SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 29, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1055327
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7175 WEST JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's $.008 par value common
stock at April 5, 1996, was 4,988,723.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - February 29, 1996
and May 31, 1995 3
Consolidated Statements of Income - Three and Nine Months
Ended February 29, 1996 and February 28, 1995 4
Consolidated Statements of Cash Flows - Nine
Months Ended February 29, 1996 and February 28, 1995 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Exhibit Index 22
Signature 24
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
February 29, May 31,
1996 1995
------------ -------
Cash and cash equivalents $ 5,548 $ 923
Receivable from affiliated limited partnerships 766 741
Accounts receivable, net of allowance for
doubtful accounts of $44 and $48, respectively 300 106
MBank receivable - 10,800
Equipment held for sale or re-lease 223 66
Residual values and other receivables arising from
equipment under lease sold to private investors 3,603 5,608
Net investment in direct finance leases 18,858 19,319
Leased equipment, net 31,82 19,987
Investments in affiliated limited partnerships 9,103 10,316
Other 3,118 2,970
Deferred income taxes 1,800 1,800
Notes receivable arising from sale-leaseback
transactions 11,674 21,037
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 32,331 65,283
--------- ---------
$ 119,153 $ 158,956
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ 748 $ 1,531
Warehouse Facility 12,106 12,156
Accounts payable and other liabilities 17,839 13,730
Term Loan 7,583 10,833
Obligations under capital leases arising from
sale-leaseback transactions 11,684 21,024
Discounted lease rentals 46,678 77,192
--------- ---------
96,638 136,466
--------- ---------
Stockholders' equity:
Common stock 32 63
Additional paid-in capital 17,011 16,961
Retained earnings 5,770 5,517
Treasury stock (298) (51)
--------- ---------
Total stockholders' equity 22,515 22,490
--------- ---------
$ 119,153 $ 158,956
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales to affiliated
limited partnerships $ 9,580 $ 14,698 $ 39,145 $ 30,936
Other equipment sales 44,218 9,071 69,284 23,184
Leasing 2,692 1,867 7,476 5,590
Interest 1,630 2,671 5,510 8,996
Other 969 1,164 2,601 3,930
----------- ---------- ---------- ----------
Total revenue 59,089 29,471 124,016 72,636
----------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 53,033 22,372 105,481 50,407
Leasing 1,409 965 4,033 2,713
Operating and other expenses 1,997 2,275 5,806 7,518
Provision for losses 25 425 75 650
Termination of Stockholders'
Agreement (Note 3) - - 325 -
Interest:
Non-recourse debt 1,905 2,927 6,210 9,903
Recourse debt 493 417 1,664 966
----------- ---------- ---------- ----------
Total costs and expenses 58,862 29,381 123,594 72,157
----------- ---------- ---------- ----------
Net income before income taxes 227 90 422 479
Income tax expense 91 36 169 191
----------- ---------- ---------- ----------
Net income $ 136 $ 54 $ 253 $ 288
=========== ========== ========== ==========
Earnings per common and dilutive
common equivalent share $ 0.03 $ 0.01 $ 0.05 $ 0.05
=========== ========== ========== ==========
Weighted average number of common
and dilutive common equivalent
shares outstanding used in
computing earnings per share 5,297,000 5,330,000 5,315,000 5,416,000
=========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 26,619 $ 13,718
-------- ---------
Cash flows from investing activities:
Equipment purchased for leasing (20,877) (12,627)
Investment in leased office facility and capital expenditures (163) (40)
Net receipts from affiliated public income funds ("PIFs") 1,037 1,595
Sale of a portion of the investment in Corporate Express, Inc. - 677
-------- ---------
Net cash used for investing activities (20,003) (10,395)
-------- ---------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 6,675 1,215
Principal payments on discounted lease rentals (4,237) (6,691)
Deferred financing costs (118) (471)
Proceeds from sales of common stock 19 221
Repurchases of common stock (247) -
Net borrowings (payments) on recourse debt (4,083) 2,286
-------- ---------
Net cash used for financing activities (1,991) (3,440)
-------- ---------
Net increase (decrease) in cash and cash equivalents 4,625 (117)
Cash and cash equivalents at beginning of period 923 2,072
-------- ---------
Cash and cash equivalents at end of period $ 5,548 $ 1,955
======== =========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,556 $ 937
Non-recourse interest paid 702 876
Income taxes paid 1,598 1,254
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from
equipment sales transactions - 3,123
Assumption of discounted lease rentals in lease acquisitions - 5,550
Increase in residual values and other receivables relating to
equipment sale transactions 897 609
Cancellation of discounted lease rentals related to bankrupt lessee - 518
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. For
further information, please refer to the financial statements of Capital
Associates, Inc. (the "Company"), and the related notes, included within
the Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1995 (the "1995 Form 10-K"), previously filed with the Securities and
Exchange Commission.
The balance sheet at May 31, 1995 has been derived from the audited
financial statements included in the Company's 1995 Form 10-K.
Certain reclassifications have been made to prior periods' financial
statements to conform to the current periods' presentation.
2. MBank Proceeds
--------------
On August 23, 1995, the Company received $10.8 million in settlement of its
claims in connection with the MBank Litigation (which is discussed in
detail in Footnote 15 to Notes to Consolidated Financial Statements to the
1995 Form 10-K). In accordance with the terms of the settlement, on August
28, 1995, the Company delivered $2.2 million to Bank One Texas, N.A. ("Bank
One"), in repayment of the monies received from Bank One in 1992 (along
with interest thereon), as required by that certain Purchase Agreement,
dated as of December 30, 1991, by and among the Company and Bank One. On
September 8, 1995, Bank One, which is pursuing its lawsuit to obtain title
to the MBank Equipment (see Part II, Item 1. LEGAL PROCEEDINGS, (a) MBANK
LITIGATION), rejected the tender and returned the $2.2 million to the
Company (while purporting to reserve all rights to make a claim to such
funds in the future). On September 12, 1995, the Company deposited the $2.2
million returned by Bank One in an interest-bearing escrow account with
Norwest Bank, N.A., pending resolution of Bank One's ongoing claims to the
MBank Equipment. The Company used the balance of the settlement proceeds,
i.e., $8.6 million, to paydown its short-term, recourse Working Capital
Facility and Warehouse Facility.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Termination of Stockholders' Agreement
--------------------------------------
Effective as of August 31, 1995, Mr. Durliat, a stockholder of the Company,
Mr. Jacobs, a stockholder and director of the Company, and the Company,
constituting all of the remaining parties to the Stockholders' Agreement
(see Exhibits 10.5(a), 10.5(b) and 10.42 referenced in the 1995 Form 10-K)
agreed to terminate the Stockholders' Agreement. In connection therewith,
the Company notified Messrs. Durliat and Jacobs that it intended to cease
making premium payments for the key-man life insurance maintained by the
Company to fund its obligation to repurchase Mr. Durliat's and Mr. Jacobs'
Company common stock upon the occurrence of certain events and, in
accordance with the terms of the Stockholders' Agreement, Mr. Durliat and
Mr. Jacobs exercised their options to acquire such insurance policies for
fifty percent (50%) of their net cash surrender values. In November 1995,
Mr. Durliat paid to the Company $218,933.41 for the insurance policies
maintained by the Company on Mr. Durliat's life, and Mr. Jacobs paid to the
Company $128,164.00 for the insurance policies maintained by the Company on
Mr. Jacob's life. During fiscal year 1995, the Company paid premiums of
$51,212 and $37,323, respectively, with respect to the life insurance
policies covering Mr. Durliat and Mr. Jacobs.
4. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include highly liquid investments with a maturity
of three months or less.
5. Reverse Split
-------------
On November 2, 1995, after obtaining the necessary Board of Director and
stockholder approvals, the Company amended its Certificate of Incorporation
to effect a reverse split of its common stock pursuant to which each share
of common stock issued and outstanding immediately prior to the effective
date of the reverse split was automatically reclassified as, and changed
into, one-half (1/2) share of common stock. The reverse split did not
change (1) the par value of the common stock (which remains $.008 per share
after the reverse split), (2) the authorized number of shares of common
stock (which remains at 15,000,000 shares after the reverse split) or (3)
the voting rights of the common stock (which remain at one vote per share
of common stock after the reverse split). Fractional shares of common stock
created in the reverse split were redeemed for cash pursuant to the formula
set forth in the Certificate of Amendment to the Certificate of
Incorporation of the Company.
6. Change in Control of Registrant
-------------------------------
On November 10, 1995, MCC Financial ("MCC") acquired voting control of
Capital Associates, Inc. (the "Company") through a private stock
transaction and the delivery of proxies for shares of common stock subject
to purchase in the future pursuant to agreements (the "Stock Purchase
Agreements") executed by and between MCC and Gary M. Jacobs and Jack M.
Durliat, two of the Company's largest shareholders.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Change in Control of Registrant, continued
-------------------------------
Pursuant to these Stock Purchase Agreements, MCC acquired 65,120 shares of
common stock (reported post-reverse split) for a purchase price of $3.30
per share or an aggregate amount of $214,896. In addition, MCC acquired the
right to purchase an additional 1,245,000 shares of common stock (reported
on a post-split basis) in the future for an aggregate purchase price of
approximately $4.5 million. See Part II, Item 6, EXHIBITS AND REPORTS ON
FORM 8-K (b) and Exhibit 99 attached to the Form 8-K filed on November 22,
1995, for more information concerning the change in control of the Company
and the terms of the November 10, 1995 transaction.
On January 9 and 10, 1996, MCC completed the purchase of 550,000 shares of
common stock (reported post-reverse split) from Messrs. Durliat and Jacobs
for a purchase price of $3.30 per share or an aggregate amount of
$1,815,000. See Part II, Other Information, Item 6, EXHIBITS AND REPORTS ON
FORM 8-K (b) and Exhibit 99 attached to the Form 8-K filed on January 16,
1996, for more information concerning the purchase by MCC of the additional
550,000 shares of common stock from Messrs. Durliat and Jacobs.
7. Bankrupt Lessee
---------------
In June 1995, Grand Palais Riverboat, Inc. (the "Lessee"), failed to make
lease payments under a lease of riverboat gaming equipment with the Company
(the "Lease"). Demand was made upon the lessee, co-lessees and guarantors
(Hemmeter Enterprises, Inc., BWBH, Inc., BWCC, Inc., Christopher Hemmeter
and Mark Hemmeter, collectively, the "Guarantors"), but no payments were
received. In July 1995, the Lessee filed for Chapter 11 bankruptcy
protection. In October 1995, the Company obtained a judgment against the
Guarantors for the amounts due and owing under the lease, including fees
and late charges. In November 1995, Hemmeter Enterprises, Inc., BWBH, Inc.,
and BWCC, Inc. filed for Chapter 11 bankruptcy protection. The aggregate
net book value of the equipment under the Lease was approximately $3
million at May 31, 1995. Due to uncertainties regarding the realization of
the Company's investment, a provision for loss of $750,000 with respect to
the Lease was recorded at May 31, 1995.
The Company has negotiated an agreement with the Guarantors for the payment
of the judgment amount. The agreement provides for the delivery of two
promissory notes by the Guarantors to the Company. The first promissory
note, which has a two and one-half year term, is in the principal amount of
$1,621,329. The second promissory note, which has a five year term, is in
the principal amount of $3,000,000. The agreement further provides that any
proceeds received by the Company from the sale of the gaming equipment to
the purchaser of the Lessee's riverboat (see the discussion in the
immediately following paragraph) will be credited against the payments due
under the five-year note.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Bankrupt Lessee, continued
---------------
The Company also has negotiated an agreement to sell the gaming equipment
for approximately $2.5 million to the party purchasing the riverboat out of
the Lessee's Chapter 11 bankruptcy proceeding. The purchase price, which
will be evidenced by a promissory note, is payable in monthly installments
over eighteen months and will be secured by a first priority, perfected
security interest in the gaming equipment.
The agreement with the Guarantor and the agreement to sell the gaming
equipment are part of the plans or reorganization of the Lessee and the
Guarantors. Both plans have been confirmed by the bankruptcy court and both
agreements have been approved by the creditors of the Lessee and the
Guarantors. However, the effective date of the plan (and, hence, both
agreements) and the commencement of payments under the agreements is
contingent on closing of the sale of the riverboat, which is anticipated to
occur during the fourth fiscal quarter 1996.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations
---------------------
Presented below are schedules (prepared solely to facilitate the discussion
of results of operations that follows) showing condensed income statement
categories and analyses of changes in those condensed categories derived
from the Consolidated Statements of Income.
<TABLE>
<CAPTION>
Condensed Consolidated Condensed Consolidated
Statements of Income Statements of Income
or the three months ended for the nine months ended
February 29, February 28, February 29, February 28,
------------ ------------ Effect on ------------ ------------ Effect on
1996 1995 net income 1996 1995 net income
------------ ------------ ---------- ------------ ------------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 765 $ 1,397 $ (632) $ 2,948 $ 3,713 $ (765)
Leasing margin (net of interest
expense on discounted lease rentals) 1,008 646 362 2,743 1,970 773
Other income 969 1,164 (195) 2,601 3,930 (1,329)
Operating and other expenses (1,997) (2,275) 278 (5,806) (7,518) 1,712
Provision for losses (25) (425) 400 (75) (650) 575
Termination of Stockholders'
Agreement - - - (325) - (325)
Interest expense on recourse debt (493) (417) (76) (1,664) (966) (698)
Income taxes (91) (36) (55) (169) (191) 22
------- -------- -------- -------- -------- --------
Net income $ 136 $ 54 $ 82 $ 253 $ 288 $ (35)
======= ======== ======== ======== ======== ========
</TABLE>
Equipment Sales
---------------
Equipment sales revenue (and related equipment sales margin) consists of
the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------- Increase
February 29, 1996 February 28, 1995 (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 $ 9,580 $ 222 $14,698 $ 350 $ (5,118) $(128)
Equipment under lease sold to
private investors 43,711 343 7,447 78 36,264 265
------- -------- ------- -------- -------- -----
53,291 565 22,145 428 31,146 137
------- -------- ------- -------- -------- -----
Transactions subsequent to initial lease term:
Sales of off-lease equipment 435 128 1,029 478 (594) (350)
Sales-type leases - - 449 345 (449) (345)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 72 72 146 146 (74) (74)
------- -------- ------- -------- -------- -----
507 200 1,624 969 (1,117) (769)
Provision for losses - (25) - (425) - 400
------- -------- ------- -------- -------- -----
Realization of value in excess of
provision for losses 507 175 1,624 544 (1,117) (369)
------- -------- ------- -------- -------- -----
Total equipment sales $53,798 $ 740 $23,769 $ 972 $ 30,029 $(232)
======= ======== ======= ======== ======== =====
</TABLE>
10 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
Equipment Sales, continued
---------------
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------- Increase
February 29, 1996 February 28, 1995 (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 $ 39,145 $ 779 $30,936 $ 778 $ 8,209 $ 1
Equipment under lease sold to
private investors 67,356 1,108 19,169 336 48,187 772
-------- -------- ------- -------- -------- -------
106,501 1,887 50,105 1,114 56,396 773
-------- -------- ------- -------- -------- -------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 1,276 577 2,108 1,061 (832) (484)
Sales-type leases 279 111 1,051 682 (772) (571)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 373 373 856 856 (483) (483)
-------- -------- ------- -------- -------- -------
1,928 1,061 4,015 2,599 (2,087) (1,538)
Provision for losses - (75) - (650) - 575
-------- -------- ------- -------- -------- -------
Realization of value in excess of
provision for losses 1,928 986 4,015 1,949 (2,087) (963)
-------- -------- ------- -------- -------- -------
Total equipment sales $108,429 $ 2,873 $54,120 $ 3,063 $ 54,309 $ (190)
======== ======== ======= ======== ======== =======
</TABLE>
Equipment Sales to PIFs and to Private Investors
------------------------------------------------
Equipment sales to PIFs increased during the nine months ended February 29,
1996, as compared to the comparable period in fiscal 1995, principally
because more leases were identified and closed due to the increased
productivity of the field lease originations team (see further discussion
below). However, equipment sales to PIFs decreased during the three months
ended February 29, 1996, as compared to the same three-month period ended
in fiscal 1995, principally because fewer leases were identified and closed
that satisfied the PIF's underwriting standards.
