<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 1995
[ ] 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.008
par value
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The approximate market value of stock held by non-affiliates was $2,314,000
based upon 2,962,000 shares held by such persons and the close price on August
18, 1995 was $.78125. The number of shares outstanding of the Registrant's $.008
par value common stock at August 18, 1995 was 10,227,247.
Documents incorporated by reference
Certain portions of Registrant's definitive proxy statement to be filed within
120 days after the end of the Registrant's fiscal year pursuant to Regulation
14A are incorporated by reference in Part III, Items 10, 11, 12 and 13 of this
report.
Page One of 44 Pages Exhibit Index Begins on Page 18
<PAGE>
PART I
ITEM 1. BUSINESS
Capital Associates, Inc. ("CAI"), was incorporated as a holding company in
October 1986. Its principal operating subsidiary, Capital Associates
International, Inc. ("CAII"), was incorporated in December 1976. Capital
Associates, Inc., is principally engaged in (1) buying, selling, leasing and
remarketing new and used equipment, (2) managing equipment on and off-lease, (3)
sponsoring, co-sponsoring, managing and co-managing publicly-registered income
funds and (4) arranging equipment-related financing.
HISTORICAL BUSINESS AND FISCAL YEAR 1995 SIGNIFICANT ACCOMPLISHMENTS
Prior to fiscal year 1987, the Company's principal business was (1) brokering
tax-advantaged, high-technology equipment lease transactions to, and for the
benefit of, third party investors and (2) remarketing high technology equipment.
The Tax Reform Act of 1986 effectively eliminated substantially all of the tax
benefits associated with that business for individual investors. For the period
fiscal year 1987 through the end of fiscal year 1991, the Company shifted its
principal business to originating leases for its own account while at the same
time continuing to (a) broker tax-advantaged equipment lease transactions to,
and for the benefit, of corporate investors and (b) remarketing equipment. The
Company financed its equity investment in new lease originations during this
period with funds drawn on its short-term recourse debt facility.
The Company reported net losses of $6,177,000, $13,630,000 and $16,066,000
during fiscal years 1992, 1991 and 1990, respectively, in part due to the change
in its business and the changes in the tax laws described above. Beginning in
the first quarter of fiscal year 1991, the Company agreed with its lenders to
begin repaying its short-term recourse debt facility. Thereafter, through the
end of the second quarter of fiscal year 1995 (the "Restructuring Period") , the
Company used substantially all of its cash flow after payment of operating
expenses to repay its short-term recourse debt facility. As a result of making
these payments, the Company did not have the funds during the Restructuring
Period to add new leases to its own lease portfolio and the Company's lease
portfolio and related revenue declined significantly during this period.
During fiscal years 1995, 1994 and 1993, the Company reported net income of
$1,116,000, $710,000, and $1,396,000, respectively, and twelve consecutive
profitable quarters. During fiscal year 1995, the Company:
* refinanced its short-term recourse debt facility with a new recourse debt
facility with a new senior bank lending group in December 1994; the new
recourse debt facility (the "Debt Facility") consists of a $32 million
warehousing facility (the "Warehouse Facility"), a $5 million working
capital facility (the "Working Capital Facility") and a $13 million,
three-year term loan (the "Term Loan")
* favorably resolved several legal proceedings in which it was involved,
including the MBank litigation which had been ongoing since early 1992; the
Company received approximately $8.4 million in settlement of its claims in
the MBank litigation;
* raised $24 million through the offering of Class A Limited Partner Units in
Capital Preferred Yield Fund III, the Company's sixth public income fund
* sold one jet aircraft and placed a previously non-earning $5 million
aircraft under lease
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ITEM 1. BUSINESS, continued
HISTORICAL BUSINESS AND FISCAL YEAR 1995 SIGNIFICANT ACCOMPLISHMENTS, continued
The ability of the Company to operate profitably in the future will depend
largely on the amount of new capital available to the Company and the cost of
that capital. The Company continues to explore possible sources of new capital
including, for example, obtaining new or additional recourse debt, obtaining new
equity capital (which could include a sale of the Company, possibly coupled with
an infusions of new funds from the purchaser into the Company), securitizing
lease transactions, obtaining equity capital from private investor purchases of
equipment leases originated by the Company and/or entering into strategic
alliances/combinations with other leasing or financial services companies. The
Company intends to invest any new capital that it obtains in leases for its own
portfolio. If the Company is unsuccessful in obtaining new capital, the ability
of the Company to continue to operate profitably will depend on (1) equipment
sales margins from new lease originations, (2) originating leases for its own
account with a substantial rate spread, (3) remarketing of equipment at a profit
and (4) further reducing its operating costs.
LEASING ACTIVITIES
All of the Company's leases are noncancelable "net" leases which contain
provisions under which the customer must make all lease payments regardless of
any defects in the equipment and which require the customer to insure the
equipment against casualty loss, and pay all related property, sales and other
taxes. The Company originates two basic types of leases, direct financing leases
("DFLs") and operating leases ("OLs"). Under generally accepted accounting
principles ("GAAP"), the primary distinguishing factor between these two types
of leases is the present value of the rents in relation to the cost of the
leased equipment. In the case of a DFL, the Company is contractually entitled to
recover at least 90% of its original investment in the equipment from the
present value of the initial lease rentals. In the case of an OL, the Company is
contractually entitled to recover less than 90% of its original investment in
the equipment from the present value of the initial lease rentals. As of May 31,
1995, the Company's net investment in DFLs was approximately $14 million and its
net investment in OLs was approximately $20 million. See Note 1 to Notes to
Consolidated Financial Statements for a detailed discussion of the Company's
lease accounting policies.
Leases are originated for the Company's own account, its public income funds
(the "PIFs") and private third party purchasers of equipment. The Company's
lease origination marketing strategy is transaction driven. With each lease
origination opportunity, the Company evaluates both the prospective lessee and
the equipment to be leased. With respect to each potential lessee, the Company
evaluates the lessee's credit worthiness. With respect to the equipment, the
Company evaluates the remarketing, upgrade potential and the probability that
the lessee will renew the lease or return the equipment at the end of the lease,
as well as its importance to the lessee's business.
Prior to fiscal year 1991, more than 50% of the equipment leases originated by
the Company consisted of office technology equipment, including data processing
and communications equipment. Since then, the Company has de-emphasized computer
equipment and diversified its own equipment lease portfolio (as well as, the
equipment portfolio it manages for private investors and the PIFs) to include a
wide variety of high technology equipment as well as transportation equipment,
materials handling equipment, manufacturing equipment, office automation
equipment, retail equipment, medical equipment, mining equipment, industrial
equipment, construction equipment, furniture, fixtures and equipment and other
equipment that meets the Company's underwriting standards.
The Company leases equipment to lessees in diverse industries throughout the
United States. To minimize credit risk, the Company generally leases equipment
to (1) lessees that have a credit rating of not less than Baa as determined by
Moody's Investor Services, Inc., or comparable credit ratings as determined by
other recognized credit rating services, or (2) companies, which although not
rated by a recognized credit rating service or rated below Baa, are believed by
the Company to be sufficiently creditworthy to satisfy the financial obligations
under the lease. As of May 31, 1995, approximately 79% of the equipment owned by
the Company was leased to companies that meet the above criteria.
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ITEM 1. BUSINESS, continued
LEASING ACTIVITIES, continued
The Company finances equipment purchases with the proceeds of borrowings under
its Warehouse Facility, pending the sale of the equipment to a private investor
or PIF, the permanent non-recourse financing of the equipment or the
securitization of the equipment/lease for its own account. In the case of
equipment financed with permanent non-recourse debt or securitized
equipment/leases, it is the Company's policy to recover all but its equity
investment in the equipment at the time it closes the financing, and all such
borrowings are secured by a first lien on the equipment and the related lease
rental payments. The Company recovers its equity investment in equipment for its
own account from renewal rents received and/or sales proceeds realized from the
equipment after repayment in full of the related permanent non-recourse debt or
securitization funding.
The Company's level of lease originations declined significantly during the
Restructuring Period. During that period, the Company sold substantially all new
lease originations to its PIFs and retained very few lease originations for its
own account. Since the closing of the Company's new Debt Facility, the Company
has resumed originating more leases for its own account. Lease originations of
approximately $96 million for fiscal 1995 were financed through $44 million of
sales to the PIFs, $25 million of sales to private investors, discounting $8
million of noncancelable lease rentals to various financial institutions at
fixed rates on a nonrecourse basis, and the remainder for the Company's account
of approximately $19 million through the use of the Company's Debt Facility.
No payments from any single lessee during fiscal year 1995 accounted for more
than ten percent (10%) of the Company's consolidated revenues. During fiscal
years 1995, 1994 and 1993, revenue from leasing activities was approximately $8
million $13 million and $26 million, respectively.
UNDERWRITING STANDARDS
All initial leases are subject to review under the Company's underwriting
standards. Each potential lessee is assigned a credit risk rating of 1 (the
highest rating) through 6 (the lowest rating), based on the application of
specific criteria during the credit review process. The Company originates
leases for its own account that have a credit rating of 1, 2 or 3. The Company
originates leases for its PIFs consistent with each PIF's own lease origination
standards, which are similar to those of the Company.
The Company's Transaction Review Committee (the "TRC"), which is composed of
members of senior management, (1) reviews and approves all material aspects of
lease transactions, the credit ratings assigned to lessees and certain pricing
and residual value assumptions, (2) advises on lease documentation requirements
and deal structuring guidelines, (3) is responsible for monitoring asset quality
on an on-going basis in order to estimate and assess the net realizable value at
the end of the lease term for the Company's equipment and for reviewing and
approving the quarterly Asset Quality Report and (4) revises and updates the
underwriting standards, when and as necessary. Generally, all transactions over
$3,000,000 must also be approved by a sub-committee of the Board of Directors.
REMARKETING ACTIVITIES
Remarketing activities consist of (1) lease portfolio management (i.e., managing
equipment under lease) and (2) asset management (i.e., managing off-lease
equipment). Revenue from remarketing activities was approximately $5 million, $9
million and $20 million during fiscal years 1995, 1994 and 1993, respectively.
One of the Company's principal goals is to minimize off-lease equipment by
proactively managing such equipment while it is under lease (e.g., renewing or
extending the lease, or re-leasing, upgrading or adding to the equipment before
the end of the initial lease term), and by selling such equipment after
termination of the lease if it cannot be profitably re-leased.
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ITEM 1. BUSINESS, continued
REMARKETING ACTIVITIES, continued
The Company attempts to maximize the remarketing proceeds from, and minimize the
warehousing costs for, off-lease equipment by (1) employing qualified and
experienced remarketing personnel, (2) developing equipment remarketing
expertise in order to maximize the profit from sales of off-lease equipment, (3)
minimizing the amount of off-lease equipment stored at independently operated
equipment warehouses and thereby reducing warehousing costs, (4) leasing and
operating its own general equipment warehouse to further reduce warehousing
costs, (5) eliminating scrap inventory from the warehouses and (6) conducting
on-site equipment inspections. The Company further supports these activities by
carefully monitoring the residual values of its equipment portfolio and
maintaining adequate reserves on its books, when and as needed, to reflect
anticipated future reductions in such values due to obsolescence and other
factors.
PRIVATE INVESTOR PROGRAMS, EQUITY SYNDICATIONS AND PIFS
The Company sells ownership interests in leased equipment to third-party
investors. The Company sold approximately $25 million, $43 million, and $14
million of equipment to private investors during fiscal years 1995, 1994 and
1993, respectively. The Company receives fees upon sale of its ownership
interests in its leased equipment. In addition, the Company may retain
participation interests in the residual value of such sold leased equipment.
