. Acquisitions
On
November 14, 2007, the Company, through GFN Finance and Royal Wolf, entered
into
a Business Sale Agreement dated November 14, 2007 (the “Business Sale
Agreement”) with GE SeaCo Australia Pty Ltd. and GE SeaCo SRL. GE SeaCo
Australia Pty Ltd is owned by GE SeaCo SRL, which is a joint venture between
Genstar Container Corporation (a subsidiary of General Electric) and Sea
Containers Ltd. Sea Containers Ltd. is in bankruptcy reorganization
(collectively “GE SeaCo”). Pursuant to the Business Sale Agreement, on November
15, 2007, the Company purchased the assets of GE SeaCo used in its dry and
refrigerated container business in Australia and Papua New Guinea for
$17,850,000, after adjustments. The Business Sale Agreement contains a
three-year non-competition agreement from GE SeaCo and certain
affiliates covering Australia and Papua New Guinea. The purchase price was
paid at the closing, less a holdback of approximately $900,000 deposited into
an
escrow account for one year to provide for damages from breach of
representations and warranties by GE SeaCo and any post-closing purchase price
adjustments.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
total
purchase price, including the Company’s transaction costs of approximately
$37,000, a non-compete agreement of $2.0 million (prior to tax
benefit) and deferred financing costs of $84,000 has been allocated to
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair market values as of November 14, 2007, as follows (in
thousands):
|
|
November
14, 2007
|
|
Fair
value of the net tangible assets acquired and liabilities
assumed:
|
|
|
|
|
|
Inventories
(primarily containers)
|
|
$
|
1,746
|
|
|
|
|
Property,
plant and equipment
|
|
|
28
|
|
|
|
|
Container
for lease fleet
|
|
|
9,952
|
|
|
|
|
Trade
and other payables
|
|
|
(229
|
)
|
|
|
|
Total
net tangible assets acquired and liabilities assumed
|
|
|
|
|
$
|
11,497
|
|
|
|
|
|
|
|
|
|
Fair
value of intangible assets acquired:
|
|
|
|
|
|
|
|
Non-compete
agreement
|
|
|
1,999
|
|
|
|
|
Deferred
financing costs
|
|
|
84
|
|
|
|
|
Goodwill
|
|
|
4,270
|
|
|
|
|
Total
intangible assets acquired
|
|
|
|
|
|
6,353
|
|
Total
purchase consideration
|
|
|
|
|
$
|
17,850
|
|
Note
5. Long-term Debt and Obligations
ANZ
Senior Credit Facility
The
Company has a credit facility with Australia and New Zealand Banking Group
Limited (“ANZ”). The facility is subject to annual reviews by ANZ and is
guaranteed and secured by the Company’s Australian subsidiaries. At the closing
of the acquisition of the assets from GE SeaCo (see Note 4), this facility
was
amended to increase the total committed facility limit to $61.6 million at
December 31, 2007.
The
aggregate ANZ facility comprises ten different sub-facilities. The largest
of
these sub-facilities is a receivables financing facility of up to $11.4 million
(AUS$13.0 million) and two interchangeable loans under which the Company may
borrow up to the lesser of $45.9 million (AUS$52.3 million) and $4.4 million
(AUS$5.0 million), respectively, or 85% of the lower of liquidation or book
value of its container fleet. The receivables financing facility bears interest
at a variable rate equal to the bank bill swap reference rate plus 1.65% per
annum and may not be terminated except on default prior to ANZ’s next review
date of the facility. The secured loan facilities mature five years following
the initial drawdown on the facility, or September 2012. There is no
amortization under the $45.9 million loan, while there is currently a $132,000
amortization per quarter under the $4.4 million loan. These loans bear
interest at ANZ’s prime rate plus 1.35% per annum, with interest payable
quarterly.
The
ANZ
credit facility is subject to certain covenants, including compliance with
a
specified consolidated interest cover ratio for each financial quarter on a
year-to-date basis, and restrictions on the payment of dividends, loans and
payments to affiliates, granting of new security interests on the assets of
any
of the secured entities. 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.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Bison
Note
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 paid Bison Capital a closing fee of $336,000 and issued to Bison
Capital warrants to purchase 500,000 shares of common stock of GFN.
The
Bison
Note bears interest at the annual rate of 13.5%, payable quarterly in arrears,
commencing October 1, 2007, 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 not prepay the Bison Note prior to September 13,
2008, but may thereafter prepay the Bison Note at a declining price of 103%
of
par prior to September 13, 2009, 102% of par prior to September 13,
2010, 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
under 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
inter-creditor agreement with ANZ. If, during the 66-month period ending on
the
scheduled maturity date, GFN’s 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 $1.1 million in cash, 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 to us for cancellation any remaining
warrants and warrants shares. The premium will be payable by us on the scheduled
maturity date, whether or not the note has been paid by us on or before (or
after) that date.
The
Bison
Note requires the maintenance of certain financial ratios based on earnings
before income taxes, depreciation and amortization (EBITDA) and Royal Wolf’s
debt levels (leverage), as well as restrictions on capital
expenditures.
The
warrants issued to Bison Capital represent the right to purchase 500,000 shares
of GFN’s common stock at an initial exercise price of $8.00 per share, subject
to adjustment for stock splits and stock dividends. The warrants will expire
September 13, 2014 to the extent not previously exercised.
The
Company was in compliance with all financial covenants pertaining to the ANZ
credit facility and Bison Note as of December 31, 2007.
Capital
Leases
Capital
lease liabilities of the Company are payable as follows as of December 31,
2007
(in thousands):
|
|
Minimum
lease payments
|
|
Interest
|
|
Principal
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
457
|
|
$
|
35
|
|
$
|
422
|
|
Between
one and five years
|
|
|
167
|
|
|
19
|
|
|
148
|
|
More
than five years
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
624
|
|
$
|
54
|
|
$
|
570
|
|
The
Company has finance leases and lease purchase contracts for various motor
vehicles, and other assets. These leases have no terms of renewal or purchase
options or escalation clauses.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
6. Financial
Instruments
The
carrying value of the Company’s financial instruments, which include cash and
cash equivalents, receivables, trade and other payables, borrowings under the
ANZ credit facility, the Bison Note, interest rate swaps, forward exchange
contracts and commercial bills; approximate fair value due to current market
conditions, maturity dates and other factors.
Exposure
to credit, interest rate and currency risks arises in the normal course of
the
Company’s business. The Company may use derivative financial instruments to
hedge exposure to fluctuations in foreign exchange rates and interest
rates.
Credit
Risk
It
is the
Company’s policy that all customers who wish to purchase or lease
containers on credit terms are subject to credit verification procedures
and the Company will agree to terms with customers believed to be creditworthy.