Equipment sales to PIFs margin ratio (margin divided by revenue) decreased
due to lower average acquisition fees received on leases sold to the PIFs
during fiscal 1996 as compared to fiscal 1995. During the first nine months
of fiscal 1996, proportionately more leases were sold to CPYF-III which
pays a 3.5% acquisition fee compared to the first nine months of fiscal
1995 when proportionately more leases were sold to CPYF-II which pays a 4%
acquisition fee.
Equipment sales to private investors increased principally because more
leases were identified and closed due to increased productivity of the
field lease originations team. The increased volume of the field lease
originators is primarily due to the Company's efforts to improve its
marketing activities, including focusing on customer relationships. In
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
Equipment Sales to PIFs and to Private Investors, continued
------------------------------------------------
this regard, lease originations from one customer relationship accounted
for approximately one-half of the total lease originations volume for the
first nine months of fiscal 1996. In addition, one sale of approximately
$30 million of equipment under lease to this customer closed during the
third fiscal quarter 1996. Total lease origination volume of $123.2 million
for the nine months ended February 29, 1996 increased 77% over total lease
originations volume for the comparable period in 1995.
Equipment sales to private investors margin ratio decreased primarily
because the margin on the $30 million sale discussed above was lower than
the average margin on other equipment sales to private investors.
Remarketing of the Portfolio and 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 table above, the realizations from
sales exceeded the provision for losses for the three and nine months ended
February 29, 1996, even without considering realizations from remarketing
activities recorded as leasing margin as discussed below. Realizations in
excess of the aggregate carrying value on the Company's portfolio has
occurred in each of the last fifteen quarters.
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 from those
exposures. The Company performs ongoing quarterly assessments of its assets
to identify other than temporary losses in value.
Margins from remarketing sales (i.e., sales occurring after the initial
lease term) are affected by the number and dollar amount of equipment
leases that mature in a particular quarter. In general, because the Company
did not significantly add to its lease portfolio during the four years
prior to May 31, 1995, fewer leases have matured and less equipment has
been available for remarketing each quarter since May 31, 1995. For this
reason, remarketing revenue declined during the three and nine months ended
February 29, 1996, as compared to the comparable periods in fiscal 1995.
Remarketing revenue and margin are expected to decline further in future
quarters as maturing leases continue to decrease. The Company's ability to
remarket additional amounts of equipment and realize a greater amount of
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Provision for Losses, continued
-----------------------------------------------------
remarketing revenue in future periods is dependent on adding additional
leases to its portfolio. However, adding leases to the Company's portfolio
will not immediately increase the pool of maturing leases because new
leases typically are not remarketed until after the initial term (which
averages approximately four years).
The provision for losses recorded during the first nine months of fiscal
1996 did not relate to any significant items because no significant
other-than-temporary losses in the value of equipment were identified in
the quarterly assessments of the Company's assets.
The provision for losses recorded during the first nine months of fiscal
1995 related to the following two significant items:
o $200,000 for equipment returned to the Company upon lease termination
(the Company originally expected that the equipment would remain with
the lessee).
o $250,000 to record the Company's loss exposure related to
approximately $350,000 of net book value of equipment leased to a
lessee that filed for Chapter 11 bankruptcy protection during December
1994.
LEASING MARGIN AND EQUIPMENT UNDER LEASE
Leasing margin consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 29, February 28, February 29, February 28,
------------ ------------ ------------ ------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Leasing revenue $ 2,692 $ 1,867 $ 7,476 $ 5,590
Leasing costs and expenses (1,409) (965) (4,033) (2,713)
Net interest expense on related
discounted lease rentals (275) (256) (700) (907)
--------- -------- --------- --------
Leasing margin $ 1,008 $ 646 $ 2,743 $ 1,970
========= ======= ========= ========
Leasing margin ratio 37% 35% 37% 35%
== == == ==
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
LEASING MARGIN AND EQUIPMENT UNDER LEASE, continued
The increase in leasing revenue, leasing costs and expenses and leasing
margin during the three and nine months ended February 29, 1996, as
compared to the comparable periods in fiscal 1995, was primarily due to
growth in the Company's lease portfolio. These revenue and expense amounts
are expected to increase further as the Company continues to grow its lease
portfolio. Net interest expense on discounted lease rentals (funded with
non-recourse debt) did not grow proportionately because the Company is
using its recourse debt facility to finance (i) certain leases held for its
own account and (2) leases held pending sale to the PIFs and third-party
investors.
The changes in the Company's equipment under lease during the nine months
ended February 29, 1996 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 leased
for sale or re-lease from equipment sales equipment
-------------------- -------------------- --------------
<S> <C> <C> <C>
As of May 31, 1995 $ 39,372 $ (11,909) $ 27,463
Leases added to the Company's lease
portfolio (a portion of which will be sold
during the remainder of fiscal year 1996) 25,727 (6,675) 19,052
Leases sold to PIFs and private investors (4,857) - (4,857)
Related provision for losses (75) - (75)
Change as a result of portfolio run-off (9,257) 4,237 (5,020)
--------- ----------- ----------
As of February 29, 1996 $ 50,910 $ (14,347) $ 36,563
========= =========== ==========
</TABLE>
14 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
OTHER INCOME
Other Income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 29, February 28, February 29, February 28,
------------ ------------ ------------ ------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fees and distributions from the
Company-sponsored PIFs $ 895 $ 730 $ 2,250 $ 2,291
Sale of the investment in Corporate
Express, Inc. stock - - - 671
Cancellation of option agreement - 444 - 444
Interest on income tax refunds - - - 178
Interest on MBank receivable - - 141 -
Other, principally recovery of sales and
property tax amounts previously expensed 74 (10) 210 346
------- ------- -------- --------
$ 969 $ 1,164 $ 2,601 $ 3,930
======= ======= ======== ========
</TABLE>
OPERATING AND OTHER EXPENSES
Operating and Other Expenses decreased $1.7 million (23%) for the first
nine months ended February 29, 1996 as compared to the comparable period in
fiscal 1995. The decrease included approximately $1 million of additional
capitalized initial direct costs, as compared to the first nine months
ended February 28, 1995, due to lease origination volume and also included
the following more significant expense reductions:
* $300,000 of insurance costs.
