-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQIe+4nOTIqnsgTTkuBVaZly/8lZ1E1BvDRRJQCMWFTPOJyKhdGfxTLGVWeKDJD+ RQ1HYGTbQ64ne9BJNov4qQ== 0000927356-00-001180.txt : 20000523 0000927356-00-001180.hdr.sgml : 20000523 ACCESSION NUMBER: 0000927356-00-001180 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL ASSOCIATES INC CENTRAL INDEX KEY: 0000804188 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 841055327 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15525 FILM NUMBER: 640911 BUSINESS ADDRESS: STREET 1: 7175 W JEFFERSON AVE STE 3000 CITY: LAKEWOOD STATE: CO ZIP: 80235 BUSINESS PHONE: 3039801000 10-Q 1 FOR PERIOD ENDING 02/29/2000, CAP. ASSC. INC. 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 1 of 23 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 2 of 23 PART I FINANCIAL INFORMATION Item 1. Financial Statements CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS
(Unaudited) February 29, May 31, 2000 1999 ------------ -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 of 23 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except earnings per share)
Three Months Ended Nine Months Ended February 29, February 29, ------------------------ ----------------------- Revenue: 2000 1999 2000 1999 ---------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 of 23 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Nine Months Ended February 29, ------------------------------ 2000 1999 -------- -------- 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
The accompanying notes are an integral part of these consolidated financial statements. 5 of 23 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. 6 of 23 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:
February 29, May 31, 2000 1999 ------------ ------- 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 ======= =======
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 7 of 23 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. 8 of 23 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. 9 of 23 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; 10 of 23 - 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 11 of 23 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"). 12 of 23 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):
Three Months Ended Nine Months Ended February 29, February 29, CAI Consolidated ------------------- ----------------- (without CATG) 2000 1999 Change 2000 1999 Change - ------------------- ------- ------ ------- ------ ------ ------- 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) ======== ======= ======== ======== ======= ========
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 Equipment Sales (for CAI, without CATG) --------------------------------------- Equipment sales revenue and the related equipment sales margin consists of the following (in thousands):
Three Months Ended ----------------------------------------- Increase February 29, 2000 February 28, 1999 (Decrease) ------------------- -------------------- --------------------- Revenue Margin Revenue Margin Revenue Margin --------- -------- ---------- -------- --------- ---------- 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) ======== ======= ======== ====== ======== ======= Nine Months Ended ----------------------------------------- Increase February 29, 2000 February 28, 1999 (Decrease) ------------------- -------------------- --------------------- Revenue Margin Revenue Margin Revenue Margin --------- -------- ---------- -------- --------- ---------- 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) ======== ======= ======== ====== ======== =======
14 of 23 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 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 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):
Three Months Ended Nine Months Ended February 28, February 28, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- 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 ======== ======== ======== ========
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 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:
Three Months Ended Nine Months Ended February 29, February 29, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------- ------- 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 ====== ====== ======= =======
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 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 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 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 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 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 EX-10.78 2 ARTHUR ANDERSEN ENGAGEMENT LETTER 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 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 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). 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 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. 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 ----------------------- EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS MAY-31-2000 FEB-29-2000 8,100,000 0 7,355,000 0 2,135,000 0 135,702,000 0 213,364,000 73,917,000 0 0 0 42,000 13,373,000 213,364,000 39,385,000 51,207,000 39,529,000 58,253,000 4,828,000 2,617,000 3,774,000 7,046,000 3,538,000 (10,584,000) (293,000) 0 0 (10,877,000) (2.08) (2.08)
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