In addition, receivable balances are monitored on an ongoing basis with the
result that the Company’s exposure to bad debts is not significant. With respect
to credit risk arising from the other significant financial assets of the
Company, which comprise cash and cash equivalents, available-for-sale financial
assets and certain derivative instruments, the Company’s exposure to credit risk
arises from default of the counter party, with a maximum exposure equal to
the
carrying amount of these instruments. As the counter party for derivative
instruments is nearly always a bank, the Company has assessed this as a low
risk.
There
are
no significant concentrations of credit risk within the Company.
Interest
Rate Risk
The
Company’s exposure to market risk for changes in interest rates relates
primarily to its long-term debt obligations. The Company’s policy is to manage
its interest cost 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, 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 are designated to
hedge
changes in the interest rate of its commercial bill liability. The secured
ANZ
loan and interest rate swap have the same critical terms, including expiration
dates. The Company believes that financial instruments designated as
interest rate hedges are highly effective. However, documentation of such as
required by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
does not
exist. Therefore, all movements in the fair values of these hedges are taken
directly to the statement of operations.
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. The Company 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.
The
Company 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 SFAS No. 133 does not
exist. Therefore, all movements in the fair values of these hedges are taken
directly to statement of operations. The Company also has certain U.S.
dollar-denominated debt at Royal Wolf, including long-term intercompany
borrowings, which are remeasured at each financial reporting date with the
impact of the remeasurement being recorded in our consolidated statements of
operations.
Note
7.
Limited Recourse Revolving Line of Credit
The
Company had an unsecured limited recourse revolving line of credit from Ronald
F. Valenta, a director and the chief executive officer of the Company, pursuant
to which the Company could borrow up to $3,000,000 outstanding at one time.
The
line of credit terminated upon the completion of the acquisition of Royal Wolf
and the outstanding principal and interest totaling $2,586,848 was repaid on
September 14, 2007.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
8.
Related Party Transactions
The
Company utilizes certain administrative, technology and secretarial services
from affiliates of officers; as well as certain limited office space provided
by
an affiliate of Mr. Valenta. Until the consummation of a business
combination by the Company, the affiliates had agreed to make such services
available to the Company free of charge, as may be required by the Company
from
time to time; with the exception of the reimbursement of certain out-of-pocket
costs incurred on behalf of the Company. Effective September 14, 2007, the
Company entered into a month-to-month arrangement with the affiliate of Mr.
Valenta for the rental of the office space at $1,148 per month. In addition,
at
that date, the Company commenced recording a charge to operating results (with
an offsetting contribution to additional paid-in capital) for the estimated
cost
of contributed services rendered to the Company at no compensation by
non-employee officers and administrative personnel of
affiliates.
Note
9.
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 by
stockholders on June 14, 2007. Under the 2006 Plan, the Company may issue to
directors, employees, consultants and advisers up to 1,500,000 shares of its
common stock pursuant to options to be granted under the 2006 Plan. The options
may be 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. The options may not have a term in
excess of ten years, and the exercise price of any option may not be less than
the fair market value of the Company’s common stock on the date of grant of the
option. Unless terminated earlier, the 2006 Plan will automatically terminate
June 30, 2016.
On
each
of September 11, 2006 (“2006 Grant”) and December 14, 2007 (“2007 Grant”), the
Company granted options to purchase 225,000 shares at an exercise price equal
to
the closing market price of the Company’s common stock as of that date, or $7.30
and $9.05, respectively, with a vesting period of five years. Stock-based
compensation expense of $187,400 related to these options was recognized in
the
statements of operations through December 31, 2007; with a corresponding
benefit to additional paid-in capital. As of December 31, 2007, there
remains $1,343,800 of unrecognized compensation expense that will be recorded
in
the statement of operations on a straight-line basis over the remaining vesting
period. Also, as of December 31, 2007, 45,000 of these options are
exercisable.
A
deduction is not allowed for income tax purposes with respect to non-qualified
options until the stock options are exercised or with respect to incentive
stock
options, 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 Company’s common stock and the exercise price at the date of
exercise. Accordingly, there is a deferred tax asset recorded for the tax effect
of the financial statement expense recorded. The tax effect of the income tax
deduction in excess of the financial statement expense, if any, will be recorded
as an increase to additional paid-in capital.
The
weighted-average fair value of the stock options granted was $3.06 and $3.75
per
option for the 2006 Grant and 2007 Grant, respectively, determined by using
the
Black-Scholes option-pricing model using the following assumptions: A risk-free
interest rate of 4.8% and 3.27% (corresponding treasury bill rates) for the
2006
Grant and 2007 Grant, respectively; an expected life of 7.5 years; an expected
volatility of 26.5% and 31.1% for the 2006 Grant and 2007 Grant, respectively;
and no expected dividend.
Royal
Wolf had an employee share option plan (ESOP) for the granting of
non-transferable options to certain key management personnel and senior
employees with more than twelve months’ service at the grant date. During the
year ended June 30, 2007, $2,930,000 was paid to the employees relating to
the
ESOP with a remaining $759,000 being paid in July 2007.
Note
10. Commitments
and Contingencies
Operating
Leases
The
Company leases various office equipment and other facilities under operating
leases. The leases have maturities of between one and nine years, some with
an
option to renew the lease after that period. None of the leases includes
contingent rentals. There are no restrictions placed upon the lessee by entering
into these leases.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Non-cancellable
operating lease rentals at December 31, 2007 are payable as follows (in
thousands):
Less
than one year
|
|
$
|
2,689
|
|
One-two
years
|
|
|
1,384
|
|
Two-three
years
|
|
|
1,108
|
|
Three-four
years
|
|
|
638
|
|
Four-five
years
|
|
|
286
|
|
Thereafter
|
|
|
384
|
|
|
|
$
|
6,489
|
|
In
connection with the asset purchase from GE SeaCo, the Company entered in a
preferred supply agreement with GE SeaCo. Under the preferred supply agreement,
GE SeaCo has agreed sell to the Company, and the Company has agreed to purchase,
all of GE SeaCo’s 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, the Company 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.
