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 March 31, 2008
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
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
32-0163571
(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
April 30, 2008.
GENERAL
FINANCE CORPORATION
INDEX
TO FORM 10-Q
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
3
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
30
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
31
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
31
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
|
|
|
|
Item
5.
|
Other
Information
|
31
|
|
|
|
|
Item
6.
|
Exhibits
|
31
|
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,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, including $68,218 held in trust account at
June 30,
2007 (successor)
|
|
$
|
886
|
|
$
|
68,277
|
|
$
|
1,169
|
|
Trade
and other receivables, net of allowance for doubtful accounts of
$237
and $452 at June 30, 2007 and March 31, 2008,
respectively
|
|
|
13,322
|
|
|
—
|
|
|
20,088
|
|
Inventories
|
|
|
5,472
|
|
|
—
|
|
|
20,660
|
|
Prepaid
expenses
|
|
|
—
|
|
|
111
|
|
|
—
|
|
Total
current assets
|
|
|
19,680
|
|
|
68,388
|
|
|
41,917
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
receivables
|
|
|
1,364
|
|
|
—
|
|
|
1,619
|
|
Property,
plant and equipment, net
|
|
|
2,737
|
|
|
2
|
|
|
4,616
|
|
Container
for lease fleet, net
|
|
|
40,928
|
|
|
—
|
|
|
71,986
|
|
Intangible
assets, net
|
|
|
4,079
|
|
|
—
|
|
|
59,821
|
|
Deferred
tax assets
|
|
|
—
|
|
|
132
|
|
|
—
|
|
Other
assets (including $1,548 of deferred acquisition costs at June 30,
2007)
|
|
|
—
|
|
|
2,556
|
|
|
23
|
|
Total
non-current assets
|
|
|
49,108
|
|
|
2,690
|
|
|
138,065
|
|
Total
assets
|
|
$
|
68,788
|
|
$
|
71,078
|
|
$
|
179,982
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Trade
payables and accrued liabilities
|
|
$
|
8,641
|
|
$
|
893
|
|
$
|
19,845
|
|
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
|
|
|
9,079
|
|
Income
tax payable
|
|
|
245
|
|
|
177
|
|
|
140
|
|
Employee
benefits
|
|
|
1,614
|
|
|
12
|
|
|
1,095
|
|
Deferred
underwriting fees
|
|
|
—
|
|
|
1,380
|
|
|
—
|
|
Total
current liabilities
|
|
|
20,859
|
|
|
4,812
|
|
|
30,159
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and obligations, net of current portion
|
|
|
33,811
|
|
|
—
|
|
|
70,968
|
|
Deferred
tax liabilities
|
|
|
881
|
|
|
—
|
|
|
1,032
|
|
Employee
benefits and other non-current liabilities
|
|
|
197
|
|
|
—
|
|
|
206
|
|
Common
stock, subject to possible conversion
|
|
|
—
|
|
|
13,339
|
|
|
—
|
|
Total
non-current liabilities
|
|
|
34,889
|
|
|
13,339
|
|
|
72,206
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
—
|
|
|
—
|
|
|
8,762
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2008,
respectively (successor)
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Class
D and common stock (predecessor)
|
|
|
12,187
|
|
|
—
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
—
|
|
|
51,777
|
|
|
60,344
|
|
Accumulated
other comprehensive income
|
|
|
862
|
|
|
—
|
|
|
3,808
|
|
Retained
earnings (accumulated deficit)
|
|
|
(9
|
) |
|
1,149
|
|
|
4,702
|
|
Total
stockholders’ equity
|
|
|
13,040
|
|
|
52,927
|
|
|
68,855
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
68,788
|
|
$
|
71,078
|
|
$
|
179,982
|
|
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
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales
of containers
|
|
$
|
14,133
|
|
$
|
19,801
|
|
Leasing
of containers
|
|
|
5,761
|
|
|
8,849
|
|
|
|
|
19,894
|
|
|
28,650
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
12,713
|
|
|
16,356
|
|
Leasing,
selling and general expenses
|
|
|
4,626
|
|
|
6,473
|
|
Depreciation
and amortization
|
|
|
1,058
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,497
|
|
|
3,570
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
44
|
|
|
91
|
|
Interest expense
|
|
|
(1,254
|
)
|
|
(2,426
|
)
|
Foreign
currency exchange gain and other
|
|
|
183
|
|
|
115
|
|
|
|
|
(1,027
|
)
|
|
(2,220
|
)
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes and minority
interest
|
|
|
470
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
244
|
|
|
376
|
|
Minority
interest
|
|
|
—
|
|
|
140
|
|
Net
income
|
|
$
|
226
|
|
$
|
834
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$ |
0.09
|
|
Diluted
|
|
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
9,690,099
|
|
Diluted
|
|
|
|
|
|
11,083,722
|
|
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)
|
|
|
|
Nine Months
|
|
Period from
|
|
Nine Months
|
|
|
|
Ended
|
|
July 1 to
|
|
Ended
|
|
|
|
March 31,
|
|
September 13,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Sales
of containers
|
|
$
|
37,441
|
|
$
|
10,944
|
|
$
|
45,277
|
|
Leasing
of containers
|
|
|
15,995
|
|
|
4,915
|
|
|
17,624
|
|
|
|
|
53,436
|
|
|
15,859
|
|
|
62,901
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
33,094
|
|
|
9,466
|
|
|
37,757
|
|
Leasing,
selling and general expenses
|
|
|
16,066
|
|
|
4,210
|
|
|
13,595
|
|
Depreciation
and amortization
|
|
|
2,582
|
|
|
653
|
|
|
4,834
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,694
|
|
|
1,530
|
|
|
6,715
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
83
|
|
|
14
|
|
|
1,194
|
|
Interest expense
|
|
|
(3,069
|
)
|
|
(947
|
)
|
|
(4,385
|
)
|
Foreign
currency exchange gain (loss) and other
|
|
|
230
|
|
|
(129
|
)
|
|
2,220
|
|
|
|
|
(2,756
|
)
|
|
