1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1999
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 Identification Number)
Incorporation or Organization)
10800 Biscayne Boulevard, Suite 800
Miami, Florida 33161
(Address of principal executive office) (Zip Code)
(305) 899-5000
(Registrant's telephone number, including area code)
Not Applicable (Former name, former address, and former fiscal year, if changed
since last report)
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 11, 1999, there were 52,742,727 shares of Common Stock outstanding.
2
UNICAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures
Exhibit Index
2
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, 1999 DECEMBER 31, 1998
------------- -----------------
ASSETS
Cash and cash equivalents $ 4,769 $ 9,772
Restricted cash 93,794 --
Accounts receivable, net 42,290 41,987
Notes receivable 27,138 9,647
Net investment in direct financing and sales-type 587,276 373,113
leases
Equipment under operating leases, net 1,685,287 430,229
Equipment held for sale or lease 190,540 79,897
Investments 16,448 29,548
Property and equipment, net 13,338 8,433
Goodwill, net of accumulated amortization
of $19,360 and $10,119, respectively 617,201 613,646
Deposits and other assets 70,782 73,251
----------- -----------
Total assets $ 3,348,863 $ 1,669,523
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse debt $ 404,571 $ 196,279
Non-recourse and limited recourse debt 1,892,395 471,043
Accounts payable and accrued expenses 92,219 84,967
Security and other deposits 50,996 24,473
Income taxes payable -- 6,353
Deferred income taxes 69,993 66,522
Other liabilities 9,637 2,598
----------- -----------
Total liabilities 2,519,811 852,235
----------- -----------
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, 52,740,032 and 51,433,539
shares issued and outstanding, respectively 53 51
Additional paid-in capital 805,035 796,960
Stock subscription notes receivable (3,299) (3,443)
Accumulated other comprehensive income 885 1,064
Retained earnings 26,378 22,656
----------- -----------
Total stockholders' equity 829,052 817,288
----------- -----------
Total liabilities and stockholders' equity $ 3,348,863 $ 1,669,523
=========== ===========
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 Data)
(unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Finance income from direct financing and sales-type $ 14,961 $ 5,568 $ 26,586 $ 5,568
leases
Rental income from operating leases 58,677 8,894 91,704 8,894
Sales of equipment 119,629 23,507 168,184 23,507
Gain on sale of leases 894 9,771 1,177 9,771
Fees, commissions and remarketing income 7,711 2,358 13,928 2,358
Interest and other income 2,904 3,910 5,888 3,910
------------ ------------ ------------ ------------
Total revenues 204,776 54,008 307,467 54,008
------------ ------------ ------------ ------------
Cost of operating leases 23,554 5,049 39,628 5,049
Cost of equipment sold 101,468 17,812 138,032 17,812
Interest expense 36,599 6,423 55,510 6,423
Selling, general and administrative expenses 28,219 7,425 53,388 24,740
Goodwill amortization 4,651 1,412 9,241 1,412
------------ ------------ ------------ ------------
Total expenses 194,491 38,121 295,799 55,436
------------ ------------ ------------ ------------
Income (loss) from operations 10,285 15,887 11,668 (1,428)
Equity in income from minority-owned affiliates -- 45 -- 45
------------ ------------ ------------ ------------
Income (loss) before taxes 10,285 15,932 11,668 (1,383)
Provision for income taxes 5,676 6,678 7,946 6,678
------------ ------------ ------------ ------------
Net income (loss) $ 4,609 $ 9,254 $ 3,722 $ (8,061)
============ ============ ============ ============
Earnings (loss) per common share, basic $ 0.09 $ 0.36 $ 0.07 $ (0.50)
Earnings (loss) per common share, diluted $ 0.09 $ 0.36 $ 0.07 $ (0.50)
Weighted average shares outstanding, basic 52,681,874 25,631,827 52,594,357 16,024,865
Weighted average shares outstanding, diluted 53,359,803 25,781,715 53,142,244 16,024,865
The accompanying notes are an integral part of these
consolidated financial statements.
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5
UniCapital Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
(unaudited)
ACCUMULATED
ADDITIONAL STOCK OTHER
COMMON PAID-IN SUBSCRIPTION COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK CAPITAL NOTES RECEIVABLE INCOME EARNINGS INCOME TOTAL
--------- --------- ---------------- ------------- --------- -------------- ----------
Balance at December 31, 1998 $ 51 $ 796,960 $ (3,443) $ 1,064 $ 22,656 $ 817,288
Issuance of 1,259,850 shares of
Common Stock in connection
with earnouts for companies
acquired in 1998 2 7,823 -- -- -- 7,825
Issuance of 46,643 shares of
Common Stock in connection
with employee stock
purchase plan -- 252 -- -- -- 252
Payments received on stock
subscription notes receivable -- -- 144 -- -- 144
Comprehensive income:
Net income -- -- -- -- 3,722 $ 3,722 3,722
Other comprehensive income:
Change in net unrealized gain
on securities, net of deferred
taxes of ($110) -- -- -- (179) -- (179) (179)
---------
Total comprehensive income $ 3,543
=========
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 $ 53 $ 805,035 $ (3,299) $ 885 $ 26,378 $ 829,052
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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6
UniCapital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 3,722 $ (8,061)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 58,121 6,932
Deferred income tax expense 3,471 3,029
Provision for credit losses 3,041 298
Compensation expense related to equity issuances -- 17,308
Gain on sale of lease financing receivables (1,177) (9,771)
Gain on sale of equipment (30,152) (1,155)
Equity in net earnings of minority-owned affiliates -- (45)
Changes in other assets and liabilities:
Restricted cash (93,794) --
Notes and accounts receivable (17,794) 3,953
Deposits and other assets (3,593) (15,674)
Accounts payable and accrued expenses 19,510 (7,999)
Security and other deposits 26,523 (2,333)
Income taxes payable (6,353) 2,296
Other liabilities 7,039 (24,265)
----------- -----------
Net cash used in operating activities (31,436) (35,487)
----------- -----------
Cash flows from investing activities:
Capital expenditures (5,431) (936)
Proceeds from sale of lease financing receivables 49,767 119,768
Proceeds from sale of equipment 120,212 22,882
Collection of direct financing and sales-type
leases, net of finance income earned 105,486 33,432
Investment in direct financing and sales-type
leases and
purchases of equipment for sale or lease (1,828,448) (184,895)
Cash paid for acquisitions, net of cash acquired -- (334,588)
Cash paid under earnout agreements for companies
acquired in 1998 (12,258) --
Decrease in investments, net 13,100 53
----------- -----------
Net cash used in investing activities (1,557,572) (344,284)
----------- -----------
Cash flows from financing activities:
Proceeds from recourse debt 533,855 153,592
Repayment of recourse debt (325,563) (278,296)
Proceeds from non-recourse and limited recourse 1,661,203 82,234
debt
Repayment of non-recourse and limited recourse (285,634) (45,715)
debt
Proceeds received on subscription notes receivable 144 --
Proceeds from issuance of common stock -- 489,931
Repayment of subordinated debt -- (2,002)
----------- -----------
Net cash provided by financing activities 1,584,005 399,744
----------- -----------
(Decrease) increase in cash and cash equivalents (5,003) 19,973
Cash and cash equivalents at beginning of period 9,772 30
----------- -----------
Cash and cash equivalents at end of period $ 4,769 $ 20,003
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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7
UniCapital Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(continued)
(unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
Supplemental disclosure of cash flow information for non-cash
items:
Stock subscription notes receivable received as consideration
for issuance of common stock $ -- $ 3,830
======= =======
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 in connection with acquisition of aircraft
and aircraft engines $59,955 $ --
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
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8
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 and
specialty finance 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,
large ticket and structured finance, 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 aircraft and aircraft
equipment, computer and telecommunications equipment, construction and
manufacturing equipment, office equipment, tractor trailers, printing equipment,
car washes, petroleum retail equipment and vending machines.
