<PAGE>
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 February 29, 2000
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1055327
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7175 West Jefferson Avenue, Lakewood, Colorado 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
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 _____
-----
The number of shares outstanding of the Registrant's $.008 par value common
stock at May 18, 2000, was 5,220,951.
Exhibit Index - Page 22
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets - February 29, 2000 (Unaudited)
and May 31, 1999 3
Consolidated Statements of Income - Three and Nine Months
Ended February 29, 2000 and February 28, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months Ended
February 29, 2000 and February 28, 1999 (Unaudited) 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Exhibit Index 22
Signature 23
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
February 29, May 31,
2000 1999
------------ --------
<S> <C> <C>
Cash and cash equivalents $ 8,100 $ 7,510
Receivables from affiliated limited partnerships 543 744
Accounts receivable, net 6,812 3,596
Inventory 2,135 1,397
Residual values and other receivables arising from
equipment under lease sold to private investors, net 5,199 4,469
Net investment in direct finance leases 34,457 42,116
Leased equipment, net 135,702 150,338
Investments in affiliated limited partnerships 1,639 1,957
Deferred income taxes 754 3,400
Other assets 4,083 5,236
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 12,896 19,773
-------- --------
212,320 240,536
Net assets of discontinued operations (Note 3) 1,044 883
-------- --------
$213,364 $241,419
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse debt $ 73,917 $ 48,141
Accounts payable - equipment purchases 662 26,857
Accounts payable and other liabilities 19,424 15,167
Discounted lease rentals 105,946 125,639
-------- --------
199,949 215,804
-------- --------
Stockholders' equity:
Common stock 42 42
Additional paid-in capital 16,888 16,829
Retained earnings (deficit) (3,515) 8,771
Treasury stock - (27)
-------- --------
Total stockholders' equity 13,415 25,615
-------- --------
$213,364 $241,419
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 29, February 29,
------------------------ -----------------------
Revenue: 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Equipment sales to PIFs $ 11,793 $ 5,669 $ 29,023 $ 17,013
Other equipment sales 27,592 33,056 80,375 107,617
Leasing 10,918 11,008 45,399 28,657
Interest 380 391 1,313 2,015
Other 524 1,415 2,006 3,803
---------- ---------- ---------- ----------
Total revenue 51,207 51,539 158,116 159,105
---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales to PIFs 11,657 5,521 28,578 16,616
Other equipment sales 27,872 32,168 78,489 105,050
Leasing 7,505 7,520 32,413 19,104
Operating and other expenses 4,828 2,989 12,058 8,816
Provision for losses 2,617 83 4,579 133
Interest:
Non-recourse debt 2,296 1,814 7,758 6,014
Recourse debt 1,478 856 3,503 2,661
---------- ---------- ---------- ----------
Total costs and expenses 58,253 50,951 167,378 158,394
---------- ---------- ---------- ----------
Net income (loss) from continuing
operations before income taxes (7,046) 588 (9,262) 711
Income tax expense 3,538 188 2,646 217
---------- ---------- ---------- ----------
Net income (loss) from
continuing operations (10,584) 400 (11,908) 494
Discounted operations (Note 3):
Income (loss) from discontinued operations
(Net of income tax benefits) (293) (25) (378) 170
---------- ---------- ---------- ----------
Net income (loss) $ (10,877) $ 375 $ (12,286) $ 664
========== ========== ========== ==========
Earnings (loss) per common share
from continuing operations:
Basic $ (2.02) $ 0.08 $ (2.29) $ 0.10
========== ========== ========== ==========
Diluted $ (2.02) $ 0.08 $ (2.29) $ 0.09
========== ========== ========== ==========
Earnings (loss) per common share
Basic $ (2.08) $ 0.07 $ (2.36) $ 0.13
========== ========== ========== ==========
Diluted $ (2.08) $ 0.07 $ (2.36) $ 0.12
========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic 5,232,000 5,211,000 5,202,000 5,151,000
========== ========== ========== ==========
Diluted 5,232,000 5,462,000 5,202,000 5,402,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended February 29,
------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 64,281 $ 59,613
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing, net (81,312) (81,626)
Investment in leased office facility and capital expenditures (779) (440)
Net receipts from affiliated public income funds 317 1,206
-------- --------
Net cash used for investing activities (81,774) (80,860)
-------- --------
Cash flows from financing activities:
Proceeds from securitization 21,246 17,068
Principal payments on securitization (10,007) (1,815)
Proceeds from discounting of lease rentals 12,545 25,958
Principal payments on discounted lease rentals (29,672) (36,238)
Proceeds from issuance of common stock 86 25
Net borrowings on revolving credit facilities 24,255 2,575
Net payments on Term Loan (614) (15)
-------- --------
Net cash (used for) provided by financing activities 17,839 7,558
-------- --------
Net increase (decrease) in cash and cash equivalents 346 (13,689)
Cash and cash equivalents at beginning of period, including
amounts from discontinued operations 7,926 17,684
-------- --------
Cash and cash equivalents at end of period, including
amounts from discontinued operations $ 8,272 $ 3,995
======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 3,858 $ 2,740
Interest cost capitalized - 160
Non-recourse interest paid 7,758 6,014
Income taxes paid 734 57
Income tax refunds received 250 260
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from
equipment sale transactions 19,731 7,742
Assumption of discounted lease rentals in lease acquisitions 14,938 23,336
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-
01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. For further
information, please refer to the consolidated financial statements of
Capital Associates, Inc. (the "Company"), and the related notes, included
within the Company's Annual Report on Form 10-K (the "1999 Form 10-K") for
the fiscal year ended May 31, 1999 ("FY 1999"), previously filed with the
Securities and Exchange Commission (the "SEC").
The balance sheet at May 31, 1999 was derived from the audited financial
statements included in the Company's 1999 Form 10-K.
2. Debt Financing
--------------
Due to losses in the quarters ending November 30, 1999 ("Q-2") and February
29, 2000 ("Q-3"), the Company was, and continues to be, in default of
certain financial covenants with respect to its Securitization Facility (as
defined below) and Senior Facility (as defined below) (collectively, its
"Senior Loans").
The Securitization Facility consists of (i) a senior loan, with a maximum
principal amount of $50,000,000, (ii) a junior loan, with a maximum
principal amount of $5,000,000, and (iii) a residual loan, with a maximum
principal amount of $10,000,000. The securitization lender is Key Global
(the "Securitization Lender"). As of February 29, 2000, the Company had
outstanding (a) $25.9 million under its senior loan and junior loan and (b)
$5.6 million under its residual loan.