(1,062
|
)
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes and minority
interest
|
|
|
(1,062
|
)
|
|
468
|
|
|
5,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
861
|
|
|
180
|
|
|
1,837
|
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
354
|
|
Net
income (loss)
|
|
$
|
(1,923
|
)
|
$
|
288
|
|
$
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
$
|
0.36
|
|
Diluted
|
|
|
|
|
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
9,910,981
|
|
Diluted
|
|
|
|
|
|
|
|
|
11,304,604
|
|
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)
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
|
|
Other
Comprehensive
|
|
Retained
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
—
|
|
|
282
|
|
|
—
|
|
|
—
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
160
|
|
|
—
|
|
|
—
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,553
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,808
|
|
|
—
|
|
|
3,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
|
9,690,099
|
|
$
|
1
|
|
$
|
60,344
|
|
$
|
3,808
|
|
$
|
4,702
|
|
$
|
68,855
|
|
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)
|
|
|
|
Nine Months
|
|
Period from
|
|
Nine Months
|
|
|
|
Ended
|
|
July 1 to
|
|
Ended
|
|
|
|
March 31,
|
|
September 13,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
Net
cash provided (used) by operating activities
|
|
$
|
3,476
|
|
$
|
4,294
|
|
$
|
(6,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
75
|
|
|
28
|
|
|
16
|
|
Acquisitions
(including deferred financing costs ), net of
cash
acquired
|
|
|
—
|
|
|
—
|
|
|
(90,954
|
)
|
Purchases of
property, plant and equipment
|
|
|
(653
|
)
|
|
—
|
|
|
(310
|
)
|
Purchases
of container lease fleet
|
|
|
(15,198
|
)
|
|
(3,106
|
)
|
|
(5,764
|
)
|
Purchases
of intangible assets
|
|
|
(508
|
)
|
|
—
|
|
|
(285
|
)
|
Payment
of deferred purchase consideration
|
|
|
(151
|
)
|
|
—
|
|
|
—
|
|
Net
cash used by investing activities
|
|
|
(16,435
|
)
|
|
(3,078
|
)
|
|
(97,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Leasing activities
|
|
|
(216
|
)
|
|
(7,921
|
)
|
|
(282
|
)
|
Proceeds
from long-term borrowings
|
|
|
5,207
|
|
|
1,124
|
|
|
36,601
|
|
Proceeds
from issuances of capital
|
|
|
8,923
|
|
|
4,990
|
|
|
—
|
|
Payments
to converting stockholders, net
|
|
|
—
|
|
|
—
|
|
|
(6,426
|
)
|
Minority
interest capital contributions
|
|
|
—
|
|
|
—
|
|
|
8,278
|
|
Repayment
of borrowings from related party
|
|
|
—
|
|
|
—
|
|
|
(2,350
|
)
|
Net
cash provided (used) by financing activities
|
|
|
13,914
|
|
|
(1,807
|
)
|
|
35,821
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash
|
|
|
955
|
|
|
(591
|
)
|
|
(68,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
567
|
|
|
886
|
|
|
68,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(983
|
)
|
|
(5
|
)
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
539
|
|
$
|
290
|
|
$
|
1,169
|
|
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 Australian dollar
to
$0.8407 U.S. dollar realized in connection with payments made upon
completion of the acquisition, the purchase price paid to the sellers for the
RWA shares was $64.3 million, 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; and the issuance of a note to Bison Capital. As a result of this
structure, the Company owns 86.2% of the outstanding capital stock of
GFN U.S. and Bison Capital owns 13.8% of the outstanding capital stock 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 consideration, including the Company’s transaction costs of
approximately $1.7 million, deferred financing costs of $1.2 million and net
long-term debt refinancing of $4.9 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
|
|
|
11,203
|
|
|
|
|
Inventories
(primarily containers)
|
|
|
9,224
|
|
|
|
|
Lease
receivables
|
|
|
2,008
|
|
|
|
|
Property,
plant and equipment
|
|
|
4,346
|
|
|
|
|
Container
for lease fleet
|
|
|
51,362
|
|
|
|
|
Trade
and other payables
|
|
|
(15,082
|
)
|
|
|
|
Income
tax payable
|
|
|
(85
|
)
|
|
|
|
Other
current liabilities
|
|
|
(3,712
|
)
|
|
|
|
Long-term
debt and obligations
|
|
|
(37,029
|
)
|
|
|
|
Total
net tangible assets acquired and liabilities assumed
|
|
|
|
|
$
|
22,525
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
1,521
|
|
|
|
|
Goodwill
|
|
|
23,241
|
|
|
|
|
Total
intangible assets acquired
|
|
|
|
|
|
49,623
|
|
Total
purchase consideration
|
|
|
|
|
$
|
72,148
|
|
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 nine months ended March 31, 2007 and for the
nine
months ended March 31, 2008 assumes the acquisition of Royal Wolf occurred
on
January 1, 2007, July 1, 2006 and July 1, 2007, respectively (in
thousands):
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
Revenues
|
|
$
|
19,894
|
|
$
|
53,436
|
|
$
|
78,760
|
|
Net
income (loss)
|
|
$
|
(349
|
)
|
$
|
(1,979
|
)
|
$
|
2,900
|
|
Pro
forma net income (loss) per share -
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
$
|
(0.20
|
)
|
$
|
0.29
|
|
Diluted
|
|
|
(0.04
|
)
|
|
(0.20
|
)
|
|
0.26
|
|
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 periods. Transactions in foreign currencies
are translated at the foreign exchange rate prevailing at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies
at the balance sheet date are translated to the functional currency at the
foreign exchange rate prevailing at that date. Foreign exchange differences
arising on translation are recognized in the statement of operations.