* $200,000 difference between estimated incentive compensation and
actual payments as modified by the Company's Board of Directors.
* $150,000 of eliminated restructuring costs associated with the
Company's prior debt facility.
As of February 29, 1996, the Company had 99 full-time employees, compared
to 90 full-time employees at February 28, 1995. The growth is due to
increases in the number of revenue producing lease origination, private
equity syndication and PIF wholesale personnel.
15 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
TERMINATION OF STOCKHOLDERS' AGREEMENT EXPENSE
See Note 3 to Notes to Consolidated Financial Statements for more
information concerning (1) the termination of the Stockholders' Agreement,
(2) the termination of the Company's obligation to continue to make premium
payments on certain key-man life insurance policies and (3) the payments
the Company received from the two stockholders to whom the policies were
assigned.
INTEREST INCOME AND EXPENSE
Interest revenue arises when equipment financed with non-recourse debt is
sold to investors. The Consolidated Statements of Income reflect an equal
amount of non-recourse interest expense. The decline in interest revenue
(and the related non-recourse interest expense) is due to a decline in the
average outstanding balance of non-recourse debt with respect to equipment
sold to investors.
Net interest expense on related discounted lease rentals increased during
the three months ended February 29, 1996, as compared to the three months
ended February 28, 1995, due to an increase in the average outstanding
balance of related discounted lease rentals. It is anticipated that net
interest expense on related discounted lease rentals will increase further
as the Company adds to its portfolio additional leases financed with
non-recourse debt.
Recourse interest expense increased during the first nine months of fiscal
1996, as compared to the first nine months of fiscal 1995. As discussed
above, the Company is financing more lease originations with its recourse
lines of credit.
INCOME TAXES
Income tax expense is provided on income at the appropriate federal and
state statutory rates applicable to such earnings. The aggregate statutory
tax rate is 40%.
As discussed in Note 6 to Notes to Consolidated Financial Statements, a
transaction was completed in which the Company's largest shareholder
obtained more than fifty percent of the ownership and voting rights of the
Company ("a change in control"). Upon completion of a change in control,
depending upon the terms and conditions of such transaction, under federal
income tax rules, the amount of ITC carryforwards and AMT carryforwards
that could be utilized to reduce income tax liability in any year may be
significantly limited. However, the Company had previously established a
valuation allowance for deferred taxes due to uncertainty that the full
amount of the ITC carryforward would be utilized prior to expiration. The
change in control and any resulting limitation on the ITC carryforward is
not expected to reduce the recoverability of the amount of the deferred
income tax assets, net of the valuation allowance.
16 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
II. Liquidity and Capital Resources
-------------------------------
The Company's activities are principally funded by its Working Capital
Facility and Warehouse Facility, rents, proceeds from sales of on-lease
equipment (to its PIFs and private investors), nonrecourse debt, fees and
distributions from its PIFs, sales and re-leases of equipment after the
expiration of the initial lease terms and other cash receipts.
On August 23, 1995, the Company received $10.8 million in settlement of its
claims in the MBank Litigation which was included in net cash from
operating activities in the accompanying Consolidated Statements of Cash
Flows. On September 12, 1995, the Company deposited $2.2 million of the
settlement proceeds in an interest-bearing escrow account with Norwest
Bank, N.A., pending resolution of Bank One's ongoing claims to the MBank
Equipment. The Company used the balance of the settlement proceeds, i.e.,
$8.6 million, to paydown its short-term, recourse Working Capital Facility
and Warehouse Facility. For more information concerning this matter, see
Note 2 to Notes to Consolidated Financial Statements. After application of
the MBank settlement proceeds, as of February 29, 1996, the outstanding
balance and the availability under (1) the Working Capital Facility were
$0.7 million and $4.3 million, respectively, and (2) the Warehouse Facility
were $12.1 million and $19.9 million, respectively. Management believes
that the Company has adequate financial resources to fund its operations
during the remainder of fiscal year 1996. The Company's Credit Agreement,
which was scheduled to mature on January 31, 1996, has been extended,
without material changes, through November 30, 1996.
During the first nine months of fiscal 1996, lease originations of $123.2
million were financed through $35.7 million of sales to the PIFs, $62.4
million of sales to private investors, and the remaining $25.1 million of
leases held for the Company's account were financed through the use of the
Company's cash, accounts payable, non-recourse debt and its Warehouse
Facility.
During July 1995, the Company and certain of its PIFs entered into an
agreement with a lender to finance up to $50 million of lease receivables
as part of a lease securitization program. Under this program, the
Company's financing obligations are 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. Aggregate closings
through February 29, 1996 were $14.4 million for the Company and its PIFs.
17 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
II. Liquidity and Capital Resources, continued
-------------------------------
Currently the Company is offering units of CPYF-III for sale to the public.
During the first nine months of fiscal 1996, the Company sold $20.9 million
of Class A units of CPYF-III (bringing total sales of Class A units of
CPYF-III to $44.6 million). For the remainder of the offering period for
CPYF-III (which ends in April 1996), the Company has $5.4 million of Class
A units in CPYF-III available for sale. The Company intends to offer units
of a succeeding program ("CPYF-IV") for sale following the closing of the
offering of units of CPYF-III for sale to the public.
During the fourth quarter of fiscal 1995, the Company leased a jet aircraft
held in inventory to an end-user under a direct finance lease. The carrying
value of the jet aircraft at that time was approximately $5 million. The
Company recently determined that it may be in its best interest to sell the
aircraft and related lease and reinvest the sale proceeds in another income
producing asset or assets, including, possibly, a lease portfolio. The
Company has received bids for the aircraft in the range of $4.5 million.
The Company currently anticipates that it will close a sale of the aircraft
for approximately $4.5 million during the fourth quarter of fiscal 1996.
The Company has not reduced the carrying value of the aircraft because (1)
the Company recently sold two other similar aircraft for approximately $5
million and (2) until recently, the Company anticipated that it would hold
the direct finance lease to term, in which case the Company would receive
the full carrying value of the aircraft.
III. Business Plan
-------------
The Company believes that it has the necessary funding capability for
fiscal year 1996 to (1) continue growing its lease origination function,
(2) continue to increase the size of its own lease portfolio and (3)
originate/acquire additional leases for sales to PIFs and private equity
investors. 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) the
Company will incur additional costs in increasing its marketing
capabilities, (b) it will take a period of time before new lease
transactions can be closed, and (c) new operating lease transactions "throw
off" lower returns (for financial reporting purposes) during their early
term. 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 related to growing the portfolio discussed above,
operating results are subject to fluctuations resulting from several 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 Company will adjust these percentages from time to
time, when and as the Company determines that it would be in its best
interests, taking into account profit opportunities, portfolio
concentration and residual risk.
18 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
III. Business Plan, continued
-------------
Finally, the Company's operating results may be affected by its cost, and
the availability of additional sources, of capital. The cost of funds for
many of the Company's competitors is lower than the Company's cost of
funds. In addition, because of the generally flat yield curve, lease rates
(which are reflective of long-term rates) are not significantly higher than
the Company's cost of funds (which primarily reflect short-term rates).