The Company currently sponsors or co-sponsors six PIFs. The Company sells a
significant portion of the equipment it acquires for lease to its PIFs. The
Company sold approximately $44 million, $70 million and $62 million of equipment
to its PIFs during fiscal years 1995, 1994 and 1993, respectively. Various
subsidiaries and affiliates of the Company act as the general partners or
co-general partners of the PIFs. In addition, CAII contributes cash and/or
equipment to each PIF in exchange for a Class B limited partner interest ("Class
B interest"). Public investors purchase units of Class A limited partnership
interest ("Class A units") for cash, which the PIFs use to purchase equipment
on-lease to lessees. The Company receives (1) fees for performing various
services for the PIFs (subject to certain dollar limits), (2) reimbursement for
organizational and offering expenses incurred in selling the Class A Units
(subject to certain dollar limits), (3) Class B partner cash distributions from
each PIF (subordinated to the cash returns on the Class A Units) and (4) general
partner cash distributions.
Capital Preferred Yield Fund-III is the only PIF currently offering Class A
units for sale to the public. In the aggregate, the six PIFs have sold $295
million of Class A units to the public through May 31, 1995. Up to $26 million
of Class A units will be offered for sale to the public during fiscal year 1996.
CAII's maximum remaining obligation to make Class B partner cash contributions
is $0.3 million.
COMPETITION
The Company competes mainly on the basis of its remarketing capability, terms
offered in its leasing transactions, reliability in meeting its commitments and
customer service. The Company's continued ability to compete effectively may be
materially affected by the availability of financing, the costs of such
financing, and the marketplace for public income fund investments. The Company
competes with a large number of equipment lessors, many of which have greater
financial resources, greater economies of scale and lower costs of capital than
the Company.
EMPLOYEES
The Company had 92 employees as of May 31, 1995 versus 114 employees as of May
31, 1994, none of whom were represented by a labor union. The Company believes
that its employee relations are good.
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ITEM 2. PROPERTIES
The Company leases office facilities (approximately 20,000 square feet) in
Lakewood, Colorado (a suburb of Denver). These facilities house the Company's
administrative, financing and marketing operations and were consolidated from
approximately 43,000 square feet as of June 1, 1995. The Lakewood, Colorado
lease is for a term of 5 years, with 5 years remaining in the term, and with a
base rent, as of May 31, 1995, of approximately $27,000 per month, plus a
pro-rata share of building costs and expenses. The Lakewood, Colorado facility
adequately provides for present and future needs, as currently planned. In
addition, the Company leases a warehouse facility and regional marketing offices
at an aggregate rental of approximately $110,000 per year.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
a. THE MBANK LITIGATION. See Footnote 15 to Notes to Consolidated Financial
Statements appearing elsewhere herein for a description of the MBank
Litigation.
b. THE PAINEWEBBER CLASS ACTION. A series of class actions have been filed in
the United States District Court for the Southern District of New York
against PaineWebber Incorporated ("PaineWebber") and certain of its
affiliates in connection with its sale and sponsorship of limited
partnership units in various limited partnerships, one of which is
PaineWebber Preferred Yield Fund L.P., one of the Company's PIFs. The
Company and its subsidiary, CAI Equipment Leasing II Corporation
("CAIEL II"), are not named defendants in these class actions. On July 27,
1995 PaineWebber announced that it (1) was taking a one-time charge of $200
million during its second quarter of 1995 to cover the financial cost of
resolving these actions and other related claims and (2) hoped to resolve
these actions within ninety (90) days of the date of its announcement.
Management believes that the PaineWebber Class Action Lawsuit will not have
a material adverse effect on the financial condition or operations of the
Company or CAIEL II.
c. The Company is also involved in 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 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the three
months ended May 31, 1995.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's common stock trades on the Nasdaq National Market under the
symbol: CAII.
On June 2, 1995, the Nasdaq Stock Market, Inc. ("Nasdaq"), informed the Company
that it was not in compliance with the minimum $1.00 bid price requirement (or
the alternative $3 million value of public float requirement) for continued
listing of its Common Stock on the Nasdaq National Market (both tests are
collectively referred to herein as the "Stock Price Requirement"). At a hearing
in front of Nasdaq on July 13, 1995, the Company requested an extension of time
to comply with the Stock Price Requirement. By letter, dated August 2, 1995,
Nasdaq (1) agreed to extend the period of time for the Company to comply with
the Stock Price Requirement through August 31, 1995, and (2) advised the Company
that if the Company is unable to comply with the Stock Price requirement by that
date, the Company will no longer be listed on the Nasdaq National Market. The
Company intends to seek a further extension of time beyond August 31, 1995 to
comply with the Stock Price Requirement if it is not in compliance with such
requirements as of August 31, 1995. No assurance can be given that the Company
will be able to obtain such further extension of time. If the Company does not
satisfy the Stock Price Requirement as of August 31, 1995, and cannot obtain a
further extension of time to comply with such requirement, the Company's Common
Stock will be delisted from the Nasdaq National Market and will most likely
thereafter be traded on the OTC Bulletin Board.
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PART II
The following table sets forth the high and low sales prices of the Company's
common stock for the periods indicated, according to published sources. High and
low sales prices shown reflect inter-dealer quotations without retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
1996 HIGH LOW
First Quarter (through August 18, 1995) 29/32 5/8
1995 HIGH LOW
First Quarter 15/16 5/8
Second Quarter 15/16 5/8
Third Quarter 13/16 15/32
Fourth Quarter 13/16 7/16
1994 HIGH LOW
First Quarter 1 5/8 15/16
Second Quarter 1 1/2 11/16
Third Quarter 1 3/8 27/32
Fourth Quarter 15/16 13/16
On August 18, 1995, the date on which trading activity last occurred, the
closing sales price of the Company's stock was $.78125. On August 18, 1995,
there were approximately 230 shareholders of record and at least 800 beneficial
shareholders of the Company's outstanding common stock.
No dividends were paid during the periods indicated. The Company does not
anticipate that it will pay cash dividends on its common stock in the
foreseeable future. See Note 9 to Notes to Consolidated Financial Statements for
a discussion of restrictions upon CAII's ability to transfer funds to the
Company in the form of cash dividends, loans or advances that limit the
Company's ability to pay dividends on its outstanding Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The table on the following page sets forth selected consolidated financial data
for the periods indicated derived from the Company's consolidated financial
statements. The data should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
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Income Statement Data
(in thousands, except per share and number of shares data)
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Equipment sales $ 81,370 $ 122,469 $ 96,233 $ 78,752 $ 207,180
Leasing 7,672 13,368 26,003 45,726 76,745
Interest 11,386 15,027 15,526 26,012 36,322
Other 4,516 4,101 3,638 4,386 2,699
--------- --------- --------- --------- ---------
104,944 154,965 141,400 154,876 322,946
--------- --------- --------- --------- ---------
Costs and expenses:
Equipment sales 70,866 114,440 85,423 72,737 194,245
Leasing 3,893 5,511 12,148 30,493 51,991
Operating and other expenses 11,603 12,307 14,060 16,833 25,327
Provision for losses 2,940 1,315 2,070 2,150 10,632
Interest - non-recourse debt 12,548 18,370 22,091 36,820 53,796
Interest - recourse debt 1,618 1,839 3,282 6,140 9,672
--------- --------- --------- --------- ---------
103,468 153,782 139,074 165,173 345,663
--------- --------- --------- --------- ---------
Income (loss) before income taxes 1,476 1,183 2,326 (10,297) (22,717)
Income tax expense (benefit) 360 473 930 (4,120) (9,087)
--------- --------- --------- --------- ---------
Net income (loss) $ 1,116 $ 710 $ 1,396 $ (6,177) $ (13,630)
========= ========= ========= ========= =========
Earnings (loss) per common and dilutive common equivalent share:
Primary:
Net income (loss) per share $ .10 $ .07 $ .14 $ (.70) $ (1.54)
Fully diluted:
Net income (loss) per share $ .10 $ .07 $ .13 $ (.70) $ (1.54)
Weighted average number of common and dilutive common equivalent shares
outstanding used in computing earnings per share:
Primary 10,649,000 10,901,000 10,306,000 8,886,000 8,850,000
Fully diluted 10,672,000 10,901,000 10,888,000 8,886,000 8,850,000
Balance Sheet Data
(in thousands) May 31,
1995 1994 1993 1992 1991
---------- --------- --------- --------- ---------
Total assets $ 158,672 $ 209,725 $ 280,635 $ 392,172 $ 611,142
Recourse Debt:
Working Capital Facility 1,531 49 21 - -
Warehouse Facility 12,156 - - - -
Short-term recourse borrowings - - - 58,984 80,320
Term Loan 10,833 18,718 37,836 - -
Obligations under capital leases
and deferred gain arising from
sale-leaseback transactions 21,024 32,337 42,496 51,618 62,236
Discounted lease rentals 77,192 128,505 168,065 237,538 390,386
Stockholders' equity 22,490 21,099 20,303 18,539 24,651
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULTS OF OPERATIONS
During the preceding five fiscal years, revenue and assets have declined.
The reason for this is that, during the Restructuring Period, the Company
used substantially all of its cash flow after payment of operating expenses
to repay its prior short-term recourse debt facility. As a result of making
these payments, and until the Company closed its new Debt Facility in
December 1994, the Company did not have the funds necessary to
significantly add to its leasing portfolio. Because a leasing portfolio
declines in size as it matures, these circumstances resulted in a
substantial decline in the Company's own leasing portfolio and related
revenue (referred to in this discussion as "portfolio run-off").
The Company originates leases for its own account and for sale to private
investors and its PIFs. Leasing is an alternative to financing equipment
with debt. Therefore, the ultimate profitability of the Company's leasing
transactions is dependent, in part, on the general level of interest rates.
Lease rates tend to rise and fall with interest rates, although lease rate
movements generally lag interest rate movements.
Because the Company finances its lease transactions with recourse and
non-recourse debt, the ultimate profitability of leasing transactions is
dependent, in part, on the difference between the interest rate inherent in
the lease and the underlying debt rate ("rate spread"). Certain of the
Company's competitors have access to lower cost funds than the Company. As
a result, the Company is at a competitive disadvantage in pricing new
leasing transactions because the Company cannot achieve rate spreads as
great as some of its competitors, or cannot drop rates to win new lease
transactions and remain profitable.
During fiscal years 1994 and 1995, the Company's business plan provided for
originating mostly DFLs financed with permanent non-recourse debt for its
own account because such leases report constant returns (after interest
expense on related non-recourse debt) over the term of the DFLs (as opposed
to OLs, which report lower returns during the early term of the leases).
The presently low interest rate environment and the expansion by commercial
banks of their leasing activities have reduced the availability of high
quality DFLs. Accordingly, the Company's 1996 business plan provides for
originating mostly OLs for its account.
Presented below are schedules showing condensed income statement categories
and analyses of changes in those condensed categories derived from the
Consolidated Statements of Income appearing on page F-4 of this report on
Form 10-K, prepared solely to facilitate the discussion of results of
operations (in thousands).
