1. Patton Boggs Aviation Briefing Exposes Five Hot Issues in Business Aviation

A strong, interactive audience of industry leaders in business aviation attended a briefing last month entitled: The New Era of Business Aviation. On March 21, 2005, Patton Boggs LLP sponsored this event at its Dallas office. Patton Boggs’ unique aviation team for this event included:

• Rodney E. Slater, former Secretary of Transportation (DOT) in the Clinton Administration

• Gregory S. Walden, former Chief Counsel of the Federal Aviation Administration (FAA)

• Stephen McHale, former Deputy Administrator of the U.S. Transportation Security Administration (TSA)

• David G. Mayer, Author of Business Leasing For Dummies and Founder of Business Leasing News

The discussion clearly highlighted five of the hottest topics in business aviation for virtually all of the participants, including lessors, owners, banks, lenders, operators, charterers and fractional/jet card program managers. These issues included the following:

• Forthcoming Cape Town Convention. David Mayer described the Cape Town Convention, including its benefits, priority, rights and remedies provisions, status and application to real deals. A significant concern related to the rights of those holding a “prospective international interest” in “aircraft objects”. The Cape Town Convention and the related Aircraft Protocol will permit the filing of an interest in certain aircraft, engines and helicopters before a closing and funding at the commitment or proposal stage. The prospective interest would rank in priority to other subsequently filed interests by virtue of being filed first, even if the subsequent interest holder is the party that actually closes the original financing transaction. The difficulty of removing a prior interest and managing filings of prospective interests created significant concern for the participants, as did the realization that the Cape Town Convention could enter into force as early as this summer. At that point, every new transaction creating an “international interest” in aircraft objects filed at the Federal Aviation Administration would also require registration of such interests at the International Registry in Ireland created under the Cape Town Convention. On a positive note, Rodney Slater emphasized how important Cape Town could become in expanding opportunities in transportation and transaction volume for business aviation. For more on Cape Town and the Aircraft Protocol, see: Aviation Finance Players Focus on Potential Impact of Cape Town Convention, by David G. Mayer, Business Leasing News (March 2005)
  

• Increased FAA Enforcement Actions. Greg Walden discussed the dramatic increase in enforcement actions by the DOT and FAA regarding the practice of business aircraft owners, brokers and lessees in placing their aircraft on the operations specifications of a certificated carrier, as well as the practice of owners, brokers and lessees in holding out air transportation without a DOT permit. The DOT has reached around 20 consent decrees in the last two years, and the FAA’s recent Emergency Cease and Desist Order against Platinum Jet following a February 2, 2005 accident at Teterboro Airport in New Jersey may signal greater FAA attention to these practices. David Mayer and Greg Walden explained the steps that must be taken to mitigate the risk of DOT or FAA enforcement action, including proper structuring of charter management arrangements and exercising due diligence in selecting the partnering carrier.

  Greg also explained the pitfalls for companies that set up a flight department as a separate corporation or limited liability company (LLC) to operate the company’s aircraft, in an apparent attempt to shield the parent from liability. The FAA currently considers these separate flight departments to fall outside of the intra-corporate family exception from the regulatory prohibition if the flight department receives any compensation for transporting persons, including reimbursement for costs, without holding an air carrier certificate. Greg said the liability risk benefits could be illusory if the FAA discovers this arrangement.  See: 14 CFR 91.501(b)(5).
  
  Several attendees noted that the practice of setting up a flight department as a legal entity within a company is widespread. They suggested that certain leasing or financing companies either fail to appreciate or ignore the enforcement risks in order to win the financing or leasing business. The FAA has authority to ground aircraft operating in violation of its rules, but more likely would seek a civil penalty against the LLC or other entity and perhaps seek to suspend or revoke the certificate held by the flight department’s pilot, whom the FAA would conclude should know better.

*Warning: A violation of the FAA or DOT rules in these cases will generally constitute a loan or lease default and may invalidate insurance coverage on the aircraft, potentially leaving a lender or lessor unprotected against loss or damage to the aircraft or persons injured in an incident or accident. 

