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, 1997
[ ] 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 EmployerIdentification 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 $3,680,625
based upon 1,510,000 shares held by such persons and the closing price on July
18, 1997 of $2.4375. The number of shares outstanding of the Registrant's $.008
par value common stock at July 18, 1997 was 5,016,232.
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 23 Pages Exhibit Index Begins on Page 20
<PAGE>
PART I
Item 1. Business
--------
Capital Associates, Inc. ("CAI" or the "Company"), was incorporated as a holding
company in October 1986. Its principal operating subsidiary, Capital Associates
International, Inc. ("CAII"), was incorporated in December 1976. The Company 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 1997 Significant Accomplishments
- --------------------------------------------------------------------
During fiscal years 1997, 1996, 1995, 1994 and 1993, the Company reported net
income of $733,000, $604,000, $1,116,000, $710,000 and $1,396,000, respectively.
The Company's profits during these five years were achieved primarily as a
result of (1) expanding and improving its lease originations, asset management,
remarketing and leased equipment sales activities, (2) the sale of other
corporate assets and the settlement of litigation and (3) a substantial
reduction of operating expenses in part due to improved back office efficiency.
During fiscal year 1997, as a result of continuing emphasis on improving lease
originations, operating efficiencies and competitive costs of capital, the
Company:
* invested in its sales force through an extensive training program and
personnel expansion
* reported profits for the fifth consecutive year and twentieth consecutive
quarter
* had lease originations exceeding $230 million, the highest level during the
last five years
* raised $27.6 million through the offering of Class A Limited Partner Units
in Capital Preferred Yield Fund IV
* expanded its financing capabilities by closing $22 million of lease
originations into two new private investment programs
Significant factors impacting the Company's profitability in the future include
the ability to develop and retain the field sales force, the amount of new
capital available to the Company, the cost of that capital and the ability to
increase lease origination levels while achieving profitability targets. The
Company continues to explore possible sources of new capital including, for
example, obtaining new or additional recourse debt, securitizing lease
transactions and selling equipment leases originated by the Company to private
investors. The Company intends to operate profitably by continuing to (1)
generate leasing margin from investing in its own lease portfolio, (2) remarket
equipment for a profit, (3) sell a majority of its lease originations for fee
income to its public income funds ("PIFs") and various private investors
including joint venture partners and other strategic alliances, and (4) control
its operating costs.
Leasing Activities
- ------------------
The Company attempts to diversify its lease origination and funding sources in
order to enhance its competitiveness regardless of changes in technology or
regulations. Lease originations are diversified (1) through its hiring and
training practices relative to the retail originations sales force, (2) locating
the retail originations sales force in regional branch offices throughout the
United States, (3) by targeting specific industries and equipment types for
lease originations, (4) by buying leases equipment on a wholesale basis (i.e.,
from other lessors), and (5) originating leases through associations with
equipment vendors (an area which the Company intends to further emphasize during
1998). Funding sources are diversified by (1) matching lease equipment
originations with the investment needs of private investors, (2) originating
leases on behalf of its PIFs and (3) securitizing lease transactions for its own
portfolio.
2 of 23
<PAGE>
Item 1. Business, continued
--------
Leasing Activities, continued
- ------------------
All of the Company's lease transactions are net leases with a specified
noncancelable lease term. These noncancelable leases have a "hell-or-high-water"
provision which requires the lessee to make all lease payments under all
circumstances and which requires the lessee to insure the equipment against
casualty loss, and pay all related maintenance expenses and property, sales and
other taxes. The Company originates two basic types of leases, direct financing
leases ("DFLs") and operating leases ("OLs"). In accordance with 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, 1997, the Company's net investment in DFLs was
approximately $8 million and its net investment in OLs was approximately $71
million. See Note 1 to Notes to Consolidated Financial Statements for a
discussion of the Company's lease accounting policies.
Leases are originated for the Company's own account, its PIFs and private
investors. The Company's lease origination 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 creditworthiness as well as the importance of
the equipment to the lessee's business. With respect to the equipment, the
Company evaluates the equipment's remarketability, upgrade potential and the
probability that the equipment will continue to be installed in place at the end
of the initial lease term because, typically, remarketing equipment in place
produces better residual returns than equipment sold or leased to a third party.
