1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 001-13973
UNICAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 65-0788314
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10800 BISCAYNE BOULEVARD, SUITE 800, MIAMI, FLORIDA 33161
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (305) 899-5000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On August 10, 2000, there were 56,977,224 shares of Common Stock
outstanding.
2
UNICAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements ....................... 3
Consolidated Balance Sheets................................................ 3
Consolidated Statements of Operations...................................... 4
Consolidated Statements of Stockholders' Equity............................ 5
Consolidated Statements of Cash Flows...................................... 6
Notes to Unaudited Consolidated Financial Statements ...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 23
PART II. OTHER INFORMATION................................................... 27
Item 1. Legal Proceedings.................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders................ 27
Item 6. Exhibits and Reports on Form 8-K................................... 27
Signature.................................................................. 28
3
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
UNICAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
ASSETS
Cash and cash equivalents............................ $ 35,082 $ 25,849
Restricted cash...................................... 58,266 126,637
Accounts receivable, net............................. 32,120 60,870
Notes receivable..................................... 8,920 45,097
Net investment in finance contracts.................. 925,566 856,527
Equipment under operating leases, net................ 141,483 1,908,686
Equipment held for sale or lease..................... 54,306 264,714
Investments.......................................... 14,452 20,981
Property and equipment, net.......................... 15,998 18,601
Goodwill, net of accumulated amortization of
$104,276 and $28,752, respectively................. 331,031 625,180
Income taxes receivable.............................. -- 5,872
Net assets of discontinued operations................ 121,004 --
Deposits and other assets............................ 14,914 45,567
---------- ----------
Total assets.................................... $1,753,142 $4,004,581
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse debt........................................ $ 408,984 $ 455,900
Non-recourse and limited recourse debt............... 861,548 2,412,233
Accounts payable and accrued expenses................ 88,963 115,210
Security and other deposits.......................... 4,300 61,185
Accrued restructuring................................ 3,848 --
Deferred income taxes................................ -- 82,772
Other liabilities.................................... 8,698 14,988
---------- ----------
Total liabilities............................... 1,376,341 3,142,288
---------- ----------
Minority interest.................................... -- 23,725
Commitments and contingencies........................ -- --
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares
authorized, no shares issued and outstanding.... -- --
Common stock, $.001 par value, 200,000,000 shares
authorized, 56,977,224 and 53,512,308 shares
issued and outstanding, respectively............ 57 53
Additional paid-in capital......................... 817,425 808,657
Stock subscription notes receivable................ (3,210) (3,210)
Accumulated other comprehensive income............. 289 430
Retained earnings (deficit)........................ (437,760) 32,638
---------- ----------
Total stockholders' equity...................... 376,801 838,568
---------- ----------
Total liabilities and stockholders' equity...... $1,753,142 $4,004,581
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
4
UNICAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---------- -------- --------- --------
Income from finance contracts............. $ 26,591 $14,656 $ 51,698 $ 26,176
Rental income from operating leases....... 19,999 15,936 37,212 30,913
Sales of equipment........................ 46,392 26,397 91,061 50,451
Gain on sale of finance contracts......... 2,073 894 7,800 1,177
Fees, commissions and remarketing income.. 3,464 6,515 8,830 12,564
Interest and other income................. 1,223 1,546 727 3,939
--------- ------- --------- --------
Total revenues....................... 99,742 65,944 197,328 125,220
--------- ------- --------- --------
Cost of operating leases.................. 14,908 10,240 26,928 19,080
Cost of equipment sold.................... 42,535 24,559 84,410 44,868
Interest expense.......................... 23,884 12,008 43,526 22,596
Selling, general and administrative
expenses ............................... 36,434 23,071 69,982 45,423
Restructuring and other nonrecurring
charges ................................ 4,042 -- 5,925 --
Goodwill amortization and impairment...... 57,783 2,707 75,524 5,402
--------- ------- --------- --------
Total expenses....................... 179,586 72,585 306,295 137,369
--------- ------- --------- --------
Income (loss) from continuing operations
before taxes............................ (79,844) (6,641) (108,967) (12,149)
Benefit for income taxes.................. (9,129) (1,500) (15,435) (2,593)
--------- ------- --------- --------
Net income (loss) from continuing
operations.............................. (70,715) (5,141) (93,532) (9,556)
--------- ------- --------- --------
Discontinued operations (Note 12): .......
Income (loss) from operations of
discontinued Big Ticket Division (plus
(less) applicable income taxes of $7.3
million, ($7.2) million, $44.4 million
and ($10.5) million, respectively)...... (18,779) 9,750 (250,873) 13,278
Loss on disposal of Big Ticket
Division including provision of $33.2
million for operating losses during
phaseout period (plus (less) applicable
income taxes of $44.1 million and
$22.4 million, respectively)............ (104,311) -- (125,993) --
--------- ------- --------- --------
Total discontinued operations........ (123,090) 9,750 (376,866) 13,278
--------- ------- --------- --------
Net income (loss) ........................ $(193,805) $ 4,609 $(470,398) $ 3,722
========= ======= ========= ========
Income (loss) per common share, basic -
continuing operations................... $ (1.24) $ (0.10) $ (1.67) $ (0.18)
Income (loss) per common share, diluted -
continuing operations................... $ (1.24) $ (0.10) $ (1.67) $ (0.18)
Income (loss) per common share, basic -
discontinued operations................. $ (2.16) $ 0.19 $ (6.74) $ 0.25
Income (loss) per common share, diluted -
discontinued operations................. $ (2.16) $ 0.19 $ (6.74) $ 0.25
Income (loss) per common share,
basic - net $ (3.40) $ 0.09 $ (8.41) $ 0.07
Income (loss) per common share, diluted -
net..................................... $ (3.40) $ 0.09 $ (8.41) $ 0.07
Weighted average shares outstanding,
basic .................................. 56,945,336 52,681,874 55,909,251 52,594,357
Weighted average shares outstanding,
diluted ................................ 56,945,336 53,359,803 55,909,251 53,142,244
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
UNICAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
STOCK ACCUMULATED
ADDITIONAL SUBSCRIPTION OTHER RETAINED
COMMON PAID-IN NOTES COMPREHENSIVE EARNINGS COMPREHENSIVE
STOCK CAPITAL RECEIVABLE INCOME (LOSS) (DEFICIT) INCOME (LOSS) TOTAL
------ ---------- ------------ ------------- --------- ------------- ---------
Balance at December 31, 1999...... $53 $808,657 $(3,210) $ 430 $ 32,638 $ 838,568
Issuance of 3,340,971
shares of common stock in
connection with earnouts
for companies acquired
in 1998......................... 4 8,656 -- -- -- 8,660
Issuance of 123,945 shares
of Common stock in
connection with employee
stock purchase plan............. -- 112 -- -- -- 112
Comprehensive income (loss):
Net loss........................ -- -- -- -- (470,398) $(470,398) (470,398)
Other comprehensive income
(loss):
Change in net unrealized
gain on securities (net
of deferred taxes of $86)... -- -- -- (141) -- (141) (141)
---------
Total comprehensive income
(loss)...................... $(470,539)
--- -------- ------- ----- --------- ========= ---------
Balance at June 30, 2000.......... $57 $817,425 $(3,210) $ 289 $(437,760) $ 376,801
=== ======== ======= ===== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
6
UNICAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
--------- -----------
Cash flows from operating activities:
Net income (loss).................................. $(470,398) $ 3,722
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 41,147 58,121
Impairment of goodwill........................... 70,245 --
Deferred income tax expense (benefit)............ (82,772) 3,471
Provision for credit losses...................... 14,131 3,041
Gain on sale of finance contracts................ (7,800) (1,177)
Gain on sale of equipment........................ (8,151) (30,152)
Gain on sale of beneficial interest in
subsidiary .................................... (220) --
Equity in net earnings of minority-owned
affiliates .................................... (441) --
Changes in other assets and liabilities:
Restricted cash................................ -- (93,794)
Notes and accounts receivable.................. 9,513 (17,794)
Income taxes receivable........................ (523) --
Deposits and other assets...................... (2,034) (3,593)
Accounts payable and accrued expenses.......... (2,371) 19,510
Security and other deposits.................... 974 26,523
Accrued restructuring.......................... 3,698 --
Net assets of discontinued operations.......... 438,330 --
Income taxes payable........................... -- (6,353)
Other liabilities.............................. 7,055 7,039
--------- -----------
Net cash provided by (used in) operating
activities................................... 10,383 (31,436)
--------- -----------
Cash flows from investing activities:
Capital expenditures............................... (2,415) (5,431)
Proceeds from sale of finance contracts............ 141,321 49,767
Proceeds from sale of equipment.................... 18,514 120,212
Proceeds from sale of beneficial interest in
subsidiary....................................... 779 --
Collection of finance contracts, net of finance
income earned.................................... 117,692 105,486
Investment in finance contracts and purchases of
equipment for sale or lease...................... (481,068) (1,828,448)
Cash paid under earnout agreements for companies
acquired in 1998................................. (2,764) (12,258)
Decrease in investments, net....................... 7,126 13,100
--------- -----------
Net cash used in investing activities.......... (200,815) (1,557,572)
--------- -----------
Cash flows from financing activities:
Proceeds from recourse debt........................ 338,147 533,855
Repayment of recourse debt......................... (385,063) (325,563)
Proceeds from non-recourse and limited
recourse debt ................................... 684,160 1,661,203
Repayment of non-recourse and limited
recourse debt ................................... (413,800) (285,634)
Proceeds received on subscription notes
receivable....................................... -- 144
Change in restricted cash.......................... (23,779) --
--------- -----------
Net cash provided by financing activities...... 199,665 1,584,005
--------- -----------
Increase (decrease) in cash and cash equivalents..... 9,233 (5,003)
Cash and cash equivalents at beginning of period..... 25,849 9,772
--------- -----------
Cash and cash equivalents at end of period........... $ 35,082 $ 4,769
========= ===========
Supplemental disclosure of non-cash investing and
financing transactions:
Debt assumed in connection with acquisition of
aircraft and aircraft engines.................... $ -- $ 59,955
========= ===========
Notes received as partial consideration on sales of
aircraft and aircraft engines.................... $ -- $ 9,200
========= ===========
Debt assumed by buyers as partial consideration
on sales of aircraft and aircraft engines........ $ -- $ 14,172
========= ===========
Debt assumed by buyers as partial consideration
on sales of equipment............................ $ 9,558 $ --
========= ===========
Common stock issued in connection with earnouts for
companies acquired in 1998....................... $ 8,659 $ 7,824
========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
7
UNICAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
UniCapital Corporation, incorporated in Delaware, was founded in
October 1997 to create a national operator and integrator of equipment leasing,
specialty finance and related businesses serving the commercial market.