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, 1998 filed with the Securities and
Exchange Commission.
Certain reclassifications have been made to prior year amounts to conform to
the current year 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, 1998 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
and compensation expense related to certain equity issuances.
NOTE 4--STOCKHOLDERS' EQUITY
During the six months ended June 30, 1999, the Company issued 1,259,850
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 $7.8 million.
In 1999, the Company implemented an employee stock purchase plan. During the
six months ended June 30, 1999, the Company issued 46,643 shares of Common Stock
to employees under the plan.
NOTE 5--EARNINGS PER SHARE
Earnings (loss) per share have 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.
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NOTE 6--SEGMENT INFORMATION
During the three months ended June 30, 1999, the Company reassessed the
economic characteristics and the nature of the products, services and customers
of the "Air Group" and "Aircraft Engine Group". Based upon the similarity of the
nature of the products, services and customers and the economic characteristics
of those subsidiaries, the Company aggregated those former reportable segments
as the "Big Ticket Division", which also includes the Rail Group.
The following tables present selected financial information for the
Company's reporting segments for the three months ended June 30, 1999 and 1998
(in thousands):
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
---------- ---------- ---------- ---------- ----------
Finance income from direct financing
and sales-type leases $ 305 $ 10,675 $ 3,981 $ -- $ 14,961
Rental income from operating leases 42,741 15,730 206 -- 58,677
Sales of equipment 93,232 26,397 -- -- 119,629
Gain on sale of leases -- 894 -- -- 894
Fees, commissions and remarketing
income 922 5,036 1,566 187 7,711
Interest and other income 1,358 552 762 232 2,904
---------- ---------- ---------- ---------- ----------
Total revenues 138,558 59,284 6,515 419 204,776
Cost of operating leases 13,314 10,191 49 -- 23,554
Cost of equipment sold 76,909 24,559 -- -- 101,468
Interest expense 24,254 6,774 1,669 3,902 36,599
Selling, general and administrative
expenses 6,405 11,965 7,515 2,334 28,219
Goodwill amortization 1,944 2,179 453 75 4,651
---------- ---------- ---------- ---------- ----------
Total expenses 122,826 55,668 9,686 6,311 194,491
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes $ 15,732 $ 3,616 $ (3,171) $ (5,892) $ 10,285
========== ========== ========== ========== ==========
Net investment in direct financing and
sales-type leases $ 12,147 $ 434,805 $ 141,164 $ (840) $ 587,276
========== ========== ========== ========== ==========
Equipment under operating leases, net $1,590,175 $ 94,821 $ 291 $ -- $1,685,287
========== ========== ========== ========== ==========
Total assets $2,107,931 $ 970,402 $ 237,369 $ 33,161 $3,348,863
========== ========== ========== ========== ==========
Total debt $1,523,524 $ 384,054 $ 128,501 $ 260,887 $2,296,966
========== ========== ========== ========== ==========
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THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
---------- ---------- ---------- ---------- ------------
Finance income from direct financing
and sales-type leases $ -- $ 3,890 $ 1,678 $ -- $ 5,568
Rental income from operating leases 4,190 4,651 53 -- 8,894
Sales of equipment 11,918 11,589 -- -- 23,507
Gain on sale of leases -- 2,004 7,767 -- 9,771
Fees, commissions and remarketing
income 1,019 834 257 248 2,358
Interest and other income 2,567 725 160 458 3,910
---------- ---------- ---------- ---------- ----------
Total revenues 19,694 23,693 9,915 706 54,008
Cost of operating leases 2,454 2,569 26 -- 5,049
Cost of equipment sold 11,019 6,793 -- -- 17,812
Interest expense 2,101 2,981 559 782 6,423
Selling, general and administrative
expenses 1,446 3,103 1,048 1,828 7,425
Goodwill amortization 267 968 155 22 1,412
---------- ---------- ---------- ---------- ----------
Total expenses 17,287 16,414 1,788 2,632 38,121
Equity in income from minority-owned
affiliates 45 -- -- -- 45
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes $ 2,452 $ 7,279 $ 8,127 $ (1,926) $ 15,932
========== ========== ========== ========== ==========
Net investment in direct financing and
sales-type leases $ -- $ 298,764 $ 61,053 $ (1,100) $ 358,717
========== ========== ========== ========== ==========
Equipment under operating leases, net $ 175,177 $ 43,431 $ 442 $ -- $ 219,050
========== ========== ========== ========== ==========
Total assets $ 326,706 $ 738,867 $ 127,151 $ 22,182 $1,214,906
========== ========== ========== ========== ==========
Total debt $ 71,124 $ 209,845 $ 26,360 $ 68,389 $ 375,718
========== ========== ========== ========== ==========
The following tables present selected financial information for the
Company's reporting segments for the six months ended June 30, 1999 and 1998 (in
thousands):
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
-------- -------- -------- -------- ------------
Finance income from direct financing
and sales-type leases $ 410 $ 19,586 $ 6,590 $ -- $ 26,586
Rental income from operating leases 60,791 30,557 356 -- 91,704
Sales of equipment 117,733 50,451 -- -- 168,184
Gain on sale of leases -- 1,177 -- -- 1,177
Fees, commissions and remarketing income 948 8,750 3,378 852 13,928
Interest and other income 1,949 1,784 1,321 834 5,888
-------- -------- -------- -------- --------
Total revenues 181,831 112,305 11,645 1,686 307,467
Cost of operating leases 20,548 18,973 107 -- 39,628
Cost of equipment sold 93,164 44,868 -- -- 138,032
Interest expense 32,472 12,283 2,763 7,992 55,510
Selling, general and administrative
expenses 10,289 22,901 14,347 5,851 53,388
Goodwill amortization 3,839 4,346 904 152 9,241
-------- -------- -------- -------- --------
Total expenses 160,312 103,371 18,121 13,995 295,799
-------- -------- -------- -------- --------