Note
11. Cash Flows From Operating Activities
The
following table provides a detail of cash flows from operating activities (in
thousands):
|
|
Predecessor
|
|
Successor
|
|
|
|
Six
Months
Ended
December
31,
|
|
Period
from
July
1 to
September
13,
|
|
Six
Months
Ended
December
31,
|
|
|
|
2006
|
|
2007
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,149
|
)
|
$
|
288
|
|
$
|
2,719
|
|
Loss
(gain) on sales and disposals of fixed assets
|
|
|
—
|
|
|
11
|
|
|
(5
|
)
|
Unrealized
foreign exchange loss (gain)
|
|
|
(65
|
)
|
|
58
|
|
|
(1,926
|
)
|
Unrealized
loss (gain) on forward exchange contracts
|
|
|
77
|
|
|
72
|
|
|
(179
|
)
|
Unrealized
loss on interest rate swaps
|
|
|
(81
|
)
|
|
90
|
|
|
(237
|
)
|
Depreciation
and amortization
|
|
|
1,524
|
|
|
653
|
|
|
2,583
|
|
Amortization
of deferred financing costs
|
|
|
—
|
|
|
—
|
|
|
408
|
|
Accretion
of interest on subordinated debt
|
|
|
852
|
|
|
32
|
|
|
70
|
|
Share-based
compensation expense
|
|
|
—
|
|
|
—
|
|
|
76
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
87
|
|
Interest
deferred for common stock subject to possible conversion, net of
income
tax effect
|
|
|
—
|
|
|
—
|
|
|
(226
|
)
|
Deferred
income taxes
|
|
|
617
|
|
|
180
|
|
|
1,905
|
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
214
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
and other receivables, net
|
|
|
(5,035
|
)
|
|
1,090
|
|
|
(7,054
|
)
|
Inventories
|
|
|
(851
|
)
|
|
(3,822
|
)
|
|
(7,261
|
)
|
Other
|
|
|
16
|
|
|
—
|
|
|
(65
|
)
|
Accounts
payable and accrued liabilities
|
|
|
9,480
|
|
|
5,642
|
|
|
2,799
|
|
Income
taxes payable
|
|
|
—
|
|
|
—
|
|
|
(392
|
)
|
Net
cash provided (used) by operating activities
|
|
$
|
4,385
|
|
$
|
4,294
|
|
$
|
(6,484
|
)
|
Item
2. Management’s 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 for us and Royal Wolf, which are included in our Transition Report
on Form 10-K for the six months ended June 30, 2007 filed with the Securities
and Exchange Commission; and 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. Factors that might cause or contribute
to
such a discrepancy include, but are not limited to, those described in our
other
Securities and Exchange Commission filings.
References
in this Report to “we”, “us”, or the “Company” are to General Finance
Corporation (“GFN”) and its consolidated subsidiaries. These subsidiaries
include GFN U.S. Australasia Holdings, Inc., a Delaware corporation (“GFN
U.S.”); GFN Australasia Holdings Pty Ltd., an Australian corporation (“GFN
Holdings”); and GFN Australasia Finance Pty Ltd, an Australian corporation (“GFN
Finance”); and, as of September 13, 2007, RWA Holdings Pty Limited (“RWA”), an
Australian corporation, and its subsidiaries (collectively, “Royal
Wolf”).
Business
Overview
We
were
incorporated in Delaware on October 14, 2005 in order to serve as a vehicle
to
effect a business combination with one or more operating businesses. From
inception through September 13, 2007, we were a development stage company.
We
did not have any business or operations and our activities were limited to
raising capital in our initial public offering (the “IPO”) in April 2006,
identifying an operating business to acquire, and negotiating and entering
into
an agreement to acquire Royal Wolf.
We
issued
8,625,000 units in our IPO. Each unit consists of one share of our common stock
and one warrant entitling the holder to purchase one share of our common stock
at a price of $6.00. The public offering price of each unit was $8.00, and
we
generated gross proceeds of $69,000,000 in the IPO. Of the gross proceeds:
(i)
we deposited $65,000,000 into a trust account (the “Trust Account”), which
amount included $1,380,000 of deferred underwriting fees; (ii) the underwriters
received $3,450,000 as underwriting fees (excluding the deferred underwriting
fees); and (iii) we retained $550,000 for offering expenses. In addition, we
deposited into the Trust Account $700,000 that we received from the issuance
and
sale of 583,333 warrants to Ronald F. Valenta, a director and our Chief
Executive Officer, and John O. Johnson, our Chief Operating Officer, prior
to
completion of the IPO. Stockholders holding the shares issued in connection
with
the IPO are referred to as “Public Stockholders.”
On
September 13, 2007 (September 14 in Australia), we 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 U.S. dollar to $0.8407
Australian dollar realized in connection with payments made upon completion
of
the acquisition, the purchase price for the RWA shares was $64.3 million,
including deposits of $1,005,000 previously paid by us in connection with the
acquisition. We paid the purchase price, less the deposits, by a combination
of
cash in the amount of $44.7 million plus the issuance to Bison Capital
Australia, L.P. (“Bison Capital”), one of the sellers, of shares of common stock
of GFN U.S., constituting 13.8% of the outstanding capital stock of GFN U.S.
following the issuance. As a result of this structure, 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, which through its indirect subsidiary
GFN
Finance owns all of the outstanding capital stock of Royal Wolf.
We
accounted for the acquisition of Royal Wolf as a “purchase.” Under the purchase
method of accounting, we allocated the total purchase price to the net tangible
assets and intangible assets acquired and liabilities assumed based on their
respective fair values as of the date of acquisition. The excess of the purchase
price over the net fair value of the assets acquired (including specifically
identified intangible assets such as customer lists and non-compete covenants)
was recorded as goodwill. See Note 1 of Notes to Condensed Consolidated
Financial Statements.
The
funds
in the Trust Account were distributed at the closing of the acquisition of
Royal
Wolf. We received approximately $60.8 million, of which we used $44.7 million
to
pay the purchase price for the RWA shares. Approximately $6.4 million ($7.93482
per share) of the funds in the Trust Account was paid to Public Stockholders
holding 809,901 shares that voted against the acquisition and, in accordance
with our certificate of incorporation, elected to receive cash in exchange
for
their shares, which have been cancelled. The remaining $1.3 million was paid
to our IPO underwriters as deferred underwriting fees.
All
references to events or activities (other than equity-related) which occurred
prior to the completion of the acquisition on September 13, 2007 (September
14
in Australia) relate to Royal Wolf, as the predecessor company (the
“Predecessor”). All references to events or activities (other than
equity-related) which occurred after the completion of the acquisition on
September 13, 2007 (September 14 in Australia) relate to us, as the successor
company (the “Successor”).
We
lease
and sell storage container products in Australia. We currently have
approximately 200 employees and operate 17 customer service centers located
in
every state in Australia. We are the only portable container lease and
sales company represented in all major business centers in Australia and, as
such, we are the only storage container products company with a nationally
integrated infrastructure and work force. We serve both small to mid-size
retail customers and large corporate customers in the following sectors: road
and rail; moving and storage; mining and defense; and portable buildings.
Historically, our revenue mix has been over 67% sales and under 33% leasing.
Generally, we consider sales and leasing in our customer service centers as
retail operations.
Our
products include the following.
Portable
Storage Containers: We
lease and sell storage container products for on-site storage by retail outlets
and manufacturers, local councils and government departments, farming and
agricultural concerns, building and construction companies, clubs and sporting
associations, mine operators and individual customers. Our portable storage
products include general purpose dry storage containers, refrigerated containers
and hazardous goods containers in a range of standard and modified sizes,
designs and storage capacities.