Non-monetary assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate at the date
of
the transaction. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to the functional
currency at foreign exchange rates prevailing at the dates the fair value
was determined.
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 storage 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 lists,
which are 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,
|
|
March
31,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
4,113
|
|
$
|
18,371
|
|
Work
in progress
|
|
|
1,359
|
|
|
2,289
|
|
|
|
$
|
5,472
|
|
$
|
20,660
|
|
Employee
benefits
Defined
contribution benefit plan
Obligations
for contributions to a defined contribution benefit 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
|
|
Nine Months Ended
|
|
|
|
March 31, 2008
|
|
Basic
|
|
|
9,690,099
|
|
|
9,910,981
|
|
Assumed
exercise of warrants
|
|
|
1,393,623
|
|
|
1,393,623
|
|
Assumed exercise
of stock options
|
|
|
—
|
|
|
—
|
|
Diluted
|
|
|
11,083,722
|
|
|
11,304,604
|
|
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
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.
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
March
2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133. SFAS
No.
161
changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why
an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, (c) how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash flows and (d)
encourages, but does not require, comparative disclosures for earlier periods
at
initial adoption. SFAS No. 161 is effective for financial statements issued
for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. Management is currently evaluating the impact that
the
adoption of this statement may have 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.
On
February 29, 2008, the Company, through Royal Wolf, entered into an asset
purchase agreement to acquire the dry and refrigerated container assets of
Container Hire and Sales (“CHS”), located south of Perth, Australia for $3.8
million. The
total
purchase price has been allocated to tangible and intangible assets acquired
and
liabilities assumed based on their estimated fair market values as of February
29, 2008.
The
allocation for these acquisitions to tangible and intangible assets acquired
and
liabilities assumed based on their estimated fair market values were as follows
(in thousands):
|
|
GE SeaCo
November 14, 2007
|
|
CHS
February 29, 2008
|
|
Fair
value of the net tangible assets acquired and liabilities
assumed:
|
|
|
|
|
|
|
|
Inventories
(primarily containers)
|
|
$
|
1,746
|
|
$
|
—
|
|
Property,
plant and equipment
|
|
|
28
|
|
|
108
|
|
Container
for lease fleet
|
|
|
9,952
|
|
|
1,435
|
|
Trade
and other payables
|
|
|
(229
|
)
|
|
4
|
|
Total
net tangible assets acquired and liabilities assumed
|
|
|
11,497
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
Fair
value of intangible assets acquired:
|
|
|
|
|
|
|
|
Non-compete
agreement
|
|
|
1,999
|
|
|
—
|
|
Deferred
financing costs
|
|
|
84
|
|
|
472
|
|
Goodwill
|
|
|
4,270
|
|
|
1,753
|
|
Total
intangible assets acquired
|
|
|
6,353
|
|
|
2,225
|
|
Total
purchase consideration
|
|
$
|
17,850
|
|
$
|
3,772
|
|
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 CHS (see Note 4), this facility was
amended to increase the total facility limit to $91.6 million (AUS$99.8 million)
at March 31, 2008.
The
aggregate ANZ facility comprises ten different sub-facilities. The largest
of
these sub-facilities are a receivables financing facility of up to $9.2 million
(AUS$10.0 million), four interchangeable loan facilities under which the Company
may borrow up to the lesser of $56.3 million (AUS$61.3 million) or 85% of the
orderly liquidation value, as defined, of its container fleet, a special finance
line for acquisitions of $19.3 million (AUS$21.0 million) and two multi option
facilities for primarily yard construction of $2.8 million (AUS$3.0 million).
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 in five years following the initial drawdown on the
facility, or September 2012, but there is currently a $138,000 (AUS$150,000)
amortization per quarter under one of the interchangeable loan sub-facilities,
which limit is $4.6 million (AUS$5.0 million). These loans bear interest at
ANZ’s prime rate plus between 1.40% and 2.50% per annum, with interest payable
quarterly.
The
ANZ
credit facility is subject to certain covenants, including compliance with
specified consolidated interest cover and senior and total debt ratios, as
defined, for each financial quarter on a year-to-date or trailing-twelve-month
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 102%
of
par prior to September 13, 2009, 101% of par prior to September 13,
2010 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 March 31, 2008.
UBOC
Credit Facility
On
March
28, 2008, the Company entered into credit agreement with Union Bank of
California, N.A. (“UBOC”) for a $1.0 million credit facility. Borrowings or
advances under the facility will bear interest at UBOC’s “Reference Rate” (which
approximates the prime rate) and are due and payable within 60 days. The
facility is guaranteed by GFN U.S., requires (among other quarterly and yearend
financial reporting covenants) that there is at least one dollar of combined
net
income for GFN and GFN U.S. for the year ended June 30, 2008 and expires on
March 31, 2009. There were no outstanding borrowings under the UBOC credit
facility at March 31, 2008.
Capital
Leases
Capital
lease liabilities of the Company are payable as follows as of March 31, 2008
(in
thousands):
|
|
Minimum
lease payments
|
|
Interest
|
|
Principal
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
381
|
|
$
|
27
|
|
$
|
354
|
|
Between
one and five years
|
|
|
141
|
|
|
17
|
|
|
124
|
|
More
than five years
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
522
|
|
$
|
44
|
|
$
|
478
|
|
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 accounting, administrative 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 that lasted until January
31,
2008 with an affiliate of Mr. Valenta for the rental of the office space at
$1,148 per month. In addition, effective September 14, 2007, 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.
Effective
January 31, 2008, the Company entered into a lease with an affiliate of Mr.