Greg Walden touched on the few options currently available to mitigate these enforcement risks. A flight department can obtain an air carrier certificate; the parent company can reduce its liability risks through insurance coverage rather than setting up a flight department as a separate legal entity; and the parent may use an existing certificated carrier to handle its flight operation functions.

• Executive Taxation for Personal Use of Aircraft. David Mayer explained the change in tax law affecting senior corporate executives who use company aircraft for personal reasons. In his presentation entitled: A Briefing on Personal Use of Company Aircraft by Executives: A Far More Taxing Experience, David described that, starting October 22, 2004, section 274 of the Internal Revenue Code of 1986 (Code) changed for the worse for executives. With the addition of section 274(e)(2) of the Code, companies can now deduct the expense of flights only to the extent of compensation imputed to executives for their personal use of company aircraft. This rule applies regardless of whether the flight costs far more (or less) than the compensation received by the executive for the fringe benefit. The participants expressed concern about the complexity of the new tax rules and the interest of the Securities and Exchange Commission (SEC) in related disclosure and compensation questions. The finance participants also shared that the cost and complexity for executives may inhibit the executive’s desire to acquire or use corporate aircraft and thereby cut the volume of new aircraft sales and financing transactions.

Warning: As a lessor, broker, owner or lender, use caution when discussing questions with executives about their taxation and disclosure obligations and when evaluating both SEC and tax implications of the new law.

• Fractional Shares, VLJ and Jet Card Growth. Greg Walden discussed new Subpart K fractional ownership rules as contrasted with Part 135 of the Federal Aviation Regulations, noting that Subpart K leaves several issues unresolved, including three tax issues.  But the opening comments from former Secretary Rodney Slater focused on the robust growth in the market for fractional shares and jet cards, and the pronounced market impact of fractional programs. As a group, these programs buy about 40 percent of the new business jets manufactured today. Rodney also pointed out that the development of very light jets (VLJ) or microjets would change transportation as we know it today. He cautioned that the new VLJs would create complex policy and infrastructure issues, such as landing rights, airport congestion and security. The participants involved in VLJs or fractional shares acknowledged that the buying power of fractional programs could occasionally delay them from maintaining a smooth upward trend in financing or leasing whole aircraft in the growing business aviation market.
  

• Security For Aircraft. Steve McHale described TSA’s views in business aviation in the aftermath of 9-11. He shared a sobering and realistic assessment of how the government must almost inevitably overreact if a terrorist incident occurs and the dramatic impact on business aviation if a business jet is involved in an incident. He pointed out the often-omitted steps in documenting transactions, including appropriate provisions on best security practices, Patriot Act (money laundering) protection, insurance coverage and remedies in case of a breach of these responsibilities. The participants at the briefing admitted some concern that improper drafting of contracts left some of them exposed to the failure of their customers to take precautions for terrorist threats.

*Opportunity Point: Patton Boggs is producing a limited number of disks containing the 202 pages of the power point presentations used at the briefing. As a subscriber of Business Leasing News, if you would like to have a CD of the power point presentations (for free), send an e-mail to Patton Boggs LLP at dallasrsvp@pattonboggs.com with your full contact information and request for a CD. Attendees will receive a CD, and a copy will be made available to subscribers who request one by April 29, 2005 -- while supplies last.

2. Lease Accounting Remains Volatile as FASB Slams Leveraged Leasing

Lease accounting is under siege again, and both lessors and lessees will feel the impact. According to a recent article in Forbes Magazine:

145 companies … have been hit with lease-accounting problems. Companies have either restated, or plan to restate, their financials due to improper lease accounting. Other companies have taken a cumulative catch-up charge to fix their lease accounting, or say they are suspicious that they have a problem.

See: Lease Accounting Gets Uglier, by Elizabeth MacDonald, Forbes.com 03.14.05, 3:30 PM ET  

*Comment:  The article used lessees in the retail and restaurant businesses that often face different issues from the equipment leasing industry. Since accounting in the equipment leasing has been a hot topic since the Enron fiasco, Forbes should recheck the accuracy of its research so it doesn’t distort the story.

The Equipment Leasing Association has been actively engaged in a dialogue with the regulatory bodies and the financial press to educate them on leasing and limit the negative impression of the leasing industry. Despite its efforts several areas have been hit hard with adverse accounting trends, including residual valuation, off-balance sheet accounting, real estate leasing and Basel II lease-related rules.