Portable
Container Buildings: We
lease and sell portable container buildings for use as site offices, housing
accommodations and for other purposes. We entered the portable building market
in August 2005 with 20’ and 40’ portable buildings manufactured from steel
container platforms, which we market primarily to mine operators, construction
companies and the general public.
Freight
Containers: We
lease and sell freight containers specifically designed for transport of
products by road and rail. Customers include national moving and storage
companies, distribution and logistics companies, domestic freight forwarders,
transport companies, rail freight operators and the Australian military. Our
freight container products include curtain-side, refrigerated and bulk cargo
containers, together with a range of standard and industry-specific dry freight
containers.
On
November 14, 2007, the Company, through GFN Finance and Royal Wolf, entered
into
a Business Sale Agreement dated November 14, 2007 (the “Business Sale
Agreement”) with GE SeaCo Australia Pty Ltd. and GE SeaCo SRL. GE SeaCo
Australia Pty Ltd is owned by GE SeaCo SRL, which is a joint venture between
Genstar Container Corporation (a subsidiary of General Electric) and Sea
Containers Ltd. Sea Containers Ltd. is in bankruptcy reorganization
(collectively “GE SeaCo”). Pursuant to the Business Sale Agreement, on November
15, 2007, the Company purchased the assets of GE SeaCo used in its dry and
refrigerated container business in Australia and Papua New Guinea for
$17,850,000. The Business Sale Agreement contains a three-year non-competition
agreement from GE SeaCo and certain affiliates covering Australia and Papua
New Guinea.
In
connection with the asset purchase from GE SeaCo, the Company entered in a
preferred supply agreement with GE SeaCo. Under the preferred supply agreement,
GE SeaCo has agreed sell to the Company, and the Company has agreed to purchase,
all of GE SeaCo’s 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, the Company 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.
Results
of Operations
Quarter
Ended December 31, 2007 (“QE FY 2008”) Compared to Quarter Ended December 31,
2006 (“QE FY 2007”)
The
following discussion compares the QE
FY
2007 results
of
operations of Royal Wolf, as Predecessor, to those of the Company, as Successor,
for QE FY 2008.
Revenues. Sales of
containers during QE FY 2008 amounted to $22.2 million compared to $12.7 million
during QE FY 2007; representing an increase of $9.5 million or 74.8% .This
increase was mainly due to growth in revenues from sales of containers in our
retail operations of $4.3 million, sales of $3.2 million in our non-retail
operations and $2.0 million due to favorable foreign exchange rates. The $4.3
million increase in our retail operations consisted of $3.0 million due to
higher unit sales and $1.3 million due to price increases. The $3.2
million increase in our non-retail operations consisted of $3.4 million due
to
higher unit sales, offset somewhat by price decreases of $0.2
million.
Leasing
of container revenues during QE FY 2008 amounted to $7.7 million compared to
$5.4 million during QE FY 2007, representing an increase of $2.3 million, or
42.6%. This was driven by favorable foreign exchange rates of $0.8 million,
an
increase of $0.3 million in our average total number of units on lease per
month
in our portable container building business, which increased by 47.8% during
QE
FY 2008 compared to QE FY 2007; and an increase of $1.2 million in our average
total number of units on lease per month in our portable storage container
business, primarily as a result of our acquisition of the assets of GE SeaCo
in
November 2007. A 4.6% decline in the average number of units on lease to our
customers in the moving and transporting business was offset by increases in
price which allowed our portable storage business revenues to remain unchanged
from QE FY 2007. Average utilization in our retail operations was 84.1% during
QE FY 2008, as compared to 85.4% during QE FY 2007; and
our average utilization in our non-retail operations was 83.1% during QE FY
2008, as compared to 76.8% during QE FY 2007. Overall our average
utilization was 83.9% in QE FY 2008, as compared to 82.8% in QE FY
2007.
The
average value of the United States (“U.S.”) dollar against the Australian dollar
declined during QE FY 2008 as compared to QE FY 2007. The average currency
exchange rate during QE FY 2007 was $0.77022 to one U.S. dollar compared to
$0.8905 to one U.S. dollar during QE FY 2008. This fluctuation in foreign
currency exchange rates resulted in an increase to our container sales
and leasing revenues of $2.0 million and $0.8 million, respectively,
during QE FY 2008 compared to QE FY 2007; representing 23.5% of the increase
in
total revenues.
Cost
of Sales.
Cost of
sales in our container sales business increased by $7.9 million to $18.5 million
during QE FY 2008 compared to $10.6 million during QE FY 2007. The
increase was due to foreign exchange translation effect of $1.3 million and
cost
increases of $3.4 million and $3.2 million in our retail and non-retail
operations, respectively. Our gross profit margin from sales revenues improved
during QE FY 2008 to 16.9% compared to 16.4% during QE FY 2007 as a result
of
price increases and favorable product mix.
Leasing,
Selling and General Expenses.
Leasing,
selling and general expenses decreased by $1.5 million during QE FY 2008, or
20.3%, to $5.9 million from $7.4 million during QE FY 2007. This decrease was
partially offset by approximately $0.6 million incurred at GFN. The following
table provides more detailed information about the Royal Wolf
operating expenses of $5.3 million in QE FY 2008 as compared to $7.4 million
in
QE FY 2007:
|
|
Quarter
Ended
December
31,
|
|
|
|
(In
millions)
|
|
|
|
2006
|
|
2007
|
|
Salaries,
wages and related
|
|
$
|
5.4
|
|
$
|
3.0
|
|
Rent
|
|
|
0.1
|
|
|
0.1
|
|
Customer
service center (“CSC”) operating costs
|
|
|
0.6
|
|
|
0.9
|
|
Business
promotion
|
|
|
0.2
|
|
|
0.2
|
|
Travel
and meals
|
|
|
0.2
|
|
|
0.2
|
|
IT
and telecommunications
|
|
|
0.1
|
|
|
0.2
|
|
Professional
costs
|
|
|
0.4
|
|
|
0.4
|
|
Other
|
|
|
0.4
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7.4
|
|
$
|
5.3
|
|
QE
FY
2007 salaries, wages and related expenses include a shared-based payment
expense of $2.9 million to recognize the full vesting of options as a result
of
the realization event on the purchase of approximately 80% of RWA by Bison
Capital in March 2007. The increase in QE FY 2008 from QE FY 2007 in
salaries, wages and related expenses and CSC costs of $0.5 million and $0.3
million, respectively, were due to the increase in number of sales and marketing
personnel as we continue to expand our infrastructure for growth. As a
percentage of revenues, operating expenses at Royal Wolf decreased to 17.7%
in
QE FY 2008 from 41.1% (25.0% not including the share-based payment expense)
in
QE FY 2007.