Income (loss) before taxes $ 21,519 $ 8,934 $ (6,476) $(12,309) $ 11,668
======== ======== ======== ======== ========
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SIX MONTHS ENDED JUNE 30, 1998
------------------------------
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
-------- ----- ----- -------- ------------
Finance income from direct financing
and sales-type leases $ -- $ 3,890 $ 1,678 $ -- $ 5,568
Rental income from operating leases 4,190 4,651 53 -- 8,894
Sales of equipment 11,918 11,589 -- -- 23,507
Gain on sale of leases -- 2,004 7,767 -- 9,771
Fees, commissions and remarketing
income 1,019 834 257 248 2,358
Interest and other income 2,567 725 160 458 3,910
-------- -------- -------- -------- --------
Total revenues 19,694 23,693 9,915 706 54,008
Cost of operating leases 2,454 2,569 26 -- 5,049
Cost of equipment sold 11,019 6,793 -- -- 17,812
Interest expense 2,101 2,981 559 782 6,423
Selling, general and administrative
expenses 1,446 3,103 1,048 19,143 24,740
Goodwill amortization 267 968 155 22 1,412
-------- -------- -------- -------- --------
Total expenses 17,287 16,414 1,788 19,947 55,436
Equity in income from minority-owned
affiliates 45 -- -- -- 45
-------- -------- -------- -------- --------
Income (loss) before taxes $ 2,452 $ 7,279 $ 8,127 $(19,241) $ (1,383)
======== ======== ======== ======== ========
NOTE 7--UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information for the three and six months
ended June 30, 1998 includes the results of UniCapital Corporation combined with
the Founding Companies and subsequent acquisitions as if all acquisitions had
occurred at the beginning of the period presented. This unaudited pro forma
financial information includes the effects of (a) the acquisition of the
Founding Companies; (b) the Offering; (c) the subsequent acquisitions; (d)
certain reductions in salaries, bonuses and benefits to the stockholders and
managers of the Founding Companies and the subsequent acquisitions to which they
agreed contractually as a condition to the acquisition; (e) amortization of
goodwill; (f) the incremental provision for federal and state income taxes
assuming all entities were subject to corporate federal and state income taxes;
and (g) the incremental costs of being a public company.
The unaudited pro forma financial information may not be comparable to and
may not be indicative of the Company's results of operations subsequent to the
acquisitions because the Founding Companies and the subsequent acquisitions were
not under common control or management and had different tax and capital
structures during the periods presented.
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
--------------------------------- ---------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) (IN THOUSANDS, EXCEPT SHARE DATA)
Total revenues $123,510 $211,780
Income before taxes $ 20,557 $ 40,950
Net income $ 11,025 $ 21,946
Earnings per common share, basic $ 0.22 $ 0.43
Earnings per common share, diluted $ 0.22 $ 0.43
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities", which is effective for
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and it
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of such derivatives
will vary based on the intended use of the derivative. The Company plans to
adopt SFAS 133 beginning in the year 2001. Adoption of SFAS 133 is not expected
to have a significant impact on the Company's results of operations, cash flows
or financial position.
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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, 1998 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 intend to integrate the businesses,
operations and administrative functions of the businesses that we acquired over
a period of time. Integration may present opportunities to reduce costs through
the elimination of duplicate functions and through economies of scale, and may
necessitate additional costs and expenditures for corporate management and
administration, corporate expenses related to being a public company, systems
integration, employee relocation and severance and facilities expansion. These
various costs and possible cost-savings make comparison of future operating
results with historical operating results difficult.
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 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.
On April 26, 1999 we announced that we will retain on-balance-sheet leases
that we transfer to our commercial paper credit facility, as well as leases to
be transferred in connection with future securitizations, rather than account
for such transactions through gain-on-sale accounting. 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. In addition, to the extent we
repurchase or otherwise transfer out of our commercial paper credit facility
leases that we originally accounted for under gain-on-sale accounting, we intend
to account for any leases substituted therefor on a gain-on-sale basis.
We expect to fund the majority of the leases that we originate through
credit facilities. We may sell leases to third parties or refinance them through
a securitization program or other structured finance products. To date, we have
not completed a securitization transaction. Should we be unable to sell or
securitize leases with fixed 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 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.
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13
HISTORICAL RESULTS OF OPERATIONS
Historical results of operations for the three and six months ended June 30,
1998 principally reflect combined results for the period from the Company's
commencement of operations in May 1998 to June 30, 1998, in addition to certain
organizational costs and compensation charges incurred prior to May 1998. As a
result, historical results of operations for the three and six months ended June
30, 1999 and 1998 are not comparable as the 1998 results principally reflect
combined results subsequent to the Company's commencement of operations.