Leveraged Lease Accounting Questioned After LILO and SILO Changes

One current and acute area of concern relates to when lessors should “rerun” their leverage lease accounting to determine the amortization of earnings associated with the lease. Formerly GAAP (paragraph 46 at page 22 of Financial Accounting Statement No. 13 (FAS No. 13), had required rerunning a leveraged lease when total net income changed but not when timing of tax cash flow assumptions changed. For example, cash flow could change as a result of a settlement with the Internal Revenue Service (IRS). However, FASB is about to change that approach.

*Term to Know: Under Paragraph 42 of FAS No. 13, a “leveraged lease” refers to direct finance leases that have three parties: a lessee, a long-term non-recourse lender providing significant debt and a lessor (called the equity participant), and a leveraged lease must have an investment pattern that “phases” under the “multiple investment sinking fund” rules (MISF), typically due to timing cash flows from tax benefits. See: “FASB Pronouncements” and “Statements of Financial Accounting Standards” for FAS No. 13 at page 20-21. The controversial lease in, lease out transactions (LILOs) and sale in, lease out contracts (SILOs a/k/a lease-to-service contracts) constitute types of leveraged leases.

Due to tax law changes, there have been and will be IRS settlements in various LILOs and SILOs. These settlements will change the timing of tax deductions though total net income will not change (or has not changed) -- it’s merely a change in timing of cash flows. Reduced tax benefits reduce the after tax yield of a leveraged lease. Under the new preliminary FASB guidance, a lessor will have to rerun leveraged leases when cash flow assumptions change.

*Tip: Although not part of the new FASB guidance, when a lessor’s composite income tax rate changes, lessors should rerun the accounting for leveraged leases when it is expected the changes in tax position become permanent or are unlikely to reverse. FASB chose not to deal with tax rate changes in the new guidance because, in its opinion, existing guidance states clearly that a change in income tax rates results in a change in total net income. A change in net income requires a rerun by a lessor of its leveraged lease accounting.

Because lessors have used inconsistent methods to determine when to rerun leveraged leases and because the LILO/SILO settlements will significantly change timing of tax benefits, the Big 4 accounting firms asked FASB for guidance on how and when to rerun these deals. See: FASB Project Update -Leveraged Leases (Dec. 3, 2004). The old adage seems to be true in this case for the leasing industry: “Be careful what you ask for.”

FASB’s Answer Hurts Lessors

FASB’s conclusion overturns current GAAP practice and requires companies to rerun accounting in all events that create a change in cash flows in a leveraged lease. For FASB’s detailed response, see the FASB Handout (March 2, 2005) under “Action Alert” and “Board Meeting Handouts” at about pdf page 11-15) at http://www.fasb.org.

*Tip: The materiality of the change will still be a decision between the lessor and his auditor.

For those LILO and SILO deals that have been settled or where settlement is deemed probable, the catch up adjustment must be booked in 2005 as a “cumulative-effect adjustment” in the statement of operations. That is, the change will appear below the line on the income statement, but will almost certainly cause large accounting write-downs by many leasing companies. See: Paragraph 20 of APB Opinion No. 20, Accounting Changes.

*Technical Point: The amount of the adjustment will equal the difference between the amount of net income from leveraged leases recognized since lease inception prior to the application of the FASB’s guidance (under the provisions of FAS No. 13) and the net income from leveraged leases that would have been recognized since lease inception pursuant to its guidance. In addition, FASB will require a re-test of leveraged lease classification to determine whether the investment still “phases” after settlement and whether a lessor is still entitled to record the lease investment net of non-recourse debt (that is, not booked by lessor as an on-balance sheet obligation of the lessor).

Implementation Moving Fast

To implement its decision, FASB has elected to issue a FASB Staff Position (FSP) in the third quarter of 2005 that will require compliance for financial statements after December 15, 2005. Calendar year companies must comply by the end of the year 2005.