<TABLE>
<CAPTION>
Condensed Consolidated Condensed Consolidated
Statements of Income Statements of Income
for the Years The effect on for the Years The effect on
Ended May 31, net income of Ended May 31, net income of
----------------------- changes between ------------------------- changes between
1995 1994 years 1994 1993 years
---------- ---------- --------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 10,504 $ 8,029 $ 2,475 $ 8,029 $ 10,810 $ (2,781)
Leasing margin (net of interest
expense on discounted lease
rentals) 2,617 4,514 (1,897) 4,514 7,290 (2,776)
Other income 4,516 4,101 415 4,101 3,638 463
Operating and other expenses (11,603) (12,307) 704 (12,307) (14,060) 1,753
Provision for losses (2,940) (1,315) (1,625) (1,315) (2,070) 755
Interest expense on
recourse debt (1,618) (1,839) 221 (1,839) (3,282) 1,443
Income taxes (360) (473) 113 (473) (930) 457
--------- --------- --------- --------- --------- --------
Net income $ 1,116 $ 710 $ 406 $ 710 $ 1,396 $ (686)
========= ========= ========= ========= ========= ========
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULTS OF OPERATIONS, continued
EQUIPMENT SALES
Equipment sales revenue (and the related equipment sales margin) consists
of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------------
1995 1994 Increase
------------------------------------------------- (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 $ 43,638 $ 1,047 $ 70,085 $ 1,774
Equipment under lease sold to
private investors 24,700 423 43,037 1,257
MBank sale proceeds 8,400 6,100 - -
-------- -------- --------- --------
76,738 7,570 113,122 3,031 $ (36,384) $ 4,539
-------- -------- --------- -------- --------- --------
Transactions subsequent to initial lease
termination:
Sales of off-lease equipment 2,505 1,269 4,759 2,021
Sales-type leases 1,227 765 2,672 1,061
Excess collections (cash collections
in excess of the associated residual
value from equipment under
lease sold to private investors) 900 900 1,916 1,916
-------- -------- --------- --------
4,632 2,934 9,347 4,998 (4,715) (2,064)
Related provision for losses - (1,940)* - (1,315) - (625)
-------- -------- --------- -------- --------- ---------
Realizations of value in excess of
provision for losses 4,632 994 9,347 3,683 (4,715) (2,689)
-------- -------- --------- -------- --------- ---------
Total equipment sales $ 81,370 $ 8,564 $ 122,469 $ 6,714 $ (41,099) $ 1,850
======== ======== ========= ======== ========= =========
<FN>
* Excludes $1,000 of bankrupt lessee credit losses occurring prior to the
expiration of the initial lease term (none for fiscal years 1994 and
1993)
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------------
1995 1994 Increase
------------------------------------------------- (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 $ 70,085 $ 1,774 $ 62,252 $ 1,773
Equipment under lease sold to
private investors 43,037 1,257 13,945 777
--------- -------- -------- --------
113,122 3,031 76,197 2,550 $ 36,925 $ 481
--------- -------- -------- --------
Transactions subsequent to initial lease
termination:
Sales of off-lease equipment 4,759 2,021 11,682 3,098
Sales-type leases 2,672 1,061 4,530 1,338
Excess collections (cash collections
in excess of the associated residual
value from equipment under
lease sold to private investors) 1,916 1,916 3,824 3,824
--------- -------- -------- --------
9,347 4,998 20,036 8,260 (10,689) (3,262)
Provision for losses - (1,315) - (2,070) - 755
--------- -------- -------- -------- --------- --------
Realizations of value in excess of
provision for losses 9,347 3,683 20,036 6,190 (10,689) (2,507)
--------- -------- -------- -------- --------- --------
Total equipment sales $ 122,469 $ 6,714 $ 96,233 $ 8,740 $ 26,236 $ (2,026)
========= ======== ======== ======== ========= ========
</TABLE>
10 of 20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULTS OF OPERATIONS, continued
EQUIPMENT SALES, continued
To partially offset the effect on income of portfolio run-off while the
Company is growing its lease portfolio, one of the Company's strategies is
to increase sales margins from equipment sold during its initial lease term
to offset the decrease in sales margins from transactions subsequent to
initial lease termination. In the ordinary course of business, the Company
will (1) sell new lease originations to its PIFs (to the extent the PIFs
have funds available for such purpose) or private investors and (2) sell
seasoned lease transactions (previously originated leases held in the
Company's portfolio) to private investors. To the extent sales of seasoned
leases exceed new lease originations, growth in the Company's portfolio
will be slower.
EQUIPMENT SALES TO PIFS
Equipment sales to the PIFs were lower during fiscal year 1995, as compared
to fiscal year 1994, primarily because (1) the PIFs were more fully
leveraged during fiscal year 1995 and, therefore, had less available
borrowing capacity to acquire additional equipment and (2) only one PIF,
CPYF-III, was offering Class A units for sale. Continuing to offer Class A
units in CPYF-III for sale is a principal operating goal of the Company and
to accomplish that goal, the Company almost doubled its PIF marketing staff
of wholesalers by the end of fiscal year 1995.
Equipment sales to PIFs increased during fiscal year 1994 as compared to
fiscal year 1993, principally because more leases that satisfied the
Company's underwriting standards were identified, in part as a result of
the opening of new sales offices.
EQUIPMENT SALES TO PRIVATE INVESTORS
Equipment sales to private investors for fiscal year 1994 included sales of
approximately $14 million of "seasoned" leases (i.e., previously originated
leases held in the Company's portfolio) and approximately $29 million of
new lease originations. This compares to fiscal year 1995 amounts of
approximately $5 million and $20 million for "seasoned" leases and new
lease originations, respectively. Equipment sales to private investors
during fiscal year 1995 were less than in the prior year primarily because
lease originations identified for sale to private investors were less than
the prior year. The continued development of a customer base of private
investors and growth in new lease originations suitable for private
equipment sales are principal operating goals of the Company.
MBANK SALE PROCEEDS
The increase in equipment sales margin during fiscal year 1995 as compared
to fiscal year 1994 is due to the MBank sale. The parties settled their
claims to the cash collateral for the original MBank lease and the Company
received approximately $8.4 million from the cash collateral for the
original MBank lease (net of amounts the Company has agreed to refund to
BankOne, Texas N.A.). The Company recorded $6.1 million in equipment sales
margin from the MBank sale (i.e., proceeds of approximately $8.4 million
less a carrying value of approximately $2.3 million).
11 of 20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULTS OF OPERATIONS, continued
REMARKETING OF THE PORTFOLIO AND RELATED PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value is
reported as equipment sales margin (if the equipment is sold) or as leasing
margin (if the equipment is re-leased). The realization of less than the
carrying value of equipment (which is typically not known until remarketing
subsequent to the initial lease termination has occurred) is recorded as
provision for losses. As shown in the tables above, the realizations from
sales exceeded the provision for losses for fiscal years 1995, 1994 and
1993, even without considering realizations from remarketing activities
recorded as leasing margin as discussed below. This circumstance of
realizing in excess of the aggregate carrying value on the Company's
portfolio has occurred in each of the last twelve quarters.
Margins from remarketing sales (i.e., sales occurring after the initial
lease term) are affected by the amount of equipment leases that matures in
a particular quarter. In general, as the size of the Company's lease
portfolio declines, fewer leases mature and less equipment is available for
remarketing each quarter. As a result, remarketing revenue and the related
margin declined during both fiscal year 1995 as compared to fiscal year
1994, and fiscal year 1994 as compared to fiscal year 1993. Remarketing
revenue and margin are expected to decline further as portfolio runoff
continues. The Company's ability to remarket additional amounts of
equipment and realize a greater amount of remarketing revenue in future
periods is dependent on adding additional leases to its portfolio. However,
adding leases to the Company's portfolio will not offset the effect of
portfolio runoff because new leases typically are not remarketed until
after their initial term (which averages three to four years).
Residual values are established equal to the estimated value to be received
from the equipment following termination of the lease. In estimating such
values, the Company considers all relevant facts regarding the equipment
and the lessee, including, for example, the likelihood that the lessee will
re-lease the equipment. The nature of the Company's leasing activities is
that it has credit exposure and residual value exposure and, accordingly,
in the ordinary course of business it will incur losses arising from these
exposures. The Company performs ongoing quarterly assessments of its assets
to identify other than temporary losses in value.
The provision for losses of $2.9 million recorded during fiscal year 1995
included $2.3 million recorded during the fourth fiscal quarter 1995. The
provision for losses for the fiscal year included the following more
significant items:
* approximately $750,000 to record the Company's loss exposure related to
approximately $3 million of net book value of equipment leased to a
lessee who filed Chapter 11 bankruptcy during July 1995
* approximately $550,000 recorded to write-down the carrying value of IBM
equipment retained residuals to fair market values based upon current
third-party quotes
* approximately $500,000 for equipment originally expected to remain with
the lessee upon lease termination which the Company now believes will
be returned
* approximately $400,000 recorded to write-down the carrying value of one
of the Company's aircraft to fair market value because of the
deteriorating financial condition of the lessee at May 31, 1995
* approximately $250,000 to record the Company's loss exposure related to
approximately $350,000 of net book value of equipment leased to another
lessee that filed Chapter 11 bankruptcy during December 1994.
12 of 20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULT OF OPERATIONS, continued
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Fiscal Years Ended May 31,
---------------------------------------
1995 1994 1993
-------- -------- --------
Leasing revenue $ 7,672 $ 13,368 $ 26,003
Leasing costs and expenses (3,893) (5,511) (12,148)
Net interest expense on related
discounted lease rentals (1,162) (3,343) (6,565)
-------- -------- --------
Leasing margin $ 2,617 $ 4,514 $ 7,290
======== ======== ========
Leasing margin ratio 34% 34% 28%
== == ==
Leasing margin has declined as a result of portfolio run-off and is
expected to decline further until the Company has significantly added to
its lease portfolio. See the discussion under "Business Plan" below.
As discussed under "Business Plan" below, the Company intends to continue
to grow its lease portfolio in the future, subject to profitability
considerations from immediate sale of leases as discussed above. The
Company's equipment under lease increased for the first time since fiscal
year 1991. The changes in the Company's equipment under lease during the
fiscal year ended May 31, 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Discounted lease
Direct finance rentals, net of
leases, operating discounted lease
leases, net and rentals assigned Net investment
equipment held to lenders arising in lease
for sale or re-lease from equipment sales portfolio
-------------------- -------------------- --------------
<S> <C> <C> <C>
As of May 31, 1994 $ 38,963 $ (16,912) $ 22,051
Leases added to the Company's lease
portfolio (a portion of which will be
sold during fiscal year 1996) 24,557 (5,255) 19,302
Leases sold to private investors (4,946) 2,410 (2,536)
Related provision for losses (2,408) - (2,408)
Change as a result of portfolio run-off (16,794) 7,848 (8,946)
--------- --------- --------
As of May 31, 1995 $ 39,372 $ (11,909) $ 27,463
========= ========= ========
</TABLE>
13 of 20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULT OF OPERATIONS, continued
OTHER INCOME
Other Income consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal years ended May 31,
---------------------------------------------
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Fees and distributions from the Company-sponsored PIFs $ 2,908 $ 3,293 $ 2,925
Gain on sale of the investment in Corporate Express, Inc. stock 671 - -
Cancellation of option agreement 444 - -
Interest on income tax refunds 178 431 -
Recovery of assets previously written off - - 352
Other, principally recovery of sales and property tax
amounts previously expensed 315 377 361
------- ------- -------
$ 4,516 $ 4,101 $ 3,638
======= ======= =======
</TABLE>
Other than fees and distributions from the company-sponsored PIFs, most of
the transactions above are "one-time" transactions and, accordingly, the
Company does not expect to realize material amounts in the future with
respect to the Other Income items listed above.
OPERATING AND OTHER EXPENSES
Operating and other expenses decreased approximately $0.7 million (6%) for
fiscal year 1995, compared to fiscal year 1994 due to on-going efforts to
minimize costs.
Operating and other expenses decreased approximately $1.8 million (12%) for
fiscal year 1994, compared to fiscal year 1993. The decrease was
principally due to (1) approximately $0.4 million from reductions in
restructuring costs, related to the Company's prior debt facility, (2)
approximately $0.8 million from compensation expense reductions and (3) a
reduction of approximately $0.6 million in legal fees.