Depreciation
and Amortization.
Depreciation and amortization expenses increased by $1.4 million to $2.2 million
during QE FY 2008 compared to $0.8 million during QE FY 2007. The increase
was
primarily the result of adjustments to fair values of fixed assets and
identifiable intangible assets as a result of acquisitions. The amortization
of
identifiable intangible assets (customer lists and non-compete agreements)
represented approximately $1.1 million of this increase.
Interest Expense.
The
increase in interest expense $0.6 million in QE FY 2008 as compared to QE FY
2007was due principally to an increase in total long-term debt, which was $41.7
million at December 31, 2006 and $69.2 million at December 31, 2007. This
increase in total debt was due principally to additional debt incurred in
connection with the acquisitions of Royal Wolf and GE SeaCo, including an
increase in the amount of Royal Wolf’s credit facility with Australian and New
Zealand Banking Group Limited and the secured senior subordinated note in the
amount of $16.8 million issued to Bison Capital.
Foreign
Currency Exchange.
As a
result of the acquisition of Royal Wolf, we now 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 income.
Effective
October 1, 2007, the foreign exchange effect of the principal balance of the
U.S. dollar-denominated intercompany borrowings are now included in accumulated
other comprehensive income since we do not expect repayment in the foreseeable
future.
Income
Taxes.
Our
effective income tax rate decreased to 32.6% during the QE FY 2008 as a result
of certain non-deductible amounts included in the QE FY 2007 for Australian
income tax purposes being extinguished and the amortization of goodwill for
U.S.
income tax reporting purposes being deductible in QE FY 2008.
Net
Income. We
had
net income of $1.2 million during QE FY 2008 compared to a net loss of $2.2
million during QE FY 2007 primarily as a result of increased revenues from
the
sales and leasing of containers in QE FY 2008 and the fact that QE FY 2007
included share-based expense of $2.9 million.
Six
Months Ended December 31, 2007 (”YTD FY 2008”) Compared to Six Months Ended
December 31, 2006 (“YTD FY 2007”)
We
had no
business or operations prior to our acquisition of Royal Wolf on
September 13, 2007. Comparisons of our results of operations for YTD FY
2008 with YTD FY 2007 therefore are not particularly meaningful. We believe
a
more meaningful comparison is the results of operations of Royal Wolf for YTD
FY
2007 with the combined results of our operations and Royal Wolf during YTD
FY
2008. To assist in this comparison, the following table sets forth condensed
statements of operations for the following: (i) Royal Wolf, as Predecessor,
for
YTD FY 2007 and for the period July 1, 2007 to September 13, 2007;
(ii) the Company, as Successor, for YTD FY 2008, which reflects the results
of
operations of Royal Wolf and its subsidiaries for the period September 14,
2007 through December 31, 2007; and (iii) the combined results of operations
of
the Predecessor and Successor for YTD FY 2008.
|
|
Predecessor
|
|
Successor
|
|
Combined
|
|
|
|
Six
Months
Ended
December
31,
|
|
Period
from
July
1 to
September
13,
|
|
Six
Months
Ended
December
31,
|
|
Six
Months
Ended
December
31,
|
|
|
|
2006
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Sale
of containers
|
|
$
|
23,308
|
|
$
|
10,944
|
|
$
|
25,476
|
|
$
|
36,420
|
|
Leasing
of containers
|
|
|
10,234
|
|
|
4,915
|
|
|
8,775
|
|
|
13,690
|
|
|
|
|
33,542
|
|
|
15,859
|
|
|
34,251
|
|
|
50,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
20,381
|
|
|
9,466
|
|
|
21,401
|
|
|
30,867
|
|
Leasing,
selling and general expenses
|
|
|
11,440
|
|
|
4,210
|
|
|
7,122
|
|
|
11,332
|
|
Depreciation
and amortization
|
|
|
1,524
|
|
|
653
|
|
|
2,583
|
|
|
3,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
197
|
|
|
1,530
|
|
|
3,145
|
|
|
4,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39
|
|
|
14
|
|
|
1,103
|
|
|
1,117
|
|
Interest expense
|
|
|
(1,815
|
)
|
|
(947
|
)
|
|
(1,959
|
)
|
|
(2,906
|
)
|
Foreign
currency exchange gain (loss) and other
|
|
|
47
|
|
|
(129
|
)
|
|
2,105
|
|
|
1,976
|
|
|
|
|
(1,729
|
)
|
|
(1,062
|
)
|
|
1,249
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes and minority
interest
|
|
|
(1,532
|
)
|
|
468
|
|
|
4,394
|
|
|
4,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
617
|
|
|
180
|
|
|
1,461
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
—
|
|
|
|
|
|
214
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,149
|
)
|
$
|
288
|
|
$
|
2,719
|
|
$
|
3,007
|
|
Revenues. Sales of
containers during YTD FY 2008 amounted to $36.4 million compared to $23.3
million during YTD FY 2007; representing an increase of $13.1 million or 56.2%
.This increase was mainly due to growth in revenues from sales of containers
in
our retail operations of $6.1 million, sales of $3.7 million in our non-retail
operations and $3.2 million due to favorable foreign exchange rates. The $6.1
million increase in our retail operations consisted of $4.2 million due to
higher unit sales and $1.9 million due to price increases. The $3.7
million increase in our non-retail operations consisted of $2.5 million due
to
higher unit sales and $1.2 million due to price increases.
Leasing
of container revenues during YTD FY 2008 amounted to $13.7 million compared
to
$10.2 million during YTD FY 2007, representing an increase of $3.5 million,
or
34.3%. This was primarily driven by favorable foreign exchange rates of $1.4
million, an increase of $0.8 million in our average total number of units on
lease per month in our portable container building business, which increased
by
67.4% during QE FY 2008 compared to QE FY 2007; and an increase of $1.2 million
in our average total number of units on lease per month in our portable storage
container business, primarily as a result of our acquisition of the assets
of GE
SeaCo in November 2007. Average utilization in our retail operations was 86.3%
during YTD FY 2008, as compared to 88.1% during YTD FY 2007; and
our average utilization in our non-retail operations was 78.3% during YTD
FY 2008, as compared to 75.9% during YTD FY 2007. Overall our average
utilization was 82.1% in YTD FY 2008, as compared to 81.1% in YTD FY
2007.
The
average value of the U.S. dollar against the Australian dollar declined during
YTD FY 2008 as compared to YTD FY 2007. The average currency exchange rate
during YTD FY 2007 was $0.76365 to one U.S. dollar compared to $0.86892 to
one
U.S. dollar during YTD FY 2008. This fluctuation in foreign currency exchange
rates resulted in an increase to our container sales
and leasing revenues of $3.2 million and $1.4 million, respectively,
during YTD FY 2008 compared to YTD FY 2007; representing 27.7% of the increase
in total revenues.