*Action Item: The draft FSP will come out any day now and you will have 60 days to comment. As a lessor with any leveraged lease portfolio, especially one with LILO or SILO transactions, don’t miss this opportunity to comment so as to limit the negative impact on your investments. One critical issue on which you may comment is whether this change to GAAP amends FAS 13. Unlike most pronouncements, pre-guidance deals will not be protected or “grandfathered.” Decisions made in good faith based on the rules in effect at the time of a transaction should be honored; but this change will not respect that approach. Consider arguing that the guidance should be prospective only.

Thanks to Bill Bosco, a lease accounting veteran and now independent consultant at his company called “Leasing 101” for editing this article and enhancing its content. Bill can be contacted at wbleasing101@aol.com and 914-522-3233.

3. SEC Investigations Threaten Existence of Unprepared Target Companies

In an age of more aggressive investigatory agencies and heightened scrutiny of corporate activity involving financial services, insurance and other companies, the decisions made during the first minutes and hours after a company learns that it is under investigation are crucial. The goal of the targeted company should be to respond as quickly and candidly as possible with minimal business disruption. Often, regulators’ perception of cooperation and responsiveness will govern the potential range of penalties, if any, that a publicly traded company may face in an enforcement investigation.

 Respond to Initial Investigation Notice Without Delay

Although no two investigations are exactly alike, the following is an analysis of what a company might expect during the first 12 hours after the inquiry is launched.

DAY ONE: 9 A.M.
News that your company is the target of an investigation typically comes in one of two ways. The Securities and Exchange Commission (SEC) will either send representatives directly to the office of the general counsel (GC) or the GC will receive a “come hither” letter that advises the company that the SEC is conducting an investigation. This letter asks that the company provide certain documents and not destroy other documents or records.

*Warning: Once your GC becomes aware of the investigation, the clock literally and figuratively begins ticking for your company’s future. Don’t lose valuable hours by spending too much time discussing the investigation notice. You must act swiftly to stem the tide of events coming your way.

DAY ONE: 10 A.M.
One of the first things the GC of a targeted company will need is a copy of the Seaboard 21(a) Report. This report outlines specific factors that the SEC deems relevant in evaluating what credit, if any, a company may be given for cooperating with investigators, including whether the company immediately stops the misconduct, cooperates with the investigation and discloses the misconduct. Some companies that have admitted to certain wrongdoing have received no punishment based upon their internal investigations, self-reporting and cooperation with the SEC.

DAY ONE: 10:45 A.M.
*Action Item: Take immediate steps to preserve all documents relevant to the investigation, including all electronic records. After locating the requested records, your GC should issue instructions for preserving and segregating relevant paperwork. The GC also should obtain and review all relevant public filings, press releases, analyst presentations and other public documents that could be even remotely linked to the investigation. It’s a safe bet that the regulators have already done so.

DAY ONE: 11 A.M.
By this time the GC should consider scheduling a 5 p.m. meeting with the board of directors and an audit committee meeting, if necessary, immediately thereafter.

*Tip: If these communications are made via e-mail, text messaging or other written format, then be cautious about the content of written communications. You may have to disclose them in other proceedings. Establish procedures in place to collect, segregate and preserve the requested documents.

DAY ONE: 11:30 A.M.
The next step is to determine which individuals know about the facts and circumstances referenced by the SEC. It is essential to determine whether current or former employees are whistle-blowers or commission sources.

*Tip: Assure that your company does not act in any manner that the SEC could view as obstructive to the SEC’s investigation. Consider critical issues affecting appropriate representation for individual witnesses. For example, is there a potential conflict of interest between the witnesses and the company that would cause the witnesses to need separate representation?

DAY ONE: Noon
By noon, the GC should focus on hiring outside securities counsel with the best experience, knowledge, reputation, credibility and availability for intense and immediate representation.

*Tip: The SEC has little sympathy for companies that attempt to slow or postpone an investigation because their outside counsel is “too busy” or not available.

DAY ONE: 1 P.M.
The GC should meet with outside counsel to discuss the scope of the investigation as outlined by the SEC. By this time, the GC should have identified and secured potential witnesses and relevant documents.

*Tip: Limit the involvement of unnecessary people. Anyone who gains knowledge of the investigation may be a potential witness. Begin making assessments of whether the evidence indicates that material information is based in reality or a tip.