INTEREST INCOME AND EXPENSE
Interest income on discounted lease rentals arises when equipment financed
with non-recourse debt is sold to investors. The Consolidated Statements of
Income include an equal amount of interest expense. The decline in interest
income and non-recourse debt interest expense is due to portfolio run-off.
Over the last three fiscal years, the decrease in recourse debt interest
expense reflects the decline in interest rates and the continuing reduction
in the outstanding balance of the Company's Debt Facility.
INCOME TAXES
Income tax expense is provided on income at the appropriate statutory rates
applicable to such earnings. The appropriate statutory tax rate for fiscal
years 1995, 1994 and 1993 was 40%. Adjustments to the valuation allowance
are recognized as a separate component of the provision for income tax
expense. Consequently, the actual income tax rate for 1995 was less than
the effective rate of 40% due to the reduction in the valuation allowance
of $230,000.
14 of 20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. RESULT OF OPERATIONS, continued
INCOME TAXES, continued
Income tax expense does not reflect actual tax payments by the Company
because net operating loss ("NOL") carryforwards and investment tax credit
("ITC") carryforwards were utilized to offset taxable income. At May 31,
1995, the Company had fully utilized all remaining NOL carryforwards.
During 1995, the Company paid alternative minimum tax ("AMT") of $1.6
million. The deferred tax asset balance at May 31, 1995 primarily reflects
the payment of, and anticipated future recovery of, such amount.
As shown in the table in Note 11 to Notes to the Consolidated Financial
Statements, the Company's significant deferred tax assets consist of an ITC
carryforward of $7.4 million (which expire from 1996 through 2001) and
alternative minimum tax ("AMT") credits of $3.3 million (which are not
subject to expiration). These tax assets are available to offset federal
income tax liability. However, the amount of ITC carryforward and AMT
credits that may be utilized to reduce tax liability is significantly
limited in computing AMT liability. As a result of this limitation on the
ITC carryforward, the Company has established a valuation allowance for
deferred tax assets to reflect the uncertainty that the ITC carryforward
will be fully utilized prior to expiration. During 1995, the valuation
allowance was reduced by $230,000 to reflect utilization of ITC
carryforward for which a valuation allowance had previously been provided.
II. LIQUIDITY AND CAPITAL RESOURCES
The Company's activities are principally funded by its Working Capital
Facility and Warehouse Facility (see Note 9 to Notes to Consolidated
Financial Statements), rents, proceeds from sales of on-lease equipment (to
its PIFs and third party investors), non-recourse debt, fees and
distributions from its PIFs, sales or re-leases of equipment after the
expiration of the initial lease terms and other cash receipts. Management
believes the Company's ability to generate cash from operations is
sufficient to fund operations, particularly when operations are viewed as
including investing and financing activities.
To reverse the effects of portfolio run-off, the Company needs to
significantly grow its lease portfolio. To the extent possible, the Company
intends to use proceeds from its Debt Facility, the MBank sale proceeds and
the possible financing proceeds from its jet aircraft to finance the equity
component of leases until such leases mature. While these sources of
capital will be sufficient for the Company's short-term needs, the Company
will pursue opportunities to obtain other sources of new capital.
During July 1995, the Company and certain of its sponsored PIFs entered
into an agreement to debt finance up to $40 million of lease receivables
with a lender as part of a lease securitization program. As with
nonrecourse debt financings of lease rentals, securitized financings are
also collateralized by the leased equipment and related rentals, and the
Company has no recourse liability to the lender for repayment of the debt.
The Company selected this securitized debt vehicle because of attractive
interest rates and anticipates that certain unleveraged leases will be debt
financed using this facility.
Currently the Company is offering units of CPYF III for sale to the public.
During fiscal year 1995, the Company sold a total of $22.7 million of Class
A units of CPYF III and sold $21.8 million during fiscal year 1994. During
fiscal year 1996, the Company has up to $26 million of Class A units in
CPYF III available for sale, which will represent a source of liquidity and
acquisition fee income for the Company. Four of the Company's PIFs,
including CPYF-III, are in their reinvestment stage and are using a portion
of their available cash to purchase additional equipment from the Company.
The Company expects to sell approximately $64 million of equipment to these
PIFs during fiscal year 1996. Two of the Company's PIFs are in their
liquidation stage and are no longer purchasing equipment.
Inflation has not had a significant impact upon the operations of the
Company.
15 of 20
<PAGE>
III. BUSINESS PLAN
Management has identified the following trends in results of operations:
* although the Company has reported a profit of $.10 per share for fiscal
year 1995 (its ninth, tenth, eleventh and twelfth consecutive
profitable quarters), the profit resulted largely from "other income"
items;
* although the Company had been continually enhancing its lease
origination capabilities by adding lease originators, the level of
lease originations were substantially below their 1995 expectations;
The Company has identified several factors which could adversely impact
profitability in the future:
* because of the flattening of the yield curve for debt securities during
calendar year 1994 and into calendar year 1995, lease rates are not
rising in line with the Company's cost of funds which makes it
difficult to maintain a substantial spread between lease rates and the
Company's cost of funds;
* even if lease originations increase significantly, growth in the
Company's profits will be slow because as a portfolio grows, under
generally accepted accounting principles, operating leases produce
lower leasing margin after interest expense during the early term of
such leases;
* the cost of funds for many of the Company's competitors is lower than
the Company's cost of funds; and
* certain of the Company's competitors also price transactions with tax
benefits not available to the Company.
During the Restructuring Period, the Company could not originate a
significant amount of leases for its own account because it did not have
the financing to fund and hold such originations. The Company believes that
it has the necessary funding capability for fiscal year 1996 to (1)
continue to increase the size of its own lease portfolio, and (2)
originate/acquire additional leases for sales to PIFs and private equity
investors. The Company has recently hired a new complement of field lease
originators to originate new leases for the Company's own portfolio and for
sale to third parties.
However, while growing the Company's lease origination function and adding
new leases to the Company's portfolio will positively affect the Company's
results of operations over time, such actions will not positively affect
the Company's results of operations in the near term because (a) it will
take a period of time before new lease transactions can be closed, (b) new
operating lease transactions "throw off" lower returns (for financial
reporting purposes) during their early term and (c) the Company will incur
additional operating expenses in increasing the size of its marketing
force. During this period of growth, the Company may realize small
operating losses or reduced operating profits as a result of these
circumstances. In addition to factors discussed above, operating results
are subject to fluctuations resulting from several of other factors,
including variations in the relative percentages of the Company's leases
entered into during the period which are classified as DFLs, OLs, or sold
for fee income.
The ability of the Company to operate profitably in the future will depend
largely on the amount of new capital available to the Company and the cost
of that capital. The Company continues to explore possible sources of new
capital including, for example, obtaining new or additional recourse debt,
obtaining new equity capital (which could include a sale of the Company,
possibly coupled with an infusions of new funds from the purchaser into the
Company), securitizing lease transactions, obtaining equity capital from
private investor purchases of equipment leases originated by the Company
and/or entering into strategic alliances/combinations with other leasing or
financial services companies. The Company intends to invest any new capital
that it obtains in leases for its own portfolio. If the Company is
unsuccessful in obtaining new capital, the ability of the Company to
continue to operate profitably will depend on (1) equipment sales margins
from new lease originations, (2) origination leases for its own portfolio
with a substantial rate spread, and (3) remarketing of equipment at a
profit and (3) further reducing its operating costs.
16 of 20
<PAGE>
Item 8. Financial Statements and Supplementary Data
See the Index to Financial Statements and Schedules appearing at Page F-1 of
this Report.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d) Financial Statements and Schedules
The financial statements and schedules listed on the accompanying Index of
Financial Statements and Schedules (page F-1) are filed as part of this Annual
Report.
(b) Reports on Form 8-K
On March 22, 1995, a Form 8-K was filed disclosing developments related to the
MBank litigation discussed under Item 3 above.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The Company will
furnish to its shareholders of record as of the record date for its 1995 Annual
Meeting of Stockholders, a copy of any of the exhibits listed below upon payment
of $.25 per page to cover the costs to the Company of furnishing the exhibits.
17 of 20
<PAGE>
ITEM NO. EXHIBIT INDEX
3.1 Certificate of Incorporation of Capital Associates, Inc. (the
"Company"), incorporated by reference to Exhibit 3.1 of the Company's
registration statement on Form S-1 (No. 33-9503).
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of
the Annual Report on Form 10-K for the fiscal year ended May 31, 1991
(the "1991 10-K").
10.1 Amended and Restated Stock Option Plan of the Company incorporated by
reference to Exhibit 10.1 of the Annual Report on Form 10-K for the
fiscal year ended May 31, 1992 (the "1992 10-K").
10.2 Form of Stock Option Agreement between the Company and the directors
of the Company (the "Option Agreement"), incorporated by reference to
Exhibit 19.12 of the Quarterly Report on Form 10-Q for the quarter
ended February 28, 1991 (the "February 1991 10-Q").
10.3(a) Amended and Restated Exhibit A to the Option Agreement between the
Company and James D. Edwards, incorporated by reference to Exhibit
19.1 of the Quarterly Report on Form 10-Q for the quarter ended
August 31, 1991 (the "August 1991 10-Q").
10.3(c) Amended and Restated Exhibit A to the Option Agreement between the
Company and William B. Patton, Jr., incorporated by reference to
Exhibit 19.1 of the August 1991 10-Q.
10.3(d) Amended and Restated Exhibit A to the Option Agreement between the
Company and Peter F. Schabarum, incorporated by reference to Exhibit
19.1 of the August 1991 10-Q.
10.4 Defined Contribution Plan and Trust, incorporated by reference to
Exhibit 10.2 of the Annual Report on Form 10-K for the fiscal year
ended May 31, 1990 (the "1990 10-K").
10.5(a) Stockholder's Agreement dated October 27, 1982 among the Company,
Richard Kazan, Jack M. Durliat, and Gary M. Jacobs, as amended,
incorporated by reference to exhibit 10.3 to the Company's
registration statement on Form S-1 (No. 33-9503).
10.5(b) Amendment to Stockholder's Agreement dated August 1, 1990,
incorporated by reference to Exhibit 10.3(b) of the 1990 10-K.
10.6 Form of Indemnification Agreement by and between the Company and its
directors, incorporated by reference to Exhibit 10.16 of the 1990
10-K.
10.8(a) Executive Employment Agreement, executed October 25, 1991 and
effective as of September 7, 1991, by and between Dennis J. Lacey,
the Company and Capital Associates International, Inc. ("CAII") (the
"Lacey Employment Agreement"), incorporated by reference to Exhibit
19.1 of the Quarterly Report on Form 10-Q for the quarter ended
November 30, 1991 (the "November 1991 10-Q").
10.8(b) Amendment No. 1 to the Lacey Employment Agreement dated as of
September 7, 1992, incorporated by reference to Exhibit 19.1 of the
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 1992 (the "November 1992 10-Q").
10.8(c) Amendment No. 2 to the Lacey Employment Agreement dated as of
April 9, 1993, incorporated by reference to exhibit 10.8(c) to the
Annual Report on Form 10-K for the fiscal year ended May 31, 1993
(the "1993 10-K").
18 of 20
<PAGE>
ITEM NO. EXHIBIT INDEX
10.8(d) Form of Amendment No. 3 to the Lacey Employment Agreement dated as of
April 20, 1993, incorporated by reference to exhibit 10.8(d) to the
1993 10-K.
10.8(e) First Amended and Restated Lacey Employment Agreement dated as of
June 15, 1993, incorporated by reference to exhibit 10.8(c) to the
1993 10-K.