Cost
of Sales.
Cost of
sales in our container sales business increased by $10.5 million to $30.9
million during YTD FY 2008 compared to $20.4 million during YTD FY 2007.
The increase was due to foreign exchange translation effect of $2.4 million
and
cost increases of $4.5 million and $3.6 million in our retail and non-retail
operations, respectively. Our gross profit margin from sales revenues improved
during YTD FY 2008 to 15.2% compared to 12.6% during YTD FY 2007 as a result
of
price increases and favorable product mix.
Leasing,
Selling and General Expenses.
Leasing,
selling and general expenses decreased by $0.1million during YTD FY 2008 to
$11.3 million from $11.4 million during YTD FY 2007. This decrease was partially
offset by approximately $1.1 million incurred at GFN. The following
table provides more detailed information about the Royal Wolf
operating expenses of $10.2 million in YTD FY 2008 as compared to $11.4 million
in YTD FY 2007:
|
|
Six
Months Ended
December
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions)
|
|
Salaries,
wages and related
|
|
$
|
7.8
|
|
$
|
5.9
|
|
Rent
|
|
|
0.2
|
|
|
0.2
|
|
CSC
operating costs
|
|
|
1.2
|
|
|
1.7
|
|
Business
promotion
|
|
|
0.4
|
|
|
0.4
|
|
Travel
and meals
|
|
|
0.4
|
|
|
0.5
|
|
IT
and telecommunications
|
|
|
0.2
|
|
|
0.4
|
|
Professional
costs
|
|
|
0.7
|
|
|
0.7
|
|
Other
|
|
|
0.5
|
|
|
0.4
|
|
|
|
$
|
11.4
|
|
$
|
10.2
|
|
YTD
FY
2007 salaries, wages and related expenses include a shared-based payment
expense of $2.9 million to recognize the full vesting of options as a result
of
the realization event on the purchase of approximately 80% of RWA by Bison
Capital in March 2007. The increase in YTD FY 2008 from YTD FY 2007 in
salaries, wages and related expenses and CSC costs of $1.0 million and $0.5
million, respectively, were due to the increase in number of sales and marketing
personnel as we continue to expand our infrastructure for growth. As a
percentage of revenues, operating expenses at Royal Wolf decreased to 20.4%
in
YTD FY 2008 from 34.0% (25.4% not including the share-based payment expense)
in
YTD FY 2007.
Depreciation
and Amortization.
Depreciation and amortization expenses increased by $1.7 million to $3.2 million
during YTD FY 2008 compared to $1.5 million during YTD FY 2007. The increase
was
primarily the result of adjustments to fair values of fixed assets and
identifiable intangible assets as a result of acquisitions. The amortization
of
identifiable intangible assets (customer lists and non-compete agreements)
represented approximately $1.3 million of this increase.
Interest
Income.
We had
interest income earned on marketable securities held in the Trust Account of
$1.0 million in YTD FY 2008.
Interest Expense.
The
increase in interest expense of $1.1 million in YTD FY 2008 as compared to
YTD
FY 2007 was due principally to an increase in total long-term debt, which was
$41.7 million at December 31, 2006 and $69.2 million at December 31, 2007.
This
increase in total debt was due principally to additional debt incurred in
connection with the acquisitions of Royal Wolf and GE SeaCo, including an
increase in the amount of Royal Wolf’s credit facility with Australian and New
Zealand Banking Group Limited and the secured senior subordinated note in the
amount of $16.8 million issued to Bison Capital.
Foreign
Currency Exchange.
As a
result of the acquisition of Royal Wolf, we now 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.
We
had foreign currency exchange gains of approximately $2.0 million in YTD FY
2008
because the Australian dollar strengthened against the U.S. dollar during YTD
FY
2008 as compared to YTD FY 2007. Effective October 1, 2007, the foreign exchange
effect of the principal balance of the U.S. dollar-denominated intercompany
borrowings are now included in accumulated other comprehensive income since
we
do not expect repayment in the foreseeable future.
Income
Taxes.
Our
effective income tax rate decreased to 33.8% during the YTD FY 2008 as a result
of certain non-deductible amounts included in the YTD FY 2007 for Australian
income tax purposes being extinguished and the amortization of goodwill for
U.S.
income tax reporting purposes being deductible in YTD FY 2008.
Net
Income. We
had
net income of $3.0 million during YTD FY 2008 compared to a net loss of $2.1
million during YTD FY 2007 primarily as a result of increased revenues from
the
sales and leasing of containers in QE FY 2008, the fact that QE FY 2007 included
share-based expense of $2.9 million and the favorable impact of the foreign
currency exchange gain..
Measures
not in Accordance with Generally Accepted Accounting Principles in the United
States (“GAAP”)
Earnings
before interest, income taxes, depreciation and amortization (“EBITDA”) and
adjusted EBITDA are supplemental measures of our performance that are not
required by, or presented in accordance with GAAP. These measures are not
measurements of our financial performance under GAAP and should not be
considered as alternatives to net income, income from operations or any other
performance measures derived in accordance with GAAP or as an alternative to
cash flow from operating, investing or financing activities as a measure of
liquidity.
EBITDA
is
a non-GAAP measure, which we define as earnings before interest expense, income
taxes and depreciation and amortization; or operating income before depreciation
and amortization. We calculate adjusted EBITDA by adjusting 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 EBITDA and adjusted EBITDA, you should be aware that in the future,
we may incur expenses similar to the adjustments in the presentation of EBITDA
and adjusted EBITDA. Our presentation of EBITDA and adjusted EBITDA should
not
be construed as an inference that our future results will be unaffected by
unusual or non-recurring items. We present EBITDA and adjusted EBITDA because
we
consider them to be important supplemental measures of our performance and
because they are frequently used by securities analysts, investors and other
interested parties in the evaluation of companies in our industry, many of
which
present EBITDA and adjusted EBITDA when reporting their results.