Valenta for its new corporate headquarters in Pasadena, California. The rent
is
$7,779 per month, plus allocated charges for common area maintenance, real
property taxes and insurance, for approximately 3,000 square feet of office
space. The term of the lease is five years, with two five-year options, and
the rent is adjusted yearly based on the consumer price index.
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 $263,950 related to these options has been recognized
in
the statements of operations through March 31, 2008, with
a
corresponding benefit to additional paid-in capital. As of March 31, 2008,
there
remains $1,267,250 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 March 31, 2008, 45,000 of the 2006 Grant options
are exercisable and no options of the 2007 Grant are exercisable.
On
January 22, 2008 (“2008 Grant”), the Company granted options to certain key
employees of Royal Wolf to purchase 489,000 shares at an exercise price equal
to
the closing market price of the Company’s common stock as of that date, or
$8.80. The 2008 Grant consists of 243,000 options with a vesting period of
five
years and 246,000 options that vest subject to a performance condition based
on
Royal Wolf achieving a certain EBITDA (earnings before interest, income taxes,
depreciation and amortization) target for the year ending June 30, 2008. The
Company has assessed that it is probable that this EBITDA target will be
achieved and has commenced recognizing compensation expense over the anticipated
vesting period of 20 months. Total stock-based compensation expense of $129,900
related to the 2008 Grant has been recognized in the statement of operations
through March 31, 2008, with a corresponding benefit to additional paid-in
capital. As of March 31, 2008, there remains $1,247,800 of unrecognized
compensation expense that will be recorded in the statement of operations on
a
straight-line basis over the remaining weighted-average vesting period of 3.3
years. There were no options exercisable under the 2008 Grant as of March
31, 2008.
A
deduction is not allowed for U.S. income tax purposes with respect to
non-qualified options granted in the United States until the stock options
are
exercised or, with respect to incentive stock options issued in the United
States, unless the optionee makes a disqualifying disposition of the underlying
shares. The amount of any deduction will be the difference between the fair
value of the Company’s common stock and the exercise price at the date of
exercise. Accordingly, there is a deferred tax asset recorded for the U.S.
tax
effect of the financial statement expense recorded related to stock option
grants in the United States. The tax effect of the U.S. income tax deduction
in
excess of the financial statement expense, if any, will be recorded as an
increase to additional paid-in capital.
The
weighted-average fair value of the stock options granted was $3.06, $3.75 and
$3.94 per option for the 2006 Grant, 2007 Grant and 2008 Grant, respectively,
determined by using the Black-Scholes option-pricing model using the following
assumptions: A risk-free interest rate of 4.8%, 3.27% and 3.01% (corresponding
treasury bill rates) for the 2006 Grant, 2007 Grant and 2008 Grant,
respectively; an expected life of 7.5 years; an expected volatility of 26.5%,
31.1% and 35.83% for the 2006 Grant, 2007 Grant and 2008 Grant, respectively;
and no expected dividend.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 out and closed 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.
Non-cancellable
operating lease rentals at March 31, 2008 are payable as follows (in
thousands):
Less
than one year
|
|
$
|
2,774
|
|
One-two
years
|
|
|
1,413
|
|
Two-three
years
|
|
|
1,046
|
|
Three-four
years
|
|
|
470
|
|
Four-five
years
|
|
|
253
|
|
Thereafter
|
|
|
315
|
|
|
|
$
|
6,271
|
|
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.
In
January 2008, Royal Wolf was notified by a Department of the Australian
government of an odor that might be caused by high levels of formaldehyde
or
volatile organic compounds that exceed national guidelines in some of its
containers. Royal Wolf is working in cooperation with the Australian
government in investigating the complaint and estimates that remediation
to
address the levels of formaldehyde and volatile organic compounds may be
required for up to 640 units. Management of the Company believes that, based
on
their investigation to-date, the remediation of this matter would not have
a
material adverse effect on the consolidated results of operations or financial
position of the Company. However, the outcome is not currently determinable
and
it is possible that the ultimate resolution with the Australian government
may
be materially adverse to the consolidated results of operations of the Company.
GENERAL
FINANCE CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
11. Cash Flows From Operating Activities
The
following table provides a detail of cash flows from operating activities (in
thousands):
|
|
Predecessor
|
|
Successor
|
|
|
|
Nine Months
|
|
Period from
|
|
Nine Months
|
|
|
|
Ended
|
|
July 1 to
|
|
Ended
|
|
|
|
March 31,
|
|
September 13,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,923
|
)
|
$
|
288
|
|
$
|
3,553
|
|
Loss
(gain) on sales and disposals of fixed assets
|
|
|
(12
|
)
|
|
11
|
|
|
3
|
|
Unrealized
foreign exchange loss (gain)
|
|
|
(243
|
)
|
|
58
|
|
|
(376
|
)
|
Unrealized
loss (gain) on forward exchange contracts
|
|
|
72
|
|
|
72
|
|
|
393
|
|
Unrealized
loss on interest rate swaps
|
|
|
(85
|
)
|
|
90
|
|
|
(13
|
)
|
Depreciation
and amortization
|
|
|
2,582
|
|
|
653
|
|
|
4,834
|
|
Amortization
of deferred financing costs
|
|
|
—
|
|
|
—
|
|
|
125
|
|
Accretion
of interest on subordinated debt
|
|
|
1,394
|
|
|
32
|
|
|
129
|
|
Share-based
compensation expense
|
|
|
—
|
|
|
—
|
|
|
282
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
160
|
|
Interest
deferred for common stock subject to possible conversion, net of
income
tax effect
|
|
|
—
|
|
|
—
|
|
|
(226
|
)
|
Deferred
income taxes
|
|
|
860
|
|
|
180
|
|
|
2,281
|
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
354
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
and other receivables, net
|
|
|
(4,706
|
)
|
|
1,090
|
|
|
(7,814
|
)
|
Inventories
|
|
|
1,129
|
|
|
(3,822
|
)
|
|
(10,016
|
)
|
Other
|
|
|
—
|
|
|
—
|
|
|
(993
|
)
|
Accounts
payable and accrued liabilities
|
|
|
4,408
|
|
|
5,642
|
|
|
827
|
|
Income
taxes payable
|
|
|
—
|
|
|
—
|
|
|
(392
|
)
|
Net
cash provided (used) by operating activities
|
|
$
|
3,476
|
|
$
|
4,294
|
|
$
|
(6,889
|
)
|
12.