UniCapital Corporation acquired twelve equipment leasing, specialty finance and
related businesses (the "Founding Companies") upon consummation of an initial
public offering (the "Offering") of its common stock ("Common Stock") in May
1998. Subsequent to the Offering, UniCapital Corporation acquired, through
merger or purchase, five additional companies, continuing the expansion of its
national operations. UniCapital Corporation, the Founding Companies and the
subsequently acquired companies are referred to collectively as the "Company."
The Company originates, acquires, sells and services equipment leases
and arranges structured financing in the computer and telecommunications
equipment, middle market and small ticket areas of the equipment leasing
industry. In addition, the Company provides lease administration and processing
services, which include the servicing of certain leases sold to third parties.
The Company's leases and structured financing arrangements cover a broad range
of equipment, including computer and telecommunications equipment, construction
and manufacturing equipment, office equipment, tractor trailers, printing
equipment, car washes, and petroleum retail equipment and, until the Company
completes the divestiture of all of the assets of the Big Ticket Division,
aircraft, aircraft engines and other aircraft equipment.
In the second quarter 2000, the Company reached a decision to
discontinue the operations of its Big Ticket Division and has developed and is
implementing a plan to divest all assets of the Big Ticket Division within one
year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair statement of
these interim results have been included. Intercompany accounts and transactions
have been eliminated. The results for the interim periods are not necessarily
indicative of the results to be expected for the entire year.
The financial statements should be read in conjunction with the
Company's Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to prior period amounts to
conform to the current presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
For a description of the Company's accounting policies, refer to the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission.
NOTE 3 -- INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are provided to reduce
deferred taxes to the amount expected to be realized based on available
evidence. The Company's effective tax rate differs from that computed at the
statutory rate principally as a result of non-deductible goodwill amortization,
asset impairment writedowns and write-offs of certain goodwill amounts in 2000.
NOTE 4 -- STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company issued 3,340,971
shares of Common Stock to the former owners of certain companies acquired in
1998. These shares were issued in connection with earnout arrangements and have
been recorded as additional purchase price in the amount of $8.7 million.
7
8
In 1999, the Company implemented an employee stock purchase plan.
During the six months ended June 30, 2000, the Company issued 123,945 shares of
Common Stock to employees under the plan.
NOTE 5 -- INCOME (LOSS) PER SHARE
Income (loss) per share has been calculated and presented in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
which requires the Company to compute and present basic and diluted earnings per
share. Dilutive securities are excluded from the computation in periods in which
they have an anti-dilutive effect.
NOTE 6 -- SEGMENT INFORMATION
The following tables present selected financial information for the
Company's continuing reporting segments as of and for the three months ended
June, 2000 and 1999 (in thousands):
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 17,760 $ 8,830 $ 1 $ 26,591
Rental income from operating
leases ......................... 19,999 -- -- 19,999
Sales of equipment................ 46,376 16 -- 46,392
Gain on sale of finance
contracts. ..................... 2,308 (235) -- 2,073
Fees, commissions and remarketing
income.......................... 1,156 1,924 384 3,464
Interest and other income......... 548 (241) 916 1,223
---------- -------- -------- ----------
Total revenues............... 88,147 10,294 1,301 99,742
---------- -------- -------- ----------
Cost of operating leases.......... 14,908 -- -- 14,908
Cost of equipment sold............ 42,531 4 -- 42,535
Interest expense.................. 11,966 5,254 6,664 23,884
Selling, general and
administrative expenses......... 24,022 10,716 1,696 36,434
Restructuring and other
nonrecurring charges............ (110) 542 3,610 4,042
Goodwill amortization and
impairment ..................... 33,733 23,975 75 57,783
---------- -------- -------- ----------
Total expenses............... 127,050 40,491 12,045 179,586
---------- -------- -------- ----------
Income (loss) from continuing
operations before taxes......... $ (38,903) $(30,197) $(10,744) $ (79,844)
========== ======== ======== ==========
Net investment in finance
contracts ...................... $ 627,521 $317,456 $(19,411) $ 925,566
========== ======== ======== ==========
Equipment under operating
leases, net .................... $ 141,479 $ 4 $ -- $ 141,483
========== ======== ======== ==========
Total assets from continuing
operations...................... $1,151,268 $378,847 $102,023 $1,632,138
========== ======== ======== ==========
Total assets from discontinued
operations...................... $ -- $ -- $ -- $ 121,004
========== ======== ======== ==========
Total assets...................... $1,151,268 $378,847 $102,023 $1,753,142
========== ======== ======== ==========
Total debt........................ $ 650,080 $290,390 $330,062 $1,270,532
========== ======== ======== ==========
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 10,675 $ 3,981 $ -- $ 14,656
Rental income from operating
leases ......................... 15,730 206 -- 15,936
Sales of equipment................ 26,397 -- -- 26,397
Gain on sale of finance
contracts. ..................... 894 -- -- 894
Fees, commissions and remarketing
income.......................... 5,013 1,315 187 6,515
Interest and other income......... 552 762 232 1,546
---------- -------- -------- ----------
Total revenues............... 59,261 6,264 419 65,944
---------- -------- -------- ----------
Cost of operating leases.......... 10,191 49 -- 10,240
Cost of equipment sold............ 24,559 -- -- 24,559
Interest expense.................. 6,774 1,669 3,565 12,008
Selling, general and
administrative expenses......... 11,965 7,515 3,591 23,071
Goodwill amortization and
impairment ..................... 2,179 453 75 2,707
---------- -------- -------- ----------
Total expenses............... 55,668 9,686 7,231 72,585
---------- -------- -------- ----------
Income (loss) from continuing
operations before taxes......... $ 3,593 $ (3,422) $ (6,812) $ (6,641)
---------- -------- -------- ----------
Net investment in finance
contracts....................... $ 434,805 $141,164 $ (840) $ 575,129
========== ======== ======== ==========
Equipment under operating leases,
net ............................ $ 94,821 $ 291 $ -- $ 95,112
========== ======== ======== ==========
Total assets...................... $ 970,402 $237,369 $226,068 $1,433,839
========== ======== ======== ==========
Total debt........................ $ 380,254 $128,501 $260,887 $ 769,642
========== ======== ======== ==========
8
9
The following tables present selected financial information for the
Company's continuing reporting segments as of and for the six months ended June,
2000 and 1999 (in thousands):
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 34,969 $ 16,727 $ 2 $ 51,698
Rental income from operating
leases ......................... 37,212 -- -- 37,212
Sales of equipment................ 91,045 16 -- 91,061
Gain on sale of finance
contracts....................... 5,891 1,909 -- 7,800
Fees, commissions and remarketing
income.......................... 3,962 3,589 1,279 8,830
Interest and other income......... (255) (552) 1,534 727
---------- -------- -------- ----------
Total revenues............... 172,824 21,689 2,815 197,328
---------- -------- -------- ----------
Cost of operating leases.......... 26,924 4 -- 26,928
Cost of equipment sold............ 84,404 6 -- 84,410
Interest expense.................. 22,544 9,971 11,011 43,526
Selling, general and
administrative expenses......... 44,779 19,897 5,306 69,982
Restructuring and other
nonrecurring charges............ 1,229 759 3,937 5,925
Goodwill amortization and
impairment ..................... 47,742 27,632 150 75,524
---------- -------- -------- ----------
Total expenses............... 227,622 58,269 20,404 306,295
---------- -------- -------- ----------
Income (loss) from continuing
operations before taxes......... $ (54,798) $(36,580) $(17,589) $ (108,967)
========== ======== ======== ==========
Net investment in finance
contracts ...................... $ 627,521 $317,456 $(19,411) $ 925,566
========== ======== ======== ==========
Equipment under operating leases,
net ............................ $ 141,479 $ 4 $ -- $ 141,483
========== ======== ======== ==========
Total assets from continuing
operations...................... $1,151,268 $378,847 $102,023 $1,632,138
========== ======== ======== ==========
Total assets from discontinued
operations...................... $ -- $ -- $ -- $ 121,004
========== ======== ======== ==========
Total assets...................... $1,151,268 $378,847 $102,023 $1,753,142
========== ======== ======== ==========
Total debt........................ $ 650,080 $290,390 $330,062 $1,270,532
========== ======== ======== ==========
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 19,586 $ 6,590 $ -- $ 26,176
Rental income from operating
leases ......................... 30,557 356 -- 30,913
Sales of equipment................ 50,451 -- -- 50,451
Gain on sale of finance
contracts. ..................... 1,177 -- -- 1,177
Fees, commissions and remarketing
income.......................... 8,727 3,127 710 12,564
Interest and other income......... 1,784 1,321 834 3,939
---------- -------- -------- ----------
Total revenues............... 112,282 11,394 1,544 125,220
---------- -------- -------- ----------
Cost of operating leases.......... 18,973 107 -- 19,080
Cost of equipment sold............ 44,868 -- -- 44,868
Interest expense.................. 12,283 2,763 7,550 22,596
Selling, general and
administrative expenses......... 22,901 14,347 8,175 45,423
Goodwill amortization and
impairment ..................... 4,346 904 152 5,402
---------- -------- -------- ----------
Total expenses............... 103,371 18,121 15,877 137,369
---------- -------- -------- ----------
Income (loss) from continuing
operations before taxes......... $ 8,911 $ (6,727) $(14,333) $ (12,149)
========== ======== ======== ==========
Net investment in finance
contracts ...................... $ 434,805 $141,164 $ (840) $ 575,129
========== ======== ========= ==========
Equipment under operating leases,
net ............................ $ 94,821 $ 291 $ -- $ 95,112
========== ======== ======== ==========
Total assets...................... $ 970,402 $237,369 $226,068 $1,433,839
========== ======== ======== ==========
Total debt........................ $ 380,254 $128,501 $260,887 $ 769,642
========== ======== ======== ==========
9
10
NOTE 7 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. As issued, SFAS 133 was effective for fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of
SFAS 133 for one year to fiscal years beginning after June 15, 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. In June 2000, the FASB issued Statement of Financial
Accounting Standard No. 138 ("SFAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an amendment of FASB Statement No.
133." SFAS 138 amends the accounting and reporting standards of SFAS 133 for
certain derivative instruments and certain hedging activities. The Company is in
the process of evaluating the impact of adopting SFAS 133 and SFAS 138 and the
effect that the adoption of SFAS 133 and SFAS 138 will have on its results of
operations and financial position.
NOTE 8 -- SALES OF FINANCE CONTRACTS
The Company transfers finance contracts to third parties in the normal
course of business, which transfers are accounted for as sales of finance
contracts under the provisions of SFAS 125. In these transactions, the Company
records a gain on the sale of finance contracts and may also retain interests in
the residual cash flows of the underlying receivables. Under the provisions of
SFAS 125, gain on sale of finance contracts is calculated as the difference
between the proceeds received, net of related selling expenses, and the
allocable carrying amount of the related finance contracts, determined using the
fair value approach.