Therefore, it is difficult to maintain a substantial spread between lease
rates and the Company's cost of funds while the Company is holding leases
in its lease portfolio pending permanent financing. The Company continues
to explore all possible sources of additional, lower cost capital,
including obtaining additional capital from sales of a greater number of
leases to private equity purchasers, factoring lease receivables,
securitizing lease receivables and structuring other forms of creative
lease/debt financing.
19 of 24
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) MBANK LITIGATION. See Note 15 to Notes to Consolidated Financial
Statements included in the 1995 Form 10-K for a discussion of the
claims asserted against the Company by Bank One, N.A., ("Bank
One") in its first amended complaint ("Bank One's Amended
Complaint"). Bank One's Amended Complaint does not assert any
money damage claims against the Company. The Company has filed a
motion with the United States District Court for the Northern
District of Texas, Dallas Division (the "District Court"), which
has agreed to retain jurisdiction over the claims in the MBank
Litigation that were not resolved in the Settlement Agreement,
asking the District Court to dismiss the claims asserted against
the Company in Bank One's Amended Complaint. In late 1995, Bank
One, The Prudential Insurance Company ("Prudential"), Texas
Commerce Bank, N.A. ("TCB"), and Federal Deposit Insurance
Corporation ("FDIC") have filed summary judgment motions against
each other concerning ownership of the Equipment. Recently, Bank
One, Prudential and TCB dismissed all of their claims against
each other. As of the date of this Quarterly Report, the District
Court has not ruled on (i) the Company's motion or (2) the
pending summary judgment motions of Bank One and FDIC.
Also see Note 2 to Notes to Financial Statements for information
concerning how the Company applied the settlement proceeds.
(b) PAINEWEBBER CLASS ACTION. The matter was resolved, at no cost to
the Company, in late 1995.
(c) NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. ARBITRATION,
MARTINEZ V. CAI SECURITIES CORPORATION, NASD ARBITRATION NO.
96-00055. In February 1996, CAI Securities Corporation, a
wholly-owned subsidiary of the Company, received a Statement of
Claim in this arbitration. Claimant has alleged certain
fraudulent actions by such subsidiary under the securities laws
in connection with the sale of securities of Leastec Income Fund
V, a limited partnership that is an affiliate of the Company. The
claim requests the award of approximately $500,000 plus costs and
an award of exemplary damages in an unspecified amount. The
Company believes that these allegations are without merit and
will not have a material adverse effect on the financial
condition or operations of the Company.
(d) OTHER. 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.
20 of 24
<PAGE>
Item 5. Other Information
-----------------
(a) NASDAQ NATIONAL MARKET SYSTEM LISTING. In December 1995, the
Nasdaq Stock Market, Inc. ("Nasdaq") affirmed the Company's
eligibility for continued listing on the Nasdaq National Market.
(b) STOCK REPURCHASE. The Company on August 28, 1995, approved and
announced a stock repurchase program. The Company has authority
under the stock repurchase program to repurchase up to 500,000
shares of stock from time to time in the open market. As of the
date of this quarterly report, the Company has repurchased
129,350 shares of common stock at an average price of $1.89
(reported on a post-split basis) pursuant to the repurchase
program.
(c) REVERSE STOCK SPLIT. The Board of the Company approved a
one-for-two reverse split of the Company's common stock (the
"Reverse Split"). The Reverse Split was effective as of November
2, 1995. See Note 5 to Notes to Consolidated Financial Statements
for more information concerning the reverse split.
(d) CHANGE OF CONTROL. See Part II, Item 6, EXHIBITS AND REPORTS ON
FORM 8-K (b) and Exhibit 99 attached to the Forms 8-K filed on
November 22, 1995 and January 16, 1996, for information
concerning the change in control of the Company. See also Note 6
to Notes to Consolidated Financial Statements for more
information concerning the change of control transaction.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Included as exhibits are the items listed in the Exhibit Index.
The Company will furnish to its shareholders a copy of any of the
exhibits listed therein upon payment of $.25 per page to cover
the costs to the Company of furnishing the exhibits.
- Amendment to Certificate of Incorporation and Reverse Split
Information Statement.
- Termination Agreement
b. On November 22, 1995, a Form 8-K was filed disclosing a change in
control of the Company. On January 16, 1996, a second Form 8-K
was filed with respect to that transaction.
21 of 24
<PAGE>
Item No. Exhibit Index
- -------- -------------
10.51 Second Amendment to Credit Agreement and Notes, dated as of
January 31, 1996, by and among Capital Associates International, Inc.,
borrower, the Lenders (as defined therein), Norwest Bank Colorado,
National Association, as Agent and Norwest Equipment Finance, Inc., as
Collateral Agent.
10.52 Assignment and Assumption, dated as of February 2, 1996, between The
Daiwa Bank, Limited, Assignor, and The Sumitomo Bank, Limited,
Assignee.
11A Computation of Primary Earnings Per Share. A computation of fully
diluted earnings per share is not presented as dilution is less than
3%.
27 Financial Data Schedule
22 of 24
<PAGE>
Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
------------------------------ ------------------------------
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 4,988,000 5,105,500 5,091,000 4,879,500
Repurchases of common stock - - (129,000) -
Shares issued during the period
(weighted average) - - 24,000 176,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 997,000 916,000 968,000 983,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (688,000) (691,500) (639,000) (622,500)
----------- ----------- ----------- -----------
Total shares, primary 5,297,000 5,330,000 5,315,000 5,416,000
=========== =========== =========== ===========
Net income $ 136,000 $ 54,000 $ 253,000 $ 288,000
=========== =========== =========== ===========
Income per common and common
equivalent share, primary $ 0.03 $ 0.01 $ 0.05 $ 0.05
=========== =========== =========== ===========
</TABLE>
23 of 24
<PAGE>
CAPITAL ASSOCIATES INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL ASSOCIATES, INC.
Registrant
Date: April 12, 1996 By:/s/John E. Christensen
-------------------------------------
John E. Christensen,
Senior Vice-President and
Chief Financial Officer
24 of 24
EXHIBIT 10.51
SECOND AMENDMENT TO CREDIT AGREEMENT AND NOTES
This Amendment, dated as of January 31, 1996, is made by and
between CAPITAL ASSOCIATES INTERNATIONAL, INC., a Colorado corporation (the
"Borrower") and each of the financial institutions appearing on the signature
pages hereof (herein collectively called the "Lenders" and individually each
called a "Lender") and NORWEST BANK COLORADO, NATIONAL ASSOCIATION, a national
banking association, in its separate capacity as agent for the Lenders (in such
capacity, the "Agent") and NORWEST EQUIPMENT FINANCE, INC., a Minnesota
corporation, in its separate capacity as collateral agent for the Lenders (in
such capacity, the "Collateral Agent").
RECITALS
The Borrower and the Lenders have entered into a Credit and
Security Agreement dated as of November 30, 1994, a First Amendment to Credit
Agreement and Notes dated November 30, 1995 and an Assumption Certificate dated
February 28, 1995 ( as amended, the "Credit Agreement"). Capitalized terms used
in these Recitals have the meanings given to them in the Credit Agreement unless
otherwise specified.