Subsequent Events
On
April
30, 2008 (May 1, 2008 in New Zealand), the Company, through Royal Wolf, acquired
RWNZ Acquisition Co. Limited and its wholly owned subsidiary, Royal Wolf Trading
New Zealand (collectively “RWNZ”) for over $18.0 million (using an exchange rate
of one New Zealand dollar to $0.7751 U.S. dollar). Among other things, the
acquisition agreement contains a three-year non-compete covenant under which
the
sellers agree not to sell or lease storage containers to retail customers in
an
area that includes New Zealand. The transaction was primarily financed under
the
existing ANZ senior credit facility (see Note 5).
On
May 1,
2008, the Company issued and sold to Bison Capital a second secured senior
subordinated promissory note in the principal amount of $5,500,000 on terms
comparable to the original Bison Note (see Note 5), except that the maturity
of
this second note is June 30, 2010.
On
May 2,
2008, the
Company offered the holders of its 8,625,000 outstanding, publicly-traded
Warrants and the 583,333 warrants issued to two executive officers (one of
whom
is also a director) the opportunity to exercise those warrants for a limited
time at a reduced exercise price of $5.10 per warrant. The offer commenced
on
May 2, 2008 and will continue through May 30, 2008, unless extended or
withdrawn. Warrants must be tendered prior to the expiration of the offer,
and
tenders of existing warrants may be withdrawn at anytime on or prior to the
expiration of the offer. Withdrawn warrants will be returned to the holder
in
accordance with the terms of the offer. Upon termination of the offer, the
original terms of the warrants will be reinstituted and the warrants will expire
on April 5, 2010, unless earlier redeemed according to their original terms
(see
Note 3).
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 and in our
post-effective amendment on Form S-1, both filed
with the Securities and Exchange Commission; as well as the condensed
consolidated financial statements included in this Quarterly Report on form
10-Q. This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known
and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “continue,” or the negative of such terms or other similar
expressions. 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 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 Australian dollar
to
$0.8407 U.S. dollar realized in connection with payments made upon completion
of
the acquisition, the purchase price paid to the sellers for the RWA shares
was
$64.3 million, 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; and the issuance of a note
to
Bison Capital. 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 18 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, we, 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, we purchased
the
assets of GE SeaCo used in its dry and refrigerated container business in
Australia and Papua New Guinea for $17,850,000. With
this
purchase, we added 6,300 containers, of which approximately 4,600 units were
leased. 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, we entered in a preferred
supply agreement with GE SeaCo. Under the preferred supply agreement, GE SeaCo
has agreed to sell to us, and we have 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, we 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.
On
February 29, 2008, we, through Royal Wolf, entered into an asset purchase
agreement to acquire the dry and refrigerated container assets of Container
Hire
and Sales (“CHS”), located south of Perth, Australia for approximately $3.8
million. With this purchase, we added 630 storage containers, of which
approximately 570 units are leased in the mining dominated Western Australia
marketplace.
On
April
30, 2008 (May 1, 2008 in New Zealand), we, through Royal Wolf, acquired RWNZ
Acquisition Co. Limited and its wholly owned subsidiary, Royal Wolf Trading
New
Zealand (collectively “RWNZ”) for approximately $18.6 million. Through
this acquisition, we acquired more than 5,800 storage containers, of which
approximately 5,000 storage containers are in the leasing fleet at an
approximately 86% utilization rate. Among
other things, the acquisition agreement contains a three-year non-compete
covenant under which the sellers agree not to sell or lease storage containers
to retail customers in an area that includes New Zealand.
Results
of Operations
Quarter
Ended March 31, 2008 (“QE FY 2008”) Compared to Quarter Ended March 31, 2007
(“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 $19.8 million compared to $14.1 million
during QE FY 2007; representing an increase of $5.7 million or 40.4%. This
increase was mainly due to growth in revenues from sales of containers in our
retail operations of $1.9 million, sales of $1.6 million in our national
accounts group or non-retail operations and $2.1 million due to favorable
foreign exchange rates. The $1.9 million increase in our retail operations
consisted of $0.3 million due to higher unit sales and $1.6 million
due to price increases. The $1.6 million increase in our national accounts
group operations consisted of $4.4 million due to higher unit sales, offset
somewhat by price reductions of $2.8 million.
Leasing
of container revenues during QE FY 2008 amounted to $8.8 million compared to
$5.8 million during QE FY 2007, representing an increase of $3.0 million, or
51.7%. This was driven by favorable foreign exchange rates of $0.9 million,
an
increase of $0.2 million in our average total number of units on lease per
month
in our portable container building business, which increased by 31.6% during
QE
FY 2008 compared to QE FY 2007; and an increase of $1.9 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 and CHS in February 2008. Average utilization in our retail
operations was 80.3% during QE FY 2008, as compared to 82.0% during QE
FY 2007; and our average utilization in our national accounts group
operations was 87.7% during QE FY 2008, as compared to 79.3% during QE
FY 2007. Overall our average utilization was 83.3% in QE FY 2008, as
compared to 81.0% 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 of one Australian dollar during QE FY 2007 was $0.78606 U.S.
dollar compared to $0.90493 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 $2.1 million and $0.9 million, respectively,
during QE FY 2008 compared to QE FY 2007; representing 34.1% of the increase
in
total revenues; or 15.1% of total revenues in QE FY 2007.