During the three and six months ended June 30, 2000, the Company
transferred finance contracts with a net book value of $16.5 million and $59.3
million, respectively, to third parties in sales transactions, received proceeds
of $14.5 million and $64.1 million, respectively, and recognized a gain of $2.0
million and $4.8 million, respectively.
During the three and six months ended June 30, 2000, the Company
transferred finance contracts with a net book value of $5.0 million and $21.7
million, respectively, to its Revolving Purchase Facility with Key Global
Finance in sales transactions, received proceeds of $5.1 million and $22.9
million, respectively, and recognized a gain of $0.1 million and $1.2 million,
respectively.
During the six months ended June 30, 2000, in connection with a
securitization transaction, the Company transferred finance contracts with a net
book value of $58.9 million and recognized a gain of $1.8 million. From this
transaction the Company received cash of $59.5 million and recorded retained
interests of $1.2 million.
NOTE 9 -- RESTRICTED CASH
At June 30, 2000, the Company reported $58.3 million of restricted
cash, which relates to reserve accounts established in September 1999 and March
2000 under securitization and other credit facilities.
NOTE 10 -- RESTRUCTURING AND OTHER NONRECURRING CHARGES
During the three months ended March 31, 2000, the Company implemented a
restructuring program and recorded certain restructuring charges related to
headcount reductions and the elimination of duplicative expenses and non-core
activities and businesses. During the three months ended June 30, 2000, the
Company recorded additional restructuring charges of $4.0 million. The
restructuring and other nonrecurring charges are shown as a separate component
of operating expenses. Cash outlays during these periods were principally for
severance. The remaining cash outlays are expected to be funded from cash flows
from operations or through credit facilities.
10
11
A summary of the restructuring charges for continuing operations is as
follows:
SECOND SECOND
QUARTER QUARTER
CASH CASH
TOTAL OUTLAYS ON TOTAL OUTLAYS ON
FIRST FIRST FIRST SECOND SECOND
QUARTER QUARTER ACCRUAL AT QUARTER QUARTER QUARTER ACCRUAL AT
EXPENSE CASH OUTLAYS MARCH 31, 2000 EXPENSES EXPENSE EXPENSES JUNE 30, 2000
------- ------------ -------------- ---------- ------- ---------- -------------
(DOLLARS IN MILLIONS)
Severance............................. $1.4 $0.9 $0.5 $0.4 $0.8 $0.1 $0.8
Future lease obligations on facility
closures............................ 0.2 0.2 0.7 0.9
Other costs........................... 0.3 0.1 0.2 0.2 2.5 0.4 2.1
---- ---- ---- ---- ---- ---- ----
Total restructuring charges...... $1.9 $1.0 $0.9 $0.6 $4.0 $0.5 $3.8
==== ==== ==== ==== ==== ==== ====
The severance costs are related to the termination of personnel in two
non-core businesses and other headcount reductions including positions ranging
from executive to administrative. At June 30, 2000 the accrual represents the
severance costs associated with those employees notified of termination by June
30, 2000.
The other costs include costs associated with the early termination of
contractual arrangements as well as costs associated with the elimination of
three non-core businesses.
NOTE 11 -- IMPAIRMENT OF GOODWILL
During the three and six months ended June 30, 2000, the Company
determined that $55.2 million and $70.2 million, respectively, of goodwill from
subsidiaries in continuing segments was impaired and fully amortized these
amounts during the respective periods. These amounts are included in the caption
"Goodwill amortization and impairment" in the accompanying Consolidated
Statement of Operations. The impairment related to three companies in the
Business Credit Group, and two companies in the Technology and Finance Group.
A summary of the impairment of goodwill is as follows:
IMPAIRMENT OF
GOODWILL
-------------
(DOLLARS IN
MILLIONS)
Business Credit Group............... $26.7
Technology and Finance Group........ 43.5
-----
Total impairment of goodwill... $70.2
=====
The impairment write-off of goodwill in the Business Credit Group and
the Technology and Finance Group was a result of the Company's determination
that certain subsidiaries could no longer generate positive cash flow from
operations. The Company has decided to exit the operations conducted by these
subsidiaries, through subsidiary closure, sale or otherwise.
In addition, the Company determined the entire amount of goodwill in
the Big Ticket Division was impaired, and fully amortized the appropriate
amounts as part of the Discontinued Operations accounting detailed in Note 12.
NOTE 12 -- DISCONTINUED OPERATIONS
During June 2000, the Company reached a decision to discontinue the
operations of its Big Ticket Division, and formulated a plan of disposal for
that division's remaining assets, which divestiture is expected to be completed
within the next twelve months. In connection with this plan, the Company wrote
down the remaining aircraft and aircraft engines to their estimated net
realizable values assuming disposition on an expedited basis. The write-down
amounted to a pretax charge of $115.2 million and is reported in the caption,
"Loss on disposal of Big Ticket Division" on the Consolidated Statements of
Operations. The Company intends to sell the aircraft and the aircraft engines to
third parties.
The "Net assets of discontinued operations" reflected on the
accompanying Consolidated Balance Sheets consist of the following:
JUNE 30,
2000
-----------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and cash equivalents............................ $ 14,050
Accounts receivable, net............................. (581)
Notes receivable..................................... 43,128
Net investment in finance contracts.................. 64,284
Equipment under operating leases, net................ 391,244
Equipment held for sale or lease..................... 106,780
Investments.......................................... 25,384
Property and equipment, net.......................... 1,984
Deposits and other assets............................ 17,028
--------
Total assets.................................... 663,301
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-recourse and limited recourse debt............... 457,539
Accounts payable and accrued expenses................ 14,198
Security and other deposits.......................... 29,273
Accrued restructuring................................ 2,820
Accrued discontinued operations...................... 33,216
Other liabilities.................................... 5,251
--------
Total liabilities.................................... 542,297
Net assets of discontinued operations ............... $121,004
11
12
The net operating results have been reported in the captions "Income
(loss) from operations of discontinued Big Ticket Division" and "Loss on
disposal of Big Ticket Division" in the Consolidated Statements of Operations.
Summarized results from discontinued operations are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Income from finance contracts............. $ 1,879 $ 305 $ 3,828 $ 410
Rental income from operating leases....... 17,161 42,741 40,913 60,791
Sales of equipment........................ 12 93,232 219,531 117,733
Fees, commissions and remarketing income.. 18 4,432 36 4,495
Interest and other income................. 1,135 1,358 2,183 1,949
--------- -------- --------- --------
Total revenues....................... 20,205 142,068 266,491 185,378
--------- -------- --------- --------
Cost of operating leases.................. 8,252 13,314 17,529 20,548
Cost of equipment sold.................... 623 80,419 240,752 96,674
Interest expense.......................... 22,155 24,317 47,709 32,535
Selling, general and administrative
expenses ............................... 12,414 5,148 27,168 7,965
Restructuring and other nonrecurring
charges ................................ 3,216 -- 3,242 --
Goodwill amortization and impairment...... 1,286 1,944 227,440 3,839
--------- -------- --------- --------
Total expenses....................... 47,946 125,142 563,840 161,561
--------- -------- --------- --------
Income (loss) from continuing operations.. (27,741) 16,926 (297,349) 23,817
Equity in income from minority-owned
affiliates.............................. 1,656 -- 2,097 --
--------- -------- --------- --------
Income (loss) from operations of
discontinued Big Ticket Division before
provision (benefit) from income taxes... (26,085) 16,926 (295,252) 23,817
Provision (benefit) for income taxes...... (7,306) 7,176 (44,379) 10,539
--------- -------- --------- --------
Income (loss) from operations of
discontinued Big Ticket Division after
provision (benefit) for income taxes.... (18,779) 9,750 (250,873) 13,278
--------- -------- --------- --------
Loss on disposal of Big Ticket Division
including provision of $33.2 million for
operating losses during phaseout period
before benefit for income taxes......... (148,416) -- (148,416) --
Benefit for income taxes.................. (44,105) -- (22,423) --
--------- -------- --------- --------
Income (loss) from operations of
discontinued Big Ticket Division........ (104,311) -- (125,993) --
Total discontinued operations............. $(123,090) $ 9,750 $(376,866) $ 13,278
========= ======== ========= ========
The Company also intends to sell the remaining 49% beneficial interest
in Aircraft Finance Trust. Aircraft Finance Trust, which was formed on April 13,
1999, was initially wholly-owned by UniCapital AFT-I, Inc. (51% equity interest)
and UniCapital AFT-II, Inc. (49% equity interest), each of which is a
wholly-owned subsidiary of the UniCapital Air Group, Inc. The Company now owns a
49% beneficial interest in Aircraft Finance Trust and accounts for its remaining
investment in Aircraft Finance Trust under the equity method of accounting. The
Company's results of operations reflect only the Company's proportionate share
of the net results from Aircraft Finance Trust as equity in net income from
minority-owned affiliates. The carrying value of this interest was $25.4 million
as of June 30, 2000 and is included in investments in the accompanying unaudited
balance sheet above.
12
13
Aircraft Finance Trust's condensed statement of operations for the
three months and six months ended June 30, 2000 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ ----------------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
Total revenues.... $39,702 $76,617
Total expenses.... $36,324 $72,358
Net income........ $ 3,378 $ 4,259
NOTE 13 -- SUBSEQUENT EVENTS
On July 26, 2000, the Company sold eighteen aircraft to a third party
for gross proceeds of $350.0 million, which represent their aggregate carrying
value as of June 30, 2000. These amounts were written down to their estimated
net realizable value at June 30, 2000 in connection with the Company's decision
to discontinue its Big Ticket Division.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
unaudited consolidated financial statements, including the related notes
thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission.
UniCapital was founded in October 1997 as a Delaware corporation. We
commenced operations in May 1998 in conjunction with the consummation of our
initial public offering and the acquisition of twelve equipment leasing,
specialty finance and related businesses. In June, July and August 1998, we
completed the acquisition of five additional equipment leasing, specialty
finance and related businesses.
We use the term "leases" to refer to both leases and finance contracts.
We derive the majority of our revenue from lease payments on leases originated
and held by the Company and sales of equipment, including sales of equipment
off-lease and the sale of new and used equipment. In addition, we derive revenue
from sales of leases to third parties, as well as from servicing fees, late
charges and administrative fees. We also receive remarketing fees for the sale
of off-lease equipment on behalf of equity investors in leases and we may obtain
a premium for sales prices in excess of an agreed-upon amount.
We intend to retain as on-balance sheet leases those leases, that we
transfer to our warehouse facilities, as those transfers will no longer be
structured to meet the criteria to be accounted for as sales. We intend to
continue our core business practice of selling certain leases to third parties
on a whole-loan basis. These sales are typically non-recourse, and we generally
maintain no retained interest in those leases.