Pursuant to the Credit Agreement, the Borrower has executed
and delivered, among others, the following promissory notes: (i) a Working
Capital Note dated February 28, 1995 in the original principal amount of
$1,500,000 payable to the order of Norwest Bank Colorado, National Association,
(ii) a Warehousing Note dated February 28, 1995 in the original principal amount
of $4,050,000 payable to the order of Norwest Bank Colorado, National
Association, (iii) a Warehousing Note dated February 28, 1995 in the original
principal amount of $5,550,000 payable to the order of Norwest Equipment
Finance, Inc., (iv) a Working Capital Note dated February 28, 1995 in the
original principal amount of $1,500,000 payable to the order of First Interstate
Bank of Denver, N.A., (v) a Warehousing Note dated February 28, 1995 in the
original principal amount of $9,600,000 payable to the order of First Interstate
Bank of Denver, N.A., (vi) a Working Capital Note dated February 28, 1995 in the
original principal amount of $1,000,000 payable to the order of The Daiwa Bank,
Limited, (vii) a Warehousing Note dated February 28, 1995 in the original
principal amount of $6,400,000 payable to the order of The Daiwa Bank, Limited,
(viii) a Working Capital Note dated February 28, 1995 in the original principal
amount of $1,000,000 payable to the order of First National Bank of Boston, (ix)
a Warehousing Note dated February 28, 1995 in the original principal amount of
$6,400,000 payable to the order of First National Bank of Boston (as amended by
the First Amendment to Credit Agreement and Notes, collectively the "Maturing
Notes").
Pursuant to the Credit Agreement, the Borrower has also
executed and delivered certain Term Notes which are not to be amended hereby.
1
<PAGE>
The Borrower has requested that the maturity of the Maturing
Notes and the Commitment Termination Date be extended to November 30, 1996, and
that certain other amendments be made to the Credit Agreement. The Lenders are
willing to do so, pursuant to the terms and conditions set forth in this Second
Amendment.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Unless otherwise defined herein,
capitalized terms used in this Amendment which are defined in the Credit
Agreement shall have the same meanings given them therein.
2. AMENDMENT OF CREDIT AGREEMENT DEFINITIONS. Section 1.1
of the Credit Agreement is amended as follows:
(a) The definition of "Commitment Termination Date" is
deleted in its entirety, and the following definition is inserted in
lieu thereof:
"Commitment Termination Date" means the earliest of
(i) November 30, 1996 or (ii) the date on which the Working Capital
Commitments and the Warehousing Commitments are terminated in full or
reduced to zero pursuant to Section 5.2(a)."
--------------
(b) The definition of "Eligible Other Investment Asset"
is amended by deleting subsection (iv) thereof in its entirety, and
inserting in lieu thereof the following:
"(iv) an Other Investment Asset with respect to which
the obligor thereunder does not have a credit rating of 3 or
better under the Borrower's credit approval standards as
described in Section 6.5 or, in any event, is the subject of
bankruptcy proceedings or has gone out of business; and"
(c) The following definition of "Second Amendment to Credit
Agreement and Notes" is inserted:
"Second Amendment to Credit Agreement and Notes" means
the Second Amendment to Credit Agreement and Notes dated as of
January 31, 1996, by and between the Lenders, the Borrower,
and the Agent."
2
<PAGE>
(d) The definition of "Lease" is deleted in its entirety,
and the following definition is inserted in lieu thereof:
"Lease" means (i) any contract under which the
Borrower has leased an item of Related Equipment to a Lessee,
whether the Borrower is the lessor thereunder or is an
assignee of the original lessor, whether or not such lease
would be a "true lease" for federal income tax purposes and
(ii) any promissory note and related security agreement under
which the Borrower has made a purchase money loan to a Lessee
for purposes of financing the purchase of an item of Related
Equipment, which promissory note is secured pursuant to a
first perfected security interest in the Related Equipment
granted to and held by the Borrower, whether the Borrower is
the lender thereunder or is an assignee of the original
lender."
(e) Clause (i) of the definition of "Lease Cash Flow" is
amended to read as follows:
"(i) payments of rent and installments of principal and
interest paid under Leases,"
(f) The definition of "Lease Value" is deleted in its
entirety, and the following definition is inserted in lieu thereof:
"Lease Value" means (A) with respect to a Lease
constituting a rental contract under which the Borrower
retains title to the Related Equipment, the Present Value of
the sum of (i) the aggregate unpaid payments of basic rent
under such Lease from the date of determination through the
scheduled expiration date thereof, (ii) the fixed purchase
price (if any) the Lessee is obligated to pay under the terms
of the Lease, (iii) all accrued but unpaid payments of basic
rent which are overdue for less than the applicable period of
time which would render such Lease not an Eligible Lease as of
the date of determination and (iv) either (a) in the case of
Warehousing Leases, fifty percent (50%) of the Residual Value
of the Related Equipment subject to such Lease or (b) in the
case of Working Capital Leases, one hundred percent (100%) of
the Residual Value of the Related Equipment subject to such
Lease and (B) with respect to a Lease constituting a
3
<PAGE>
promissory note and related security agreement granting to the
Borrower a security interest in Related Equipment owned by a
Lessee, the sum of (i) the outstanding principal balance of
such promissory note and (ii) all accrued but unpaid interest
on such promissory note up to the end of the applicable period
of time which would render such Lease not an Eligible Lease a
of the date of determination. For purposes of the foregoing,
basic rent under a Lease means rental payments for the use of
the Related Equipment, exclusive of any portion thereof
relating to sales or use taxes, maintenance, licensing fees,
late charges or any other similar matters."
3. AMENDMENT OF MATURING NOTES. Each Maturing Note is
amended by deleting the date "January 31, 1996" as it appears therein and
inserting in lieu thereof the date "November 30, 1996."
4. DELIVERY OF PROMISSORY NOTES. Section 6.2 of the Credit
Agreement is amended by adding to the end thereof the following sentences:
"With respect to each Lease constituting a promissory
note and security agreement, the Borrower shall deliver to the
Collateral Agent the original of such promissory note,
together with an allonge endorsing such promissory note as
follows:
Pay to the order of Norwest Equipment Finance, Inc.,
as agent for and on behalf of each financial
institution becoming a party to that certain Credit
and Security Agreement with the undersigned dated
November 30, 1994, as amended.
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By:________________________________________
Its:______________________________________
The Borrower shall not permit execution of any copy of
such promissory note other than the original for delivery to
the Collateral Agent. Delivery of each such promissory
note, together with an allonge as provided above, shall be
accompanied by a security agreement granting to the Borrower a
perfected, first priority security interest in the Related
4
<PAGE>
Equipment being purchased with proceeds of such promissory
note, together with evidence of the filing with appropriate
filing officers of a UCC financing statement from the Lessee
to the Borrower with respect to the Related Equipment."
5. ELIGIBLE LESSEES. Section 6.3(a) of the Credit Agreement
is amended by deleting the first sentence thereof in its entirety and inserting
in lieu thereof the following:
"The Lessee under a Lease has a credit rating of 3 or
better under the Borrower's credit approval standards as
described in Section 6.5 and has otherwise satisfied all such
credit approval standards as of the date on which the related
Lease was purchased or entered into by the Borrower."
and by adding to the end thereof the following sentence:
"Notwithstanding anything in the foregoing to the
contrary, to the extent a Lease constitutes a promissory
note and security agreement with respect to the Related
Equipment, such promissory note and security agreement shall
be written on the forms attached to the Second Amendment to
Credit Agreement and Notes as SCHEDULE 6.3A, subject to only
such changes or modifications as are otherwise permitted in
accordance with the foregoing provisions of this Section
6.3(a)."