Sales
of
containers and leasing of containers represented 69% and 31% and 71% and 29%
of
total revenues in QE FY 2008 and QE FY 2007, respectively.
Cost
of Sales.
Cost of
sales in our container sales business increased by $3.7 million to $16.4 million
during QE FY 2008 compared to $12.7 million during QE FY 2007. The
increase was due to foreign exchange translation effect of $1.9 million and
cost
increases of $1.2 million and $0.6 million in our retail and national
operations, respectively. Our gross profit margin from sales revenues improved
during QE FY 2008 to 17.4% compared to 10.0% during QE FY 2007 as a result
of
price increases and favorable product mix.
Leasing,
Selling and General Expenses.
Leasing,
selling and general expenses increased by $1.9 million during QE FY 2008, or
41.3%, to $6.5 million from $4.6 million during QE FY 2007. This increase
includes approximately $0.6 million, or 33.3% of the increase, incurred at
GFN.
The following table provides more detailed information about the Royal
Wolf operating expenses of $5.9 million in QE FY 2008 as compared to $4.6
million in QE FY 2007:
|
|
Quarter Ended March 31,
|
|
|
|
(In millions)
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Salaries,
wages and related
|
|
$
|
2.8
|
|
$
|
3.3
|
|
Rent
|
|
|
0.1
|
|
|
0.1
|
|
Customer
service center (“CSC”) operating costs
|
|
|
0.7
|
|
|
1.1
|
|
Business
promotion
|
|
|
0.2
|
|
|
0.2
|
|
Travel
and meals
|
|
|
0.1
|
|
|
0.2
|
|
IT
and telecommunications
|
|
|
0.1
|
|
|
0.2
|
|
Professional
costs
|
|
|
0.4
|
|
|
0.4
|
|
Other
|
|
|
0.2
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.6
|
|
$
|
5.9
|
|
The
increase in QE FY 2008 from QE FY 2007 in salaries, wages and
related expenses and CSC costs of $0.5 million and $0.4 million,
respectively, were due primarily 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 20.6%
in
QE FY 2008 from 23.1% in QE FY 2007.
Depreciation
and Amortization.
Depreciation and amortization expenses increased by $1.2 million to $2.3 million
during QE FY 2008 compared to $1.1 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 $1.0 million of this increase.
Interest Expense.
The
increase in interest expense of $1.1 million in QE FY 2008 as compared to QE
FY
2007was due principally to an increase in total long-term debt, which was $40.7
million at December 31, 2006, $39.8 million at March 31, 2007, $69.2 million
at
December 31, 2007 and $80.0 million at March 31, 2008. The increase in total
debt in QE FY 2008 was due primarily to our acquisition of CHS at principally
Royal Wolf’s credit facility with Australian and New Zealand Banking Group
Limited (“ANZ”).
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.
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 27.9% 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 $0.8 million during QE FY 2008 compared to net income of $0.2
million during QE FY 2007 primarily as a result of increased revenues from
the
sales and leasing of containers in QE FY 2008, offset somewhat by additional
interest expense.
Nine
Months Ended March 31, 2008 (”YTD FY 2008”) Compared to Nine Months Ended March
31, 2007 (“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 March 31, 2008; and (iii) the combined results of operations of
the
Predecessor and Successor for YTD FY 2008.
|
|
Predecessor
|
|
Successor
|
|
Combined
|
|
|
|
Nine Months
|
|
Period from
|
|
Nine Months
|
|
Nine Months
|
|
|
|
Ended
|
|
July 1 to
|
|
Ended
|
|
Ended
|
|
|
|
March 31,
|
|
September 13,
|
|
March 31,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
2008
|
|
|
|
(In
thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of containers
|
|
$
|
37,441
|
|
$
|
10,944
|
|
$
|
45,277
|
|
$
|
56,221
|
|
Leasing
of containers
|
|
|
15,995
|
|
|
4,915
|
|
|
17,624
|
|
|
22,539
|
|
|
|
|
53,436
|
|
|
15,859
|
|
|
62,901
|
|
|
78,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
33,094
|
|
|
9,466
|
|
|
37,757
|
|
|
47,223
|
|
Leasing,
selling and general expenses
|
|
|
16,066
|
|
|
4,210
|
|
|
13,595
|
|
|
17,805
|
|
Depreciation
and amortization
|
|
|
2,582
|
|
|
653
|
|
|
4,834
|
|
|
5,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,694
|
|
|
1,530
|
|
|
6,715
|
|
|
8,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
83
|
|
|
14
|
|
|
1,194
|
|
|
1,208
|
|
Interest expense
|
|
|
(3,069
|
)
|
|
(947
|
)
|
|
(4,385
|
)
|
|
(5,332
|
)
|
Foreign
currency exchange gain (loss) and other
|
|
|
230
|
|
|
(129
|
)
|
|
2,220
|
|
|
2,091
|
|
|
|
|
(2,756
|
)
|
|
(1,062
|
)
|
|
(971
|
)
|
|
(2,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes and minority
interest
|
|
|
(1,062
|
)
|
|
468
|
|
|
5,744
|
|
|
6,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
861
|
|
|
180
|
|
|
1,837
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
354
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,923
|
)
|
$
|
288
|
|
$
|
3,553
|
|
$
|
3,841
|
|
Revenues. Sales of
containers during YTD FY 2008 amounted to $56.2 million compared to $37.4
million during YTD FY 2007; representing an increase of $18.8 million or 50.3%
.This increase was mainly due to growth in revenues from sales of containers
in
our retail operations of $8.0 million, sales of $5.3 million in our national
accounts group or non-retail operations and $5.3 million due to favorable
foreign exchange rates. The $8.0 million increase in our retail operations
consisted of $4.5 million due to higher unit sales and $3.5 million
due to price increases. The $5.3 million increase in our national accounts
group operations consisted of $6.9 million due to higher unit sales, offset
somewhat by price reductions of $1.6 million.