We expect to fund an increasing amount of our prospective originations
through third parties on a whole-loan or non-recourse basis, a deviation from
our prior strategy of funding the majority of the leases that we originate
through credit facilities. Some of our originations will be refinanced through
structured finance products. Should we be unable to sell, finance or securitize
leases going forward our business, financial condition and results of operations
would be materially and adversely affected. In addition, should we be unable to
sell, finance or securitize leases going forward with satisfactory fixed
interest rates within a reasonable period of time after funding, our operating
margins could be adversely affected by any increase in interest rates to the
extent that we have not effectively hedged our interest rate exposure on
variable rate debt. Moreover, increases in interest rates, which cause us to
raise the implicit interest rate charged to our customers, could decrease demand
for our lease and other financial products.
The leases we acquire or originate generally are noncancelable for a
specified term, during which we generally receive scheduled payments sufficient,
in the aggregate, to cover our borrowing costs and, when aggregated with the
residual, the costs of the underlying equipment. The noncancelable term of each
lease is generally equal to or less than the equipment's estimated economic
life. Initial terms of the leases in our portfolio generally range from 12 to 84
months. Certain of the leases we acquire or originate carry a $1.00 buy-out
provision upon the maturity of the lease.
Our leases are collateralized by the equipment leased as well as, in
some cases, a personal guarantee provided by a principal of the lessee. We
manage credit risk through diversifying our business customer base, geographic
location of lessees and the type of business equipment leased. We believe that
prepayment risks are mitigated by the noncancelable nature of the majority of
our leases.
On June 19, 2000 the Company named E. Talbot Briddell as the Company's
chief executive officer, replacing Robert J. New. Daniel Chait, senior vice
president and treasurer, has been appointed interim chief financial officer,
replacing Jonathan New, who left the Company to pursue other interests. In
addition to the changes in senior management, subsequent to June 30, 2000, the
Company eliminated 38 positions and reduced the salaries of 11 senior employees.
13
14
In the second quarter 2000, following the appointment of new senior
management, the Company reached a decision to discontinue the operations of its
Big Ticket Division and has developed and implemented a plan to divest all
assets of the Big Ticket Division within one year. As a result, the Company
recorded a pretax charge of $174.5 million ($123.1 million after taxes) for the
three months ended June 30, 2000. The charge includes $89.0 million for the
asset impairment related to aircraft, $26.2 million related to asset impairment
of aircraft engines, $50.1 million related to operating costs during the wind
down period and $9.2 million related to the writedown of a note and a deposit.
During the three months ended June 30, 2000, the Company decided to
exit the operations of two companies in the Business Credit Group and one
company in the Technology and Finance Group because they have not produced
sufficient operating cash flows and are not expected to do so in the foreseeable
future. We expect to exit, through subsidiary closure, sale or otherwise, these
businesses during 2000. This decision is consistent with our strategy to
re-deploy capital to profitable businesses in the Technology and Finance Group
and the Business Credit Group. Consequently, $55.2 million of related goodwill
was considered to be permanently impaired and was written off.
RESULTS OF OPERATIONS
The following table sets forth selected financial data for the Company
and its subsidiaries as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2000 1999
-------------------- ------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Income from finance contracts............. $ 26,591 26.6% $14,656 22.2%
Rental income from operating leases....... 19,999 20.1 15,936 24.2
Sales of equipment........................ 46,392 46.5 26,397 40.0
Gain on sale of finance contracts......... 2,073 2.1 894 1.4
Fees, commissions and remarketing income.. 3,464 3.5 6,515 9.9
Interest and other income................. 1,223 1.2 1,546 2.3
--------- ------ ------- -----
Total revenues....................... 99,742 100.0 65,944 100.0
--------- ------ ------- -----
Cost of operating leases.................. 14,908 14.9 10,240 15.5
Cost of equipment sold.................... 42,535 42.7 24,559 37.2
Interest expense.......................... 23,884 23.9 12,008 18.2
Selling, general and administrative
expenses................................ 36,434 36.5 23,071 35.0
Restructuring and other nonrecurring
charges................................. 4,042 4.1 -- --
Goodwill amortization and impairment...... 57,783 57.9 2,707 4.1
--------- ------ ------- -----
Total expenses....................... 179,586 180.0 72,585 110.0
--------- ------ ------- -----
Income (loss) from continuing operations
before taxes............................ (79,844) (80.0) (6,641) (10.0)
Benefit for income taxes.................. (9,129) (9.1) (1,500) (2.2)
--------- ------ ------- -----
Net loss from continuing operations....... (70,715) (70.9) (5,141) (7.8)
--------- ------ ------- -----
Discontinued operations (Note 12) :.......
Income (loss) from operations of
discontinued Big Ticket Division (plus
(less) applicable income taxes of $7.3
million and ($7.2) million,
respectively) .......................... (18,779) (18.8) 9,750 14.8
Loss on disposal of Big Ticket Division
including provision of $33.2 million
for operating losses during phaseout
period (plus (less) applicable income
of 44.1 million)........................ (104,311) (104.6) -- 0.0
--------- ------ ------- -----
Total discontinued operations........ (123,090) (123.4) 9,750 14.8
--------- ------ ------- -----
Net income (loss)......................... $(193,805) (194.3)% $ 4,609 7.0%
========= ====== ======= =====
14
15
The following tables set forth selected financial data for the Company by
continuing reported business segment for the three months ended June 30, 2000
and 1999.
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 17,760 $ 8,830 $ 1 $ 26,591
Rental income from operating
leases ......................... 19,999 -- -- 19,999
Sales of equipment................ 46,376 16 -- 46,392
Gain on sale of finance
contracts....................... 2,308 (235) -- 2,073
Fees, commissions and remarketing
income.......................... 1,156 1,924 384 3,464
Interest and other income......... 548 (241) 916 1,223
---------- -------- --------- ------------
Total revenues............... 88,147 10,294 1,301 99,742
---------- -------- --------- ------------
Cost of operating leases.......... 14,908 -- -- 14,908
Cost of equipment sold............ 42,531 4 -- 42,535
Interest expense.................. 11,966 5,254 6,664 23,884
Selling, general and
administrative expenses......... 24,022 10,716 1,696 36,434
Restructuring and other
nonrecurring charges............ (110) 542 3,610 4,042
Goodwill amortization and
impairment ..................... 33,733 23,975 75 57,783
---------- -------- --------- ------------
Total expenses............... 127,050 40,491 12,045 179,586
---------- -------- --------- ------------
Income (loss) from continuing
operations before taxes........... $ (38,903) $(30,197) $ (10,744) $ (79,844)
========== ======== ========= ===========
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 10,675 $ 3,981 $ -- $ 14,656
Rental income from operating
leases ......................... 15,730 206 -- 15,936
Sales of equipment................ 26,397 -- -- 26,397
Gain on sale of finance
contracts. ..................... 894 -- -- 894
Fees, commissions and remarketing
income.......................... 5,013 1,315 187 6,515
Interest and other income......... 552 762 232 1,546
---------- -------- --------- ------------
Total revenues............... 59,261 6,264 419 65,944
---------- -------- --------- ------------
Cost of operating leases.......... 10,191 49 -- 10,240
Cost of equipment sold............ 24,559 -- -- 24,559
Interest expense.................. 6,774 1,669 3,565 12,008
Selling, general and
administrative expenses......... 11,965 7,515 3,591 23,071
Goodwill amortization and
impairment ..................... 2,179 453 75 2,707
---------- -------- --------- ------------
Total expenses............... 55,668 9,686 7,231 72,585
---------- -------- --------- ------------
Income (loss) from continuing
operations before taxes......... $ 3,593 $ (3,422) $ (6,812) $ (6,641)
========== ======== ========= ===========
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE RESULTS FOR THE
THREE MONTHS ENDED JUNE 30, 1999
Income from finance contracts. Income from finance contracts for the
three months ended June 30, 2000 increased by $11.9 million, or 81.4%, to $26.6
million from $14.7 million for the three months ended June 30, 1999. This
increase is primarily due to the $369.0 million increase in the finance contract
portfolios of the Technology and Finance Group and Business Credit Group,
partially offset by a decrease in lease originations for the three months ended
June 30, 2000 as compared to the three months ended June 30, 1999.
Rental income from operating leases. Rental income from operating
leases for the three months ended June 30, 2000 increased by $4.1 million, or
25.5%, to $20.0 million from $15.9 million for the three months ended June 30,
1999. This increase is due to a $46.4 million increase in equipment under
operating leases in the Technology and Finance Group.
Sales of equipment. Sales of equipment for the three months ended June
30, 2000 increased by $20.0 million, or 75.7%, to $46.4 million from $26.4
million for the three months ended June 30, 1999. This increase is primarily due
to an increase in the number of leases qualifying for sales-type lease treatment
in two of the companies in the Technology and Finance Group.
Gain on sale of finance contracts. Gain on sale of finance contracts
for the three months ended June 30, 2000 increased by $1.2 million, or 131.9%,
to $2.1 million from $0.9 million for the three months ended June 30, 1999. This
increase is primarily attributable to an increase in sales to third parties of
finance contracts originated by the Technology and Finance Group.
Fees, commissions and remarketing income. Fees, commissions and
remarketing income for the three months ended June 30, 2000 decreased by $3.1
million, or 46.8%, to $3.4 million from $6.5 million for the three months ended
June 30, 1999. This decrease is primarily due to the completion of large
transactions in the Technology and Finance Group in the three months ended June
30, 1999.
15
16
Interest and other income. Interest and other income for the three
months ended June 30, 2000 decreased by $0.3 million, or 20.9%, to $1.2 million
from $1.5 million for the three months ended June 30, 1999. This decrease is due
to a write-down as a result of a change in estimates of the value of the
Company's retained interests.
Cost of operating leases. Cost of operating leases for the three months
ended June 30, 2000 increased by $4.7 million, or 45.6%, to $14.9 million from
$10.2 million for the three months ended June 30, 1999. This increase is
primarily due to the $46.4 million growth in the equipment under operating
leases in the Technology and Finance Group.
Cost of equipment sold. Cost of equipment sold for the three months
ended June 30, 2000 increased by $18.0 million, or 73.2%, to $42.5 million from
$24.5 million for the three months ended June 30, 1999. This increase is
primarily due to an increase in the number of leases qualifying for sales-type
lease treatment in two of the companies in the Technology and Finance Group.