6. RELEASE OF SECURITY INTEREST IN CERTAIN EQUIPMENT.
Section 6.9 of the Credit Agreement is amended by adding the following paragraph
at the end of such Section 6.9:
"Notwithstanding anything in the foregoing to the
contrary, in the case of Pre-Sold Leases, as defined below,
the Security Interest in each such Pre-Sold Lease and the
Related Equipment covered by such Pre-Sold Lease shall be
deemed automatically terminated, released and extinguished
upon the sale and transfer of title to such Pre-Sold Lease and
the Related Equipment to a third party purchaser thereof and
receipt by the Borrower of fair market consideration for
such transfer. For purposes of the foregoing, a "Pre-Sold
Lease" means any Lease with respect to which (i) possession
thereof has not been delivered to and at no time held by, the
Collateral Agent, (ii) neither the Lease nor the Related
Equipment has at any time been described in a Borrowing Base
Certificate, (iii) neither the Lease nor the Related
Equipment has at any time been included or described as an
asset of the Borrower for purposes of computing its Collateral
Coverage Ratio or its Non-Residual Collateral Coverage Ratio
under Sections 9.10 and 9.14 of the Credit Agreement,
respectively, and (iv) the Lease and Related Equipment have
been sold by the Borrower to a third party purchaser within
5
<PAGE>
seven calendar days following the date on which the Borrower
shall have obtained title to such Lease and Related
Equipment."
7. ADDITION TO INVESTMENTS. Section 10.4(b) of the Credit
Agreement is hereby deleted in its entirety and the following is inserted in
lieu thereof:
"(b) (i) investments in direct obligations of the
United States of America or any agency or instrumentality
thereof whose obligations constitute full faith and credit
obligations of the United States of America having a maturity
of one year or less, (ii) commercial paper issued by U.S.
corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service,
(iii) certificates of deposit or bankers' acceptances having a
maturity of one year or less issued by members of the Federal
Reserve System having deposits in excess of $100,000,000
(which certificates of deposit or bankers' acceptances are
fully insured by the Federal Deposit Insurance Corporation)
(iv) repurchase obligations with respect to any obligation
described in clause (i) above and entered into with a
depository institution the deposits of which are insured by
the Federal Deposit Insurance Corporation and the short-term
unsecured debt obligations of which are rated "A-1" or "A-2"
by Standard & Poors Corporation or "P-1" or "P-2" by Moody's
Investors Service or (v) money market funds having ratings in
the highest or second highest available rating category by
Standard & Poors Corporation or Moody's Investors Service
which invest only in investments described in clauses (i)
through (iv) above;"
8. CHANGE IN MANAGEMENT, OWNERSHIP OR CONTROL. Section
10.11 of the Credit Agreement is hereby amended by deleting the name "Richard H.
Robinson" as it appears therein and inserting in lieu thereof the name "Robert
A. Golden."
9. NO OTHER CHANGES. Except as explicitly amended by this
Amendment, all terms and conditions of the Credit Agreement and the Maturing
Notes shall remain in full force and effect. Notwithstanding anything to the
contrary contained herein or in any other instrument executed by the Borrower,
the Guarantors, any Lender, the Agent or the Collateral Agent, the agreements,
covenants and provisions contained herein shall constitute the only evidence of
the Lenders' agreement with respect to modification of any of the Loan
Documents. The Borrower acknowledges and agrees that no express or implied
consent to any additional or further amendments or modifications of any of the
Loan Documents shall be inferred or implied by the execution and delivery of
this Amendment. Further, execution of this Amendment shall not constitute a
6
<PAGE>
waiver (either express or implied) of any requirement set forth in the Credit
Agreement for the express written approval of the Lenders or Required Lenders,
as the case may be, for any other or future modifications or amendments of the
Loan Documents, and no such further approval (either express or implied) has
been given with respect thereto as of the date of this Amendment.
10. CONDITIONS PRECEDENT. This Amendment shall be effective
when the Agent shall have received:
(a) an original of this Amendment duly executed on behalf of
the Borrower, each Lender, the Agent and the Collateral Agent,
(b) the Acknowledgment and Agreement of Guarantors set forth
at the end of this Amendment, duly executed by each Guarantor,
(c) a Certificate of the Secretary of the Borrower
certifying as to (i) the resolutions of the board of directors of the
Borrower approving the execution and delivery of this Amendment, (ii)
the fact that the Articles of Incorporation and Bylaws of the Borrower,
which were certified and delivered to the Lender pursuant to the
Secretary's Certificate executed by the Borrower's Secretary prior to
an in contemplation of the execution and delivery of the Credit
Agreement (the "Secretary's Certificate") continue in full force and
effect and have not been amended or otherwise modified except as set
forth in such Secretary's Certificate, and (iii) certifying that the
officers and agents of the Borrower who have been certified to the
Lender, pursuant to the Secretary's Certificate, as being authorized to
sign and to act on behalf of the Borrower continue to be so authorized
or setting forth the sample signatures of each of the officers and
agents of the Borrower authorized to execute and deliver this Amendment
and all other documents, agreements and certificates on behalf of the
Borrower,
(d) the Warehousing Agency Fee described in paragraph 16
hereof, and
(e) such other matters as the Lender may require.
11. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to the Lenders as follows:
(a) The Borrower has all requisite power and authority to
execute this Amendment and to perform all of its obligations hereunder,
and this Amendment has been duly executed and delivered by the Borrower
and constitutes the legal, valid and binding obligation of the
7
<PAGE>
Borrower, enforceable in accordance with its terms, except to the
extent the enforcement thereof may be limited by any applicable
bankruptcy, insolvency or similar laws now or hereafter in effect
affecting creditors' rights generally.
(b) The execution, delivery and performance by the Borrower
of this Amendment have been duly authorized by all necessary corporate
action and do not (i) require any authorization, consent or approval by
any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound
or affected.
(c) All of the representations and warranties contained in
the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
12. REFERENCES. All references in the Credit Agreement to
"this Agreement" shall be deemed to refer to the Credit Agreement as amended by
this Amendment; and any and all references in the Security Documents to the
Credit Agreement shall be deemed to refer to the Credit Agreement as amended by
this Amendment.
13. NO WAIVER. The execution of this Amendment and
acceptance of any documents related hereto shall not be deemed to be a waiver of
any Default or Event of Default under the Credit Agreement or breach, default or
event of default under any Security Document or other document held by the
Lender, whether or not known to the Lender and whether or not existing on the
date of this Amendment.
14. RELEASE. The Borrower, and each Guarantor by signing
the Acknowledgment and Agreement of Guarantor set forth below, hereby absolutely
and unconditionally release and forever discharge each Lender, the Agent and the
Collateral Agent and any and all participants, parent corporations, subsidiary
corporations, affiliated corporations, insurers, indemnitors, successors and
assigns thereof, together with all of the present and former directors,
officers, agents and employees of any of the foregoing, from any and all claims,
demands or causes of action of any kind, nature or description, whether arising
in law or equity or upon contract or tort or under any state or federal law or
8
<PAGE>
otherwise, which the Borrower or such Guarantor has had, now has or has made
claim to have against any such person for or by reason of any act, omission,
matter, cause or thing whatsoever arising from the beginning of time to and
including the date of this Amendment, whether such claims, demands and causes of
action are matured or unmatured or known or unknown.