Make a Realistic Assessment

If it appears that there has been a potential material violation, every effort should be made to prevent an ongoing or future violation. The GC should determine whether the individuals responsible for the violation are still employed in the same position or another position.

*Tip: Consider engaging employment counsel if you decide to suspend or terminate an employee involved in the alleged wrongdoing. If a current employee asserts his or her Fifth Amendment privilege against self-incrimination, evaluate whether immediately terminating the employee for “not cooperating” with investigators may create a “lose-lose” scenario. On one hand, the individual and company may be subject to disciplinary proceedings for failing to cooperate with investigators, while, on the other hand, the investigators could draw a negative conclusion about what the employees’ potential testimony might have been.

DAY ONE: 2 P.M.
If the preliminary investigation indicates that a material violation may have occurred, the company should begin to consider taking corrective action as necessary, amending disclosure or registration documents and reporting obligations created by the investigation.

*Remember: The chief executive officer, chief operating officer, chief financial officer and/or audit committee may have certification obligations that are triggered under the Sarbanes-Oxley Act of 2002 or other regulations. See: Making Its Mark, Sarbanes-Oxley Reaches Its First Anniversary, by David G. Mayer (Aug. 2003).

Act Cautiously in Handling Witnesses and Meeting with the Board

DAY ONE: 3 P.M.
With the board meeting scheduled for 5 p.m., the next two hours should be devoted to meeting with outside counsel and interviewing key witnesses identified in the preliminary investigation.

*Warning: Use extreme caution when interviewing key witnesses and in deciding what information and or documents to share with witnesses and employees. Employment, representation, confidentiality and privilege issues are crucial. Take copious notes during any interview, especially since it may be the last voluntary interview your company obtains.

DAY ONE: 5 P.M.
The board of directors meeting commences. The board should be fully informed of the SEC’s investigation, as well as the status and preliminary results of the internal investigation. The GC should identify any corrective measures that have been taken since receiving notification of the investigation, as well as any corrective actions that have not yet been implemented but are recommended by the GC or outside counsel, including the potential timetable.

Depending on the issues raised by the board and the scope of the investigation, an initial determination may be made regarding whether the board and/or audit committee need separate representation. Also, the board and audit committee may determine that they need to conduct their own independent investigations. If this determination is made, the board and/or committee should convene separately and discuss how to proceed.

Prepare for the Long Haul

DAY ONE: 8 P.M.
The board meeting adjourns. Before the GC calls it a day, he or she meets with outside counsel to discuss the ongoing strategy and timetable for the next steps in the investigation. The real work begins tomorrow.

Investigations continue to occur at the pinnacle of corporate America. Financial services industry executives must not only focus on their own corporate governance, but also on the potentially devastating impact that an investigation may have on a customer’s business. It pays to understand the steps to take should you or your customers face an investigation. But the best case is the one where you never have to test these Day One skills or have to call on outside counsel to help you.

Thanks to Cheryl Jerome Moore and David Clouston, Securities Litigation Partners in the Dallas office of Patton Boggs, for contributing this article. This article is a modified version of an article that appeared in The National Law Journal on December 13, 2004 under the title: A crucial first day in an SEC investigation.

4. Leasing 101: What is an "Operating Lease” in Federal Leasing?

The Boeing Company failed to achieve federal operating lease treatment for its proposed $23 billion lease of 100 Boeing KC-767A aerial refueling tankers last year. That failure contributed to the deal’s high-profile termination by the Secretary of Defense. See: Report of the Congressional Budget Office (CBO) to the Honorable Don Nickles, Chairman, Committee on the Budget, dated August 26, 2003.

The distinction between a lease-purchase and an operating lease under federal law is every bit as important as the difference between a capital lease and operating lease under Financial Accounting Standards No. 13 first issued in 1976 by the Financial Accounting Standards Board. See: Leasing 101: What Are Basic “Off-Balance Sheet” Criteria Under FAS 13?, by David G. Mayer, Business Leasing News (March 2004).