Interest expense. Interest expense for the three months ended June 30,
2000 increased by $11.9 million, or 98.9%, to $23.9 million from $12.0 million
for the three months ended June 30, 1999. This increase is primarily due to
increased borrowings outstanding to finance the $382.0 million growth of the
Company's lease and equipment portfolio as well as the effect of rising interest
rates.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 increased by
$13.3 million, or 58.0%, to $36.4 million from $23.1 million for the three
months ended June 30, 1999. Approximately $6.5 million of this increase is due
to a provision for lease losses taken in excess of the Company's normal
quarterly provision as a result of the bankruptcies and general credit
deterioration of several customers of the Technology and Finance Group and the
Business Credit Group. In addition the impact of new employment agreements with
certain of the Company's officers and subsidiary executives resulted in higher
personnel as compared to the three months ended June 30, 1999.
Restructuring and other nonrecurring charges. The Company incurred $4.0
million of restructuring and other nonrecurring charges during the three months
ended June 30, 2000, primarily as a result of severance costs related to the
elimination of non-core businesses and other headcount reductions throughout the
Company. In addition, the Company wrote off capitalized assets related to
LeaseAdvisor.com.
Goodwill amortization and impairment. Goodwill amortization and
impairment for the three months ended June 30, 2000 increased by $55.1 million,
to $57.8 million from $2.7 million for the three months ended June 30, 1999.
This increase is primarily due to the impairment write-off of goodwill in the
amount of $55.2 million, as a result of the Company's decision to exit certain
operations and redeploy capital to more profitable operations. Of this amount,
$31.7 million related to one company in the Technology and Finance Group and
$23.5 million related to two companies in the Business Credit Group. The Company
expects to complete the exit from the business activities of those entities by
the end of 2000.
The following table sets forth selected financial data for the Company
and its subsidiaries as a percentage of revenues for the periods indicated.
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2000 1999
-------------------- -------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Income from finance contracts............. $ 51,698 26.2% $ 26,176 21.0%
Rental income from operating leases....... 37,212 18.8 30,913 24.7
Sales of equipment........................ 91,061 46.1 50,451 40.3
Gain on sale of finance contracts......... 7,800 4.0 1,177 0.9
Fees, commissions and remarketing income.. 8,830 4.5 12,564 10.0
Interest and other income................. 727 0.4 3,939 3.1
--------- ------ -------- ------
Total revenues....................... 197,328 100.0 125,220 100.0
--------- ------ -------- ------
Cost of operating leases.................. 26,928 13.6 19,080 15.2
Cost of equipment sold.................... 84,410 42.7 44,868 35.8
Interest expense.......................... 43,526 22.1 22,596 18.1
Selling, general and administrative
expenses................................ 69,982 35.5 45,423 36.3
Restructuring and other nonrecurring
charges................................. 5,925 3.0 -- --
Goodwill amortization and impairment...... 75,524 38.3 5,402 4.3
--------- ------ -------- ------
Total expenses....................... 306,295 155.2 137,369 109.7
--------- ------ -------- ------
Income (loss) from continuing operations
before taxes............................ (108,967) (55.2) (12,149) (9.7)
Benefit for income taxes.................. (15,435) (7.8) (2,593) (2.1)
--------- ------ -------- ------
Net loss from continuing operations....... (93,532) (47.4) (9,556) (7.6)
--------- ------ -------- ------
Discontinued operations (Note 12):........
Income (loss) from operations of
discontinued Big Ticket Division (plus
(less) applicable income taxes of $44.4
million and ($10.5) million,
respectively) .......................... (250,873) (127.1) 13,278 10.6
Loss on disposal of Big Ticket Division
including provision of $33.2 million for
operating losses during phaseout period
(plus (less) applicable income taxes of
$22.4 million).......................... (125,993) (63.8) -- --
--------- ------ -------- ------
Total discontinued operations........ (376,866) (190.9) 13,278 10.6
--------- ------ -------- ------
Net income (loss)......................... $ (470,398) (238.3)% $ 3,722 3.0%
========== ====== ======== ======
16
17
The following tables set forth selected financial data for the Company by
continuing reported business segment for the six months ended June 30, 2000 and
1999.
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 34,969 $ 16,727 $ 2 $ 51,698
Rental income from operating
leases ......................... 37,212 -- -- 37,212
Sales of equipment................ 91,045 16 -- 91,061
Gain on sale of finance
contracts. ..................... 5,891 1,909 -- 7,800
Fees, commissions and remarketing
income.......................... 3,962 3,589 1,279 8,830
Interest and other income......... (255) (552) 1,534 727
---------- -------- --------- -----------
Total revenues............... 172,824 21,689 2,815 197,328
---------- -------- --------- -----------
Cost of operating leases.......... 26,924 4 -- 26,928
Cost of equipment sold............ 84,404 6 -- 84,410
Interest expense.................. 22,544 9,971 11,011 43,526
Selling, general and
administrative expenses......... 44,779 19,897 5,306 69,982
Restructuring and other
nonrecurring charges............ 1,229 759 3,937 5,925
Goodwill amortization and
impairment ..................... 47,742 27,632 150 75,524
---------- -------- --------- -----------
Total expenses............... 227,622 58,269 20,404 306,295
---------- -------- --------- -----------
Income (loss) from continuing
operations before taxes......... $ (54,798) $(36,580) $ (17,589) $ (108,967)
========== ======== ========= ===========
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
TECHNOLOGY
AND BUSINESS
FINANCE CREDIT CORPORATE
GROUP GROUP DIVISION CONSOLIDATED
---------- -------- --------- ------------
Income from finance contracts..... $ 19,586 $ 6,590 $ -- $ 26,176
Rental income from operating
leases ......................... 30,557 356 -- 30,913
Sales of equipment................ 50,451 -- -- 50,451
Gain on sale of finance
contracts. ..................... 1,177 -- -- 1,177
Fees, commissions and remarketing
income.......................... 8,727 3,127 710 12,564
Interest and other income......... 1,784 1,321 834 3,939
---------- -------- --------- -----------
Total revenues............... 112,282 11,394 1,544 125,220
---------- -------- --------- -----------
Cost of operating leases.......... 18,973 107 -- 19,080
Cost of equipment sold............ 44,868 -- -- 44,868
Interest expense.................. 12,283 2,763 7,550 22,596
Selling, general and
administrative expenses......... 22,901 14,347 8,175 45,423
Goodwill amortization and
impairment ..................... 4,346 904 152 5,402
---------- -------- --------- -----------
Total expenses............... 103,371 18,121 15,877 137,369
---------- -------- --------- -----------
Income (loss) from continuing
operations before taxes......... $ 8,911 $ (6,727) $ (14,333) $ (12,149)
========== ======== ========= ===========
17
18
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE RESULTS FOR THE
SIX MONTHS ENDED JUNE 30, 1999
Income from finance contracts. Income from finance contracts for the
six months ended June 30, 2000 increased by $25.5 million, or 97.5%, to $51.7
million from $26.2 million for the six months ended June 30, 1999. This increase
is primarily due to the $369.0 million increase in the finance contract
portfolios of the Technology and Finance Group and Business Credit Group.
Rental income from operating leases. Rental income from operating
leases for the six months ended June 30, 2000 increased by $6.3 million, or
20.4%, to $37.2 million from $30.9 million for the six months ended June 30,
1999. This increase is primarily due to a $46.4 million increase in equipment
under operating leases in the Technology and Finance Group.
Sales of equipment. Sales of equipment for the six months ended June
30, 2000 increased by $40.6 million, or 80.5%, to $91.1 million from $50.5
million for the six months ended June 30, 1999. This increase is primarily due
to an increase in the number of leases qualifying for sales-type lease treatment
in two of the companies in the Technology and Finance Group.
Gain on sale of finance contracts. Gain on sale of finance contracts
for the six months ended June 30, 2000 increased by $6.6 million, or 562.7%, to
$7.8 million from $1.2 million for the six months ended June 30, 1999. This
increase is primarily attributable to an increase in sales to third parties of
finance contracts originated by the Technology and Finance Group.
Fees, commissions and remarketing income. Fees, commissions and
remarketing income for the six months ended June 30, 2000 decreased by $3.7
million, or 29.7%, to $8.8 million from $12.5 million for the six months ended
June 30, 1999. This decrease is primarily due to the completion of large
transactions in the Technology and Finance Group in the six months ended June
30, 1999.
Interest and other income. Interest and other income for the six months
ended June 30, 2000 decreased by $3.2 million, or 81.5%, to $.7 million from
$3.9 million for the six months ended June 30, 1999. This decrease is due to a
write-down as a result of a change in estimates of the value of the Company's
retained interests.
Cost of operating leases. Cost of operating leases for the six months
ended June 30, 2000 increased by $7.8 million, or 41.1%, to $26.9 million from
$19.1 million for the six months ended June 30, 1999. This increase is primarily
due to the $46.4 million growth in the equipment under operating leases in the
Technology and Finance Group.
Cost of equipment sold. Cost of equipment sold for the six months ended
June 30, 2000 increased by $39.5 million, or 88.1%, to $88.4 million from $44.9
million for the six months ended June 30, 1999. This increase is primarily due
to an increase in the number of leases qualifying for sales-type lease treatment
in two of the companies in the Technology and Finance Group.
Interest expense. Interest expense for the six months ended June 30,
2000 increased by $20.9 million, or 92.6%, to $43.5 million from $22.6 million
for the six months ended June 30, 1999. This increase is primarily due to
increased borrowings outstanding to finance the $382.0 million growth of the
Company's lease and equipment portfolio as well as the effect of rising interest
rates.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended June 30, 2000 increased by
$24.6 million, or 54.1%, to $70.0 million from $45.4 million for the six months
ended June 30, 1999. Approximately $6.5 million of this increase is due to a
provision for leases losses taken in excess of the Company's normal provision as
a result of the bankruptcies and general credit deterioration of several
customers of the Technology and Finance Group and Business Credit Group. In
addition, the impact of new employment agreements with certain of the Company's
officers and subsidiary executives, resulted in higher personnel costs, as
compared to the six months ended June 30, 1999.
Restructuring and other nonrecurring charges. The Company incurred $5.9
million of restructuring and other nonrecurring charges during the six months
ended June 30, 2000, primarily as a result of severance costs related to the
elimination of non-core businesses and other headcount reductions throughout the
Company.
Goodwill amortization and impairment. Goodwill amortization and
impairment for the six months ended June 30, 2000 increased by $70.1 million, to
$75.5 million from $5.4 million for the six months ended June 30, 1999. This
increase is primarily due to the impairment write-off of goodwill in the amount
of $70.2 million, as a result of the Company's decision to exit certain
operations and redeploy capital to more profitable operations. Of this amount,
$43.5 million related to two companies in the Technology and Finance Group and
$26.7 million related to three companies in the Business Credit Group. The
Company closed two of the companies during the second quarter of 2000 and
expects to complete the exit from the business activities of those entities by
the end of 2000.
18
19
LIQUIDITY AND CAPITAL RESOURCES
The "Revolving Facility" and "Limited Recourse Conduit Facility"
(referred to as the "Senior Credit Facilities") and the "Warehouse Facility" are
described in greater detail under the heading "Credit Facilities."