EBITDA
and adjusted EBITDA have limitations as analytical tools, and should not be
considered in isolation, or as a substitute for analysis of our results as
reported under GAAP. Because of these limitations, EBITDA and adjusted EBITDA
should not be considered as measures 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 GAAP results and
using EBITDA and adjusted EBITDA only supplementally. The following table
shows our EBITDA and adjusted EBITDA, and the reconciliation from operating
income (loss):
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
Quarter
Ended
December
31,
|
|
|
Quarter
Ended
December
31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
Operating
income (loss)
|
|
$
|
(773
|
)
|
$
|
3,256
|
|
Add
- depreciation and amortization
|
|
|
818
|
|
|
2,245
|
|
EBITDA
|
|
|
45
|
|
|
5,501
|
|
Add
-
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
42
|
|
Contributed
services
|
|
|
|
|
|
73
|
|
Adjusted
EBITDA
|
|
$
|
45
|
|
$
|
5,616
|
|
|
|
Predecessor
|
|
Successor
|
|
Combined
|
|
|
|
Six
Months
Ended
December
31,
|
|
Period
from
July
1 to
September
13,
|
|
Six
Months
Ended
December
31,
|
|
Six
Months
Ended
December
31,
|
|
|
|
2006
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(In
thousands)
|
|
Operating
income (loss)
|
|
$
|
197
|
|
$
|
1,530
|
|
$
|
3,145
|
|
$
|
4,675
|
|
Add
- depreciation and amortization
|
|
|
1,524
|
|
|
653
|
|
|
2,583
|
|
|
3,236
|
|
EBITDA
|
|
|
1,721
|
|
|
2,183
|
|
|
5,728
|
|
|
7,911
|
|
Add
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
— |
|
|
—
|
|
|
76
|
|
|
76
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
87
|
|
Adjusted
EBITDA
|
|
$
|
1,721
|
|
$
|
2,183
|
|
$
|
5,891
|
|
$
|
8,074
|
|
Liquidity
and Financial Condition
Our
principal source of capital for operations consists of funds available from
the
secured credit facility with Australia and New Zealand Banking Group Limited,
which we refer to as “ANZ”. We also finance a smaller portion of capital
requirements through finance leases and lease-purchase contracts. Prior to
September 2007, we had an unsecured limited recourse revolving line of credit
from Ronald F. Valenta, our Chief Executive Officer. Supplemental information
pertaining to our combined sources and uses of cash is presented in the table
below.
|
|
Predecessor
|
|
Successor
|
|
Combined
|
|
|
|
Six
Months
Ended
December
31,
|
|
Period
from
July
1 to
September
13,
|
|
Six
Months
Ended
December
31,
|
|
Six
Months
Ended
December
31,
|
|
|
|
2006
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(In
thousands)
|
|
Net
cash provided (used) by operating activities
|
|
$
|
4,385
|
|
$
|
4,294
|
|
$
|
(6,484
|
)
|
$
|
(2,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
$
|
(10,047
|
)
|
$
|
(3,078
|
)
|
$
|
(74,872
|
)
|
$
|
(77,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
$
|
6,454
|
|
$
|
(1,807
|
)
|
$
|
14,009
|
|
$
|
12,202
|
|
Operating
activities.
Our
operations used net cash flow of $2.2 million during YTD FY 2008, as
compared to providing net cash flow of $4.4 million during YTD FY 2007,
primarily as a result of the increase in our receivables and inventory levels
to
meet the anticipated growth in sales of our containers.
Investing
Activities. Net
cash
used by investing activities was $78.0 million for YTD FY 2008, as compared
to $10.0 million for YTD FY 2007. The increase in the use of cash was
primarily the result of the acquisitions of Royal Wolf, which used $53.1
million, and GE SeaCo, which used $17.9 million. Net capital expenditures for
our lease fleet were $3.8 million in YTD FY 2008 and $9.2 million in
YTD FY 2007. Capital expenditures for our lease fleet are primarily due to
continued demand for our products, requiring us to purchase and refurbish more
containers and portable buildings with the growth of our business. Our container
for lease fleet has increased from 15,948 units at June 30, 2007 to 23,377
units
at December 31, 2007. The amount of cash that we use during any period in
investing activities is almost entirely within management’s discretion. Other
than the preferred supply agreement with GE SeaCo discussed in Note 10 of Notes
to Condensed Consolidated Financial Statements, we have no other contracts
or
other arrangements pursuant to which we are required to purchase a fixed or
minimum amount of goods or services in connection with any portion of our
business.
Financing
Activities. Net
cash
provided by financing activities was $12.2 million during YTD FY 2008, as
compared to $6.5 million during YTD FY 2007. On September 14, 2007, we used
$2.4 million to fully repay the line of credit with Mr. Valenta. In addition,
in
September 2007, we paid $6.4 million to stockholders electing to convert their
shares of common stock into cash. Net borrowings under the ANZ credit facility,
finance leasing activities and the Bison secured senior subordinated note
totaled $14.5 million in YD FY 2008, as compared to net borrowings of $6.5
million in YTD FY 2007. These net borrowings were used together with cash flow
generated from operations to primarily fund expansion of our container lease
fleet.
Financial
Condition
Inventories
increased from $5.5 million at June 30, 2007 to $16.8 million at December
31, 2007, primarily to meet the anticipated growth in sales of our containers
and from the acquisition of GE SeaCo. In addition, during QE 2008, we commenced
recording purchases of containers directly into inventory rather than initially
into fixed assets; which increased the inventory balance by approximately $2.6
million at December 31, 2007 from June 30, 2007.
Property,
plant and equipment increased from $2.7 million at June 30, 2007 to $4.4
million at December 31, 2007 primarily due to the step-up to fair value in
the
basis of the fixed assets as a result of the purchase accounting adjustments
in
connection with our acquisition of Royal Wolf.
Our
total
container for lease fleet increased from $40.9 million at June 30, 2007 to
$66.5 million at December 31, 2007 primarily to meet the demand of increased
leasing utilization and the acquisition of GE SeaCo. At December 31, 2007,
we
had 23,377 units in our container lease fleet, as compared to 15,848 units
at
June 30, 2007.
Intangible
assets increased from $4.1 million at June 30, 2007 to $56.4 million at
December 31, 2007 as a result of the purchase accounting adjustments in
connection with our acquisitions of Royal Wolf and GE SeaCo.
Long-term
debt, including current portion, increased from $44.2 million at June 30,
2007 to $69.2 million at December 31, 2007 primarily due to additional debt
incurred in connection with the acquisitions of Royal Wolf and GE SeaCo,
including an increase in the amount of Royal Wolf’s credit facility with
Australian and New Zealand Banking Group Limited and the secured senior
subordinated note in the amount of $16.8 million issued to Bison
Capital. See Note 5 of Notes to Condensed Consolidated Financial Statements
for
further discussion of our long-term debt.
We
believe that our cash on-hand and cash flow provided by operations will be
adequate to cover our working capital and debt service requirements and a
certain portion of our planned capital expenditures to the extent such items
are
known or are reasonably determinable based on current business and market
conditions. We expect to finance our capital expenditure requirements under
our
ANZ credit facility or through capital lease agreements. We continually evaluate
potential acquisitions. We expect that any future acquisitions will be funded
through cash flow provided by operations and by additional borrowings under
our
ANZ credit facility.
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 specific customer segments can be seasonal, our operations
as a whole are not seasonal to any significant extent. We experience a reduction
in sales volumes during Australia’s 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 relocations industry, which experiences its
seasonal peak of personnel relocations during this same summer holiday
break.