The Company leases equipment to lessees in diverse industries throughout the
United States. To minimize credit risk, the Company has established credit
underwriting standards which specify that 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 (an "investment grade credit"), 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 (a "less than investment grade
credit"). As of May 31, 1997, approximately 99% of the equipment owned by the
Company was leased to companies that meet the above criteria.
Over the past three fiscal years, the Company has diversified its own equipment
lease portfolio (as well as the equipment portfolio it manages for private
investors and the PIFs) to include all types of equipment that meet the
Company's underwriting standards with emphasis on (i) material handling
equipment, (ii) office furniture and store fixtures, (iii) circuit board and
semiconductor manufacturing, production and testing equipment, (iv) machine tool
and factory automation equipment and (v) information technology equipment.
The Company only purchases equipment that is subject to relatively short-term
leases (generally seven years or less). The Company finances such equipment
purchases with the proceeds of borrowings under the Working Capital Facility or
Warehouse Facility components of its Bank Facility or internally generated funds
pending (1) the sale of the equipment to a strategic funding partner, joint
venture partner, private investor or PIF, or (2) the permanent non-recourse
financing of the equipment or the securitization of the equipment/lease held for
its own account. In the case of leases held for the Company's account, the
typical lease transaction requires a cash investment by the Company of 5% to 30%
of the original equipment cost, commonly known in the industry as an "equity
investment", and all permanent non-recourse borrowings related to the
transaction are secured by a first lien on the equipment and the related lease
rental payments. The Company's equity investment is typically financed with
either proceeds from borrowings under its Working Capital Facility or internally
generated funds. The Company recovers its equity investment 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.
3 of 23
<PAGE>
Item 1. Business, continued
--------
Leasing Activities, continued
- ------------------
Lease originations of $231 million for fiscal year 1997 were financed through
$63 million of sales to the PIFs, $101 million of sales to private investors,
and the remaining $67 million of leases, which were held for the Company's
account (a significant portion of which will be sold during fiscal year 1998),
were financed through the use of the Company's cash, accounts payable,
non-recourse bank debt and recourse bank debt under its Warehouse Facility.
As a result of the present relatively low interest rate environment and
resulting relatively low lease rates, the Company sells the majority of leases
it originates to private investors having a lower cost of capital than the
Company.
The Company is able to originate a certain amount of leases with higher lease
rates. Such leases are generally sold to the PIF's because, as PIF sponsor, the
Company has a fiduciary responsibility to maximize investor returns and does so
by blending higher yielding transactions with investment grade credit quality
leases having lower lease rates. However, given the present market environment,
the number of higher yielding transactions having adequate credit quality is
limited, and consequently, the volume of leases sold to the PIF's is limited.
Consequently, future equipment sales to PIF's are expected to comprise a smaller
percentage of total placements of new lease originations than in the past.
The Company continues to evaluate additional sources of capital (from sources
such as securitization or a private debt placement) which will provide the
liquidity necessary to significantly add leases to its own portfolio. The goal
of such financing will be to lower the Company's cost of capital and expand the
availability of capital. The Company believes this will enable it to originate
leases for its own portfolio which have competitive market lease rates and good
credit quality. The Company believes that in the present market there are
significant opportunities to originate leases having these characteristics.
However, the Company's present capital structure (i.e., both cost of capital and
amount available) precludes taking full advantage of market opportunities for
such leases. Should the Company be successful in identifying and closing on new
financing meeting these criteria (for which no assurance can be given), it
intends to grow its own lease portfolio.
During fiscal years 1997, 1996 and 1995, leasing revenue was $14.4 million,
$10.2 million, and $7.7 million, respectively.
During fiscal year 1997 and 1996, payments from one lessee accounted for 13% and
11%, respectively, of total leasing revenue. In addition, other equipment sales
revenue related to equipment leased to that lessee accounted for 77% and 88% of
total other equipment sales revenue during fiscal years 1997 and 1996,
respectively. No lessee accounted for 10% or more of the Company's revenues in
fiscal year 1995.
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 historical
loss experience for leases originated since 1991 is less than 1%.
4 of 23
<PAGE>
Item 1. Business, continued
--------
Underwriting Standards, continued
- ----------------------
The Company's Transaction Review Committee, which is comprised 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) monitors 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. All transactions over $3,000,000 with a less than
investment grade credit and over $5,000,000 with an investment grade credit must
also be approved by the Executive 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). 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) because generally,
remarketing equipment in place produces better residual returns than equipment
sold or re-leased to a third-party. However, if the Company is unsuccessful in
keeping the equipment in place, it will attempt to sell or re-lease the off-
lease equipment to a different lessee, or sell the off-lease equipment to
equipment brokers or dealers. Revenue from remarketing activities was $6.0
million, $3.0 million, and $4.6 million during fiscal years 1997, 1996 and 1995,
respectively.