The Company's senior secured debt facility (the "Senior Facility") consists
of (i) a term loan ("Term Facility"), (ii) a working capital revolving
credit loan ("Working Capital Facility") and (iii) a warehouse revolving
credit loan ("Warehouse Facility"). The lender group consists of the agent
bank, First Union National Bank, and participating lenders, BankBoston,
N.A., US Bank, Norwest Bank of Colorado, N.A., and European America Bank
(the "Lender Group" and, along with the Securitization Lender, the "Senior
Lenders"). As of February 29, 2000, the Company had outstanding $67 million
under its Senior Facility, consisting of (a) $2.0 million under its Term
Loan, (b) $5.4 million under its Working Capital Facility and (c) $59.6
million under its Warehouse Facility.
The Senior Facility is collateralized by all assets of the Company. The
Senior Facility contains certain provisions, which limit the Company's
ability to incur additional indebtedness, sell assets, incur or suffer to
exist liens, enter into guarantees and make distributions.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As discussed above, the Company is in default under its Senior Loans. The
Company is negotiating with its Senior Lenders (and certain Investors, as
defined below) to obtain the terms and conditions of a forbearance agreement
with respect to such defaults. See Note 4 "Recent Developments" below. In
the absence of a forbearance agreement, all advances to the Company are at
the discretion of the Senior Lenders. No assurances can be made that any
further advances will be made under the Senior Loans or, absent a
forbearance agreement, that the Senior Lenders will not exercise the rights
and remedies available to them as a result of such defaults.
3. Discontinued Operations
-----------------------
Capital Associates Technology Group, a subsidiary of the Company ("CATG")
reported a net loss of $378,000 for the nine months ended February 29, 2000.
In October 1999, the Company formalized a plan to dispose of CATG and
engaged an advisory group to proceed with efforts to find a qualified buyer
for CATG. The Company's consolidated Balance Sheets and Statements of Income
reflect the operations of CATG as discontinued for all periods presented.
Included in the assets and liabilities of discontinued operations in the
Company's consolidated Balance Sheets are the following accounts of CATG:
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
------------ -------
<S> <C> <C>
Cash and cash equivalents $ 172 $ 416
Receivables 4,557 4,396
Inventory 1,201 1,181
Fixed assets 359 212
Recourse bank debt (1,986) (1,919)
Accounts payable and accrued liabilities (3,259) (3,403)
------- -------
Total assets and liabilities of CATG $ 1,044 $ 883
======= =======
</TABLE>
In the fourth quarter of 2000 ("Q-4"), management signed a letter of intent
for the sale of CATG. Management believes that the gain recognized upon the
ultimate disposition of CATG will not be significant. CATG's revenue for the
three and nine months ended February 29, 2000 totaled approximately $7
million and $24 million, respectively.
4. Recent Developments
-------------------
According to its own records, as of February 29, 2000, Capital Associates
International, Inc., a subsidiary of the Company ("CAII"), owed various
investors in the Company's lease programs (the "Investors") approximately
$5.3 million, consisting of (a) $1.8 million owed to the Company's own
public income funds (the "PIFs"), (b) $1.7 million owed to the Islamic Funds
and (c) $1.8 million owed to other investors. As of April 30, 2000, the
amounts owed to investors is approximately $3.4 million. The amounts owed to
Investors consist of rents, sales and other remarketing proceeds and other
amounts (collectively, "Prior Rents") relating to equipment and leases owned
by Investors and collected by CAII on their behalf during periods prior to
February 1, 2000, pursuant to contractual arrangements between the Company
and such Investors (the "Investor Agreements"). CAII does not have the funds
at this time to repay all of the Prior Rents. The Company is in negotiations
with the Investors and the Senior Lenders to develop a plan (the
"Restructuring Plan") (a) for repayment of the Prior Rents and the Senior
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loans, (b) to cure the existing defaults under the Senior Loans and Investor
Agreements and (c) to obtain the Senior Lenders' and the Investors'
agreement to forbear from acting on such defaults while the parties are
negotiating and documenting the definitive plan documents. Pending the
development of such Restructuring Plan, several Investors are withholding
fees and other amounts due to CAII and offsetting the withheld amounts
against the Prior Rents due to them. Because repayment of the Prior Rents is
entirely dependent on the Company's ability to generate proceeds from
operations after repayment of debt service, there can be no assurance that
the Company will, in fact, be able to repay all of the Prior Rents owed to
Investors. Moreover, because repayment of the Senior Loans is dependent on
the Company's ability to realize at least the net book value of its lease
portfolio, there can be no assurance that the Company will be able to sell
such portfolios or otherwise collect proceeds therefrom in an amount
sufficient to repay all amounts due under the Senior Loans.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
I. Results of Operations
---------------------
Recent Update
-------------
The current sources of funding for the Company's lease transactions are (i)
its $61.2 million Warehouse Facility, (ii) its $6.9 million Working Capital
Facility, (iii) permanent non-recourse financing, including securitization
of receivables, (iv) sales of equipment under lease to third parties or to
the Company's lease investment programs and public income funds (the
"PIFs"), (v) management fees from the PIFs and other lease investment
programs and (vi) the Company's internally generated cash flow ("Financing
Sources").
In FY 1999, the Company discontinued sales of units of limited partnership
interest in its PIFs. Consequently, the PIFs, which historically had
provided the Company with a significant source of funding for lease
transactions and fee income, are no longer a material source of lease
funding for the Company.
To date, in FY 2000 (which ends on May 31, 2000), the Company has acquired
equipment for its own portfolio and for resale to third parties utilizing
all of the above referenced Financing Sources. These acquisitions required a
substantial amount of equity (i.e., the difference between equipment cost
and funding), which the Company funded out of its internally generated cash
flow. In addition to the equity required for such acquisitions, the Company
also continued to fund from its own internal cash flow (a) the operating
losses and capital costs of two of its operating affiliates, Capital
Associates Technology Group ("CATG") and Name Brand Computer Outlet
("NBCO"), and (b) the expenses associated with the conversion of its lease
accounting system and its Y2K compliance program.
Because of these significant cash requirements, the Company experienced a
liquidity problem in the quarter ended February 29, 2000 ("Q-3"), and the
Company was unable to make certain payments due to certain of its Investors
(as defined below). Additionally, due to the loss in the quarter ended
November 30, 1999 ("Q-2"), the Company was in default of certain financial
covenants in its Securitization Facility and Senior Facility (the "Senior
Loans").
The Company's Securitization Facility consists of (i) a senior loan, with a
maximum principal amount of $50,000,000, (ii) a junior loan, with a maximum
principal amount of $5,000,000 and (iii) a residual loan, with a maximum
principal amount of $10,000,000. The securitization lender is Key Global
(the "Securitization Lender"). As of February 29, 2000, the Company had
outstanding (a) $25.9 million under its senior and junior loans and (b) $5.6
million under its residual loan.
The Company's senior, secured debt facility (the "Senior Facility") consists
of (i) a term loan ("Term Facility"), (ii) a working capital revolving
credit loan ("Working Capital Facility") and (iii) a warehouse revolving
credit loan ("Warehouse Facility"). The lender group consists of the agent
bank, First Union National Bank, and participating lenders, BankBoston,
N.A., US Bank, Norwest Bank of Colorado, N.A., and European America Bank
(the "Lender Group" and, along with the Securitization Lender, the "Senior
Lenders"). As of February 29, 2000, the Company had outstanding $67 million
under its Senior Facility, consisting of (a) $2.0 million under its Term
Loan, (b) $5.4 million under its Working Capital Facility and (c) $59.6
million under its Warehouse Facility.