The following tables set forth selected financial data for the Company and
its subsidiaries on an historical basis and as a percentage of revenues for the
periods indicated.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------
1999 1998
----------------------- -----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Finance income from direct financing and sales-type $ 14,961 7.3% $ 5,568 10.3%
leases
Rental income from operating leases 58,677 28.7 8,894 16.5
Sales of equipment 119,629 58.4 23,507 43.5
Gain on sale of leases 894 0.4 9,771 18.1
Fees, commissions and remarketing income 7,711 3.8 2,358 4.4
Interest and other income 2,904 1.4 3,910 7.2
-------- ------- -------- -------
Total revenues 204,776 100.0 54,008 100.0
-------- ------- -------- -------
Cost of operating leases 23,554 11.5 5,049 9.3
Cost of equipment sold 101,468 49.6 17,812 33.0
Interest expense 36,599 17.9 6,423 11.9
Selling, general and administrative expenses 28,219 13.7 7,425 13.7
Goodwill amortization 4,651 2.3 1,412 2.6
-------- ------- -------- -------
Total expenses 194,491 95.0 38,121 70.5
-------- ------- -------- -------
Income from operations 10,285 5.0 15,887 29.5
Equity in income from minority-owned affiliates -- 0.0 45 0.1
-------- ------- -------- -------
Income before taxes 10,285 5.0 15,932 29.6
Provision for income taxes 5,676 2.8 6,678 12.4
-------- ------- -------- -------
Net income $ 4,609 2.2% $ 9,254 17.2%
======== ======= ======== =======
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1999 1998
---------------------- -----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Finance income from direct financing and sales-type $ 26,586 8.6% $ 5,568 10.3%
leases
Rental income from operating leases 91,704 29.8 8,894 16.5
Sales of equipment 168,184 54.7 23,507 43.5
Gain on sale of leases 1,177 0.4 9,771 18.1
Fees, commissions and remarketing income 13,928 4.6 2,358 4.4
Interest and other income 5,888 1.9 3,910 7.2
-------- ------- -------- --------
Total revenues 307,467 100.0 54,008 100.0
-------- ------- -------- --------
Cost of operating leases 39,628 12.9 5,049 9.3
Cost of equipment sold 138,032 44.9 17,812 33.0
Interest expense 55,510 18.0 6,423 11.9
Selling, general and administrative expenses 53,388 17.4 24,740 45.8
Goodwill amortization 9,241 3.0 1,412 2.6
-------- ------- -------- --------
Total expenses 295,799 96.2 55,436 102.6
-------- ------- -------- --------
Income from operations 11,668 3.8 (1,428) (2.6)
Equity in income from minority-owned affiliates -- 0.0 45 0.1
-------- ------- -------- --------
Income before taxes 11,668 3.8 (1,383) (2.5)
Provision for income taxes 7,946 2.6 6,678 12.4
-------- ------- -------- --------
Net income $ 3,722 1.2% $ (8,061) (14.9)%
======== ======= ======== ========
13
14
The following tables set forth selected financial data for the Company and
its subsidiaries on an historical basis by segment for the three months ended
June 30, 1999 and 1998.
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
-------- ----- ----- -------- ------------
Finance income from direct financing
and sales-type leases $ 305 $ 10,675 $ 3,981 $ -- $ 14,961
Rental income from operating leases 42,741 15,730 206 -- 58,677
Sales of equipment 93,232 26,397 -- -- 119,629
Gain on sale of leases -- 894 -- -- 894
Fees, commissions and remarketing
income 922 5,036 1,566 187 7,711
Interest and other income 1,358 552 762 232 2,904
-------- -------- -------- -------- --------
Total revenues 138,558 59,284 6,515 419 204,776
Cost of operating leases 13,314 10,191 49 -- 23,554
Cost of equipment sold 76,909 24,559 -- -- 101,468
Interest expense 24,254 6,774 1,669 3,902 36,599
Selling, general and administrative
expenses 6,405 11,965 7,515 2,334 28,219
Goodwill amortization 1,944 2,179 453 75 4,651
-------- -------- -------- -------- --------
Total expenses 122,826 55,668 9,686 6,311 194,491
Income (loss) before taxes $ 15,732 $ 3,616 $ (3,171) $ (5,892) $ 10,285
======== ======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
-------- ----- ----- -------- ------------
Finance income from direct financing
and sales-type leases $ -- $ 3,890 $ 1,678 $ -- $ 5,568
Rental income from operating leases 4,190 4,651 53 -- 8,894
Sales of equipment 11,918 11,589 -- -- 23,507
Gain on sale of leases -- 2,004 7,767 -- 9,771
Fees, commissions and remarketing
income 1,019 834 257 248 2,358
Interest and other income 2,567 725 160 458 3,910
------- ------- ------- ------- -------
Total revenues 19,694 23,693 9,915 706 54,008
Cost of operating leases 2,454 2,569 26 -- 5,049
Cost of equipment sold 11,019 6,793 -- -- 17,812
Interest expense 2,101 2,981 559 782 6,423
Selling, general and administrative
expenses 1,446 3,103 1,048 1,828 7,425
Goodwill amortization 267 968 155 22 1,412
------- ------- ------- ------- -------
Total expenses 17,287 16,414 1,788 2,632 38,121
Equity in income from minority-owned
affiliates 45 -- -- -- 45
------- ------- ------- ------- -------
Income (loss) before taxes $ 2,452 $ 7,279 $ 8,127 $(1,926) $15,932
======= ======= ======= ======= =======
14
15
The following tables set forth selected financial data for the Company
and its subsidiaries on an historical basis by segment for the six months ended
June 30, 1999 and 1998.
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
-------- ----- ----- -------- ------------
Finance income from direct financing
and sales-type leases $ 410 $ 19,586 $ 6,590 $ -- $ 26,586
Rental income from operating leases 60,791 30,557 356 -- 91,704
Sales of equipment 117,733 50,451 -- -- 168,184
Gain on sale of leases -- 1,177 -- -- 1,177
Fees, commissions and remarketing
income 948 8,750 3,378 852 13,928
Interest and other income 1,949 1,784 1,321 834 5,888
-------- -------- -------- -------- --------
Total revenues 181,831 112,305 11,645 1,686 307,467
Cost of operating leases 20,548 18,973 107 -- 39,628
Cost of equipment sold 93,164 44,868 -- -- 138,032
Interest expense 32,472 12,283 2,763 7,992 55,510
Selling, general and administrative
expenses 10,289 22,901 14,347 5,851 53,388
Goodwill amortization 3,839 4,346 904 152 9,241
-------- -------- -------- -------- --------
Total expenses 160,312 103,371 18,121 13,995 295,799
Income (loss) before taxes $ 21,519 $ 8,934 $ (6,476) $(12,309) $ 11,668
======== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
TECHNOLOGY
AND BUSINESS
BIG TICKET FINANCE CREDIT CORPORATE
DIVISION GROUP GROUP DIVISION CONSOLIDATED
-------- ----- ----- -------- ------------
Finance income from direct financing
and sales-type leases $ -- $ 3,890 $ 1,678 $ -- $ 5,568
Rental income from operating leases 4,190 4,651 53 -- 8,894
Sales of equipment 11,918 11,589 -- -- 23,507
Gain on sale of leases -- 2,004 7,767 -- 9,771
Fees, commissions and remarketing
income 1,019 834 257 248 2,358
Interest and other income 2,567 725 160 458 3,910
-------- -------- -------- -------- --------
Total revenues 19,694 23,693 9,915 706 54,008
Cost of operating leases 2,454 2,569 26 -- 5,049
Cost of equipment sold 11,019 6,793 -- -- 17,812
Interest expense 2,101 2,981 559 782 6,423
Selling, general and administrative
expenses 1,446 3,103 1,048 19,143 24,740
Goodwill amortization 267 968 155 22 1,412
-------- -------- -------- -------- --------
Total expenses 17,287 16,414 1,788 19,947 55,436
Equity in income from minority-owned
affiliates 45 -- -- -- 45
-------- -------- -------- -------- --------
Income (loss) before taxes $ 2,452 $ 7,279 $ 8,127 $(19,241) $ (1,383)
======== ======== ======== ======== ========
UNAUDITED PRO FORMA AND HISTORICAL RESULTS OF OPERATIONS
The unaudited pro forma financial information for the three and six months
ended June 30, 1998 includes the results of UniCapital Corporation combined with
the Founding Companies and subsequent acquisitions as if all acquisitions had
occurred at the beginning of the period presented. This unaudited pro forma
financial information includes the effects of (a) the acquisition of the
Founding Companies; (b) the Offering; (c) the subsequent acquisitions; (d)
certain reductions in salaries, bonuses and benefits to the stockholders and
managers of the Founding Companies and the subsequent acquisitions to which they
agreed contractually as a condition to the acquisition; (e) amortization of
goodwill; (f) the incremental provision for federal and state income taxes
assuming all entities were subject to corporate federal and state income taxes;
and (g) the incremental costs of being a public company.