The Company attempts to maximize the remarketing proceeds from, and to 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 and PIFs
- ----------------------------------
The Company sells ownership interests in leased equipment to private investors
for fee income. In accordance with GAAP, the Company records sales revenue and
costs of sales on what is known as a "broad" basis, meaning equipment sales
revenue is equal to the sales price of the equipment and equipment sales cost is
equal to the carrying value of the equipment. In the event the Company
warehouses a transaction prior to sale, the Company records leasing revenue and
expenses during the warehouse period. Revenue from the sale of equipment under
lease to private investors was $131.6 million, $91.0 million, and $24.7 million
during fiscal years 1997, 1996 and 1995, respectively.
The Company currently sponsors or co-sponsors seven PIFs. The Company sells a
significant portion of the equipment it acquires for lease to its PIFs. Revenue
from the sale of equipment under lease to the PIFs was $67.0 million, $72.2
million, and $43.6 million during fiscal years 1997, 1996 and 1995,
respectively.
5 of 23
<PAGE>
Item 1. Business, continued
--------
Private Investor Programs and PIFs, continued
- ----------------------------------
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 Class A limited partnership units
("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) including acquisition fees and on-going
management fees, (2) reimbursement for organizational and offering expenses
incurred in selling the Class A Units (subject to certain dollar limits), (3)
Class B interest cash distributions from each PIF (subordinated to the cash
returns on the Class A Units), (4) general partner cash distributions and (5)
reimbursement of certain operating expenses incurred in connection with each
PIFs operations.
Capital Preferred Yield Fund IV began selling units to investors during April
1996 and is the only PIF currently offering Class A Units for sale to the
public. In the aggregate, the seven PIFs have sold $349 million of Class A Units
to the public through May 31, 1997. Up to $21 million of Class A Units will be
offered for sale to the public during fiscal year 1998. CAII's maximum remaining
obligation to make Class B partner cash contributions is $0.2 million.
Competition
- -----------
The Company competes mainly on the basis of its lease rates, terms offered in
its leasing transactions, reliability in meeting its commitments and customer
service. Lease rates are determined primarily by the Company's funding costs and
equipment residuals resulting from its remarketing capability. The Company's
continued ability to compete effectively may be materially affected by the
availability of funding options and of financing and the costs of such
financing. 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 108 employees as of May 31, 1997 versus 96 employees as of May
31, 1996, none of whom were represented by a labor union. The Company believes
that its employee relations are good.
Item 2. Properties
----------
The Company leases office facilities (approximately 23,000 square feet) in
Lakewood, Colorado (a suburb of Denver). These facilities house the Company's
administrative, financing and marketing operations. 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.
6 of 23
<PAGE>
Item 3. Legal Proceedings
-----------------
The Company is involved in the following legal proceedings:
a. The Company is involved in certain arbitration proceedings pursuant to the
requirements of the National Association of Securities Dealers ("NASD"),
representing three claims against CAI Securities Corporation, a wholly
owned subsidiary of the Company. All three claims allege breach of
fiduciary duty, breach of contract, negligence and misrepresentation with
regard to the sale of limited partnership units in Leastec Income Fund V
("LIFV"), a limited partnership whose general partner is an affiliate of
the Company. The three claims involve investments in LIFV of approximately
$625,000 and seek damages of $838,000 and special punitive and exemplary
damages (one claim specifies $1,500,000 in such damages while the other two
claims do not specify an amount). All three claims have been brought by the
same company on behalf of three investors. Management has been of the
belief that it has good and substantial defenses against these claims and
that the Company's subsidiary will prevail. In July 1997, one of the cases,
seeking $500,000 in damages and $1,500,000 in punitive damages, was heard
by an NASD arbitration panel and that arbitration panel has now determined
that there was no breach of fiduciary duty, no breach of contract, no
negligence and no misrepresentation with regard to the sale of limited
partnership units of LIFV and the subsequent financial reporting thereof
and that no award is due the claimant under any of his claims. The claimant
was assessed $7,300 in forum fees by the NASD for the arbitration
proceeding.
b. The Company is involved in other routine legal proceedings incidental to
the conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition
or operations of the Company
Item 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, 1997.