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<PAGE>
According to its own records, as of February 29, 2000, Capital Associates
International, Inc., a subsidiary of the Company ("CAII"), owed various
investors in the Company's lease programs (the "Investors") approximately
$5.3 million, consisting of (a) $1.8 million owed to the Company's own
public income funds (the "PIFs"), (b) $1.7 million owed to the Islamic Funds
and (c) $1.8 million owed to other investors. As of April 30, 2000, the
amounts owed to Investors is approximately $3.4 million. The amounts owed to
Investors consist of rents, sales and other remarketing proceeds and other
amounts (collectively, "Prior Rents") relating to equipment and leases owned
by Investors and collected by CAII on their behalf during periods prior to
February 1, 2000, pursuant to contractual arrangements between the Company
and such Investors (the "Investor Agreements").
The Company began meeting with its Senior Lenders and Investors to discuss
its liquidity issues in December 1999. In January 2000, the Company created
a special committee of the Board of Directors (the "Board"), consisting of
William Buckland, Gary Jacobs and James Walker, to deal specifically with
these issues and to interface with the Senior Lenders and Investors on an
ongoing basis.
In response to these issues, the Company has taken (or is in the process of
taking) the following actions:
- began selling leases/equipment financed under its Warehouse Facility to
reduce interest expense and bank debt. Subsequent to Q-3, the Company
has signed an agreement to sell approximately $25 million of leases of
which the Company has closed sales of $6.1 million of such equipment
leases. During Q-3, the Company established a reserve of $1.9 million
for the portfolio sale;
- began selling all committed lease originations to private investors
(rather than retaining any for the Company's own portfolio) to maximize
current cash flow;
- terminated its lease originations activities;
- reduced its work force, including its lease originations force, in
order to reduce costs :
- on May 31, 1999, the Company had 195 full time employees
- as of April 30, 2000, the Company had 146 full time employees
- refocused the workforce on maximizing the realization of booked
residuals and on improving operational processes, including collection
of accounts receivable;
- began efforts to reduce costs at CATG in connection with increased
efforts to sell the subsidiary. Subsequently, the Company signed a
letter of intent for the sale of CATG in the fourth quarter of 2000;
- began exploring the possible sale of its general partner and Class B
Limited Partners interests in the PIFs;
- retained a special consultant to assist senior management and the Board
in putting together a new cash flow projection and business plan for FY
2000 and FY 2001 and reconciling Investor Prior Rent amounts;
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- began exploring the possibility of outsourcing the Company's lease
portfolio servicing duties and responsibilities for its own portfolios
and the investors portfolios;
- began reviewing its operating and capital budgets for all operations
including NBCO, for the purposes of further reducing operating costs. In
an effort to reduce operating costs at NBCO, the Company closed the NBCO
warehouse located in Colorado and centralized these operations within
the Ohio facility; and
- adopted certain employee retention programs.
The Company does not have the funds at this time to repay all of the Prior
Rents and amounts owed under the Senior Loans. The Company is in
negotiations with the Investors and its Senior Lenders to develop a plan
(the "Restructuring Plan") (a) for repayment of the Prior Rents and the
Senior Loans, (b) to cure the existing defaults under the Senior Loans and
Investor Agreements and (c) to obtain the Senior Lenders' and the Investors'
agreement to forbear from acting on such defaults while the parties are
negotiating and documenting the definitive Restructuring Plan documents.
Pending the development of such Restructuring Plan, several Investors are
withholding fees and other amounts due to CAII and offsetting the withheld
amounts against the Prior Rents due to them. Because repayment of the Prior
Rents is entirely dependent on the Company's ability to generate proceeds
from operations after repayment of debt service, there can be no assurance
that the Company will, in fact, be able to repay all of the Prior Rents owed
to Investors. Moreover, because repayment of the Senior Loans is dependent
on the Company's ability to realize at least the net book value of its lease
portfolio, there can be no assurance that the Company will be able to sell
such portfolios or otherwise collect proceeds therefrom in an amount
sufficient to repay all amounts due under the Senior Loans.
In the event the Company is unsuccessful in addressing the operational and
financial issues discussed above and/or is unsuccessful in negotiating an
acceptable Restructuring Plan with its Investors and/or Senior Lenders, it
may be necessary to downsize the Company further to run off its existing
portfolio, attempt to sell the Company or all or substantially all of its
assets, or file for protection under the Federal Bankruptcy laws. The
Company may not be able to realize the book value of its assets in the event
of a liquidation or "fire" sale of assets. Morever, as the size of the
Company's workforce declines and coupled with the termination of its lease
originations activities, there is a risk that in the near future it may
become uneconomic for the Company to continue to incur the overhead costs
associated with the management and servicing of its, and the Investors',
lease portfolios. As a result the Company may consider outsourcing its lease
portfolio management duties to an unrelated third party.
General Comments
----------------
The Company incurred a consolidated net loss of ($10.9 million) for the
quarter ended February 29, 2000, compared to consolidated net income of
$375,000 for the same quarter in the prior year. The Company incurred a
consolidated net loss of ($12.3 million) for the nine months ended February
29, 2000, compared to consolidated net income of $664,000 for the same nine
month period in the prior year. Results for the quarter ended February 29,
2000 reflect: (1) a provision for losses of $2.6 million primarily related
to the future sale of a $25 million portfolio of leased assets, (2) a
reduction of $900,000 in margin on sale of equipment to private investors,
(3) an increase in interest expense of approximately $1.1 million, (4) an
increase in operating and other expenses of $1.8 million, (5) a decrease in
other income of $900,000, and (6) an increase in the valuation allowance for
deferred tax assets of approximately $3.4 million.
As discussed, significant factors which may impact the Company's
profitability, as well as
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viability, in the future include the successful negotiation of a
Restructuring Plan with the Investors and Senior Lenders, the improvement in
liquidity through expense reduction and asset sales, the realization of
residual values in excess of booked values, the collection of the accounts
receivable backlog and the continuing ability of lessees to meet their lease
commitments.
Several factors cause operating results to fluctuate, including (i) the
level of fee income obtained from the sale of leases in excess of lease
equipment cost, (ii) the seasonality of lease originations, (iii) the volume
of leases maturing in a particular period and the resulting gain on
remarketing, (iv) variations in the relative percentages of the Company's
leases originated and held which are classified as DFLs or Ols, and (v) the
impact of rising interest rates on the Company's own portfolio that is not
permanently funded with fixed rate financing. The Company has in the past
varied the volume of originated leases held relative to leases sold to
private investors when and as the Company determines it would be in its best
interest, taking into account cash flow needs, profit opportunities,
portfolio concentration, residual risk and its fiduciary duty to originate
leases for its PIFs.