The unaudited pro forma financial information may not be comparable to and
may not be indicative of the Company's results of operations subsequent to the
acquisitions because the Founding Companies and the subsequent acquisitions were
not under common control or management and had different tax and capital
structures during the periods presented.
15
16
The following table sets forth selected financial data for the Company and
its subsidiaries on a historical and a pro forma basis and as a percentage of
revenues for the periods indicated.
HISTORICAL PRO FORMA
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------------------- -------------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Finance income from direct financing and sales-type $ 14,961 7.3% $ 12,674 10.3%
leases
Rental income from operating leases 58,677 28.7 15,609 12.6
Sales of equipment 119,629 58.4 70,720 57.3
Gain on sale of leases 894 0.4 11,195 9.1
Fees, commissions and remarketing income 7,711 3.8 8,604 6.9
Interest and other income 2,904 1.4 4,708 3.8
-------- ------- -------- -------
Total revenues 204,776 100.0 123,510 100.0
-------- ------- -------- -------
Cost of operating leases 23,554 11.5 9,343 7.6
Cost of equipment sold 101,468 49.6 60,863 49.3
Interest expense 36,599 17.9 10,856 8.8
Selling, general and administrative expenses 28,219 13.7 18,836 15.3
Goodwill amortization 4,651 2.3 4,530 3.6
-------- ------- -------- -------
Total expenses 194,491 95.0 104,428 84.6
-------- ------- -------- -------
Income from operations 10,285 5.0 19,082 15.4
Equity in income from minority-owned affiliates -- 0.0 1,475 1.2
-------- ------- -------- -------
Income before taxes 10,285 5.0 20,557 16.6
Provision for income taxes 5,676 2.8 9,532 7.7
-------- ------- -------- -------
Net income $ 4,609 2.2% $ 11,025 8.9%
======== ======= ======== =======
HISTORICAL RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE PRO
FORMA COMBINED RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998
Finance income from direct financing and sales-type leases. Finance income from
direct financing and sales-type leases for the three months ended June 30, 1999
increased by $2.3 million, or 18.1%, to $15.0 million from $12.7 million for the
pro forma three months ended June 30, 1998. This increase is primarily due to an
increase in the direct financing and sales-type lease portfolios of the
Technology and Finance Group and Business Credit Group resulting from increased
originations during the three months ending June 30, 1999 and the Company's
decision to retain, for its own portfolio, a greater portion of the leases that
it originates rather than sell such leases in transactions qualifying for
gain-on-sale accounting treatment.
Rental income from operating leases. Rental income from operating leases for the
three months ended June 30, 1999 increased by $43.1 million, or 276.3%, to $58.7
million from $15.6 million for the pro forma three months ended June 30, 1998.
This increase is primarily due to a $1.4 billion increase in the Big Ticket
Division's portfolio of equipment under operating lease and a $51.4 million
increase in the Technology and Finance Group's portfolio of equipment under
operating lease.
Sales of equipment. Sales of equipment for the three months ended June 30, 1999
increased by $48.9 million, or 69.2%, to $119.6 million from $70.7 million for
the pro forma three months ended June 30, 1998. This increase is primarily due
to the increase in sales of aircraft engines and portfolio management sales of
aircraft by the Big Ticket Division.
Gain on sale of leases. Gain on sale of leases for the three months ended June
30, 1999 decreased by $10.3 million, or 92.0%, to $0.9 million from $11.2
million for the pro forma three months ended June 30, 1998. This decrease is due
to the Company's decision to retain, for its own portfolio, a greater portion of
the leases it originates rather than sell such leases in transactions qualifying
for gain-on-sale accounting treatment.
Fees, commissions and remarketing income. Fees, commissions and remarketing
income for the three months ended June 30, 1999 decreased by $0.9 million, or
10.5%, to $7.7 million from $8.6 million for the pro forma three months ended
June 30, 1998. This decrease is primarily due to a reduction in broker fee
income in the Business Credit Group resulting primarily from the Company's
decision to retain, for its own portfolio, a greater portion of the leases that
it originates and a reduction in commission income on municipal lease
transactions in the Technology and Finance Group.
16
17
Interest and other income. Interest and other income for the three months ended
June 30, 1999 decreased by $1.8 million, or 38.3%, to $2.9 million from $4.7
million for the pro forma three months ended June 30, 1998. This decrease is
primarily due to the investment of proceeds from the Company's initial public
offering during the period ended June 30, 1998. These proceeds were deployed
prior to the period ended June 30, 1999.
Cost of operating leases. Cost of operating leases for the three months ended
June 30, 1999 increased by $14.3 million, or 153.8%, to $23.6 million from $9.3
million for the pro forma three months ended June 30, 1998. This increase is
primarily due to an increase of $1.4 billion in the Big Ticket Division's
portfolio of equipment under operating lease and a $51.4 million increase in the
Technology and Finance Group's portfolio of equipment under operating lease.
Cost of equipment sold. Cost of equipment sold for the three months ended June
30, 1999 increased by $40.6 million, or 66.7%, to $101.5 million from $60.9
million for the pro forma three months ended June 30, 1998. This increase is
primarily due to increased sales of aircraft engines and portfolio mangement
sales of aircraft by the Big Ticket Division.