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.
7 of 23
<PAGE>
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.
1998 HIGH LOW
---- ---- ---
First Quarter (through July 18, 1997) 3 1/2 2 1/4
1997 HIGH LOW
---- ---- ---
First Quarter 4 3/8 2 1/8
Second Quarter 4 1/4 3 1/8
Third Quarter 4 1/4 2 7/8
Fourth Quarter 3 13/16 2 1/2
1996 HIGH LOW
---- ---- ---
First Quarter 2 3/8 1 1/4
Second Quarter 2 1/8 1 1/2
Third Quarter 1 7/8 1 3/8
Fourth Quarter 3 5/16 1 5/8
On July 18, 1997, the date on which trading activity last occurred, the closing
sales price of the Company's stock was $2.4375. On July 18, 1997, there were
approximately 180 shareholders of record and at least 520 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 8 to Notes to Consolidated Financial Statements for
a discussion of restrictions on CAII's ability to transfer funds to the Company
which, in turn, limits 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.
8 of 23
<PAGE>
Income Statement Data
- ---------------------
(in thousands, except per share and number of shares data)
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Equipment sales $ 204,545 $ 166,242 $ 81,370 $ 122,469 $ 96,233
Leasing 14,420 10,212 7,672 13,368 26,003
Interest 4,582 6,716 11,386 15,027 15,526
Other 3,987 3,511 4,516 4,101 3,638
--------- --------- --------- --------- ---------
227,534 186,681 104,944 154,965 141,400
--------- --------- --------- --------- ---------
Costs and expenses:
Equipment sales 200,018 161,797 70,866 114,440 85,423
Leasing 8,928 5,466 3,893 5,511 12,148
Operating and other expenses 9,568 8,332 11,603 12,307 14,060
Provision for losses 365 430 2,940 1,315 2,070
Interest - non-recourse debt 6,012 7,705 12,548 18,370 22,091
Interest - recourse debt 1,900 2,145 1,618 1,839 3,282
--------- --------- --------- --------- ---------
226,791 185,875 103,468 153,782 139,074
--------- --------- --------- --------- ---------
Income before income taxes 743 806 1,476 1,183 2,326
Income tax expense 10 202 360 473 930
--------- --------- --------- --------- ---------
Net income $ 733 $ 604 $ 1,116 $ 710 $ 1,396
========= ========= ========= ========= =========
Earnings per common and dilutive common equivalent share:
PRIMARY:
Net income per share $ .14 $ .12 $ .21 $ .13 $ .27
FULLY DILUTED:
Net income per share $ .14 $ .11 $ .21 $ .13 $ .26
Weighted average number of common and
dilutive common equivalent shares outstanding
used in computing earnings per share:
PRIMARY 5,403,000 5,186,000 5,325,000 5,451,000 5,153,000
FULLY DILUTED 5,414,000 5,393,000 5,337,000 5,451,000 5,444,000
Balance Sheet Data
- ------------------
(in thousands) May 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Total assets $ 146,517 $ 127,511 $ 158,956 $ 209,725 $ 280,635
Recourse bank debt 20,712 17,538 24,520 18,767 37,857
Discounted lease rentals 61,466 63,749 98,216 160,842 210,561
Stockholders' equity 23,501 22,881 22,490 21,099 20,303
</TABLE>
9 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
I. Results of Operations
---------------------
During fiscal years 1997, 1996, 1995, 1994 and 1993, the Company reported
net income of $733,000, $604,000, $1,116,000, $710,000 and $1,396,000,
respectively.
Operating results are subject to fluctuations resulting from several
factors, including seasonality of lease originations, variations in the
relative percentages of the Company's leases entered into during the period
which are classified as DFLs or OLs, or are sold for fee income as well as
the level of fee income obtained from the sale of leases in excess of lease
equipment cost. The Company will adjust the mix of OLs and DFLs and volume
of leases sold to private investors 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.
In the ordinary course of business, the Company will continue to (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. Presented below is a schedule showing new
lease originations volume and the placement of new lease originations by
fiscal year (in thousands).
Year ended May 31,
------------------------------
1997 1996 1995
-------- -------- --------
Placement:
Equipment under lease sold to PIFs $ 63,000 $ 67,000 $ 44,000
Equipment under lease sold to private
investors 101,000 82,000 25,000
Leases added to the Company's lease
portfolio (a significant portion of
which will be/were sold during the
subsequent fiscal years) 67,000 43,000 27,000
-------- -------- --------
Total lease origination volume $231,000 $192,000 $ 96,000
======== ======== ========
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.