In the past, the Company has originated leases with the intention of either
selling the lease to the PIFs or private investors or holding the lease
through maturity. Leases originated and held for sale are referred to as
"warehouse leases", or "warehouse portfolio". Leases the Company intends to
hold to maturity are referred to as "Company-owned leases" or "Company-owned
portfolio". The Company generally holds warehouse leases for one to six
months before sale to private investors. Leases held to maturity are
generally more profitable than leases sold to private investors (i.e.,
aggregate leasing margin earned over the life of the lease is generally
greater than the fee earned from sale to private investors, which includes
rents retained in excess of interest expense during the holding period).
However, due to the unavailability of debt financing due to a number of
market and Company-specific factors, all current lease originations are
being sold to private investors.
Many sales to private investors are structured to enable the Company to
share in some of the additional profit associated with holding a lease to
maturity (arising from the remarketing of the lease equipment upon lease
maturity). The Company's strategy is to retain an interest in the residual
value of leases sold to private investors where it believes additional
profit may be available through remarketing upon lease maturity. The
Company's retained interest in leases it has sold to private investors is
reflected in the accompanying Consolidated Balance Sheets as "Residual
value, net, arising from equipment under lease sold to private investors",
(also referred to as "retained residuals").
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Interim Financial Results
- -------------------------
Presented below are schedules showing condensed income statement categories
and analyses of changes in those condensed categories for the Company. This
schedule is derived from the Consolidated Statements of Income prepared
solely to facilitate the discussion of results of operations that follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 29, February 29,
CAI Consolidated ------------------- -----------------
(without CATG) 2000 1999 Change 2000 1999 Change
- ------------------- ------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ (144) $ 1,036 $ (1,180) $ 2,331 $ 2,964 $ (633)
Leasing margin 3,413 3,488 (75) 12,986 9,553 3,433
Other income 524 1,415 (891) 2,006 3,803 (1,797)
Operating and other expenses (4,828) (2,989) (1,839) (12,058) (8,816) (3,242)
Provision for losses (2,617) (83) (2,534) (4,579) (133) (4,446)
Interest expense, net (3,394) (2,279) (1,115) (9,948) (6,660) (3,288)
Income tax (expense) benefit (3,538) (188) (3,350) (2,646) (217) (2,429)
-------- ------- -------- -------- ------- --------
Net income (loss) from
continuing operations $(10,584) $ 400 $(10,984) $(11,908) $ 494 $(12,402)
======== ======= ======== ======== ======= ========
</TABLE>
Lease Originations
------------------
Generally, originated leases are initially financed utilizing the Company's
Warehouse Facility and then sold to private investors or to the PIFs. Profits
from the sale of leases are reported in the table above as "equipment sales
margin". In addition, the Company realizes rental or finance profits from
leases held prior to sale (reported as "leasing margin" in the table above)
and incurs interest expense on the Warehouse Facility during the period the
leases are held.
Due to (a) adverse changes in the lease financing marketplace, (b) reduced
sales opportunities to third parties for leased equipment and (c) the
unavailability of debt financing, the Company reduced its sales force in Q-3
and the fiscal quarter ending May 31, 2000 ("Q-4") to reduce costs and to
focus its efforts on major customer accounts. Due to the current defaults
under its Senior Loan agreements, the Company must rely, in part, on purchases
of leases from third parties to meet a portion of its future lease
originations needs. There can be no assurance that the Company will be
successful in syndicating its own future lease originations or in purchasing
leases to meet it own lease originations needs.
13 of 23
<PAGE>
Equipment Sales (for CAI, without CATG)
---------------------------------------
Equipment sales revenue and the related equipment sales margin consists of the
following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------- Increase
February 29, 2000 February 28, 1999 (Decrease)
------------------- -------------------- ---------------------
Revenue Margin Revenue Margin Revenue Margin
--------- -------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 11,793 $ 136 $ 5,669 $ 147 $ 6,124 $ (11)
Equipment under lease sold to private
investors 23,421 (500) 32,377 440 (8,956) (940)
-------- ------- -------- ------ -------- -------
35,214 (364) 38,046 587 (2,832) (951)
-------- ------- -------- ------ -------- -------
Transactions subsequent to initial lease
term (remarketing revenue):
Sales of off-lease equipment 3,306 195 31 19 3,275 176
Sales-type leases 38 38 106 106 (68) (68)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 283 283 (283) (283)
-------- ------- -------- ------ -------- -------
3,344 233 420 408 2,924 (175)
Deduct related provision for losses - (686) - (83) - (603)
-------- ------- -------- ------ -------- -------
Realization of value in excess of
provision for losses 3,344 (453) 420 325 2,924 (778)
Add back related provision for losses - 686 - 83 - 603
-------- ------- -------- ------ -------- -------
3,344 233 420 408 2,924 (175)
-------- ------- -------- ------ -------- -------
Equipment brokerage sales 827 (13) 259 41 568 (54)
-------- ------- -------- ------ -------- -------
Total equipment sales $ 39,385 $ (144) $ 38,725 $1,036 $ 660 $(1,180)
======== ======= ======== ====== ======== =======
<CAPTION>
Nine Months Ended
----------------------------------------- Increase
February 29, 2000 February 28, 1999 (Decrease)
------------------- -------------------- ---------------------
Revenue Margin Revenue Margin Revenue Margin
--------- -------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 29,023 $ 445 $ 17,013 $ 397 $ 12,010 $ 48
Equipment under lease sold to private
investors 70,729 (402) 104,552 1,618 (33,823) (2,020)
-------- ------- -------- ------ -------- -------
99,752 43 121,565 2,015 (21,813) (1,972)
-------- ------- -------- ------ -------- -------
Transactions subsequent to initial lease
term (remarketing revenue):
Sales of off-lease equipment 6,401 1,379 1,993 185 4,408 1,194
Sales-type leases 318 318 106 106 212 212
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 9 9 519 519 (510) (510)
-------- ------- -------- ------ -------- -------
6,728 1,706 2,618 810 4,110 896
Deduct related provision for losses - (2,648) - (133) - (2,515)
-------- ------- -------- ------ -------- -------
Realization of value in excess of
provision for losses 6,728 (942) 2,618 677 4,110 (1,619)
Add back related provision for losses - 2,648 - 133 - 2,515
-------- ------- -------- ------ -------- -------
6,728 1,706 2,618 810 4,110 896
-------- ------- -------- ------ -------- -------
Equipment brokerage sales 2,918 582 447 139 2,471 443
-------- ------- -------- ------ -------- -------
Total equipment sales $109,398 $ 2,331 $124,630 $2,964 $(15,232) $ (633)
======== ======= ======== ====== ======== =======
</TABLE>
14 of 23
<PAGE>
Equipment Sales to PIF's
------------------------
In February 1998, the Company sold the remaining units of limited partnership
interest in its last PIF, Capital Preferred Yield Fund-IV, L.P. ("CPYF IV").