15. COSTS AND EXPENSES. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Agent on demand for
all costs and expenses incurred by the Agent in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Agent
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Agent may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
16. AGENCY FEE. The Borrower agrees to pay to the Agent,
for the account of both Agents, a Warehousing agency fee of $100,000, payable
upon execution of this Amendment. The Warehousing agency fee shall be deemed
fully earned by the Agents upon execution of this Amendment.
17. MISCELLANEOUS. This Amendment and the Acknowledgment
and Agreement of Guarantors may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original and all of
which counterparts, taken together, shall constitute one and the same
instrument.
[SIGNATURE PAGES FOLLOW]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Credit Agreement and Notes to be duly executed as of the date first
written above.
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By /s/John E. Christensen
---------------------------------
John E. Christensen
Its Senior Vice President
NORWEST BANK COLORADO,
NATIONAL ASSOCIATION,
as Agent and Lender
By /s/Sandra A. Sauer
---------------------------------
Sandra A. Sauer
Its Vice President
NORWEST EQUIPMENT FINANCE,
INC., as Collateral Agent and Lender
By /s/Judy I. VanOsdel
---------------------------------
Judy I. VanOsdel
Its Vice President
<PAGE>
FIRST INTERSTATE BANK
OF DENVER, N.A.
By /s/Kirk D. Reed
---------------------------------
Kirk D. Reed
Its Vice President
THE DAIWA BANK, LIMITED
By /s/David M. Lawrence /s/David I. Hughes
----------------------------------------------
David M. Lawrence
Its Vice President & Its Senior Vice President and
Manager Regional Manager (West)
FIRST NATIONAL BANK OF BOSTON
By /s/Gunther Fritze
---------------------------------
Gunther Fritze
Its Director
M1:0094007.01
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of
Capital Associates International, Inc. (the "Borrower") to the Lenders described
in the foregoing Amendment (the "Lenders") pursuant to their separate
Guaranties, each dated as of November 30, 1994 (each a "Guaranty"), hereby
acknowledges receipt of the foregoing Second Amendment; (ii) consents to the
terms (including without limitation the release set forth in paragraph 14 of the
Amendment) and execution thereof; (iii) reaffirms its obligations to the Lenders
pursuant to the terms of its Guaranty; and (iv) acknowledges that the Lenders
may amend, restate, extend, renew or otherwise modify the Credit Agreement and
any indebtedness or agreement of the Borrower, or enter into any agreement or
extend additional or other credit accommodations, without notifying or
obtaining the consent of the undersigned and without impairing the
liability of the undersigned under its Guaranty for all of the Borrower's
present and future indebtedness to the Lenders.
CAPITAL ASSOCIATES, INC.
By /s/John E. Christensen
-------------------------------------
Its Senior Vice President, Chief
---------------------------------
Financial Officer and Treasurer
CAI EQUIPMENT LEASING I CORPORATION
By /s/John E. Christensen
-------------------------------------
Its Senior Vice President, Principal
---------------------------------
Financial and Chief Administrative
Officer
CAI EQUIPMENT LEASING III CORPORATION
By /s/John E. Christensen
-------------------------------------
Its Senior Vice President, Principal
---------------------------------
Financial and Chief Administrative
Officer
<PAGE>
CAI EQUIPMENT LEASING IV CORPORATION
By /s/John E. Christensen
-------------------------------------
Its Senior Vice President, Principal
---------------------------------
Financial and Chief Administrative
Officer
CAI PARTNERS MANAGEMENT COMPANY
By /s/John E. Christensen
-------------------------------------
Its Senior Vice President, Principal
---------------------------------
Financial and Chief Administrative
Officer
CAPITAL EQUIPMENT CORPORATION
By /s/John E. Christensen
-------------------------------------
Its Senior Vice President
---------------------------------
CAI LEASE SECURITIZATION I CORPORATION
By /s/John E. Christensen
-------------------------------------
Its President
-------------------------------------
M1:0094007.01
EXHIBIT 10.52
[USCBD]
ASSIGNMENT AND ASSUMPTION
AGREEMENT AND ASSUMPTION dated as of February 2, 1996 between
The Daiwa Bank, Limited, a bank organized under the laws of Japan ("Assignor")
and The Sumitomo Bank, Limited, a bank organized under the laws of Japan
("Assignee").
W I T N E S S E T H:
WHEREAS, Assignor desires to assign all of its right, title
and interest in and to the loan agreements (the "Loan Agreements") set forth on
Schedule A hereto and the other agreements set forth on Schedule A hereto and
all documents related to the Loan Agreements to the extent related to
obligations under the Loan Agreements (collectively, the "Agreement") and all of
its liabilities and obligations under the Agreements, and the Assignee desires
to accept the assignment of such right, title and interest and to assume such
liabilities and obligations;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements hereinafter set forth, Assignor and Assignee
agree as follows:
1. ASSIGNMENT. As of the Effective Date, Assignor hereby
sells, assigns, transfers and sets over to Assignee all of its right, title and
interest in ant to, and obligations under, the Agreements, including without
limitation Assignor's commitments to extend credit pursuant to the Agreements,
as in effect on the Effective Date, and the amounts owing to Assignor on the
Effective Date pursuant to the Agreements.
2. ASSUMPTION. As of the Effective Date, Assignee hereby
accepts the assignment by Assignor of Assignor's right, title and interest in
and to, and obligations under, the Agreements, and hereby fully and
unconditionally assumes all of Assignor's liabilities and obligations under the
Agreements. As of the Effective Date, (a) Assignee shall be a party to the
Agreements and, to the extent provided in this Assignment and Assumption, have
the rights and obligations of Assignor thereunder and (b) Assignor shall, to the
extent provided in this Assignment and Assumption, relinquish its rights and be
released from its obligations under the Agreements.
<PAGE>
3. EFFECTIVENESS. This Assignment and Assumption shall
become effective on February 2, 1996 (the "Effective Date").
4. GOVERNING LAW. This Assignment and Assumption shall be
governed by and construed in accordance with the laws of the State of New York.
5. COUNTERPARTS. This Assignment and Assumption may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signature thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment
and Assumption to be duly executed in their respective corporate names by their
respective duly authorized officers, all as of the day and year first above
written.
THE DAIWA BANK, LIMITED
By /s/B.P. Maddams
----------------------------------------
Name: B.P. Maddams
Title: Executive Vice President &
Assistant General Manager
By /s/Brian M. Smith
----------------------------------------
Name: Brian M. Smith
Title: Senior Vice President &
Regional Manager
THE SUMITOMA BANK, LIMITED
By /s/Yukoh Araya
----------------------------------------
Name: Yukoh Araya
Title: Vice President
2
<PAGE>
[REDACTED]
SCHEDULE A
----------
Capital Associates International, Inc.
Credit and Security Agreement, dated as of November 30, 1994, among
Capital Associates International, Inc. as Borrower, the Banks named
therein and Norwest Bank Colorado, N.A. as Agent.
17
<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> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 5,548
<SECURITIES> 0
<RECEIVABLES> 1,066
<ALLOWANCES> 44
<INVENTORY> 223
<CURRENT-ASSETS> 0
<PP&E> 31,829
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,153
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 22,483
<TOTAL-LIABILITY-AND-EQUITY> 96,638
<SALES> 53,798
<TOTAL-REVENUES> 59,089
<CGS> 53,033
<TOTAL-COSTS> 54,442
<OTHER-EXPENSES> 1,997
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 2,398
<INCOME-PRETAX> 227
<INCOME-TAX> 91
<INCOME-CONTINUING> 136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