For Boeing, a key passage of the report stated in part:

“After analyzing the Air Force's report and receiving additional information about the proposed lease from the Air Force and Boeing, CBO has concluded that the proposed transaction would essentially be a purchase of the tankers by the federal government but at a cost greater than would be incurred under the normal appropriation and procurement process...Even if, however, one views the arrangement as a lease, CBO's analysis indicates that the proposal does not meet the conditions for an operating lease described in the Congressional Scorekeeping Guidelines and in OMB Circular A-11….”  

See: Federal Leasing Under Attack: Criticism Mounts Against Boeing 767 Tanker Deal, by David G. Mayer, Business Leasing News (Sept. 2003).

Annex B - Scoring Lease-Purchase and Leases of Capital Assets to OMB Circular A-11 contains six criteria that must be met for a lease to qualify as an operating lease (plus detailed explanations and methods for making the correct determination):

• The asset must be a general-purpose asset, not for a special purpose of, or built to unique specifications for, the government;

• There must be a private-sector market for the asset;

• The present value of the lease payments cannot exceed 90 percent of the asset's fair market value at the start of the lease;

• The lease cannot contain a bargain-price purchase option;

• Ownership of the asset must remain with the lessor during the term of the lease and is not transferred to the government at or shortly after the end of the lease term; and

• The lease term cannot exceed 75 percent of the asset's estimated economic life.

For purposes of leases to the Department of Defense, a lease must also comply with section 8159 (in Title VIII of the Department of Defense Appropriations Act, 2002, H.R. 3338, Public Law No: 107-117) to be treated as an operating lease in the budget, which incorporates Circular A-11.

*Tip: When structuring a federal lease, apply these government accounting rules correctly if you want to obtain operating lease treatment. You must price and structure your federal leases accordingly.

Thanks to Michael Guiffre, a Partner at Patton Boggs LLP who assists in federal leasing and contracting transactions, for his review of this article.

5. BLN Case & Comment: Preferred Capital Revisited: State Attorneys General Weigh In

BACKGROUND: Last month Business Leasing News, we discussed the pending Preferred Capital case involving the Norvergence lessees. That case questioned whether the forum selection clause was valid if it only specified the forum where the ultimate lessor (Norvergence assignee) was located, but did not state a specific court in a specific state where disputes with that lessor would be heard. See: BLN Case & Comment: Norvergence Strikes Again - Preferred Capital, Inc. v. Thomas E. Strellec, by David G. Mayer, Business Leasing News (March 2005).

The Equipment Leasing Association submitted a brief in support of enforcing the forum selection by the lessors. See: Leasing 101: What Is a "Forum Selection Clause”? by David G. Mayer, Business Leasing News (March 2005).

The saga continues in the Preferred Capital case as the Attorneys General in Connecticut, Florida, Illinois, Louisiana, Massachusetts, Michigan, New York, Ohio, Pennsylvania, Rhode Island, South Dakota and Texas submitted their arguments in an amicus curiae brief  in support of the lessees on March 16, 2005.

ISSUE:  Is the Norvergence forum selection clause valid?

ANSWER/ARGUMENT: No. The Attorneys General argue that “floating forum selection” clauses are invalid “since they fail to put the customer [Norvergence lessees] on notice of where it [the lessee] would be required to defend an action” by the lessor. The Attorneys General argued that the forum selection clause was unfair and unreasonable because they did not clearly and conspicuously name the specific jurisdiction where the lessee could be sued. They also argued that the small and unsophisticated lessees involved did not freely negotiate for a forum where disputes would be heard, which creates a fundamentally unfair and unenforceable arrangement due to the hardship it would visit on the lessee.

OUTCOME: Unknown.

*Comment: The entire argument of the Attorneys General misses the point. It is not the lessors who should bear the brunt of the failure of Norvergence to perform it obligations. Lessors use standard provisions in leases that the lessees may freely negotiate. Lessors almost always retain the right to assign a lease as a financial asset and try to accommodate the interests of the assignee to select the most appropriate forum to settle disputes. The Attorneys General should focus on Norvergence and not the other lessors who allegedly used standard documents to buy the leases originated by Norvergence.