The Company has elected not to organize additional PIFs. Currently, only two
PIFs are in their reinvestment stage and are actively acquiring leases.
Equipment Sales to Private Investors
------------------------------------
Equipment sales to private investors decreased for the three and nine months
ended February 29, 2000 compared to the three and nine months ended February
28, 1999 by approximately $9 million and $34 million. Equipment sales during
the nine months ended February 28, 1999 include a one-time portfolio sale of
approximately $20 million to a private investor.
The margin from sales of equipment under lease to private investors reflects
the impact of the period of time leases are held by the Company prior to sale
(referred to as the "hold period"). During the hold period, the Company
records leasing margin. For equipment sold to PIFs or to private investment
programs, the sales price of the equipment is adjusted in accordance with the
relevant partnership or program agreement to reflect leasing margin during the
hold period as if the PIF or private investor had owned the equipment since
lease inception. Consequently, the sales price paid to the Company is reduced
by any leasing margin the Company retains. As a result, the Company's
economic profit attributed to leases it sells is reflected, in part, as
leasing margin and, in part, as equipment sale margins. The longer the hold
period is for a particular lease, the greater the amount of economic profit is
reflected as leasing margin. Because the Company has been increasing the
period of time it holds leases prior to sale, equipment sales margin for
transactions during the initial lease term for the nine months ended February
29, 2000 has declined and leasing margin has increased.
The Company defers income related to its servicing obligation on leases it
sells. This income is amortized over the life of the lease and is included in
"Other Income".
During the three and nine months ended February 29, 2000, other equipment
sales revenue related to equipment leased to two lessees accounted for 81% and
equipment leased to one lessee accounted for 50%, respectively of total other
equipment sales revenue. During the three and nine months ended February 28,
1999 other equipment sales revenue related to one lessee accounted for 71% and
40%, respectively of total other equipment sales revenue.
Equipment Brokerage Sales
-------------------------
NBCO acquires used personal computers, monitors and printers from a variety of
sources, including end-users and other lessors. The equipment is sold in
quantity to third parties through NBCO's telemarketing and brokerage
operations or to consumers through NBCO's retail facilities.
Revenue from equipment brokerage sales increased during the three and nine
months ended February 29, 2000 compared to the same period in 1999 as a result
of sales to consumers through NBCO's retail facilities. The Company
significantly expanded its retail sales to consumers when NBCO was established
in December 1998. Prior to establishing NBCO, equipment brokerage sales
generally consisted of quantity sales to third parties.
As discussed above, the Company has begun the process of reviewing the
operating and capital
15 of 23
<PAGE>
budgets for all operations including NBCO. In an effort to reduce operationg
costs at NBCO, the Company closed the NBCO warehouse located in Colorado and
centralized these operations within the Ohio facility.
Remarketing of the Lease Portfolio and Related Provision for Losses
-------------------------------------------------------------------
The Company has successfully realized gains on the remarketing of its
portfolio of equipment after the initial lease term for the past seven years.
The remarketing of equipment for an amount greater than its book value is
reported as part of equipment sales margin (if the equipment is sold) or
leasing margin (if the equipment is re-leased). The realization of less than
the carrying value of equipment is recorded as provision for losses (which is
typically not known until remarketing after the expiration of the initial
lease term).
Remarketing revenue and the related margin (i.e., sales occurring after the
initial lease term) are affected by the (i) number and dollar amount of
equipment leases that mature in a particular quarter (the average lease term
is 3 to 5 years) and (ii) the composition of equipment available for
remarketing.
The Company retained very few lease originations for its own portfolio during
the mid-1990's resulting in lower amounts of equipment available for
remarketing after lease maturity. Lease originations have increased since
that time and the Company has retained leases for its own portfolio.
Residual values are established equal to the estimated values to be received
from equipment following termination of the leases. In estimating such
values, the Company considers all relevant facts regarding the equipment and
the lessees, including, for example, the equipment's remarketability, upgrade
potential and the probability that the equipment will remain in place at the
end of an initial lease term. The nature of the Company's leasing activities
is such that it has credit and residual value exposure and in the ordinary
course of business, will incur losses arising from these exposures. The
Company performs periodic assessments of its assets to identify other than
temporary losses in value. The Company's policy is to record allowances for
losses as soon as any other-than-temporary declines in asset values are known.
However, chargeoffs are recorded upon the termination or remarketing of the
underlying assets. As such, chargeoffs will primarily occur subsequent to the
recording of the allowances for losses.
Approximately $1.9 million of the $2.6 million of provision for losses
recorded during the three months ended February 29, 2000 resulted from the
future sale of a $25 million portfolio of leased assets. This sale is
expected to occur in tranches during the fourth quarter and consists primarily
of warehoused leases. The proceeds of the sale will be applied to reduce the
amounts outstanding under the Warehouse Facility.
The remaining provision for losses recorded during the three and nine months
ended February 28, 1999 reflected the amount necessary to maintain the
allowance for losses at a level which adequately provided for declines in the
value of equipment.
16 of 23
<PAGE>
Leasing Margin
--------------
Leasing margin consists of the following (in thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Leasing revenue $ 10,918 $ 11,008 $ 45,399 $ 28,657
Leasing costs and expenses (7,505) (7,520) (32,413) (19,104)
-------- -------- -------- --------
Leasing margin $ 3,413 $ 3,488 $ 12,986 $ 9,553
======== ======== ======== ========
The increase in leasing revenue and leasing costs during the nine months ended
February 29, 2000 compared to the nine months ended February 28, 1999 is
primarily due to the Company increasing the period of time it holds leases
prior to sale resulting in equipment sales margin decreasing and leasing
margin increasing. During the three and nine months ended February 29, 2000
and February 28, 1999 no lessee accounted for more than 10% of total leasing
revenue.
Leasing margin ratio may fluctuate based upon (i) the mix of direct finance
leases and operating leases, (ii) remarketing activities, (iii) the method
used to finance leases added to the Company's lease portfolio, and (iv) the
relative age and types of leases in the portfolio (operating leases have a
lower leasing margin early in the lease term, increasing as the term passes
and the majority of leases added to CAI's portfolio have been operating
leases).
Other Income
------------
Other income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fees and distributions from the PIFs $ 203 $ 284 $ 636 $ 1,128
Management fees from private programs 182 367 933 978
Sale of installment note - 423 - 423
Other 139 341 437 1,274
-------- -------- -------- --------
$ 524 $ 1,415 $ 2,006 $ 3,803
======== ======== ======== ========
</TABLE>
During fiscal 1998, the Company completed the offering of units of limited
partnership interest in its last PIF, CPYF IV. The Company has elected not to
organize additional PIFs. As a result, fees and distributions from the PIFs
(reported as "Other Income") have declined and will continue to decline.