Leasing
of container revenues during YTD FY 2008 amounted to $22.5 million compared
to
$16.0 million during YTD FY 2007, representing an increase of $6.5 million,
or
40.6%. This was driven by favorable foreign exchange rates of $2.3 million,
an
increase of $1.0 million in our average total number of units on lease per
month
in our portable container building business, which increased by 54.1% during
YTD
FY 2008 compared to YTD FY 2007; and an increase of $3.2 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 and CHS in February 2008. Average utilization in our retail
operations was 82.8% during YTD FY 2008, as compared to 83.6% during
YTD FY 2007; and our average utilization in our national accounts group
operations was 81.4% during YTD FY 2008, as compared to 77.0% during
YTD FY 2007. Overall our average utilization was 82.6% in YTD FY 2008, as
compared to 81.0% in YTD FY 2007.
The
average value of the U.S. dollar against the Australian declined during YTD
FY
2008 as compared to YTD FY 2007. The average currency exchange rate of one
Australian dollar during YTD FY 2007 was $0.77101 U.S. dollar compared to
$0.88084 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 $5.3 million and $2.3 million, respectively,
during YTD FY 2008 compared to YTD FY 2007; representing 30.0% of the increase
in total revenues; or 14.2% of total revenues in YTD FY 2007.
Sales
of
containers and leasing of containers represented 71% and 29% and 70% and 30%
of
total revenues in YTD FY 2008 and YTD FY 2007, respectively.
Cost
of Sales.
Cost of
sales in our container sales business increased by $14.1 million to $47.2
million during YTD FY 2008 compared to $33.1 million during YTD FY 2007.
The increase was due to foreign exchange translation effect of $4.2 million
and
cost increases of $5.6 million and $4.3 million in our retail and national
operations, respectively. Our gross profit margin from sales revenues improved
during YTD FY 2008 to 16.0% compared to 11.6% during YTD FY 2007 as a result
of
price increases and favorable product mix.
Leasing,
Selling and General Expenses.
Leasing,
selling and general expenses increased by $1.7million, or 10.6%, during YTD
FY
2008 to $17.8 million from $16.1 million during YTD FY 2007. This increase
includes approximately $1.6 million, or 94.1% of the increase, incurred at
GFN.
The following table provides more detailed information about the Royal
Wolf operating expenses of $16.2 million in YTD FY 2008 as compared to $16.1
million in YTD FY 2007:
|
|
Nine Months Ended March 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
(In millions)
|
|
Salaries,
wages and related
|
|
$
|
10.6
|
|
$
|
9.2
|
|
Rent
|
|
|
0.3
|
|
|
0.3
|
|
CSC
operating costs
|
|
|
1.9
|
|
|
2.8
|
|
Business
promotion
|
|
|
0.6
|
|
|
0.7
|
|
Travel
and meals
|
|
|
0.5
|
|
|
0.7
|
|
IT
and telecommunications
|
|
|
0.3
|
|
|
0.6
|
|
Professional
costs
|
|
|
1.1
|
|
|
1.2
|
|
Other
|
|
|
0.8
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16.1
|
|
$
|
16.2
|
|
YTD
FY
2007 salaries, wages and related expenses include a shared-based payment
expense of approximately $3.0 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 (not including the share-based
payment expense) in YTD FY 2008 from YTD FY 2007 in salaries, wages and
related expenses and CSC costs of $1.5 million and $0.9 million,
respectively, were primarily 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 20.6%
in
YTD FY 2008 from 30.1% (24.3% not including the share-based payment expense)
in
YTD FY 2007.
Depreciation
and Amortization.
Depreciation and amortization expenses increased by $2.9 million to $5.5 million
during YTD FY 2008 compared to $2.6 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 $2.2 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 $2.2 million in YTD FY 2008 as compared to
YTD
FY 2007 was due principally to an increase in total long-term debt, which was
$33.7 million at June 30, 2006, $39.8 million at March 31, 2007, $44.2 million
at June 30, 2007 and $80.0 million at March 31, 2008. The increase in total
debt
in YTD FY 2008 was due primarily to our acquisitions of Royal Wolf, GE SeaCo
and
CHS at principally Royal Wolf’s credit facility with ANZ 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 32.5% 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 $3.8 million during YTD FY 2008 compared to a net loss of $1.9
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, offset somewhat by increased interest
expense.