Interest expense. Interest expense for the three months ended June 30, 1999
increased by $25.7 million, or 235.8%, to $36.6 million from $10.9 million for
the pro forma three months ended June 30, 1998. This increase is primarily due
to increased borrowings outstanding to finance the growth of the Company's lease
and equipment portfolio, including the $1.4 billion increase in equipment under
operating leases in the Big Ticket Division.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 1999 increased by
$9.4 million, or 50.0%, to $28.2 million from $18.8 million for the pro forma
three months ended June 30, 1998. This increase is primarily due to growth in
the volume of originations and assets under management, as well as costs that
are being incurred in relation to systems implementation and integration of the
Company's subsidiaries.
Equity in income from minority-owned affiliates. During 1999, the Company
liquidated a significant portion of its investments in minority-owned
affiliates.
The following table sets forth selected financial data for the Company and its
subsidiaries on a historical and a pro forma basis and as a percentage of
revenues for the periods indicated.
HISTORICAL PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------------- -----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Finance income from direct financing and sales-type $ 26,586 8.6% $ 25,186 11.9%
leases
Rental income from operating leases 91,704 29.8 29,220 13.8
Sales of equipment 168,184 54.7 120,657 57.0
Gain on sale of leases 1,177 0.4 15,052 7.1
Fees, commissions and remarketing income 13,928 4.6 14,748 6.9
Interest and other income 5,888 1.9 6,917 3.3
-------- ------- -------- -------
Total revenues 307,467 100.0 211,780 100.0
-------- ------- -------- -------
Cost of operating leases 39,628 12.9 17,972 8.5
Cost of equipment sold 138,032 44.9 91,283 43.1
Interest expense 55,510 18.0 20,455 9.7
Selling, general and administrative expenses 53,388 17.4 35,643 16.8
Goodwill amortization 9,241 3.0 9,060 4.3
-------- ------- -------- -------
Total expenses 295,799 96.2 174,413 82.4
-------- ------- -------- -------
Income from operations 11,668 3.8 37,367 17.6
Equity in income from minority-owned affiliates -- 0.0 3,583 1.7
-------- ------- -------- -------
Income before taxes 11,668 3.8 40,950 19.3
Provision for income taxes 7,946 2.6 19,004 9.0
-------- ------- -------- -------
Net income $ 3,722 1.2% $ 21,946 10.3%
======== ======= ======== =======
HISTORICAL RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE PRO
FORMA COMBINED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998
Finance income from direct financing and sales-type leases. Finance income from
direct financing and sales-type leases for the six months ended June 30, 1999
increased by $1.4 million, or 5.6%, to $26.6 million from $25.2 million for the
pro forma six months ended June 30, 1998. This increase is primarily due to an
increase in the direct financing and sales-type lease portfolios of the
Technology and Finance Group and Business Credit Group resulting from increased
originations during the six months ending June 30, 1999 and the Company's
decision to retain, for its own portfolio, a greater portion of the leases that
it originates rather than to sell such leases in transactions qualifying for
gain-on-sale accounting treatment.
17
18
Rental income from operating leases. Rental income from operating leases for the
six months ended June 30, 1999 increased by $62.5 million, or 214.0%, to $91.7
million from $29.2 million for the pro forma six months ended June 30, 1998.
This increase is primarily due to a $1.4 billion increase in the Big Ticket
Division's portfolio of equipment under operating lease and a $51.4 million
increase in the Technology and Finance Group's portfolio of equipment under
operating lease.
Sales of equipment. Sales of equipment for the six months ended June 30, 1999
increased by $47.5 million, or 39.4%, to $168.2 million from $120.7 million for
the pro forma six months ended June 30, 1998. This increase is primarily due to
the increase in sales of aircraft engines and portfolio management sales of
aircraft by the Big Ticket Division.
Gain on sale of leases. Gain on sale of leases for the six months ended June 30,
1999 decreased by $13.9 million, or 92.1%, to $1.2 million from $15.1 million
for the pro forma six months ended June 30, 1998. This decrease is due to the
Company's decision to retain, for its own portfolio, a greater portion of the
leases it originates, rather than sell such leases in transactions qualifying
for gain-on-sale accounting treatment.
Fees, commissions and remarketing income. Fees, commissions and remarketing
income for the six months ended June 30, 1999 decreased by $0.8 million, or
5.4%, to $13.9 million from $14.7 million for the pro forma six months ended
June 30, 1998. This decrease is primarily due to a reduction in broker fee
income in the Business Credit Group resulting primarily from the Company's
decision to retain, for its own portfolio, a greater portion of the leases that
it originates and a reduction in commission income on municipal lease
transactions in the Technology and Finance Group.
Interest and other income. Interest and other income for the six months ended
June 30, 1999 decreased by $1.0 million, or 14.5%, to $5.9 million from $6.9
million for the pro forma six months ended June 30, 1998. This decrease is
primarily due to the investment of proceeds from the Company's initial public
offering during the period ended June 30, 1998. These proceeds were deployed
prior to the period ended June 30, 1999.
Cost of operating leases. Cost of operating leases for the six months ended June
30, 1999 increased by $21.6 million, or 120.0%, to $39.6 million from $18.0
million for the pro forma six months ended June 30, 1998. This increase is
primarily due to an increase of $1.4 billion in the Big Ticket Division's
portfolio of equipment under operating lease and a $51.4 million increase in the
Technology and Finance Group's portfolio of equipment under operating lease.
Cost of equipment sold. Cost of equipment sold for the six months ended June 30,
1999 increased by $46.7 million, or 51.2%, to $138.0 million from $91.3 million
for the pro forma six months ended June 30, 1998. This increase is primarily due
to the increased sales of aircraft engines and portfolio management sales of
aircraft by the Big Ticket Division.
Interest expense. Interest expense for the six months ended June 30, 1999
increased by $35.0 million, or 170.7%, to $55.5 million from $20.5 million for
the pro forma six months ended June 30, 1998. This increase is primarily due to
increased borrowings outstanding to finance the growth of the Company's lease
and equipment portfolio, including the $1.4 billion increase in equipment under
operating leases in the Big Ticket Division.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended June 30, 1999 increased by
$17.8 million, or 50.0%, to $53.4 million from $35.6 million for the pro forma
six months ended June 30, 1998. This increase is primarily due to growth in the
volume of originations and assets under management, as well as costs that are
being incurred in relation to systems implementation and integration of the
Company's subsidiaries.