In February 1999, the Company sold an installment note for $669,000 to the
parent company of the debtor. The note had a carrying value of $246,000 and
the Company recorded a gain of $423,000. The installment note was received by
the Company during the fiscal year ended May 31, 1995, in settlement of
certain litigation related to a lessee default.
Operating and Other Expenses (for CAI without CATG)
---------------------------------------------------
The aggregate amount of operating and other expenses increased $1,839,000 and
$3,242,000 for
17 of 23
<PAGE>
the three and nine months ended February 29, 2000, compared to the three and
nine months ended February 28, 1999, respectively. The increase primarily
reflects (a) costs associated with the start-up of NBCO, (b) expenses
associated with the computer conversion of the Company's lease accounting
system including Y2K compliance, (c) severance costs associated with reduction
in personnel and (d) expenses associated with certain bank agreements
previously capitalized.
Interest Expense, Net (for CAI without CATG)
--------------------------------------------
Interest expense, net consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 29, February 29,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Interest income $ (380) $ (391) $(1,313) $(2,015)
Non-recourse interest expense 2,296 1,814 7,758 6,014
------ ------ ------- -------
Net non-recourse interest expense 1,916 1,423 6,445 3,999
Recourse interest expense 1,478 856 3,503 2,661
------ ------ ------- -------
Interest expense, net $3,394 $2,279 $ 9,948 $ 6,660
====== ====== ======= =======
</TABLE>
The Company finances leases for its own portfolio primarily with non-recourse
debt. Interest income arises when equipment financed with non-recourse debt
is sold to investors. As a result, interest income reported in the
accompanying Consolidated Statements of Income reflect an amount equal to non-
recourse interest expense. Therefore, net non-recourse interest expense on
related discounted lease rentals pertains to the Company's owned lease
portfolio. Such amount increased due to an increase in the average
outstanding balance of related discounted lease rentals related to growth in
the Company's owned portfolio.
Recourse interest expense increased during the three and nine months ended
February 29, 2000 compared to the three and nine months ended February 28,
1999 primarily due to increased borrowings and interest rate under the
Warehouse Facility used to fund the growth in the number of leases the Company
holds for sale to private investors.
Income Taxes
------------
For the three and nine months ended February 29, 2000, the Company has
recognized an income tax expense of approximately $3.5 million and $2.6
million, respectively. During Q-3, the Company established a valuation
allowance for deferred tax assets due to the uncertainty that any future
benefit will be realized as a result of the losses incurred this fiscal year.
As of February 29, 2000 the remaining deferred tax asset is related to
anticipated refunds of AMT taxes paid for FY 1998 and 1999.
For the three and nine months ended February 28, 1999, income tax expense is
provided on income at the appropriate federal and state statutory rates
applicable to such earnings. The aggregate statutory tax rate is 40%,
adjusted in prior fiscal periods for a reduction in the valuation allowance
for deferred income tax assets to reflect a reduction in uncertainty about the
utilization of the AMT credit carryforward in future years as a result of the
Company's past profitable results of operations. See Note 12 to Notes to
Consolidated Financial Statements in the 1999 Form 10-K.
18 of 23
<PAGE>
II. Liquidity and Capital Resources
-------------------------------
Historically, the Company has funded its leasing activities with proceeds
from its various Financing Sources.
In the past, the Company sold a significant portion of its lease originations
to the PIFs. During FY 1998, the Company completed the offering of units of
limited partnership interest in its last PIF, CPYF IV. The Company has
elected not to organize additional PIFs. Consequently, future equipment sales
to PIFs will reflect only the reinvestment needs of the existing PIFs, and
therefore are expected to represent smaller amounts of equipment sales margin
and cash flow.
Effective October 1999, the Company formalized a plan to dispose of its CATG
business segment. At that time, the Company engaged an advisory group to
proceed with efforts to find a suitable business opportunity acceptable to
the Company and its shareholders, whereby CATG may be sold.
Leases that, in the past, would have been originated for sale to the PIFs
were retained by the Company or sold to private investors. This strategy
increased the Company-owned leased portfolio. The Company finances leases for
its own portfolio on a long-term basis utilizing the Securitization Facility,
which provides the Company with financing for 90-95% of the cost of leased
equipment. The remaining cost of the equipment (also referred to as "equity
capital") is financed utilizing availability under the Company's Senior
Facility and/or cash from operations.
In addition, the Company increased the amount of leases it was holding under
its Warehouse Facility, which provides the Company with financing for 95% of
the cost of leased equipment (the remainder of such cost being financed by
the Company out of its equity capital and/or cash from operations). In
addition, the Company originated certain leases intended for sale to
investors which were not eligible for financing under the Warehouse Facility.
In such cases, the Company used equity capital or cash from operations to
fund 100% of the cost of such leased equipment.
In FY 2000, the Company actively acquired equipment for its own portfolio
utilizing all of its Financing Sources. As discussed above, these
acquisitions required a substantial amount of equity, which the Company
funded out of its internally generated cash flow. In addition to the equity
required for equipment acquisitions, the Company also continued to fund from
its own internal cash flow (a) the operating losses and capital costs of CATG
and NBCO and (b) the expenses associated with the conversion of its lease
accounting system and its Y2K compliance program.
Because of these significant cash requirements, the Company experienced a
liquidity problem in Q-3, and the Company was unable to make certain payments
due to its Investors. Additionally, due to the loss in Q-3, the Company was
at such time, and continues to be in, default of certain financial covenants
in its Senior Loans. See the discussion of the Company's current cash
position, the existing defaults under the Company's Senior Loans, the Prior
Rents owed to Investors and the steps the Company is taking with respect to
the foregoing in "I. Results of Operations - Recent Update" above.
The Company does not have the funds at this time to repay all of the Prior
Rents and amounts owed under the Senior Loans. The Company is in negotiations
with the Investors and its Senior Lenders to develop a Restructuring Plan (a)
for repayment of the Prior Rents and the Senior Loans, (b) to cure the
existing defaults under the Senior Loans and Investor Agreements and (c)
19 of 23
<PAGE>
to obtain the Senior Lenders' and the Investors' agreement to forbear from
acting on such defaults while the parties are negotiating and documenting the
definitive Restructuring Plan documents. Pending the development of such
Restructuring Plan, several Investors are withholding fees and other amounts
due to CAII and offsetting the withheld amounts against the Prior Rents due to
them. Because repayment of the Prior Rents is entirely dependent on the
Company's ability to generate proceeds from operations after repayment of debt
service, there can be no assurance that the Company will, in fact, be able to
repay all of the Prior Rents owed to Investors. Moreover, because repayment of
the Senior Loans is dependent on the Company's ability to realize at least the
net book value of its lease portfolio, there can be no assurance that the
Company will be able to sell such portfolios or otherwise collect proceeds
therefrom in an amount sufficient to repay all amounts due under the Senior
Loans.