Impact
of Inflation
We
believe that inflation has not had a material effect on our
business.
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 accounting principles generally accepted in the United States
of
America. 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 condensed consolidated financial statements.
For
the
issuances of stock options, we follow the fair value provisions of Statement
of
Financial Accounting Standards (“SFAS”) SFAS No. 123R, Share-Based Payment. SFAS
No. 123R 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 and the embedded derivative 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 management’s judgment and may impact net income. In
particular, the Company uses volatility rates based upon a sample of comparable
companies in Royal Wolf’s industry and 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
derivative.
In
preparing our condensed 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 is 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 will 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 will 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.
We
adopted FASB Interpretation 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109,
effective January 1, 2007. For discussion of the impact of adoption of FIN
48, see Note 2 of Notes to the Condensed Consolidated Financial
Statements.
There
have been no other significant changes in our critical accounting policies,
estimates and judgments during the quarter ended December 31,
2007.
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, commodity prices, equity prices, and other market-driven rates or
prices.
Credit
Risk.
It is
our policy that all customers who wish to purchase or lease
containers on credit terms are subject to credit verification procedures
and the Company will agree to terms with customers believed to be creditworthy.
In addition, receivable balances are monitored on an ongoing basis with the
result that our exposure to bad debts is not significant. For transactions
that are not denominated in the measurement currency of the relevant operating
unit, we do not offer credit terms without the specific approval of the Head
of
Credit in Australia. With respect to credit risk arising from the other
financial assets, which comprise cash and cash equivalents, available-for-sale
financial assets and certain derivative instruments, our exposure to credit
risk
arises from default of the counter party, with a maximum exposure equal to
the
carrying amount of these instruments. As the counter party for derivative
instruments is nearly always a bank, we have assessed this as a low
risk. In our opinion, we have no significant concentrations of credit
risk.
Interest
Rate Risk.
Our
exposure to market risk for changes in interest rates relates primarily to
long-term debt obligations. Our policy is to manage interest cost using a mix
of
fixed and variable rate debt. To manage this mix in a cost-efficient manner,
we
enter into interest rate swaps, in which we agree 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 are
designated to hedge changes in the interest rate of our commercial bill
liability. The secured loan and interest rate swap have the same critical terms,
including expiration dates. We believe that financial instruments
designated as interest rate hedges are highly effective. However, documentation
of such as required by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
does not
exist. Therefore, all movements in the fair values of these hedges are taken
directly to statement of operations.
Foreign
currency risk.
We have
transactional currency
exposure. 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. We have a bank account at ANZ 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. We use forward currency
contracts and options to eliminate the currency exposures on the majority of
our
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. We believe that financial instruments designated as foreign
currency hedges are highly effective. However documentation of such as required
by SFAS No. 133 does not exist. Therefore, all movements in the fair values
of
these hedges are taken directly to statement of operations.
We
are
exposed to market risks related to foreign currency translation caused by
fluctuations in foreign currency exchange rates between the U.S. dollar and
the
Australian dollar. The assets and liabilities of Royal Wolf are translated
from
the Australian dollar into the U.S. dollar at the exchange rate in effect at
each balance sheet date, while income statement amounts are translated at the
average rate of exchange prevailing during the reporting period. A strengthening
of the U.S. dollar against the Australian dollar could, therefore, reduce the
amount of cash and income we receive and recognize from our Australian
operations. We also now have certain U.S. dollar-denominated debt at Royal
Wolf,
including long-term intercompany borrowings, which are remeasured at each
financial reporting date with the impact of the remeasurement being recorded
in
our consolidated statements of operations. As foreign exchange rates vary,
our
results of operations and profitability may be harmed. We cannot predict the
effects of exchange rate fluctuations on our future operating results because
of
the potential volatility of currency exchange rates. To the extent we expand
our
business into other countries; we anticipate that we will face similar market
risks related to foreign currency translations caused by exchange rate
fluctuations between the U.S. dollar and the currencies of those
countries.
Reference
is made to Note 6 of Notes to Condensed Consolidated Financial Statements for
a
further discussion of financial instruments.
Item
4. Controls and Procedures
Ronald
F.
Valenta (our principal executive officer) and Charles E. Barrantes (our
principal financial officer) carried out an evaluation as of December 31, 2007
of the effectiveness of our disclosure controls and procedures, as defined
in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the “Exchange Act”). Based upon that evaluation, they concluded that, as of
December 31, 2007, our disclosure controls and procedures were
(1) effective in that they were designed to ensure that material
information relating to us is made known to our principal executive and
principal financial officers, and (2) effective in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
There
has
not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13a-15(d) under the Exchange
Act
that occurred during the quarter ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II. OTHER
INFORMATION
Item
1. Legal
Proceedings
None.
Item
1A. Risk Factors
There
have been no material changes to the risk factors disclosed in our Transition
Report on Form 10-K for the six months ended June 30, 2007 and our
post-effective amendment on Form S-1 filed on January 29, 2008.
Item
2.
Unregistered Sales of Equity Securities and Use of
Proceeds
None
that
have not been previously reported.
Item.
3. Defaults Upon Senior Securities
Not
applicable
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
See
Exhibit Index Attached.
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.
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Date:
February 14, 2008 |
GENERAL
FINANCE
CORPORATION |
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By: |
/s/
Ronald
F. Valenta |
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Ronald
F. Valenta
Chief
Executive Officer
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By: |
/s/ Charles
E. Barrantes |
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Charles
E. Barrantes
Chief
Financial Officer
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EXHIBIT
INDEX
Exhibit
Number
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Exhibit
Description
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2.2
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Business
Sale Agreement (incorporated by reference to Exhibit 2.1 of Registrant’s
Post-Effective Amendment No. 1 to Form S-1 filed January 29,
2008).
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10.30
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Employment
Agreement between General Finance Corporation and Christopher A.
Wilson
(incorporated by reference to Exhibit 10.1 of Registrant’s Post-Effective
Amendment No. 1 to Form S-1 filed January 29, 2008).
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10.31
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Preferred
Supply Agreement among General Electric Capital Container Finance
Corporation, Genstar Container Corporation, GE SeaCo SRL, Sea Containers
Ltd., Royal Wolf Trading Australia Pty Limited and GE SeaCo Australia
Pty
Limited (incorporated by reference to Exhibit 10.2 of Registrant’s
Post-Effective Amendment No. 1 to Form S-1 filed January 29,
2008).
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10.32
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Variation
Letter between Australia and New Zealand Banking Group Limited and
Royal
Wolf Australia Group (incorporated by reference to Exhibit 10.3 of
Registrant’s Post-Effective Amendment No. 1 to Form S-1 filed January 29,
2008).
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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
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