As of June 30, 2000, we had cash and cash equivalents of approximately
$35.1 million. Our business is capital intensive and requires access to
substantial short-term and long-term credit and other capital to fund new
equipment leases and the purchase of equipment. We will continue to require
access to significant additional capital to maintain and expand the volume of
leases that we fund, as well as to fund any possible future acquisitions of
lease portfolios.
Our uses of cash include the origination of equipment leases and the
purchase of equipment, payment of interest expenses, repayment of borrowings
under our credit facilities, operating and administrative expenses, income taxes
and capital expenditures, and may include payment of the cash portion of the
earn-out arrangements with the former stockholders of certain of the acquired
companies, as well as any possible future acquisitions of lease portfolios.
Effective March 31, 2000 we amended our Revolving Facility to waive
required compliance with two of the three primary financial covenants,
(fixed-charge coverage ratio and minimum tangible net worth covenants ), which
waiver has been extended through August 31, 2000 and expanded to include a
waiver of compliance with the third financial covenant (debt to tangible net
worth covenant). If we had not amended this facility, our financial condition as
of March 31, 2000 and our results of operations for the first quarter of 2000
would have caused us to breach the fixed-charge coverage ratio and the minimum
tangible net worth covenants of this facility. Although compliance with these
financial covenants has been waived through August 31, 2000, we will not be in
compliance with these financial covenants, or the debt to tangible net worth
ratio covenant, as of September 1, 2000 and we may not be able to negotiate
extensions of the waiver or negotiate modifications of the covenants prior to
the expiration of the waiver. In addition, our financial condition as of March
31, 2000 and our results of operations for the first quarter of 2000 would have
caused us to breach the fixed-charge coverage ratio and minimum tangible net
worth covenants of the Morgan Stanley Asset Funding Warehouse Facility. We
amended the facility to waive required compliance with these covenants and to
waive a borrowing base deficiency, which deficiency has since been cured by the
application of proceeds from the underlying collateral. The amendment has been
extended to August 31, 2000 and expanded to include waivers of compliance with
the debt to tangible net worth and profitability covenants. We may not be able
to negotiate an extension of this waivers prior to its expiration, or negotiate
modifications of the covenants prior to the expiration of the waivers. We also
amended our Full Recourse Conduit Facility, effective as of August 16, 1999, to
adjust certain financial covenants thereunder to be the same as those under the
Revolving Facility. The Full Recourse Conduit Facility has subsequently merged
into the Limited Recourse Conduit Facility as of July 20, 2000, with all
financings and commitments thereunder being transferred to the Limited Recourse
Conduit Facility as of such date. There are no financial covenants in the
Limited Recourse Conduit Facility.
Even if we are able to comply with the financial covenants in the
Revolving Facility or the Morgan Stanley Asset Funding Warehouse Facility
through renegotiation of the respective financial covenants, we may not remain
in compliance. Any breach of the financial covenants that is not waived by our
lenders constitutes an event of default. An event of default under one of our
credit facilities could constitute an event of default under each of our other
credit facilities. If an event of default occurs under the Senior Credit
Facilities, our lenders could declare all amounts outstanding, together with
accrued interest, to be immediately due and payable. If we could not repay these
amounts, then our lenders could proceed against the collateral, which would have
a material adverse effect on our business and financial condition.
Our existing financial condition will limit our ability to obtain
additional sources of financing. Although we believe that we would not be able
to obtain additional credit facilities at this time, we anticipate that we will
be able to sell leases and obtain financing for transactions on a non-recourse
basis. Our failure to remain in compliance with the financial covenants of our
credit facilities will have a material adverse effect on our ability to obtain
any additional sources of financing. If we are unable to obtain additional
sources of financing, or to renew, replace or modify our credit facilities prior
to their expiration with facilities of like amount, or if we are unable to
implement other alternative strategies, then we may have insufficient cash to
continue to operate our business as it is now conducted, and may be unable, in
whole or in part, to fund new equipment leases or the purchase of equipment,
fund the acquisition of lease portfolios, fund additional purchase price
consideration pursuant to the earnout provisions of various acquisition
agreements, or fund other working capital requirements. Accordingly, in such
circumstances, we would have to make choices among the various demands upon our
liquidity, and among available alternatives to increase liquidity (including
asset dispositions on then available terms), and our business, financial
condition and results of operations would be materially and adversely affected.
19
20
CREDIT FACILITIES
We have in place a series of credit facilities (the "Senior Credit
Facilities") which consist of the following: (i) a $300.0 million Corporate
Revolving Credit Facility (the committed amount of which is reducing with the
proceeds realized on certain asset sales as detailed below) primarily to finance
working capital needs (the "Revolving Facility"); and (ii) an asset-backed
commercial paper conduit facility totaling $450.0 million to finance small
ticket and middle market leases, consisting of a limited recourse Equipment
Lease Receivable Facility (the "Limited Recourse Conduit Facility").
The Company paid and continues to pay financing fees in connection with
entering into or extending each of the Senior Credit Facilities, which are being
amortized as a yield adjustment over the terms of the Senior Credit Facilities
using the interest method, and will pay an annual administration fee equal to a
percentage of certain of the facilities. We expect that the aggregate fees and
expenses to be paid in connection with entering into the Senior Credit
Facilities will be paid from cash flows from operating activities as well as
borrowings under the Revolving Facility.
Revolving Facility. Under the Revolving Facility, we could initially
borrow up to $300.0 million (which amount has been reduced by the amount of the
proceeds realized on certain asset sales, as detailed below) with a $50.0
million sublimit for letters of credit and a $15.0 million swingline sublimit.
The proceeds of the Revolving Facility may be used for general working capital
needs, subject to certain limitations. Amounts outstanding under the Revolving
Facility bear interest, at our option, at Bank of America's base rate plus an
applicable margin or a Eurodollar rate plus an applicable margin. Our
obligations under the Revolving Facility are guaranteed by all of our
subsidiaries other than certain special purpose entities. The Revolving Facility
is secured by a pledge of all of the capital stock of our domestic guaranteeing
subsidiaries (and a pledge of 65% of the voting stock and all of the non-voting
stock of each non-United States guaranteeing subsidiary) and a security interest
in all other assets and properties of the Company and those subsidiaries
guaranteeing the Revolving Facility, other than assets financed on a
non-recourse basis by the Company and any assets subject to liens granted in
connection with certain permitted indebtedness (including securitizations).
Borrowings under the Revolving Facility are subject to certain conditions,
including but not limited to absence of material adverse effect and absence of
material litigation. In addition, the Revolving Facility contains covenants,
including but not limited to limitations on liens (other than permitted liens),
investments, dividends and other restricted payments, incurrence of recourse
indebtedness, transactions with affiliates, acquisitions other than permitted
acquisitions (as defined in the Revolving Facility) as well as various financial
covenants, including ratios of recourse and limited recourse debt to tangible
net worth, cash flow to interest and rents, and maintenance at all times of a
minimum tangible net worth. We amended the Revolving Facility as of March 31,
2000 to waive required compliance with certain financial covenants, which waiver
has been extended through August 31, 2000. If we had not amended this facility,
our financial condition as of March 31, 2000 and our results of operations for
the first quarter of 2000 would have caused us to breach the fixed-charge
coverage ratio and tangible net worth ratio covenants of the Revolving Facility.
As a condition to this amendment, we have agreed to (i) develop a revised
business plan, which includes the sale of our Big Ticket Division assets, (ii)
apply the net proceeds of any liquidity events or asset sales (excluding $25
million of such net proceeds which we may retain) to reduce the amount
outstanding under the facility, with a corresponding permanent reduction in the
lenders' commitment thereunder, (iii) appoint independent financial consultants
to assist us in evaluating our business and financial condition and (iv) pay the
costs of any financial consultants engaged by our lender to conduct an
independent investigation of our business and financial condition. The Revolving
Facility, which was entered into in June 1998, has a three-year term. We pay a
quarterly fee equal to a percentage of the unused portion of the Revolving
Facility. As of June 30, 2000, the Company had borrowings of $287.0 million
outstanding under the Revolving Facility with a weighted average interest rate
of 9.4%.
As of August 9, 2000, the Company has received approximately $42.0
million of net proceeds from certain liquidity events and asset sales. Of this
amount $25.0 million was applied to reduce the amount outstanding under the
Revolving Facility (but did not reduce the maximum availability thereunder) and
approximately $17.0 million was applied to reduce the amount outstanding under
the facility and resulted in a permanent reduction of the lenders' commitments
under the Revolving Facility to $283.0 million. The amount outstanding under the
Revolving Facility as of August 9, 2000 was $249.0 million.
Limited Recourse Conduit Facility. We have established the Limited
Recourse Conduit Facility with Bank of America, as agent, pursuant to which a
commercial paper conduit (the "CP Conduit") or, if the CP Conduit does not buy
them, one or more bank investors, which will include Bank of America (the "Bank
Investors"), will purchase beneficial interests in leases (the "Net Investment")
in an amount initially of up to $200.0 million (the "Facility Limit"), from a
special purpose entity, collateralized by small ticket and middle market leases
meeting certain eligibility requirements. Two indirect, bankruptcy-remote
subsidiaries of the Company (the "Transferors") may purchase the Company's
interest in certain financing leases and related leased equipment originated or
purchased by the Company or eligible subsidiaries of the Company. The CP Conduit
(or, upon the occurrence of certain events, the Bank Investors) will purchase
beneficial interests in leases from the Transferors at an amount equal to a
percentage of the present value of the remaining lease receivables. Collections
on the leases will generally be applied first to pay any amounts due under the
20
21
Limited Recourse Conduit Facility and certain other specified facilities, and
then to the Transferors. We plan to reduce the Net Investment under the Limited
Recourse Conduit Facility periodically through securitizations, re-financings
and whole-loan sales. The Limited Recourse Conduit Facility contains certain
restrictions, including but not limited to limitations on liens on the leases,
indebtedness, certain lease modifications and changes in credit and collection
practices. The Limited Recourse Conduit Facility requires payment by the
Transferor of program fees, facility fees, administration fees and commercial
paper dealer fees. The term of the Limited Recourse Conduit Facility has been
extended through September 7, 2000. As of June 30, 2000, the amount outstanding
under the Limited Recourse Conduit Facility was $254.7 million with a weighted
average interest rate of 7.4%.
As of July 20, 2000, our Full Recourse Conduit Facility with Bank of
America, as administrative agent, was merged into the Limited Recourse Conduit
Facility. As of June 30, 2000, the amount outstanding under the Full Recourse
Conduit Facility was $112.7 million with a weighted average interest rate of
7.7%. All financings, availability and commitments thereunder were transferred
to the Limited Recourse Conduit Facility. After giving effect to the transfer,
the amount outstanding under the Limited Recourse Conduit Facility, as of July
20, 2000, was $370.8 million with a weighted average interest rate of 7.3%. The
Facility Limit under the Limited Recourse Conduit Facility was increased to
$437.5 million as of July 20, 2000 and was further increased to $450.0 million
as of July 25, 2000.