As discussed, significant factors which may impact the Company's
profitability, as well as viability, in the future include the successful
negotiation of a Restructuring Plan with the Investors and Senior Lenders, the
improvement in liquidity through expense reduction and asset sales, the
realization of residual values in excess of booked values, the collection of
the accounts receivable backlog and the continuing ability of lessees to meet
their lease commitments.
In the event the Company is unsuccessful in addressing the operational and
financial issues discussed above and/or is unsuccessful in negotiating an
acceptable Restructuring Plan with its Investors and/or Senior Lenders, it may
be necessary for the Company to terminate its remaining limited new lease
origination activity and to run off its existing portfolio, attempt to sell
the Company or all or substantially all of its assets or file for protection
under the Federal Bankruptcy laws. The Company may not be able to realize the
book value of its assets in the event of a liquidation or "fire" sale of
assets. Morever, as the size of the Company's workforce declines and coupled
with the termination of its lease originations activities, there is a risk
that in the near future it may become uneconomic for the Company to continue
to incur the overhead costs associated with the management and servicing of
its, and the Investors', lease portfolios. As a result the Company may
consider outsourcing its lease portfolio management duties to an unrelated
third party.
III. New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. 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. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement 133, an Amendment of FASB Statement 133. Statement 137
effectively extends the required application of Statement 133 to fiscal years
beginning after June 15, 2000, with earlier application permitted. The Company
adopted Statement 133 in the first quarter of 2000.
The Company's hedging activities are limited to the floating-to-fixed interest
rate swap acquired in connection with the Securitization Facility. That hedge
is designed to effectively hedge the exposure to interest rate changes. As
such, the impact of adoption of SFAS 133 is not material.
20 of 23
<PAGE>
IV. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
--------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to
factors that could cause actual future results to differ both adversely and
materially from currently anticipated results, including, without limitation,
the level of lease originations, realization of residual values, the
availability and cost of financing sources and the ultimate outcome of any
contract disputes. Certain specific risks associated with particular aspects
of the Company's business are discussed in detail throughout Item 2 of this
report and Parts I and II of the 1999 Form 10-K when and where applicable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved in other routine legal proceedings incidental to
the conduct of its business. Management believes that none of these
legal proceedings will have a material adverse effect on the financial
condition or operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
See "Part I., Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" above for a discussion of pending
defaults under the Company's Senior Loans.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
21 of 23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
10.78 Arthur Andersen Engagement Letter, dated March 6, 2000.
(b) Reports on Form 8-K
-------------------
None.
Item No. Exhibit Index
- -------- -------------
27 Financial Data Schedule
22 of 23
<PAGE>
CAPITAL ASSOCIATES INC. AND SUBSIDIARIES
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.
CAPITAL ASSOCIATES, INC.
Registrant
Date: May __, 2000 By: /s/Michael J. Schuh
--------------------------------------------
Michael J. Schuh
Senior Vice-President and
Chief Operations Officer
23 of 23
<PAGE>
ARTHUR ANDERSEN
Arthur Andersen LLP
Suite 300
501 North 44th Street
Phoenix AZ 85008
March 6, 2000 Tel 602 286 2000
Mr. William H. Buckland
Chairman, Board of Directors
Capital Associates, Inc.
7175 West Jefferson Ave.
Suite 4000
Lakewood, Colorado 80235
Re: Capital Associates. Inc.
- ----------------------------
Dear Bill:
This letter will confirm our understanding of the arrangements made between the
Board of Directors of Capital Associates, Inc. ("the Board") and Arthur Andersen
LLP ("Andersen") to provide financial advisory services related to Capital
Associates, Inc ("the Company").
SERVICES
- --------
Presently, we expect to perform the following, working with the Board and
management as follows:
. Develop a 26 week cash flow projection by week and assess the Company's
ability to meet its current cash flow obligations;
. Review and provide recommendations related to the Company's cash allocation
procedures, lease and equipment tracking system, and cash management system;
. Work with senior management and the Board to consider possible alternative
strategies and assist management in its preparation of a two year business
plan; and
. Other tasks as identified and requested by the Board or management.
The terms of this letter are intended to apply to all restructuring services
that Andersen is requested to perform on behalf of the Company and the Board.
However, Andersen reserves the right to amend this letter in the event that
Andersen determines that certain procedures or services requested of Andersen in
connection with this engagement need to be appropriately defined or clarified.
In the event that Capital Associates Board of Directors ultimately elects to
reorganize the Company (or any part thereof) through the filing of a petition
for relief pursuant to chapter 11 of title 11 of the United States Code
("Bankruptcy Petition"), Andersen's continuing employment by the Company (to be
referred to herein as "Debtors-in Possession" upon the filing of a Petition)
will be subject to the approval of the Bankruptcy Court and evidenced by a
signed order approving an application submitted by the Debtors-in Possession to
employ Andersen as restructuring consultants and accountants. In the event that
a Bankruptcy Petition is filed, the terms
<PAGE>
Mr. William H. Buckland
Page 2
March 6,2000
and conditions of Andersen's role as restructuring consultants will be similar
to those outlined herein. Additional language, or a separate employment
application, and retainer arrangement will need to be prepared to define the
terms and conditions of Andersen's responsibilities.
FEES AND EXPENSES
- -----------------
Our charges for this assignment would be based on the level of personnel
involved and the time incurred at our standard billing rates, plus reasonable
out-of-pocket expenses. A summary of our current hourly billing rates is listed
below:
Partner/Managing Director $300-$400
Managers $200-$295
Staff Professionals $100-$195
We have requested that the company remit a retainer ("Retainer") of $75,000 to
Andersen in connection with this work.
Andersen shall provide the Company with billing statements on a weekly basis. We
reserve the right to present our billings on a more frequent basis. Billings
will be applied by Andersen against any Retainer, and the Retainer will be
replenished immediately by the Company. In the absence of a Retainer, payment on
all billings will be required upon receipt of the statement. Andersen will not
bill the Company for travel time to the Company if billable work is not being
performed coincidentally. When possible, Andersen will arrange travel
schedules/plans in an effort to minimize travel expenses. In the event Andersen
expects to incur any other reimbursable expenses beyond those typically
associated with travel and temporary housing, we will seek the Company's
approval before incurring any such expense.
At this time, it is contemplated that Richard Williamson and John Finn will have
daily management responsibility for this engagement. Mr. Williamson's standard
billing rate is $305 and Mr. Finn's standard rate is $265. Fees will also be
required for quality control purposes to ensure that the appropriate services
are being provided. From time to time, it may be necessary to have additional
Andersen resources committed to this engagement in order to complete certain
projects, however, at this time specific resources have not been identified. We
will endeavor to use certain Company personnel, if deemed appropriate by
Andersen, to staff certain projects. Andersen will notify the Company prior to
assigning additional resources to the engagement.
In the event that the services of Mr. Williamson or Mr. Finn are unavailable and
we wish to use other individuals to perform their role, Andersen will notify the
Company and obtain its consent before billing fees for any services from the
other individuals.