Equity in income from minority-owned affiliates. During 1999, the Company
liquidated a significant portion of its investments in minority-owned
affiliates.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive and requires access to substantial
short-term and long-term credit 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 or leasing and specialty
finance companies.
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 leasing and specialty
finance companies or lease portfolios.
18
19
We believe that funds generated from operations, borrowings from amounts
available under our credit facilities, and possible future sources of financing,
for which we are currently negotiating, will be sufficient to finance our
current operations and planned capital expenditure requirements for the next
twelve months, assuming the consummation of one or more such possible future
sources of financing and the satisfactory renewal, modification or replacement
of our credit facilities. If we are unable to consummate one or more such
possible future sources of financing, or to renew, modify or replace our credit
facilities prior to their expiration with facilities of like amount, or we are
unable to implement other alternative strategies, then we may have insufficient
cash to continue the current rate of growth of our business or otherwise to
continue to operate our business as it is now conducted, and may be unable, in
whole or in part, for example to fund new equipment leases or the purchase of
equipment, fund the acquisition of lease portfolios, fund the purchase price of
additional leasing or specialty finance companies or fund other working capital
requirements. Accordingly, in such circumstances, we would have to make choices
among the various demands upon our liquidity, and our business, financial
condition and results of operations could be materially and adversely affected.
From time-to-time we engage in discussions and conduct analyses with
respect to possible acquisitions of equipment, lease portfolios and leasing and
specialty finance companies, some of which may lead to and include the
negotiation and execution of letters of intent. In order to consummate these
transactions, we would need to issue additional equity securities, incur
additional indebtedness or obtain additional sources of financing, and if we
were unable to do so, our business, financial condition and results of
operations could be materially and adversely affected.
Credit Facilities
We have $1.4 billion in committed capital, through the following credit
facilities:
(i) We have a $300.0 million Corporate Revolving Credit Facility, primarily
to finance acquisitions and working capital. As of June 30, 1999, we had
borrowings of $259.6 million outstanding, with a weighted average interest rate
of 7.59%. This facility, which was entered into in June 1998, has a three-year
term.
(ii) We have two asset-backed commercial paper facilities totaling $600.0
million, which will decrease to $400 million as of October 1, 1999, to finance
small ticket and middle market leases, consisting of an Equipment Lease
Receivable Purchase Facility and an Equipment Lease Receivable Financing
Facility. As of June 30, 1999, $340.6 million was outstanding under the Purchase
Facility and $144.8 million was outstanding under the Finance Facility, with a
weighted average interest rate of 5.9%. The Purchase Facility and the Financing
Facility were renewed on August 16, 1999 and expire on August 14, 2000.
(iii) We also have a $500.0 million revolving credit facility to finance the
purchase and leasing of aircraft. As of June 30, 1999 we had borrowings
outstanding of $175.9 million, with a weighted average interest rate of 7.74%.
This facility, which was entered into in October 1998, has a 364-day term. On
March 26, 1999, we entered into an amendment to this credit facility. The credit
facility permits us to borrow up to a specified percentage of the value of the
collateral. The amendment increased this percentage and provides for an increase
in the applicable interest rate in the event that we borrow in excess of the
amount that would have been permitted prior to the amendment.
We did not renew our $300.0 million Special Purpose Entity Large Ticket
Warehouse Facility upon its expiration on June 9, 1999. Prior to its expiration,
we used this facility to finance the purchase and leasing of aircraft. We
believe that our $500.0 million revolving credit facility (described above) is
sufficient to meet our needs for the financing of the purchase and leasing of
aircraft.
On April 30, 1999 we entered into a loan arrangement in the amount of $40.5
million, to fund the purchase of the equity interest in the portfolio of 36
commercial aircraft that we acquired from GE Capital Aviation Services on May 5,
1999 and for general corporate purposes. The loan has a 6-month term and an
interest rate of LIBOR plus 400 basis points. The loan is secured by a security
interest in the aircraft and engine assets held by the special purpose entities
which are the borrowers under the loan arrangement.
YEAR 2000 READINESS
As many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, they may be unable to process accurately certain data before, during
or after the year 2000. As a result, business and governmental entities are at
risk for possible miscalculations or systems failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K")
issue.
19
20
We are in the process of implementing a Y2K readiness program with the
objective of having all of our significant Business Systems functioning properly
with respect to the Y2K issue before January 1, 2000. The program is divided
into three major sections -- Infrastructure, Applications Software, and
third-party suppliers and customers ("External Agents"). The phases common to
all sections are: (1) inventorying Y2K items and assigning priorities; (2)
assessing the Y2K compliance of those items; (3) repairing, retiring or
replacing the items that are determined not to be Y2K compliant, beginning with
the items considered most critical to the Company's operations; (4) testing
those items; (5) implementing necessary changes; and (6) designing and
implementing contingency plans.
Infrastructure. This section consists of hardware and systems software other
than Applications Software. We estimate that approximately 75 percent of the
activities related to this section were completed by June 30, 1999. The testing
phase is ongoing as hardware or system software is remediated, upgraded or
replaced. All Infrastructure activities are expected to be completed by the end
of 1999.
Applications Software. This section includes the remediation, retirement or
replacement of applications software that is not Y2K compliant. We are using
both internal and external resources to complete this process. As of June 30,
1999, approximately 90 percent of the applications software was remediated or
replaced, and tested. The implementation of any necessary changes is scheduled
to be completed by August 31, 1999. The remaining applications were remediated
or replaced by June 30, 1999 and are expected to be tested by October 31, 1999
and any necessary changes are expected to be implemented by the end of 1999.
External Agents. This section includes the process of identifying and
prioritizing service providers, vendors, suppliers, customers and governmental
entities that we believe will be critical to our business operations after
January 1, 2000. We could be adversely affected if these critical business
partners failed to provide essential services. We are sending questionnaires,
conducting interviews, browsing websites and using other available means to
attempt to ascertain the Y2K readiness of our critical business partners. We
expect to complete this process by August 31, 1999.
We are developing contingency plans intended to mitigate possible
disruptions in business operations that may result from the Y2K issue and we are
developing cost estimates for these plans. If our Y2K readiness program is
unsuccessful, we may, as a contingency plan, contract with third party lease
portfolio service providers to meet the servicing needs of our daily operations.
Contingency plans and related cost estimates will be continually refined, as
additional information becomes available.
We estimate that the aggregate cost of our Y2K efforts will be approximately
$1.3 million, of which approximately $1.1 million has been spent. The costs of
remediation are being expensed as they are incurred and are being funded through
operating cash flow. The costs associated with the replacement of computerized
systems, hardware or equipment (currently estimated to be approximately $0.5
million), substantially all of which has been capitalized, are included in the
above estimates.