10.10(a) Crisis Recovery Employee Incentive Bonus plan dated as of December 2,
1991, incorporated by reference to Exhibit 19.3 of the November 1992
10-Q.
10.10(b) Capital Associates, Inc. Incentive Program to Enhance Earnings Growth
dated June 27, 1993, incorporated by reference to exhibit 10.10(b) to
the 1993 10-K.
10.40 Purchase Agreement, dated as of December 30, 1991 by and among CAII,
the Company and Bank One, Texas, N.A., incorporated by reference to
Exhibit 19.11 of the November 1991 10-Q.
10.41 Form of Consulting Agreement, dated as of April 30, 1993 by and among
the Company CAII and William B. Patton, Jr., incorporated by
reference to Exhibit 10.41 of the 1993 10-K.
10.42 Amendment to Stockholders' Agreement, dated as of June 1, 1994, by
and between the Company, Durliat, Jacobs and Kazan, incorporated by
reference to Exhibit 10.42 of the 1994 10-K.
10.43 Confidentiality and Standstill Agreement, dated as of June 1, 1994,
by and between the Company and Kazan, incorporated by reference to
Exhibit 10.43 of the 1994 10-K.
10.44 Indemnification Agreement, dated as of January 14, 1994, by and
between the Company and Jacobs, incorporated by reference to Exhibit
10.44 of the 1994 10-K.
10.45 Form of Stock Option Agreement between the Company and the directors
of the Company (with a grant date of August 27, 1993 for Kazan,
Patton, Edwards and Schabarum and a grant date of January 14, 1994
for Jacobs), incorporated by reference to Exhibit 10.45 of the 1994
10-K.
10.48 Form of Credit and Security Agreement, dated as of November 30, 1994,
by and among CAII, Norwest Bank Colorado, National Association
("Norwest"), Norwest Equipment Finance, Inc., and First Interstate
Bank of Denver, N.A. ("First Interstate") (the "New Lenders"),
incorporated by reference to Exhibit 10.48 of the February 1995 10-Q.
10.49 Settlement Agreement and Release of Liens and Claims, dated as
of December 2, 1994, by and among the Company, CAII, each of
the Company's and CAII's wholly-owned subsidiaries, Mellon Bank,
N.A., as Agent, and the Lenders, incorporated by reference to Exhibit
10.49 of the February 1995 10-Q.
11 Statement regarding Computation of Per Share Earnings.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick.
27 Financial Data Schedule
19 of 20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on August 29, 1995.
CAPITAL ASSOCIATES, INC.
By /s/John E. Christensen
-------------------------------
John E. Christensen
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities indicated and
on the dates listed.
Signature Title Date
/s/William B. Patton, Jr. Chairman of the Board August 29, 1995
- ------------------------- and Director
William B. Patton, Jr.
/s/William H. Buckland Director August 29, 1995
- -------------------------
William H. Buckland
/s/James D. Edwards Director August 29, 1995
- -------------------------
James D. Edwards
/s/Gary M. Jacobs Director August 29, 1995
- -------------------------
Gary M. Jacobs
/s/Dennis J. Lacey President, Chief Executive August 29, 1995
- ------------------------- Officer and Director
Dennis J. Lacey
/s/Peter F. Schabarum Director August 29, 1995
- -------------------------
Peter F. Schabarum
/s/James D. Walker Director August 29, 1995
- -------------------------
James D. Walker
/s/Joseph F. Bukofski Assistant Vice President August 29, 1995
- ------------------------- and Controller
Joseph F. Bukofski (Principal Accounting Officer)
20 of 20
<PAGE>
INDEX OF FINANCIAL STATEMENTS
AND SCHEDULES
Financial Statements
- --------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
May 31, 1995 and 1994 F-3
Consolidated Statements of Income for
the Years Ended May 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Changes in
Stockholders' Equity for the Years
Ended May 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-7 to F-22
Schedules
- ---------
Independent Auditors' Report F-23
Schedule II - Valuation and Qualifying
Accounts and Reserves for the Years
Ended May 31, 1995, 1994 and 1993 F-24
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Directors
Capital Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Associates, Inc. and subsidiaries as of May 31, 1995, and 1994 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended May 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capital Associates,
Inc. and subsidiaries as of May 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three year period
ended May 31, 1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
/s/ KPMG Peat Marwick
---------------------
Denver, Colorado
July 14, 1995, except for Note 15
which is as of August 23, 1995
F - 2
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
ASSETS
May 31,
1995 1994
-------- --------
Cash $ 923 $ 2,072
Accounts receivable, net of allowance for
doubtful accounts of $308 and $343 563 1,625
MBank receivable (Note 15) 10,800 -
Equipment held for sale or re-lease 66 5,242
Residual values and other receivables arising from
equipment under lease sold to private investors 5,608 5,098
Net investment in direct finance leases 19,319 18,106
Leased equipment, net 19,987 15,615
Investment in affiliated limited partnerships 10,316 12,178
Other 2,970 5,779
Deferred income taxes 1,800 -
Notes receivable arising from sale-leaseback
transactions 21,037 32,417
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 65,283 111,593
--------- ---------
$ 158,672 $ 209,725
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ 1,531 $ 49
Warehouse Facility 12,156 -
Accounts payable and other liabilities 13,446 8,187
Term Loan 10,833 18,718
Deferred income taxes - 830
Obligations under capital leases arising
from sale-leaseback transactions 21,024 32,337
Discounted lease rentals 77,192 128,505
--------- ---------
136,182 188,626
--------- ---------
Commitments and contingencies (Notes 10, 12, 15, and 16)
Stockholders' equity:
Common stock, $.008 par value,
15,000,000 shares authorized,
10,214,000 and 9,759,000 shares issued 63 60
Additional paid-in capital 16,961 16,689
Retained earnings 5,517 4,401
Treasury stock, at cost (51) (51)
--------- ---------
Total stockholders' equity 22,490 21,099
--------- ---------
$ 158,672 $ 209,725
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 3
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Year Ended May 31,
1995 1994 1993
---------- ---------- ----------
Revenue:
Equipment sales to affiliated
limited partnerships $ 43,638 $ 70,085 $ 62,252
Other equipment sales (Note 15) 37,732 52,384 33,981
Leasing 7,672 13,368 26,003
Interest 11,386 15,027 15,526
Other 4,516 4,101 3,638
---------- ---------- ---------
Total revenue 104,944 154,965 141,400
---------- ---------- ---------
Costs and expenses:
Equipment sales (Note 15) 70,866 114,440 85,423
Leasing 3,893 5,511 12,148
Operating and other expenses 11,603 12,307 14,060
Provision for losses 2,940 1,315 2,070
Interest:
Non-recourse debt 12,548 18,370 22,091
Recourse debt 1,618 1,839 3,282
---------- ---------- ---------
Total costs and expenses 103,468 153,782 139,074
---------- ---------- ---------
Net income before income taxes 1,476 1,183 2,326
Income tax expense 360 473 930
---------- ---------- ---------
Net income $ 1,116 $ 710 $ 1,396
========== ========== =========
Earnings per common and dilutive
common equivalent share:
Primary $ .10 $ .07 $ .14
========== ========== =========
Fully diluted $ .10 $ .07 $ .13
========== ========== =========
Weighted average number of common
and dilutive common equivalent
shares outstanding used in
computing earnings per share:
Primary 10,649,000 10,901,000 10,306,000
========== ========== ==========
Fully diluted 10,672,000 10,901,000 10,888,000
========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 4
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------ Paid-in Retained --------------
Shares Amount Capital Earnings Shares Cost Total
------ ------ ------- -------- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1992 9,096,000 $ 54 $ 16,432 $ 2,295 147,500 $ (242) $ 18,539
Sale of common stock under
incentive stock option plan 56,000 1 23 - - - 24
Issuance of shares to officers 534,000 4 149 - (115,500) 191 344
Net income - - - 1,396 - - 1,396
---------- ---- -------- ------- ---------- ------ --------
Balance at May 31, 1993 9,686,000 59 16,604 3,691 32,000 (51) 20,303
Sale of common stock under
incentive stock option plan 23,000 - 10 - - - 10
Issuance of shares to officer 50,000 1 56 - - - 57
Income tax benefit from
stock compensation - - 19 - - - 19
Net income - - - 710 - - 710
---------- ---- -------- ------- ---------- ------ --------
Balance at May 31, 1994 9,759,000 60 16,689 4,401 32,000 (51) 21,099
Sale of common stock under:
- incentive stock option plan 164,000 1 14 - - 15
- non-qualified stock option plan 291,000 2 200 - - 202
Income tax benefit from
stock compensation - - 58 - - 58
Net income - - - 1,116 - 1,116
---------- ---- -------- ------- ---------- ------ --------
Balance at May 31, 1995 10,214,000 $ 63 $ 16,961 $ 5,517 32,000 $ (51) $ 22,490
========== ==== ======== ======= ========== ====== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 5
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,116 $ 710 $ 1,396
-------- -------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,860 6,613 12,998
Recovery of investment in direct financing leases 6,913 13,840 20,129
Cost of sales 4,813 14,634 14,774
Provision for losses 2,940 1,315 2,070
Deferred income taxes (2,630) (670) (200)
Margin on MBank sale (6,100) - -
Gain on sale of investment in Corporate Express, Inc. (671) - -
Sales-type lease margin (765) (1,062) (1,338)
Decrease in accounts receivable 1,062 2,131 4,311
Other 3,390 (1,709) (70)
-------- -------- --------
Total adjustments 13,812 35,092 52,674
-------- -------- --------
Net cash provided by operating activities 14,928 35,802 54,070
-------- -------- --------
Cash flows from investing activities:
Equipment purchased for leasing (17,000) (3,446) (19,518)
Net receipts from affiliated public income funds 1,783 2,395 3,164
Sale of investment in Corporate Express, Inc. 677 - -
-------- -------- --------
Net cash used in investing activities (14,540) (1,051) (16,354)
-------- -------- --------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 2,306 4,916 13,697
Principal payments on discounted lease rentals (9,219) (21,725) (34,126)
Deferred financing costs (594) - -
Proceeds from sales of common stock217 10 24
Net borrowings (payments) on recourse debt 5,753 (19,090) (21,127)
-------- -------- --------
Net cash used in financing activities (1,537) (35,889) (41,532)
-------- -------- --------
Net decrease in cash (1,149) (1,138) (3,816)
Cash at beginning of year 2,072 3,210 7,026
-------- -------- --------
Cash at end of year $ 923 $ 2,072 $ 3,210
======== ======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,535 $ 1,867 $ 3,631
Non-recourse interest paid 1,112 3,055 6,042
Income taxes paid 1,444 809 1,805
Income tax refunds received 923 1,623 70
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals associated with equipment sold to third-party investors 3,123 36,612 18,007
Assumption of discounted lease rentals in lease acquisitions 5,550 15,795 23,171
Increase in other receivables relating to equipment sale transactions 2,727 1,876 49
Cancellation of discounted lease rentals related to bankrupt lease 518 - -
Cancellation of option agreement:
Decrease in accounts payable and other liabilities 1,197 - -
Decrease in other receivables relating to equipment sale transactions 573 - -
MBank sale:
Increase in accounts receivable 10,800 - -
Increase in accounts payable 2,400 - -
Decrease in other assets 2,300 - -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 6
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capital
Associates, Inc. ("CAI") and its subsidiaries (collectively, the
"Company"). Intercompany accounts and transactions are eliminated in
consolidation.