We may never know if the lessors failed to do adequate due diligence to identify problems with Norvergence. But the involvement of significant state officials like the Attorneys General sends a clear signal to the leasing industry. Regardless of the outcome of this case, lessors should consider:

• Treating small businesses and small transactions with extra attention on potentially contentious issues even though such attention may entail some extra transaction costs. For example, lessors could consider drafting clear and CONSPICUOUS forum selection, waiver of defenses and choice of law provision to mitigate the risk of Norvergence – type challenges.

• Structuring transactions so that, regardless of where the ultimate lessor/assignee is located, the lease can be amended and clarified on assignment. For example, such amendment could enable the new lessor, at its election, to select and conspicuously disclose a specific court for hearing of disputes other than the original selection by the assigning lessor in a floating forum selection clause. The amendment would require the consent of the lessee.

• Altering pricing if the lessee refuses to consent (that is, the lessor/assignee could increase pricing or accept terms of the deal selected by the originating lessor like Norvergence).

Is it worth the effort to take these or other steps for lessors to mitigate the risk of a case like Norvergence? It sure seems to beat the cost and aggravation, not to mention the lousy precedent, of getting embroiled in a litigation like this one and fighting with state officials who have unlimited litigation budgets. For more on risk mitigation measures, see: Norvergence Bankruptcy Forces Lessors To Mitigate New Risks, by David G. Mayer, Business Leasing News (Feb. 2005).  

6. About Patton Boggs LLP and My Law Practice; Recent Publications; Upcoming Speeches

I am a member of the Patton Boggs LLP Corporate Finance Group in our Dallas office. Patton Boggs LLP is a law firm of more than 400 lawyers located in five offices in the United States and internationally in Doha, Qatar. The firm has extensive capabilities in over 50 distinct areas of legal practice that include leasing, secured transactions, personal property financing, corporate finance, syndications, power project regulatory, development and finance disciplines, mezzanine financing, bankruptcy, real estate, public policy, litigation, intellectual property and technology law, and much more.

The leasing and secured transaction practices regularly involve the buying, selling, financing and leasing of real and personal property of all kinds, including business aircraft, energy, facility, production, power plant, technology and health care assets. We also structure, negotiate and close secured transactions of all kinds. We have fully integrated team that handle securitizations, tax-exempt and federal leasing arrangements, and corporate and portfolio acquisitions, among a full range of financing and acquisition transactions. Despite the improving economy, we continue to assist our clients with troubled deals and bankruptcies, including repossessions, lift stay actions, true lease contests, deficiency litigation, workouts and forbearance arrangements.

If I, or any other lawyer at Patton Boggs LLP can help you with your legal or business challenges, feel free to call me at (214) 758-1545 or e-mail me at dmayer@pattonboggs.com for information about any of these areas or the many others available at Patton Boggs LLP, or to discuss anything I have written in Business Leasing News. We welcome the opportunity to build a relationship with you!

Recent Publications

Here are two feature articles published in January by David G. Mayer:

• Norvergence Strikes Again – Problems With Forum Selection Clauses, by David G. Mayer, The Monitor at page 26-27 (April 2005). 

• Off Balance Sheet Leasing: Is the End in Sight?, by David G. Mayer, The Monitor (Jan. 2005). Mindy Berman of 42 North Structured Finance, Inc. commented on this article.

• The Bright Side of Big Deficits, by David G. Mayer, Equipment Leasing Today (Jan. 2005) (on federal leasing). Michael Guiffre of Patton Boggs LLP edited this article.

Upcoming Speeches

• On Sunday, May 15, 2005, Bob Downey of Caterpillar Financial Services Corporation and I will speak on Leasing to State and Federal Government: A Primer in Specialized Markets, at the 2005 Legal Forum sponsored by the Equipment Leasing Association, at the Loews Miami Beach Hotel, Miami, Florida.

• On Tuesday, May 17, 2005, Stephen T. Whelan of Thacher Profitt & Wood, LLC, and I will be conducting an interactive "Breakout Session" on Complex Transactions. Steve will address credit support issues in securitizations and I will talk about the fundamentals of The Cape Town Convention and related Aircraft Protocol. We will present at the 2005 Legal Forum sponsored by the Equipment Leasing Association, at the Loews Miami Beach Hotel, Miami, Florida.