Our Y2K readiness program is an ongoing process and the estimates of costs
and completion dates for various components of the Y2K readiness program
described above are subject to change. The failure to correct a Y2K issue could
result in a failure of certain normal business activities or operations, which
could adversely affect the Company's results of operations, liquidity and
financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
We could experience 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 and variations in interest rates.
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, 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, including historical results, 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," 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
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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,
1998. 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.
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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 U.S. Federal
Reserve Prime rate ("Prime") or the London Interbank Offered Rate ("LIBOR"). For
information regarding amounts outstanding and weighted average interest rates at
June 30, 1999, see the discussion in "Liquidity and Capital Resources."
We continually monitor interest rates in order to mitigate exposure to
unfavorable variations. Our objectives in managing this risk include:
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. These
instruments synthetically alter the repricing characteristics of variable-rate
debt obligations, effectively allowing us to pay a fixed interest rate on a
portion of the debt, which reduces our exposure to unfavorable 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 table below presents, as of June 30, 1999, the following
information regarding interest rate swap agreements to which we are a party: (i)
notional amount of the agreement, (ii) the fixed interest rate to be paid by the
Company, (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,
--------------------------------------------------------------------------------
JUNE 30, 1999 2000 2001 2002 2003 2004 THEREAFTER
INTEREST RATE SWAPS -------------
- -----------------------------
Amortizing notional amount $ 21,702,270 $19,359,076 $14,626,297 $ 9,534,979 $ 6,195,136 $ 3,727,173 $1,569,511
Rate to be paid by the Company 5.240%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ 365,127
Maturity March 2007
Amortizing notional amount $ 44,480,556 $37,895,259 $24,876,118 $14,512,868 $ 9,110,764 $ 5,050,826 $1,839,404
Rate to be paid by the Company 5.495%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ 319,171
Maturity January 2006
Amortizing notional amount $ 77,666,231 $67,824,839 $49,871,720 $33,579,802 $20,220,427 $10,167,080 $2,530,844
Rate to be paid by the Company 5.475%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ 839,648
Maturity April 2009
Amortizing notional amount $ 8,381,780 $ 7,542,336 5,811,463 $ 3,967,955 $ 2,626,488 1,755,460 $ 731,917
Rate to be paid by the Company 5.555%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ 81,310
Maturity April 2006
Amortizing notional amount $ -- $11,535,672 6,269,329 $ 903,496 $ -- $ -- $ --
Rate to be paid by the Company 5.693%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ (13,853)
Commencement July 1999
Maturity September 2001
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EFFECTIVE PERIOD OF INTEREST RATE SWAP
AVERAGE NOTIONAL AMOUNT FOR THE TWELVE MONTHS ENDING JUNE 30,
-----------------------------------------------------------------------------------
JUNE 30, 1999 2000 2001 2002 2003 2004 THEREAFTER
INTEREST RATE SWAPS -------------
- -----------------------------
Amortizing notional amount $ -- $ 27,891,679 $ 23,160,212 $ 13,765,308 $ 3,953,215 $ 861,908 $ --
Rate to be paid by the Company 6.015%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ (34,237)
Commencement August 1999
Maturity November 2003
Amortizing notional amount $ -- $ -- $ 1,074,308 1,003,392 $ 915,243 $ 818,946 $ 418,958
Rate to be paid by the Company 6.540%
Rate to be received by the 30-day CP (a)
Company
Fair value at June 30, 1999 $ (2,546)
Commencement October 2000
Maturity February 2010
Fixed notional amount $ 75,000,000 $ 75,000,000 $ 75,000,000 $ 75,000,000 $ 75,000,000 $ -- $ --
Rate to be paid by the Company 5.125%
Rate to be received by the 3-month LIBOR
Company
Fair value at June 30, 1999 $ 2,236,067
Maturity November 2002
Fixed notional amount $ 80,000,000 $ 80,000,000 $ -- $ -- $ -- $ -- $ --
Rate to be paid by the Company 5.230%
Rate to be received by the 1-month LIBOR
Company
Fair value at June 30, 1999 $ 314,618
Maturity April 2000
Fixed notional amount $ 60,000,000 $ 60,000,000 $ 60,000,000 $ 60,000,000 $ -- $ -- $ --
Rate to be paid by the Company 5.500%
Rate to be received by the 1-month LIBOR
Company
Fair value at June 30, 1999 $ 1,377,605
Maturity January 2002
Fixed notional amount $ 175,000,000 $175,000,000 $175,000,000 $175,000,000 $175,000,000 $ -- $ --
Rate to be paid by the Company 5.560%
Rate to be received by the 1-month LIBOR
Company
Fair value at June 30, 1999 $ 5,522,926
Maturity October 2002
Fixed notional amount $ 345,000,000 $345,000,000 $345,000,000 $345,000,000 $345,000,000 $345,000,000 $ --
Rate to be paid by the Company 5.650%
Rate to be received by the 1-month LIBOR
Company
Fair value at June 30, 1999 $ 15,287,034
Maturity January 2004
Fixed notional amount $ 230,000,000 $230,000,000 $230,000,000 $230,000,000 $230,000,000 $230,000,000 $230,000,000
Rate to be paid by the Company 5.710%
Rate to be received by the 1-month LIBOR
Company
Fair value at June 30, 1999 $ 11,784,298
Maturity November 2004
- ------------------
(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).
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
UniCapital and its subsidiaries are from time to time parties to lawsuits
arising out of our respective operations. We believe that any pending litigation
to which we or our subsidiaries are parties will not 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 14, 1999.
(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, Theodore J. Rogenski,
Stuart L. Cauff, Jonathan J. Ledecky, Vincent W. Eades, Richard C. Emery, Bruce
E. Kropschot and Anthony K. Shriver.
(c) Set forth below is the tabulation of the votes with respect to the election
of Class I Directors.
DIRECTOR For Withheld
- -------- --- --------
Scott Brown 42,764,169 4,690,787
Paul Feinsilver 40,906,746 6,548,210
Robert F. Kopp 45,139,691 2,315,265
Robert W. VanHellemont 45,527,885 1,927,071
Set forth below is the tabulation of the 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, 1999.
For Against Abstain
- --- ------- -------
45,295,389 1,822,167 337,400
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.
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SIGNATURES
Pursuant to the requirement 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 (Registrant)
Date: August 16, 1999 By: /s/ JONATHAN NEW
----------------------------------
Jonathan New
Chief Financial Officer
(Principal Financial and Accounting Officer)