The Company has investments in affiliated public income funds (the
"PIFs", consisting of both general partnership and subordinated limited
partnership interests) and other 50%-or-less owned entities. Such
investments are primarily accounted for using the equity method. The
parent company's assets consist solely of its investments in
subsidiaries and it has no liabilities separate from its subsidiaries.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting
for Income Taxes. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
EQUIPMENT HELD FOR SALE OR RE-LEASE
Equipment held for sale or re-lease, recorded at the lower of cost or
market value expected to be realized, consists of equipment previously
leased to end users which has been returned to the Company following
lease expiration.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is computed by dividing
net income by the weighted average number of shares of common stock and
common stock equivalents (consisting solely of common stock options)
outstanding during the period.
RECLASSIFICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOW - The principal portion of receipts
of direct financing leases and proceeds from sales of equipment have
been classified as "Cash flows from operating activities". Previously,
such amounts were reported as "Cash flows from investing activities".
F - 7
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
RECLASSIFICATIONS, continued
The effect of the reclassification on previously issued financial
statements is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year 1994 Fiscal Year 1993
-------------------------------- --------------------------------
As Previously As As Previously As
Reported Reclassified Reported Reclassified
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net cash provided by
operating activities $ 4,138 $ 35,802 $ 15,378 $ 54,070
Net cash provided by (used in)
investing activities 30,613 (1,051) 22,338 (16,354)
</TABLE>
EQUIPMENT LEASING AND SALES
Lease Accounting - Statement of Financial Accounting Standards No. 13
requires that a lessor account for each lease by either the direct
financing, sales-type or operating lease method. Direct financing and
sales-type leases are defined as those leases which transfer
substantially all of the benefits and risks of ownership of the
equipment to the lessee. The Company currently utilizes the direct
financing or the operating method for substantially all of the Company's
lease originations. The Company currently utilizes the sales-type and
operating lease methods for substantially all subsequent lease activity
for an item of equipment after the expiration of the initial lease term.
For all types of leases, the determination of profit considers the
estimated value of the equipment at lease termination, referred to as
the residual value. After the origination of a lease, the Company may
engage in financing of lease receivables on a non-recourse basis and/or
equipment sale transactions to reduce or recover its investment in the
equipment.
The Company's accounting methods and their financial reporting effects
are described below:
Lease Inception
---------------
DIRECT FINANCING LEASES ("DFLs") - The cost of equipment is recorded as
net investment in DFLs. Leasing revenue, which is recognized over the
term of the lease, consists of the excess of lease payments plus the
estimated residual value over the equipment's cost. Earned income is
recognized monthly to provide a constant yield and is recorded in
leasing revenue in the accompanying statements of income. Initial direct
costs ("IDC") are capitalized and amortized over the lease term in
proportion to the recognition of earned income. Residual values are
established at lease inception equal to the estimated value to be
received from the equipment following termination of the initial lease
(which in certain circumstances includes anticipated re-lease proceeds)
as determined by the Company. In estimating such values, the Company
considers all relevant information and circumstances regarding the
equipment and the lessee.
F - 8
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
EQUIPMENT LEASING AND SALES, continued
OPERATING LEASES ("OLs") - Leasing revenue consists principally of
monthly rentals. The cost of equipment is recorded as leased equipment
and is depreciated on a straight-line basis over the lease term to an
amount equal to the estimated residual value at the lease termination
date. Residual values are established at lease inception equal to the
estimated value to be received from the equipment following termination
of the initial lease (which in certain circumstances includes
anticipated re-lease proceeds) as determined by the Company. In
estimating such values, the Company considers all relevant information
and circumstances regarding the equipment and the lessee. IDC are
capitalized and amortized over the lease term in proportion to the
recognition of rental income. Depreciation expense and amortization of
IDC are recorded as leasing costs in the accompanying statements of
income. Because revenue, depreciation expense and the resultant profit
margin before interest expense are recorded on a straight-line basis,
and interest expense on discounted lease rentals is incurred on the
interest method, profit is skewed toward lower returns in the early
years of the term of an OL and higher returns in later years.
Transactions Subsequent to Lease Inception
------------------------------------------
NON-RECOURSE DISCOUNTING OF RENTALS - The Company may assign the rentals
from leases to financial institutions at fixed interest rates on a
non-recourse basis. In return for such future lease payments, the
Company receives the discounted value of the payments in cash. In the
event of default by a lessee, the financial institution has a first lien
on the underlying leased equipment, with no further recourse against the
Company. Cash proceeds from such financings are recorded on the balance
sheet as discounted lease rentals. As lessees make payments to financial
institutions, leasing revenue and interest expense are recorded.
SALES TO PRIVATE INVESTORS OF EQUIPMENT UNDER LEASE - The Company sells
title to leased equipment that in some cases is subject to existing
non-recourse debt in equipment sale transactions with third-party
investors. In such transactions, the investors obtain ownership of the
equipment as well as rights to equipment rentals and tax benefits. Upon
sale, the Company records equipment sales revenue equal to the sales
price of the equipment which may include a residual interest retained by
the Company (recorded as an asset at present value using an appropriate
interest rate) and records equipment sales cost equal to the carrying
value of the related assets (including remaining unamortized IDC).
Income is recorded on residual interests retained by the Company after
cumulative cash collections on such residuals exceed the recorded asset
amount. Fees for remarketing equipment associated with such transactions
are reflected in operations as realized.
Other accounts arising from private equity sales include:
DISCOUNTED LEASE RENTALS, etc. - Pursuant to FASB Technical Bulletin
No. 86-2, although private investors and PIFs may acquire the
equipment sold to them by the Company subject to the associated
non-recourse debt, the debt is not removed from the balance sheet
unless such debt has been legally assumed by the third-party
investors. If not legally assumed, a corresponding asset ("discounted
lease rentals assigned to lenders arising from equipment sale
transactions") is recorded representing the present value of the end
user rentals receivable relating t o such transactions. Interest
income is recorded on the discounted lease rentals and an equal
amount of interest expense on the related liability is recorded in
the accompanying statements of income.
F - 9
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
EQUIPMENT LEASING AND SALES, continued
SALE-LEASEBACK TRANSACTIONS - In sale-leaseback transactions, the
Company leases equipment, obtains non-recourse financing on the
equipment, sells the equipment to a third party and leases the
equipment back from the third party. Income in a sale-leaseback
transaction is deferred and principally amortized over the leaseback
term in proportion to the reduction in the leased asset. For
financial reporting purposes, a note receivable from the third-party,
a capital lease obligation equal to the present value of the
leaseback payments and a deferred gain are recorded at the time of the
transaction. Amortization of the deferred gain is generally
recorded as a reduction of leasing costs and expenses in the
accompanying statements of income unless the estimated residual value
of the underlying equipment has experienced an other than temporary
decline in value, in which case amortization ceases. The Company has
not entered into a sale/leaseback transaction since fiscal year 1991.
INTEREST INCOME - Interest income, as shown in the accompanying
statements of income, includes interest on discounted lease rentals
and interest on notes receivable arising from sale-leaseback
transactions.
SALES TO PIFS - Upon the sale of equipment to its PIFs, the Company
records equipment sales revenue equal to the sales price of the
equipment (including any acquisition fees earned) and costs of sales
equal to the carrying value of the related assets (including
remaining unamortized IDC). Fees for services the Company performs
for the PIFs are recognized at the time the services are performed.
Transactions Subsequent to Initial Lease Termination
----------------------------------------------------
After the initial term of equipment under lease expires, the equipment
is either sold or released. When the equipment is sold, the remaining
net book value of equipment sold is removed and gain or loss recorded.
When the equipment is released, the Company utilizes the sales-type
method (described below) or the OL method (described above).
Sales-type Leases
-----------------
The excess of the present value of future rentals and the present value
of the estimated residual value (collectively, "the net investment")
over the carrying value of the equipment subject to the sales-type lease
is reflected in operations at the inception of the lease. Thereafter,
the net investment is accounted for as a DFL, as described above.
ALLOWANCE FOR LOSSES
An allowance for losses is maintained at levels determined by management
to adequately provide for any other than temporary declines in asset
values. In determining losses, economic conditions, the activity in used
equipment markets, the effect of actions by equipment manufacturers, the
financial condition of lessees, the expected courses of action by
lessees with regard to leased equipment at termination of the initial
lease term, and other factors which management believes are relevant,
are considered. Assets are reviewed quarterly to determine the adequacy
of the allowance for losses.
F - 10
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
ALLOWANCE FOR LOSSES, continued
The Company evaluates the realizability of the carrying value of its
investment in its PIFs based upon all estimated future cash flows from
the PIFs. As a result of such analyses, certain distributions have been
accounted for as a recovery of cost instead of income.
2. RESIDUAL VALUES AND OTHER RECEIVABLES ARISING FROM EQUIPMENT UNDER LEASE
SOLD TO PRIVATE INVESTORS
As of May 31, 1995 and 1994, the equipment types for which the Company
recorded the present value of the estimated residual values and other
receivables arising from private sales of equipment under lease were (in
thousands):
Description 1995 1994
----------- ------ ------
Furniture and fixtures $1,284 $1,118
Mining, manufacturing and material handling 786 725
Aircraft 396 518
Other miscellaneous equipment 404 812
IBM, primarily peripheral computer equipment - 461
------ ------
Total equipment residuals 2,870 3,634
Notes receivable due directly from investors 2,678* 1,289
End user rentals under existing leases
assigned to the Company by investors 60 175
------ ------
$5,608 $5,098
====== ======
*Balance was collected during June 1995
Residual values and other receivables arising from equipment under lease
sold to private investors were net of an allowance for doubtful
accounts of $1,654,000 and $6,934,000 as of May 31, 1995 and 1994,
respectively.
3. NET INVESTMENT IN DFLS
The components of the Company's net investment in DFLs as of May 31, 1995
and 1994 were (in thousands):
1995 1994
------ ------
Minimum lease payments receivable $ 21,486 $ 18,214
Estimated residual values 1,161 2,256
IDC 159 136
Less unearned income (3,487) (2,500)
-------- --------
$ 19,319 $ 18,106
======== ========
F - 11
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LEASED EQUIPMENT, net
The Company's investment in equipment under OLs, by major classes, as of
May 31, 1995 and 1994 were (in thousands):
1995 1994
-------- --------
Material handling $ 7,151 $ 2,074
Other technology and communication equipment 5,536 4,168
Other 4,274 5,361
Aircraft 4,125 9,040
Mining equipment 3,989 402
IBM processors and peripheral computer equipment 3,329 6,973
Furniture and fixtures 2,460 447
IDC 239 103
-------- --------
31,103 28,568
Less accumulated depreciation (8,700) (11,212)
Less allowance for losses (2,416) (1,741)
-------- --------
$ 19,987 $ 15,615
======== =========
Depreciation on leased equipment was $3,771,000, $5,209,000, and
$11,425,000 for fiscal years 1995, 1994 and 1993, respectively.
5. FUTURE MINIMUM LEASE PAYMENTS
Future minimum lease payments receivable from noncancelable leases on
equipment owned by the Company as of May 31, 1995, were as follows (in
thousands):
Years Ending May 31 DFLs OLs
---- ---
1996 $ 9,607 $ 7,099
1997 3,802 5,619
1998 2,035 2,847
1999 1,288 1,680
2000 4,754 1,017
Thereafter 0 708
------- -------
$21,486 $18,970
======= =======
6. NOTES RECEIVABLE AND OBLIGATIONS UNDER CAPITAL LEASES ARISING FROM SALE-
LEASEBACK TRANSACTIONS
In sale-leaseback transactions, the leaseback payments are generally equal
in amount to the principal and interest payments due under the note
receivable and, accordingly, the notes receivable and obligations under
capital leases arising from sale-leaseback transactions do not represent
future net cash inflows or outflows of the Company.