OTHER CREDIT FACILITIES
Revolving Purchase Facility. In November 1999, we closed a $50.0
million increase in our $75.0 million discretionary, revolving facility with Key
Global Finance. This facility is used to fund eligible leases and is available
to most of the originating units in our Technology and Finance Group as well as
one of the originating units in our Business Credit Group. Key Global Finance
has the right to replace the Company as servicer, because the Company has
sustained losses for two consecutive quarters.
TERM LOANS
Aircraft Facility. Effective March 30, 2000, we converted our revolving
credit facility for the financing of aircraft into a term loan (the "Aircraft
Facility"). As a condition of the conversion, the Company pledged 100% of the
stock of UniCapital AFT-II, Inc., five engines and the Class C Notes related to
the 1999-1 and 2000-1 securitization transactions. The Aircraft Facility is
nonrecourse to the Company and is secured by a first priority perfected pledge
of all of the common stock of each special purpose entity wholly owned by the
Company which uses the Aircraft Facility ("SPE Aircraft Borrower") and each
domestic subsidiary of each SPE Aircraft Borrower, a first priority perfected
security interest in all present and future assets and properties of each SPE
Aircraft Borrower and each of its subsidiaries and certain other assets of the
Company as detailed above. Borrowings under the Aircraft Facility are subject to
certain conditions, including but not limited to absence of material adverse
effect and absence of material litigation. In addition, the Aircraft Facility
contains certain covenants, including but not limited to limitations on liens,
dividends and other restricted payments, capital expenditures, acquisitions,
incurrence of debt, as well as requirements related to annual appraisals of
eligible aircraft, approved aircraft and aircraft engine types and interest rate
protection acceptable to the lender, and various financial covenants customary
for transactions of this type, including a ratio of collateral cash flow to
interest. The Aircraft Facility had an initial expiry in December 2000. As of
June 30, 2000, the Company had borrowings of $346.8 million outstanding under
the Aircraft Facility with a weighted average interest rate of 9.9%. The
aircraft lease collateral performance for the first quarter would have caused
the SPE Aircraft Borrower to breach the collateral interest coverage ratio
financial covenant of the Aircraft Facility. This financial covenant was
modified in connection with the amendment to the facility effective March 30,
2000.
On July 26, 2000 the aircraft securing the Aircraft Facility were sold
and the full amount of the Aircraft Facility was repaid. A new loan agreement
dated July 21, 2000 (the "New Aircraft Facility") closed on July 26, 2000
pursuant to which the Company financed various assets including 100% of the
stock of UniCapital AFT-II, Inc., three engines and the Class C Notes related to
the 1999-1 and 2000-1 securitization transactions. The New Aircraft Facility is
nonrecourse to the Company. Interest on the loan will be charged at 30-day LIBOR
plus 3.25% and principal will amortize as proceeds are received from the
underlying collateral in excess of amounts necessary to pay interest. The loan
matures on the earlier of December 31, 2000 or the date on which amounts due
under the Revolving Facility are due and payable.
Morgan Stanley Asset Funding. Effective May 15, 2000, Morgan Stanley
Asset Funding, Inc., (the "Lender") converted our existing $200 million
warehouse facility (the "Warehouse Facility") into a term loan by not allowing
additional borrowings under this facility. We had established a Warehouse
Facility with Morgan Stanley Asset Funding, Inc., (the "Lender") pursuant to
which the Lender would make loans to an indirect, bankruptcy-remote subsidiary
of the Company (the "SPE Borrower"). As security for these loans, the SPE
Borrower assigned all of the SPE Borrower's right, title and interest in, to and
under certain small ticket and middle
21
22
market leases and loans and related equipment originated or purchased by the
Company or eligible subsidiaries of the Company (the "Originators"). The
Warehouse Facility contains certain covenants, including but not limited to
limitations on liens, investments, dividends and other restricted payments,
capital expenditures, transactions with affiliates, acquisitions, incurrence of
debt, and interest rate protection acceptable to Lender, and various financial
covenants customary for transactions of this type. The term of the Warehouse
Facility, which was entered into in December 1999, is 364 days. As of June 30,
2000, the Company had borrowings of $15.5 million outstanding under the
Warehouse Facility with a weighted average interest rate of 7.4%. Our financial
condition as of March 31, 2000 and our results of operations for the first
quarter of 2000 would have caused us to breach the fixed-charge coverage ratio
and minimum tangible net worth covenants of the Warehouse Facility. We amended
the facility to waive required compliance with these covenants. The amendment
has been extended to August 31, 2000 and expanded to include waivers of an
existing borrowing base deficiency and compliance with the debt to tangible net
worth and profitability covenants.
Subsequent to June 30, 2000, the Company, the SPE Borrower, UniCapital
Operations Group, Inc. and Morgan Stanley & Co. Incorporated ("Morgan Stanley")
entered into a Sale Advisory Agreement, effective as of July 12, 2000, whereby
Morgan Stanley would act as the SPE Borrower's agent with respect to the sale of
the collateral pledged to the Lender under the Warehouse Facility. As
compensation for its services thereunder, Morgan Stanley would receive a fee
based upon cash sales proceeds of the sale of any lease serving as collateral
for this facility. Morgan Stanley's engagement pursuant to the Sale Advisory
Agreement currently expires on August 31, 2000; provided, that if the Lender's
waiver under the Warehouse Facility is extended, Morgan Stanley's engagement
under the Sale Advisory Agreement is also extended, and in either case, such
extension shall be for a term of not less than the term of the extension of the
waivers under the Revolving Facility (but in any event not for a term past
October 31, 2000).
SECURITIZATION TRANSACTIONS
On September 9, 1999, we completed our first securitization transaction
involving the issuance of $365.7 million of Equipment Contract Backed Notes
originated primarily by the Business Credit Group and the Technology and Finance
Group. In connection with this transaction, four tranches of Class A Notes were
sold to accredited investors under Rule 144A. The Class A-1 Notes had short term
ratings of A-1+ by Standard & Poor's, P-1 by Moody's Investor Services, Inc.,
F1+/AAA by Fitch IBCA and D-1+ by Duff & Phelps Credit Rating Co. The Class A-2
through A-4 Notes were rated AAA by Standard & Poor's, Aaa by Moody's Investor
Services, Inc., AAA by Duff & Phelps Credit Rating Co. and AAA by Fitch IBCA.
The Class A Notes benefit from a surety bond issued by Ambac Assurance Corp. In
addition, Class B and Class C Notes, rated BBB and BB, respectively by Duff &
Phelps Credit Rating Co. and Fitch IBCA, were retained by the Company. We
financed the Class B Notes pursuant to short term facilities. The weighted
average interest rate for the Class A Notes as of June 30, 2000 was 7.03%. The
weighted average interest rate will vary as Class A Notes are paid. As of June
30, 2000, the outstanding principal balance was $301.2 million.
On March 28, 2000, the Company completed its second securitization
transaction involving the issuance of $301.5 million of Equipment Contract
Backed Notes originated primarily by the Business Credit Group and the
Technology and Finance Group. In connection with this transaction, four tranches
of Class A Notes and the Class B Notes were sold to accredited investors under
Rule 144A. The Class A-1 Notes had short term ratings of A-1+ by Standard &
Poor's, P-1 by Moody's Investor Services, Inc., F1+/AAA by Fitch IBCA and D-1+
by Duff & Phelps Credit Rating Co. The Class A-2 through A-4 Notes were rated
AAA by Standard & Poor's, Aaa by Moody's Investor Services, Inc., AAA by Duff &
Phelps Credit Rating Co. and AAA by Fitch IBCA. The Class A Notes benefit from a
surety bond issued by the Ambac Assurance Corp. The Class B Notes were rated
BBB- by each of Duff & Phelps Credit Rating Co. and Fitch IBCA. In addition,
Class C Notes rated BB by Duff & Phelps Credit Rating Co and Fitch IBCA were
retained by the Company. The weighted average interest rate for the Class A and
Class B Notes as of June 30, 2000 was 7.15%. The weighted average interest rate
will vary as Class A and Class B Notes are paid. As of June 30, 2000, the
outstanding principal balance was $290.4 million.
On June 29, 2000, the Company received $29.1 million in proceeds from
the pre-funding of its second securitization transaction. The indenture trustee
held the additional proceeds for the benefit of note holders and Ambac Assurance
Corporation pending the transfer of additional equipment leases to the note
issuers. Most of the proceeds received by the Company were used to reduce
outstanding indebtedness under the Limited Recourse Conduit Facility that had
been used to finance the transferred leases. The remaining $32 million of
pre-funding proceeds was used as a pre-payment of principal on the Class A-1
Notes on July 20, 2000. In connection with the release of the proceeds from the
pre-funding, the Company agreed to elevate the status of the back-up servicer
for both the 99-1 and 2000-1 securitizations from stand-by status to a live
status. A new back-up servicer was selected and is establishing a fully
redundant servicing capability on its system for the leases and loans in the
securitizations. Notwithstanding the elevated status and readiness of the
back-up servicer, the collateral pools for both 99-1 and 2000-1 continue to
perform to expectations, and the Company continues servicing these leases and
loans at this time.
22
23
Under the terms of each of the securitization transactions, if we
sustain losses for two consecutive quarters or if certain financial triggers
occur, then the majority interest of the bondholders (currently controlled by
Ambac Assurance Corp., as note insurer) may remove the Company as servicer. As
of June 30, 2000, we have sustained losses for two consecutive quarters, and
Ambac Assurance Corp. as note insurer, may direct Wells Fargo Bank Minnesota,
National Association, as indenture trustee, to replace the Company as servicer.
In addition, if we default certain obligations under the securitization
agreements, or if certain portfolio performance triggers occur (including, but
not limited to delinquency, default and charged off contract measurements, each
a "Restricting Event"), then certain payments on subordinate securities
otherwise due to the holders of the subordinate securities and the Company may
be redirected to accelerate the outstanding principal on the senior bonds. Upon
payment in full of the outstanding principal and interest on the senior notes,
or upon the cure or waiver of any Restricting Event, cash flow from the
collateral pool may resume to the holders of the subordinate securities.