Either party may terminate this engagement immediately upon two (2) days written
notice to the other party. Any Party may terminate its responsibility for
Andersen's fees and expenses and other obligations hereunder upon written notice
to Andersen and each other Party; provided however, that such Party shall remain
responsible for fees and expenses incurred through the date of delivery of such
notice and neither such Party nor its counsel shall be entitled to consultation
with or work product produced by Andersen after such date hereunder.
POTENTIAL CONFLICTS OF INTEREST
- -------------------------------
We are not aware of any situations that, in our view, constitute a conflict of
interest or will impair our ability to objectively provide assistance in the
above matter. We take no responsibility for monitoring other possible conflicts
that could arise during the course of the engagement, although we will inform
you promptly should any
<PAGE>
Mr. William H. Buckland
Page 3
March 6, 2000
come to our attention. We confirm that no principal or member of our staff has
any financial interest or business connection with Capital Associates. We
reserve the right to resign from this engagement at any time if conflicts of
interest arise or become known to us that, in our judgment, will impair our
ability to perform objectively.
STATEMENT OF LIMITATIONS
- ------------------------
Andersen's services are limited to those discussed in this engagement letter and
do not include auditing, accounting, tax-related assistance, or advisory
services other than those described herein. Our services are not designed, nor
should they be relied upon, to disclose weaknesses in internal controls,
financial statement errors, irregularities, or illegal acts affecting Capital
Associates. The Board and Capital Associates shall be responsible for providing
information necessary for our analysis, except where mutually agreed upon by the
Company and Andersen. The accuracy and completeness of such information
submitted by the Company or any intermediary to us for analysis, on which we
rely and which will form the basis of our conclusions and recommendations, are
the responsibility of Capital Associates. It is expressly understood that our
engagement is by the Company's Board and that our responsibility is to the Board
and that our findings and recommendations shall only be available to the Board,
unless we are authorized to present such findings or recommendations to a third
party in which case we may present the information expressly authorized by the
Board.
This engagement letter sets forth the entire understanding between Andersen and
the Board, and supersedes all prior agreements, arrangements and communications,
whether oral or written, with respect to the subject matter hereof. This
engagement letter may be amended or modified only in writing signed by Andersen
and you. This letter is not intended to modify or prejudice the understandings
covered by other Arthur Andersen engagement letters with you.
Andersen will not be expressing any professional opinions (including, without
limitation, any compilation reports, review reports or similar reports) on
financial statements or performing attest procedures with respect to other
information in conjunction with our engagement.
We will be serving only in a capacity as a consultant. As a consultant, Andersen
will provide assistance as described in this engagement letter, but will not act
as an agent or broker and as such, all decisions resulting from the engagement
will be made by the Company and its management.
The invalidity or unenforceability of any provision of the engagement letter
shall not invalidate or affect the enforceability of any other provision of this
engagement letter.
CONFIDENTIALITY
- ---------------
During the course of this engagement, Andersen may receive confidential
information relating to this as well as from other parties-in-interest. Andersen
agrees that any such confidential information will be used by Andersen only in
connection with this engagement and that Andersen will exert its best efforts
not to disclose any of the confidential information to any party, other than
you, your clients and their respective designated representatives, without the
prior consent of the affected parties, unless otherwise required by law or
unless such information is freely available in the public domain (other than as
a breach of any agreement to keep it confidential).
<PAGE>
Mr. William H. Buckland
Page 4
March 6, 2000
We appreciate the opportunity to assist you on this important assignment. To
confirm the arrangements for our services, please sign the enclosed copy of this
letter and return it to us for our files. If you have any questions regarding
this letter or any other matter relating to our services, please contact Richard
M. Williamson at your convenience. Mr. Williamson's direct line in the office is
(602) 286-1983.
Very truly yours,
ARTHUR ANDERSEN LLP
By: /s/ Richard J. Williamson
Richard M. Williamson
<PAGE>
ANNEX A
-------
INDEMNIFICATION
---------------
Capital Associates, Inc. (the "Company"), its officers and directors shall
indemnify and hold harmless Arthur Andersen LLP and its affiliates (including
their past, present or future personnel, and any other entity within the Arthur
Andersen Worldwide Organization) from and against any and all claims,
liabilities, losses and damages (or actions in respect thereof) in any way
related to or arising out of the agreement attached hereto, or Andersen's
connection therewith, and shall reimburse Andersen (and any other such
indemnified person) for any legal and other expenses as they are incurred in
connection with or relating to investigating, preparing to defend or defending
any actions, claims or other proceedings (including any investigation or
inquiry) arising in any manner out of or in connection with the attached
agreement, or Andersen's connections therewith (whether or not such indemnified
person is a named party in such proceeding); provided, however, that the Company
shall not be responsible for any claims, liabilities, losses or damages to the
extent that it is finally judicially determined that they result from actions
taken or omitted to be taken by Andersen due to Andersen's gross negligence or
willful misconduct.
The Company shall not, in connection with any one such action or proceeding (or
separate but substantially similar or related actions or proceedings) arising
out of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together with local
counsel) at the time for Andersen and such other indemnified persons. The
Company shall not be liable for any settlement of any such action or proceeding
effected without the Company's written consent. If a settlement is entered into
with the Company's written consent or if there is a final and nonappealable
judgment for the plaintiff in any such action or proceeding, the Company shall
indemnify and hold harmless Andersen (and any other such indemnified person)
from and against any loss or liability (to the extent stated above) by reason of
such settlement or judgment.
If this indemnification is unavailable to an indemnified person under the first
paragraph hereof in respect of any losses, claims, damages or liabilities
referred to therein, then the Company, in lieu of indemnifying such indemnified
person, shall contribute to the amount paid or payable by such indemnified
person as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and Andersen on the other hand in connection with the
matters covered by the attached agreement, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
but also the Company's relative fault on the one hand and Andersen on the other,
as well as any other relevant equitable considerations. The amount paid or
payable by a party as a result of the losses, claims, damages and liabilities
referred to above shall be deemed to include any legal or other fees or expenses
incurred in defending any action or claim.
<PAGE>
The Company and Andersen confirm that it would not be just and equitable if
contribution pursuant to the prior paragraph were determined by pro rata
allocation or by any other method that does not take into account the equitable
considerations referred to in such paragraph. Notwithstanding the provisions of
this attachment, Andersen shall not be required to contribute any amount in
excess of the amount of fees received by Andersen under the attached agreement.
This provision shall survive the termination of this engagement for any reason.
In no event shall Andersen be liable for consequential, special, incidental or
punitive loss, damage or expense (including, without limitation, lost profits,
opportunity costs, etc.) even if Andersen has been advised of their possible
existence.
Confirmed and Agreed to on this
_________ day of_______, 2000:
Capital Associates, Inc.
By: /s/ William H. Buckland
-----------------------
Name: W.H. Buckland
-----------------------
Title: Director
-----------------------
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