F - 12
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES RECEIVABLE AND OBLIGATIONS UNDER CAPITAL LEASES ARISING FROM SALE-
LEASEBACK TRANSACTIONS, continued
Aggregate maturities of notes receivable and obligations under capital
leases arising from sale-leaseback transactions are as follows (in
thousands):
Notes
Years Ending May 31 Receivable Obligations
---------- -----------
1996 $ 12,628 $ 12,603
1997 7,666 7,673
1998 743 748
--------- ---------
$ 21,037 $ 21,024
======== ========
Notes receivable and obligations arising from sale-leaseback transactions
bear interest at rates ranging from 10% to 12%.
7. CONCENTRATION OF CREDIT RISK
The Company leases various types of equipment to companies in diverse
industries throughout the United States. To minimize credit risk, the
Company generally leases equipment to (i) companies that have a credit
rating of not less than Baa as determined by Moody's Investor Services,
Inc., or comparable credit ratings as determined by other recognized
credit rating services, or (ii) companies, which although not rated by a
recognized credit rating service or rated below Baa, are believed by the
Company to be sufficiently creditworthy to satisfy the financial
obligations under the lease.
At May 31, 1995, equipment under OLs and DFLs owned by the Company was
leased to companies with the following credit ratings:
Percentage of the
net book value of
Credit Rating equipment under lease
------------- ---------------------
Baa (or equivalent) or above 79%
Below Baa (or equivalent) 18
In bankruptcy 3
8. DISCOUNTED LEASE RENTALS
Discounted lease rentals outstanding at May 31, 1995 bear interest at rates
between 6% to 12%. Aggregate maturities of such non-recourse obligations
are (in thousands):
Years Ending May 31:
1996 $ 37,485
1997 26,147
1998 10,516
1999 2,377
2000 667
--------
$ 77,192
========
F - 13
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DEBT FACILITIES
The Company closed a new recourse debt facility (the "Debt Facility") on
December 2, 1994. The lender group currently consists of Norwest Bank
Colorado, National Association (the "Agent"), Norwest Equipment Finance,
Inc. (the "Collateral Agent"), First Interstate Bank of Denver, N.A., The
Daiwa Bank, Ltd. and The First National Bank of Boston (the "Lenders").
The Borrower under the Debt Facility is Capital Associates International,
Inc., a wholly-owned subsidiary of the Company ("CAII").
The Debt Facility consists of three components, a term loan facility (the
"Term Loan"), a revolving working capital facility (the "Working Capital
Facility") and a revolving warehousing facility (the "Warehouse
Facility"). The principal terms of the three facilities are as follows
(in thousands):
<TABLE>
<CAPTION>
Working Capital
Term Loan Facility Warehouse Facility
----------------- ----------------- ------------------
<S> <C> <C> <C>
Maturity Date November 30, 1997 November 30, 1995 November 30, 1995
Maximum amount $ 13,000 $ 5,000 lesser of $ 32,000
or borrowing base
Borrowings at May 31, 1995 10,833 1,531 12,156
-------- -------- --------
Potential availability at May 31, 1995 N/A $ 3,469 $ 19,844
======== ======== ========
Interest rate at May 31, 1995 Prime* plus .75%** Prime* plus .75% Prime* plus .50%
<FN>
* Agent's Prime at May 31, 1995 was 9%.
</FN>
<FN>
** As required by the Debt Facility, CAII has acquired, at its own cost
(of $59,500), a 36-month interest rate cap contract at 10.5% with
respect to 50% of the principal balance of the Term Loan.
</FN>
</TABLE>
Principal reductions under the Term Loan are scheduled to occur as follows
(in thousands):
Fiscal year ending May 31, 1996 $ 4,333
Fiscal year ending May 31, 1997 4,333
Fiscal year 1998 through November 30, 1997 2,167
--------
$ 10,833
========
The Debt Facility (1) is collateralized by all of CAII's assets and (2) is
senior, in order of priority, to all of CAII's indebtedness, subject to
certain limited exceptions. The Company and certain of the Company's and
CAII's subsidiaries have pledged all of their assets, with limited
exceptions, to collateralize their guarantees. The Debt Facility restricts
CAII's ability to pay dividends or loan or advance funds to the Company.
As of May 31, 1995, there were no defaults existing under the Debt
Facility.
F - 14
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTIES
PIFs:
The Company sponsors or co-sponsors six PIFs that purchase equipment under
lease from the Company. The Company acts as either a general partner or
co-general partner of each PIF for which it receives general partner
distributions as well as management fees. As of May 31, 1995,
approximately $0.4 million was receivable from the PIFs for such fees. In
addition, the Company is required to make subordinated limited partnership
investments in the PIFs. The Company has a maximum remaining obligation to
make further cash contributions of approximately $0.3 million for all of
the existing PIFs (which relates solely to CPYF III). Amounts related to
the PIFs are as follows (in thousands):
1995 1994 1993
------ ------ ------
Equipment sales margin $ 1,047 $ 1,774 $ 1,773
Fees and distributions 2,908 3,293 2,925
Investment contributions in subordinated
limited partnership interests 230 200 130
OTHER RELATED PARTY TRANSACTIONS:
A director and principal shareholder of the Company is a shareholder and
executive officer of Corporate Express, Inc. ("CE"). During fiscal year
1995, the Company sold all of its investment in CE resulting in a gain of
$671,000, which is included in "Other Revenue" in the accompanying
Consolidated Statements of Income.
11. INCOME TAXES
The components of the income tax expense (benefit) charged to continuing
operations were (in thousands):
1995 1994 1993
------ ------ ------
Current:
Federal $ 1,990 $ 1,000 $ 730
State and local 1,000 143 400
------- ------- ------
2,990 1,143 1,130
------- ------- ------
Deferred:
Federal (1,800) (400) (150)
State and local (830) (270) (50)
------- ------- ------
(2,630) (670) (200)
------- ------- ------
Total tax provision $ 360 $ 473 $ 930
======= ======= ======
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34% to pre-tax income from continuing
operations as a result of the following:
1995 1994 1993
------ ------ ------
Computed "expected" tax expense $ 502 $ 402 $ 791
State tax provisions, net of
federal benefits 88 71 139
Reduction in valuation allowance
for deferred income tax assets (230) - -
------ ------ ------
$ 360 $ 473 $ 930
====== ====== ======
F - 15
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES, continued
Income taxes are provided on income from continuing operations at the
appropriate federal and state statutory rates applicable to such earnings.
The effective tax rate for the fiscal years ended May 31, 1995 and 1994
was 40%.
Components of income tax expense attributable to net income before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current:
Taxes on net income before carryforwards $ 9,390 $ 8,593 $ 5,190
Benefit of loss carryforwards utilized (5,800) (7,050) (4,060)
Benefit of investment tax credit ("ITC")
carryforward utilized (600) (400) -
------- ------- --------
2,990 1,143 1,130
------- ------- --------
Deferred:
Tax effect of net change in temporary differences (7,200) (7,850) (4,260)
Loss carryforwards utilized 5,800 7,050 4,060
ITC carryforward utilized 600 400 -
Alternative Minimum Tax ("AMT"), net of
utilization of investment tax credit carryforward (1,600) (1,100) -
Increase (decrease) in valuation allowance for
deferred income tax assets (230) 830 -
------- ------- --------
(2,630) (670) (200)
------- ------- --------
Provision for income taxes $ 360 $ 473 $ 930
======= ======= ========
</TABLE>
Significant components of the Company's deferred tax liabilities and
assets as of May 31, 1995 and 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax liabilities:
Direct finance leases accounted for as operating leases for income tax
purposes, and equipment depreciation for tax purposes in excess of
financial reporting depreciation $ 2,400 $ 8,800
Residual values and other receivables arising from equipment under
lease sold to private investors recognized for financial reporting
purposes, but not for tax reporting purposes 1,000 1,400
-------- --------
Total deferred income tax liabilities 3,400 10,200
-------- --------
Deferred income tax assets:
Receivables realized for financial reporting purposes, but not for
income tax reporting purposes - 400
Other assets and liabilities, net 900 100
Net operating loss carryforwards - 5,500
Capital loss carryforwards - 300
Investment tax credit carryforwards 7,400 8,000
AMT credit carryforwards 3,300 1,700
-------- --------
Total deferred income tax assets 11,600 16,000
Valuation allowance for deferred income tax assets (6,400) (6,630)
-------- --------
Net deferred income tax assets 5,200 9,370
-------- --------
Net deferred income tax asset (liability) $ 1,800 $ (830)
======== ========
</TABLE>
F - 16
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES, continued
At May 31, 1995, the Company had an investment tax credit carryforward of
$7.4 million, which expires from 1996 through 2001, and AMT credits of
$3.3 million. Under present United States tax law, AMT credits may be
carried forward indefinitely and may be utilized to reduce regular tax
liability to an amount equal to AMT liability.
The Company has established a valuation allowance for deferred taxes due
to the uncertainty that the full amount of the ITC carryforward will be
utilized prior to expiration. The reduction in the valuation allowance
recorded in fiscal 1995 of $230,000 represents the utilization of an ITC
carryforward for which a valuation allowance had previously been provided.
12. COMMON AND PREFERRED STOCK
The Company has authority to issue 2,500,000 shares of preferred stock at
$0.008 par value. At May 31, 1995, no shares of preferred stock had been
issued.
Two principal stockholders, who together own approximately 32% of the
outstanding shares of the Company's stock are parties to an agreement with
the Company pursuant to which each of them has granted the Company and,
secondarily, the other, a right of first refusal under certain
circumstances to purchase their shares of common stock at current market
value. Upon the death or disability of one of them, the Company is
obligated to purchase his shares at an amount equal to the greater of $1
million or the amount of insurance proceeds to be received by the Company
in the event of death. The Company is the owner of life insurance policies
providing approximately $3 million of coverage with respect to each of the
principal stockholders.
13. STOCK OPTIONS
The Company has a qualified incentive stock option plan whereby stock
options may be granted to employees to purchase shares of the Company's
common stock at prices equal to 100% of the estimated fair value at the
date of grant. The Company has a non-qualified plan covering all directors
except the CEO.
Common stock received through the exercise of qualified incentive stock
options which are sold by the optionee within two years of grant or one
year of exercise result in a tax deduction for the Company equivalent to
the taxable gain recognized by the optionee. For financial reporting
purposes, the tax effect of this deduction is accounted for as additional
paid-in capital. Such optionee sales resulted in tax benefits to the
Company of $58,000 and $19,000 in fiscal years 1995 and 1994,
respectively.