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. 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
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
(In
thousands)
|
|
Operating
income
|
|
$
|
1,497
|
|
$
|
3,570
|
|
Add
- depreciation and amortization
|
|
|
1,058
|
|
|
2,251
|
|
EBITDA
|
|
|
2,555
|
|
|
5,821
|
|
Add
-
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
206
|
|
Contributed
services
|
|
|
—
|
|
|
73
|
|
Adjusted
EBITDA
|
|
$
|
2,555
|
|
$
|
6,100
|
|
|
|
Predecessor
|
|
Successor
|
|
Combined
|
|
|
|
Nine Months
|
|
Period from
|
|
Nine Months
|
|
Nine Months
|
|
|
|
Ended
|
|
July 1 to
|
|
Ended
|
|
Ended
|
|
|
|
March 31,
|
|
September 13,
|
|
March 31,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
2008
|
|
|
|
(In thousands)
|
|
Operating
income
|
|
$
|
1,694
|
|
$
|
1,530
|
|
$
|
6,715
|
|
$
|
8,245
|
|
Add
- depreciation and amortization
|
|
|
2,582
|
|
|
653
|
|
|
4,834
|
|
|
5,487
|
|
EBITDA
|
|
|
4,276
|
|
|
2,183
|
|
|
11,549
|
|
|
13,732
|
|
Add
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
282
|
|
|
282
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
160
|
|
|
160
|
|
Adjusted
EBITDA
|
|
$
|
4,276
|
|
$
|
2,183
|
|
$
|
11,991
|
|
$
|
14,174
|
|
Liquidity
and Financial Condition
Our
principal source of capital for operations consists of funds available from
the
secured credit facility with ANZ. We also finance a smaller portion of capital
requirements through finance leases and lease-purchase contracts, have a $1.0
million line of credit with Union Bank of California, N.A and have outstanding
senior subordinated notes with Bison Capital. 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
|
|
|
|
Nine Months
|
|
Period from
|
|
Nine Months
|
|
Nine Months
|
|
|
|
Ended
|
|
July 1 to
|
|
Ended
|
|
Ended
|
|
|
|
March 31,
|
|
September 13,
|
|
March 31,
|
|
March 31,
|
|
|
|
2007
|
|
2007
|
|
2008
|
|
2008
|
|
|
|
(In thousands)
|
|
Net
cash provided (used) by operating activities
|
|
$
|
3,476
|
|
$
|
4,294
|
|
$
|
(6,889
|
)
|
$
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
$
|
(16,435
|
)
|
$
|
(3,078
|
)
|
$
|
(97,297
|
)
|
$
|
(100,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
$
|
13,914
|
|
$
|
(1,807
|
)
|
$
|
35,821
|
|
$
|
34,014
|
|
Operating
activities.
Our
operations used net cash flow of $2.6 million during YTD FY 2008, as
compared to providing net cash flow of $3.5 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 $100.4 million for YTD FY 2008, as
compared to $16.4 million for YTD FY 2007. The increase in the use of
cash was primarily the result of the acquisitions of Royal Wolf, which used
$69.3 million, GE SeaCo, which used $17.9 million, and CHS, which used $3.8
million. Net capital expenditures for our lease fleet were $8.9 million in
YTD FY 2008 and 15.2 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. 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, which has favorable pricing but
does not have a minimum purchase commitment, we have no long-term contracts
or
other arrangements pursuant to which we are required to purchase at a
predetermined price or a minimum amount of goods or services in connection
with
any portion of our business.
Financing
Activities. Net
cash
provided by financing activities was $34.0 million during YTD FY 2008, as
compared to $13.9 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 $29.5 million in YD FY 2008, as compared to net
borrowings of $5.0 million in YTD FY 2007. These net borrowings were used
together with cash flow generated from operations to primarily fund acquisitions
and the expansion of our container lease fleet.
Financial
Condition
Inventories
increased from $5.5 million at June 30, 2007 to $20.7 million at March 31,
2008, primarily to meet the anticipated growth in sales of our containers and
from the acquisition of GE SeaCo. In addition, during FY 2008, we commenced
recording purchases of containers directly into inventory rather than initially
into fixed assets; which increased the inventory balance by approximately $3.0
million at March 31, 2008 from June 30, 2007.
Property,
plant and equipment increased from $2.7 million at June 30, 2007 to $4.6
million at March 31, 2008, 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
$72.0 million at March 31, 2008, primarily due to the step-up to fair value
in
the basis of the containers as a result of the purchase accounting adjustments
in connection with our acquisition of Royal Wolf, to meet the demand of
increased leasing utilization, and as a result of the acquisitions of GE SeaCo
and CHS. At March 31, 2008, we had 24,271 units (14,921units in retail
operations and 9,350 units in national account group operations) in our
container lease fleet, as compared to 15,948 units (11,104 units in retail
operations and 4,844 units in national account group operations) at June 30,
2007. At those dates, 19,680 units (11,771 in retail operations and 7,909 in
national account group operations) and 13,055 units (9,180 in retail operations
and 3,875 in national account group operations) were on lease, respectively.
Intangible
assets increased from $4.1 million at June 30, 2007 to $59.8 million at
March 31, 2008 as a result of the purchase accounting adjustments in connection
with our acquisitions of Royal Wolf, GE SeaCo and CHS.
Long-term
debt, including current portion, increased from $44.2 million at June 30,
2007 to $80.0 million at March 31, 2008 primarily due to the acquisitions of
Royal Wolf, GE SeaCo and CHS. These acquisitions were funded in large part
by
borrowings on the Royal Wolf’s credit facility with ANZ and the issuance of the
secured senior subordinated note in the amount of $16.8
million 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 primarily
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, by
additional borrowings under our ANZ credit facility and by proceeds received
in
our offering of a reduced exercise price to our publicly-traded and certain
privately-placed warrants for conversion into common stock through May 30,
2008
(see Note 12 of Notes to Condensed Consolidated Financial
Statements).
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 March 31,
2008.
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 March 31, 2008
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
March 31, 2008, 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 March 31, 2008 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 March 20, 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.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
May 14, 2008
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GENERAL
FINANCE CORPORATION
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|
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By:
|
/s/
Ronald F. Valenta
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|
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Ronald
F. Valenta
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|
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Chief
Executive Officer
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|
|
|
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By:
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/s/
Charles E. Barrantes
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|
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Charles
E. Barrantes
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|
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Chief
Financial Officer
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Exhibit
Number
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|
Exhibit
Description
|
|
|
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10.33
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|
Variation
Letter between Australia and New Zealand Banking Group Limited and
Royal
Wolf Australia Group (incorporated by reference to Exhibit 10.4 of
Registrant’s Post-Effective Amendment No. 1 to Form S-1 filed March 20,
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
|
|
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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