A Message from the Founder, David G. Mayer

Lessons From the Dell

No, Dude, this Dell is not a small, wooded area in a secluded valley, as people once thought. It’s Dell, the IT giant, headed by Michael Dell, the now 40-year-old entrepreneur who started his company tinkering with electronics in his garage. He is now one of the wealthiest men in the world and one of the most respected executives in America. As his company turns 21, it not only comes of age, but also celebrates a remarkable achievement of being named by Fortune Magazine as America’s Most Admired Company. See: The Education of Michael Dell, Fortune Magazine at page 73 (March 7, 2005).

Dell bested nine other luminaries on Fortune’s Top Ten List (subscribers only) for the honor, including, respectively, General Electric Company, Starbucks, Wal-Mart Stores, Southwest Airlines, FedEx, Berkshire Hathaway, Microsoft, Johnson & Johnson and Proctor & Gamble. Dell is third in Fortune’s world list of Most Admired Companies behind General Electric and Wal-Mart Stores and just ahead of Toyota Motor.

Dell has thrived despite the downward spiral of the PC industry. It has migrated in the last three to four years from a PC company into servers, printers and other diversified IT products. The company still holds a market share of 33.1 percent of the PC market in the U.S. even as its diversification strategy gains momentum. Dell’s revenues have ramped up at 19 percent per year while profits grow even more rapidly (24 percent total return in 2004).

So, what lessons can we take from Dell’s business achievements? Here’s my spin on points made by Fortune Magazine in describing the man and his company. Dell has excelled in its business by:

1. Executing and innovating. Dell spends less on research and development than HP and IBM, each of which spends 6 percent of their respective annual sales while Dell spends less than $500 million per year (one percent of sales). Yet, this level investment works for Dell because Dell focuses solely on operating standards-based computing (Wintel) while the competition works on proprietary systems. Dell has remained focused. It executes well using its resources wisely. Its innovation runs the gamut from its business process, supply chain management and manufacturing throughput to innovative customer value propositions and savvy technology development.

2. Leveraging existing business. Dell leverages its existing business to build and transition to sustainable technology, not just the latest cool craze (though Dell admires Apple’s profitable hit with the iPod). The printers business, a natural extension of the PC business for Dell, illustrates this success. Dell is engaged in head-to-head competition with HP, which earns 70 percent of its profit from printers. Dell is using its existing businesses to expand and create a lasting platform for continuous growth of the printers market through leveraging its existing PC business.

3. Controlling costs. The whole concept of ordering by mail revolutionized sales by reducing costs of sales. Controlling costs seems to be an essential element of growing its bottom line. For example, it targets the communities that need jobs as a place to build new plants in exchange for tax incentives that reduce the total project cost while increasing capacity to produce its products. Dell is running its factories flat out as it expands its empire.

While these three points only touch on the many positive attributes of today’s Dell, they suggest the importance of product focus, strong execution and active cost control to propel a business to success. What three aspects of your business will determine your success? Michael Dell inspired Fortune Magazine over 19 years ago when it wrote about Michael Dell’s aptitude and potential as a 21-year old. Perhaps you should look closely at people inside and outside of your organization and tap their potential as a critical element of your success in the coming years.

Have a great April and thanks, as always, for reading BLN.

Thanks to the BLN Staff and Notice of BLN Changes Coming Soon

I extend special thanks to BLN’s editors at Patton Boggs LLP for their comments on this edition, J. Atwood Jeter, a real estate and wind power associate, Margaret Anderson, Adrian Nicole McCoy and the rest of our great BLN staff, as well as our primary web site review partner, Jeff Turner. The technical team, consisting in part of George Barber and Winston Jackson, provide you the easy-to-use navigation and artistic appearance of BLN. Claire Campbell, our Chief Librarian in Dallas, provides research for BLN.

Look for a new and better format and enhanced technology in the e-mail version of BLN and on BLN’s web page at http://www.pattonboggs.com/newsletters/bln. I can’t say more now, but keep watching for the change that will soon be available to you. You’ll know it when you see it!

David G. Mayer
Founder
Business Leasing News
Patton Boggs LLP
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Suite 3000
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E-Mail: dmayer@pattonboggs.com

© David G. Mayer 2005

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