FLUCTUATIONS IN QUARTERLY RESULTS
We have experienced and may continue to experience significant
fluctuations in quarterly operating results due to a number of factors
including, among others, the consummation of a transaction in a particular
calendar quarter (or the failure to complete such a transaction), variations in
the volume of leases originated, variations in interest rates and market
conditions for assets in the principal asset classes of our portfolio. In
addition, certain of our operating subsidiaries may from time to time experience
relatively large transactions for one or a few customers or relatively large
sales of equipment and/ or lease portfolios, which may not recur or may not be
followed by correspondingly large transactions in subsequent periods. Moreover,
to the extent that we retain for our own portfolio a greater portion of the
leases that we acquire or originate and the equipment that we acquire, we will
not generate revenue from gain on sale for the retained leases or revenue from
sales of the retained equipment. As a result of these fluctuations, results for
any one quarter should not be relied upon as being indicative of performance in
future quarters.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain statements contained in this Quarterly Report on Form 10-Q
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"intend," "estimate," "anticipate," "believe," "expect" or "continue" or the
negative thereof or variations thereon or similar terminology. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from possible
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; changes in interest rates; changes in
asset values; inflation or deflation; changes in markets for financial products,
including securitized assets; changes in political, social and economic
conditions and local regulations; changes in, or failure to comply with,
government regulations; demographic changes; changes in the mix of sources of
revenues; competition; changes in business strategy or development plans;
availability of capital sufficient to meet the Company's need for capital or on
terms or at times acceptable to the Company; and availability of qualified
personnel. Factors that could cause or contribute to such differences include
those discussed under the heading "Factors that May Affect Future Operating
Results" in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. Unforeseen delays may affect the timing of the exit from certain
operations. Unforeseen delays and expenses as well as possible unfavorable
market conditions for certain of our assets, such as the current unfavorable
market condition for the sale of aircraft engines, may affect our ability to
develop or implement our asset turnover program, our ability to refinance our
debt or to secure adequate sources of liquidity, and our ability to divest our
Big Ticket Division assets in an orderly manner. The Company assumes no
obligation to update any forward-looking statements to reflect actual results or
changes in the factors affecting such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We incur debt to fund the origination and acquisition of leases,
equipment, lease portfolios and equipment leasing businesses and for general
corporate purposes. The interest rates charged on the debt are generally
determined based on variable measures of interest rates such as the prevailing
"Prime" rates in the United States or the London Interbank Offered Rate
("LIBOR"). For information regarding contractual interest rates on the debt and
amounts outstanding and weighted average interest rate at June 30, 2000, see the
discussion in "Liquidity and Capital Resources."
23
24
We continually monitor interest rates in order to mitigate exposure to
certain unfavorable variations. Our objectives in managing this risk include:
o achieving fixed-rate financing at the same time the Company
establishes the rate to be received by the Company on a lease;
o achieving certain ratios of fixed-rate debt to variable-rate debt;
and
o achieving certain levels of our aggregate cost of funds.
As a result, from time to time we utilize interest rate swaps to hedge
some of the Company's exposure to changing interest rates. We do not hedge all
interest rate risks. As used by the Company, interest rate swaps synthetically
alter the repricing characteristics of recorded assets and liabilities,
effectively allowing us to reduce our exposure to variations in Prime or LIBOR.
There are risks associated with the use of these instruments, including:
o the possible inability of the counterparties to meet the terms of
their contracts; and
o market movements in values and interest rates.
We do not enter into interest rate swap agreements for trading
purposes.
The fair value of the swaps at any particular time is determined by
calculating the difference between the contractual payments at the contract rate
and the prevailing market rate of the swap at such time, and discounting the
stream of payments at the appropriate market discount rate.
The following table presents, as of June 30, 2000, the following
information regarding interest rate swap agreements to which we are a party: (i)
the notional amount of the agreement, (ii) the fixed interest rate to be paid by
the Company or its subsidiaries, (iii) the variable rate to be paid by the
counterparty under the agreement, (iv) the fair value of the instrument, (v) the
commencement date for agreements for which the effective period does not begin
until a subsequent date, if applicable, and (vi) the maturity of the agreement.
EFFECTIVE PERIOD OF INTEREST RATE SWAP
AVERAGE NOTIONAL AMOUNT FOR THE TWELVE MONTHS ENDING JUNE 30,(b)
----------------------------------------------------------------------------------------
JUNE 30,
2000 2001 2002 2003 2004 2005 THEREAFTER
----------- ----------- ----------- ----------- ----------- ------------ -----------
INTEREST RATE SWAPS
Amortizing notional
Amount................ $18,359,074 $15,102,977 $ 8,025,253 $ 3,254,387 $ 721,400
Rate to be paid by the
Company............... 6.115%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 192,248
Maturity................ October 2003
Amortizing notional
Amount................ $20,415,787 $17,958,565 $16,715,485 $10,607,621 $ 3,863,134
Rate to be paid by
the Company........... 6.245%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 298,117
Maturity................ June 2004
Amortizing notional
Amount................ $17,852,364 $19,793,306 $19,980,187 $16,587,973 $14,268,946 $10,880,986 $ 3,489,414
Rate to be paid by
the Company........... 6.575%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 290,932
Maturity................ August 2009
24
25
EFFECTIVE PERIOD OF INTEREST RATE SWAP
AVERAGE NOTIONAL AMOUNT FOR THE TWELVE MONTHS ENDING JUNE 30,(b)
----------------------------------------------------------------------------------------
JUNE 30,
2000 2001 2002 2003 2004 2005 THEREAFTER
----------- ----------- ----------- ----------- ----------- ------------ -----------
Amortizing notional
Amount................ $37,787,381 $31,659,520 $20,317,905 $12,010,403 $ 7,724,733 $ 4,724,766 $ 1,692,597
Rate to be paid by
the Company........... 7.035%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ (94,915)
Maturity................ September 2009
Amortizing notional
Amount................ $28,200,158 $23,584,956 $13,293,152 $ 8,485,329 $ 6,272,981 $ 5,437,439 $ 2,515,175
Rate to be paid by
the Company........... 6.995%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ (47,887)
Maturity................ September 2009
Amortizing notional
Amount................ $37,797,907 $32,000,262 $19,149,369 $11,977,226 $ 8,159,220 $ 6,081,504 $ 2,519,819
Rate to be paid by
the Company........... 7.110%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ (153,553)
Maturity................ September 2009
Amortizing notional
Amount................ $30,699,464 $27,327,162 $19,539,362 $11,836,138 $ 6,681,176 $ 2,917,286 $ 722,446
Rate to be paid by
the Company........... 6.840%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 43,253
Maturity................ February 2010
Amortizing notional
Amount................ $20,081,393 $17,189,748 $10,985,742 $ 5,733,607 $ 2,678,265 $ 1,008,991 $ 248,975
Rate to be paid by
the Company........... 6.870%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 9,318
Maturity................ February 2008
Amortizing notional
Amount................ $ -- $13,808,749 $10,879,506 $ 6,425,402 $ 3,453,019 $ 2,085,022 $ 919,888
Rate to be paid by
the Company........... 7.520%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ (200,406)
Commencement............ August 2000
Maturity................ May 2008
Amortizing notional
Amount................ $ -- $17,010,964 $12,098,151 $ 6,942,214 $ 3,242,523 $ 1,282,445 $ 288,646
Rate to be paid by
the Company........... 7.295%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ (136,547)
Commencement............ August 2000
Maturity................ May 2008
Amortizing notional
Amount................ $ -- $28,426,977 $19,740,188 $ 9,861,294 $ 4,481,464 $ 2,056,156 $ 528,668
Rate to be paid by
the Company........... 7.095%
25
26
EFFECTIVE PERIOD OF INTEREST RATE SWAP
AVERAGE NOTIONAL AMOUNT FOR THE TWELVE MONTHS ENDING JUNE 30,(b)
----------------------------------------------------------------------------------------
JUNE 30,
2000 2001 2002 2003 2004 2005 THEREAFTER
----------- ----------- ----------- ----------- ----------- ------------ -----------
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ (91,003)
Commencement............ October 2000
Maturity................ January 2010
Amortizing notional
Amount................ $16,373,086 $15,561,166 $11,088,039 $ 6,539,233 $ 6,539,233 $ 6,539,233
Rate to be paid by
the Company........... 7.230%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 21,410
Maturity................ July 2005
Fixed notional amount... $75,000,000 $75,000,000
Rate to be paid by
the Company........... 6.830%
Rate to be received by
the Company........... 3-month LIBOR
Fair value at June 30,
2000.................. $ 70,182
Maturity................ May 2001
Amortizing notional
Amount................ $ -- $ 1,074,308 $ 1,003,392 $ 915,243 $ 818,946 $ 713,777 $ 354,634
Rate to be paid by
the Company........... 6.540%
Rate to be received by
the Company........... 30-day CP(a)
Fair value at June 30,
2000.................. $ 19,832
Commencement............ October 2000
Maturity................ January 2010
- ----------
(a) The rate to be received by the Company is based on a 30-day commercial paper
rate published by the U.S. Federal Reserve (H15 report).
(b) The amortizing notional amount is based on contractual agreements with the
counterparty.
26
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Individuals purporting to represent various classes comprising
stockholders who purchased shares of UniCapital common stock between May 14,
1998 and May 15, 2000 have filed seven actions in the United States District
Court for the Southern District of Florida. Each of the actions named the
Company, Robert New and Jonathan New as defendants. The actions alleged that the
defendants made misstatements, failed to disclose material information, and
otherwise violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10-b thereunder and Sections 11, 12(a), and 15 of the Securities
Act of 1933. The actions seek declaratory relief, unspecified monetary damages,
and attorneys' fees. The Company believes theses complaints to be without merit
and intends to contest these actions vigorously.
UniCapital and its subsidiaries are from time to time parties to other
legal proceedings arising out of our respective operations. We believe that none
of these legal proceedings will have a material adverse effect upon our business
or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of UniCapital was held on
May 18, 2000.
(b) The individuals specified in (c) below were elected as
directors at the meeting and the terms of office of each of
the following individuals, as directors, continued after the
meeting: Robert J. New, Stuart L. Cauff, Jonathan J. Ledecky,
Anthony K. Shriver and Scott Brown.
(c)
Set forth below is the tabulation of the votes with respect to
the election of Class II Directors.
--------------------------------------------------------------
Director For Withheld
--------------------------------------------------------------
Vincent W. Eades 37,283,530 5,780,598
--------------------------------------------------------------
Anthony K. Shriver 36,840,377 6,233,751
--------------------------------------------------------------
Set forth below is the tabulation of votes with respect to the
selection of PricewaterhouseCoopers LLP, independent certified public
accountants, to audit the consolidated financial statements of UniCapital for
the year ending December 31, 2000.
For Against Abstain
--- ------- -------
42,053,246 970,534 50,348
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
11.01 Statement Regarding Computation of Per Share Earnings
27.01 Financial Data Schedule
(b.) Reports on Form 8-K
None.
27
28
SIGNATURE
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.
UniCapital Corporation
Date: August 14, 2000
By: /s/ DANIEL CHAIT
------------------------------------
Daniel Chait
Chief Financial Officer
(Principal Financial Officer)
28