F - 17
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS, continued
The following table summarizes the activity in this plan for the periods
indicated:
Options Exercise Price Options
Outstanding Per Share Exercisable
----------- -------------- -----------
Outstanding at June 1, 1992 2,693,000 0.0625 - 2.7500 1,112,000
==========
Exercised (56,000) 0.3400 - 0.5625
Granted 160,000 0.4065 - 1.1250
Canceled (446,000) 0.3400 - 2.7500
---------
Outstanding at May 31, 1993 2,351,000 0.0625 - 1.1250 1,336,000
==========
Exercised (23,000) 0.3400 - 0.5625
Granted 55,000 0.8125 - 1.2188
Canceled (119,000) 0.3400 - 1.1250
---------
Outstanding at May 31, 1994 2,264,000 0.0625 - 1.2188 1,682,000
==========
Exercised (454,000) 0.0625 - 1.0625
Granted 491,000 0.6250 - 0.6600
Canceled (208,000) 0.3400 - 1.1875
---------
Outstanding at May 31, 1995 2,093,000 0.3400 - 1.2188 1,670,000
========= ==========
14. QUARTERLY FINANCIAL DATA (unaudited)
Summarized quarterly financial data for the years ended May 31, 1995 and
1994 are (in thousands, except per share data):
Total Net Income Per Common and
Fiscal year 1995: Revenue Income Common Equivalent Share
---------------- ------- ------ -----------------------
First quarter $ 18,769 $ 163 $ .02
Second quarter 24,396 71 .01
Third quarter 29,471 54 .01
Fourth quarter 32,308 828 .08
Total Net Income Per Common and
Fiscal year 1994: Revenue Income Common Equivalent Share
---------------- ------- ------ -----------------------
First quarter $ 52,342 $ 281 $ .03
Second quarter 39,900 174 .02
Third quarter 22,297 187 .02
Fourth quarter 40,426 68 .01
15. LEGAL PROCEEDINGS
MBank Litigation - Capital Associates International, Inc. ("CAII") had
been a third party defendant in certain litigation involving Bank One
Texa s, N.A. ("Bank One"), The Prudential Insurance Company
("Prudential"), Texas Commerce Bank, N.A. ("TCB") and the Federal deposit
Insurance Corporation ("FDIC") since January 1992 (the "MBank
Litigation"). The MBank Litigation involved multiple disputes among the
parties concerning the ownership of certain equipment (the "Equipment")
that the Company leased (the "Lease") to MBank Dallas, N.A. ("MBank"), in
1987 and the rights to certain cash collateral for MBank's obligations
under that Lease (the "Cash Collateral") following MBank's default under
the Lease in 1989.
F - 18
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. LEGAL PROCEEDINGS, continued
MBANK LITIGATION, continued
On March 16, 1995, the United States District Court for the Northern
District of Texas, Dallas Division (the "District Court") granted the
motions for partial summary judgment of CAII, Prudential and TCB and
denied the motion for partial summary judgment of the FDIC (the "District
Court's Opinion").
On August 15, 1995, the FDIC (in its corporate capacity and in its
capacity as receiver for MBank), Prudential, TCB and CAII agreed to settle
their claims on the terms set forth in that Settlement Agreement, dated
as of the same date and filed with the District Court a Joint Motion
Regarding Settlement of Claims Among FDIC, CAI, TCB and Prudential (the
"Joint Motion"), seeking to have the District Court (a) ratify and approve
the dismissal of the arties claims against each other, (b) accept tender
of the bill of sale for the equipment and (c) approve distribution of the
remaining Cash Collateral as follows:
a. $7.0 million to the FDIC; and
b. $2.0 million to TCB and Prudential, jointly, to be divided between TCB
and Prudential as they agree; and
c. the remaining proceeds (in the approximate amount of $10.8 million) to
CAII (CAII agreed to pay approximately $2.4 million of the $10.8
million to Bank One, in repayment of the monies received from Bank One
in 1992, with interest thereon at the rate of 18% per annum, as
required by that certain Purchase Agreement, by and among CAII, the
Company and Bank One (the "Bank One Purchase Agreement"));
On August 16, 1995, the District Court approved the Joint Motion. On
August 23, 1995, TCB distributed approximately $10.8 million to CAII.
Bank One is not a party to the Settlement Agreement or the Joint Motion.
In August 1995, the District Court approved Bank One's request to file
its first amended complaint in the MBank Litigation ("Bank One's Amended
Complaint"). Bank One's Amended Complaint seeks, with respect to CAII,
(1) a declaratory judgment that CAII is obligated to convey title to the
Equipment to Bank One and (2) a permanent injunction prohibiting CAII
from transferring title to the equipment to the FDIC ("Bank One's Amended
Claims"). Bank One's Amended Complaint does not assert any money damage
claims against CAII. CAII delivered a confirmatory bill of sale for the
Equipment to the District Court on August 15, 1995. The Company has filed
a motion with the District Court asking it to dismiss Bank One's Amended
Claims against CAII. CAII intends to defend vigorously Bank One's Amended
Claims. Management believes, based upon the advice of counsel, that the
ultimate outcome with respect to Bank One's Amended Claims will not have
a material adverse effect on the Company's financial position.
The MBank sale proceeds of approximately $8.4 million and the MBank
equipment carrying value of approximately $2.3 million were included in
"Other equipment sales" and "Cost of equipment sales", respectively, in
the accompanying Consolidated Statements of Income.
16. COMMITMENTS
The Company leases office space under long-term non-cancelable operating
leases. The leases contain renewal options and provide for annual
escalation for utilities, taxes and service costs. Minimum future rental
payments required by such leases are as follows (in thousands):
F - 19
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS, continued
Year Ending May 31,
1996 $ 400
1997 353
1998 353
1999 340
2000 321
-------
$ 1,767
=======
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statements of Financial Standards
No. 107 ("SFAS No. 107"), Disclosures about Fair Value of Financial
Instruments. SFAS No. 107 specifically excludes certain items from its
disclosure requirements such as the Company's investment in leased
assets. Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the net assets of the
Company.
The carrying amounts at May 31, 1995 for cash, accounts receivable,
residual values and other receivables arising from equipment under lease
sold to private investors, the Working Capital Facility, the Warehouse
Facility, accounts payable and other liabilities and the Term Loan
approximate their fair values due to the short maturity of these
instruments, or because the related interest rates approximate current
market rates.
As of May 31, 1995, discounted lease rentals and discounted lease rentals
assigned to lenders arising from equipment sale transactions of
$77,192,000 and $65,283,000, respectively, have fair values of
$76,551,000 and $64,741,000, respectively. The fair values were estimated
utilizing market rates of comparable debt having similar maturities and
credit quality as of May 31, 1995.
F - 20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Directors
Capital Associates, Inc.:
Under date of July 14, 1995, except for note 15, which is as of August 23, 1995,
we reported on the consolidated balance sheets of Capital Associates, Inc. and
subsidiaries as of May 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three year period ended May 3, 1995, as contained in the
Company's annual report on Form 10-K for the year 1995. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in the accompanying
index. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK
/s/KPMG Peat Marwick
------------------------------
Denver, Colorado
July, 14, 1995
F - 21
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
for the years ended May 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- ---------- --------------------------- ------------- ---------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions(1) Period
- ----------------------------------- --------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1995:
- -----------------------
Allowance for doubtful accounts -
- residual values and other
receivables arising from
equipment under lease sold
to private investors $ 6,934 $ 532 $ - $ (5,812) $ 1,654
- accounts receivable 343 - - (35) 308
Allowance for losses
- leased equipment 1,741 2,408 - (1,733) 2,416
-------- ------- ------- -------- --------
$ 9,018 $ 2,940 $ - $ (7,580) $ 4,378
======== ======= ======= ======== ========
Year ended May 31, 1994:
- -----------------------
Allowance for doubtful accounts -
- residual values and other
receivables arising from
equipment under lease sold
to private investors $ 8,719 $ 82 $ - $ (1,867) $ 6,934
- accounts receivable 593 - - (250) 343
Allowance for losses
- investment in affiliated
public income funds - 130 - (130) -
- leased equipment 4,153 1,103 - (3,515) 1,741
-------- ------- ------- -------- --------
$ 13,465 $ 1,315 $ - $ (5,762) $ 9,018
======== ======= ======= ======== ========
Year ended May 31, 1993:
- -----------------------
Allowance for doubtful accounts -
- residual values and other
receivables arising from
equipment under lease sold
to private investors $ 10,826 $ - $ 13 $ (2,120) $ 8,719
- accounts receivable 1,448 - - (855) 593
- net investment in direct
financing leases 2,715 - - (2,715) -
Allowance for losses
- leased equipment 5,846 2,070 - (3,763) 4,153
-------- ------- ------- -------- --------
$ 20,835 $ 2,070 $ 13 $ (9,453) $ 13,465
======== ======= ======= ======== ========
<FN>
(1) Principally charge-offs of assets against the established allowances.
</FN>
<FN>
See accompanying independent auditors' report.
</FN>
</TABLE>
F - 22
<PAGE>
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Year Ended May 31,
-----------------------------------
1995 1994 1993
-------- -------- --------
Shares outstanding at
beginning of period 9,727,000 9,654,000 8,948,000
Shares issued during the
period (weighted average) 377,000 58,000 642,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 1,905,000 2,251,000 1,708,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (1,360,000) 1,062,000) (992,000)
----------- ---------- ----------
Total shares, primary 10,649,000 10,901,000 10,306,000
=========== ========== ==========
Net Income $ 1,116,000 $ 710,000 1,396,000
=========== ========== ==========
Income per common and common
equivalent share, primary .10 $ .07 $ .14
=========== ========== ==========
F - 23
<PAGE>
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Year Ended May 31,
1995 1994 1993
-------- -------- --------
Shares outstanding at
beginning of period 9,727,000 9,654,000 8,948,000
Shares issued during the
period 377,000 58,000 642,000
(weighted average)
Dilutive shares contingently issuable
upon exercise of options 1,905,000 2,251,000 1,708,000
(weighted average)
Less shares assumed to have been
purchased for treasury with
assumed proceeds
from exercise of stock options (1,337,000) (1,062,000) (410,000)
(weighted average) ----------- ---------- ---------
Total shares, fully diluted 10,672,000 10,901,000 10,888,000
=========== ========== ==========
Net Income $ 1,116,000 $ 710,000 $1,396,000
=========== ========== ==========
Income per common and common
equivalent share, fully diluted $ .10 $ .07 $ .13
=========== ========== ==========
F - 24
LIST OF SUBSIDIARIES
0F
CAPITAL ASSOCIATES, INC.
Name Place of Incorporation
- ---- ----------------------
Capital Associates International, Inc. Colorado
CAI Equipment Leasing I Corporation Colorado
CAI Equipment Leasing II Corporation Colorado
CAI Equipment Leasing III Corporation Colorado
CAI Equipment Leasng IV Corporation Colorado
CAI (Japan), Incorporated Japan
CAI Leasing Canada, Limited Alberta, Canada
CAI Partners Management Company Colorado
CAI Securities Corporation California
Capital Equipment Corporation Colorado
Whitewood Credit Corporation Colorado
CAI Lease Securitization-I Corporation Delaware
Exhibit 23
Consent of Independent Auditors
-------------------------------
The Board of Directors
Capital Associates, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 33-59570 and No. 33 68514) of Capital Associates, Inc. of our report
dated July 14, 1995, except for Note 15, which is as of August 23, 1995,
relating to the consolidated balance sheets of Capital Associates, Inc. and
subsidiaries as of May 31, 1995 and 1994, and related consolidated statements of
income, changes in shareholders' equity, and cash flows and related schedule
for the three years then ended, which reports appear in the May 31, 1995 annual
report on Form 10-K of Capital Associates, Inc.
KPMG Peat Marwick LLP
/s/KPMG Peat Marwick LLP
------------------------
Denver, Colorado
July 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> May-31-1995
<PERIOD-END> May-31-1995
<CASH> 923
<SECURITIES> 0
<RECEIVABLES> 563
<ALLOWANCES> 308
<INVENTORY> 66
<CURRENT-ASSETS> 0
<PP&E> 19,987
<DEPRECIATION> 0
<TOTAL-ASSETS> 158,672
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 63
0
0
<OTHER-SE> 22,427
<TOTAL-LIABILITY-AND-EQUITY> 136,182
<SALES> 81,370
<TOTAL-REVENUES> 104,944
<CGS> 70,866
<TOTAL-COSTS> 74,759
<OTHER-EXPENSES> 11,603
<LOSS-PROVISION> 2,940
<INTEREST-EXPENSE> 14,166
<INCOME-PRETAX> 1,476
<INCOME-TAX> 360
<INCOME-CONTINUING> 1,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,116
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