However, the Company has developed relationships with various private
investors and formed various strategic alliances with investors that have a
lower cost of capital enabling the Company to originate and sell leases at
competitive prices.
As a result of the present relatively low interest rate environment and
resulting relatively low lease rates, the Company sells the majority of
leases it originates to private investors having a lower cost of capital
than the Company.
10 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
The Company is able to originate a certain amount of leases with higher
lease rates. Such leases are generally sold to the PIF's because, as PIF
sponsor, the Company has a fiduciary responsibility to maximize investor
returns and does so by blending higher yielding transactions with
investment grade credit quality leases having lower lease rates. However,
given the present market environment, the number of higher yielding
transactions having adequate credit quality is limited, and consequently,
the volume of leases sold to the PIF's is limited. The Company's response
to these factors has been to limit the amount of funds it raises from PIF
investors. Consequently, future equipment sales to PIF's are expected to
comprise a smaller percentage of total placements of new lease originations
than in the past.
The Company continues to evaluate additional sources of capital (from
sources such as securitization or a private debt placement) which will
provide the liquidity necessary to significantly add leases to its own
portfolio. The goal of such financing will be to lower the Company's cost
of capital and expand the availability of capital. The Company believes
this will enable it to originate leases for its own portfolio which have
competitive market lease rates and good credit quality. The Company
believes that in the present market there are significant opportunities to
originate leases having these characteristics. However, the Company's
present capital structure (i.e., both cost of capital and amount available)
precludes taking full advantage of market opportunities for such leases.
Should the Company be successful in identifying and closing on new
financing meeting these criteria (for which no assurance can be given), it
intends to grow its own lease portfolio.
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 The effect Statements of Income The effect
for the years on net income for the years on net income
ended May 31, of changes ended May 31, of changes
---------------------- between ---------------------- between
1997 1996 years 1996 1995 years
--------- -------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 4,527 $ 4,445 $ 82 $ 4,445 $ 4,404 $ 41
MBank sales margin - - - - 6,100 (6,100)
Leasing margin (net of interest expense
on discounted lease rentals) 4,062 3,757 305 3,757 2,617 1,140
Other income 3,987 3,511 476 3,511 4,516 (1,005)
Operating and other expenses (9,568) (8,332) (1,236) (8,332) (11,603) 3,271
Provision for losses (365) (430) 65 (430) (2,940) 2,510
Interest expense on recourse debt (1,900) (2,145) 245 (2,145) (1,618) (527)
Income taxes (10) (202) 192 (202) (360) 158
-------- -------- -------- --------- -------- --------
Net income $ 733 $ 604 $ 129 $ 604 $ 1,116 $ (512)
======== ======== ======== ========= ======== ========
</TABLE>
11 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
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,
---------------------------------------------- Increase
1997 1996 (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 $ 66,987 $ 1,442 $ 72,202 $ 1,539
Equipment under lease sold to private investors 131,600 1,768 91,007 1,303
--------- --------- -------- ---------
198,587 3,210 163,209 2,842 $ 35,378 $ 368
--------- --------- --------- --------- -------- ---------
Transactions subsequent to initial lease termination:
Sales of off-lease equipment 5,359 720 2,121 859
Sales-type leases 71 69 359 191
Excess collections (cash collections in excess
of the associated residual value from equipment
under lease sold to private investors) 528 528 553 553
--------- --------- -------- ---------
5,958 1,317 3,033 1,603 2,925 (286)
Deduct related provision for losses - (365) - (430) - 65
--------- --------- --------- --------- -------- ---------
Realizations of value in excess of provision for
losses 5,958 952 3,033 1,173 2,925 (221)
Add back related provision for losses - 365 - 430 - (65)
--------- --------- --------- --------- -------- ---------
5,958 1,317 3,033 1,603 2,925 (286)
--------- --------- --------- --------- -------- ---------
Total equipment sales $ 204,545 $ 4,527 $ 166,242 $ 4,445 $ 38,303 $ 82
========= ========= ========= ========= ======== =========
Year Ended May 31,
---------------------------------------------- Increase
1996 1995 (Decrease)
---------------------------------------------- ---------------------
Revenue Margin Revenue Margin Revenue Margin
--------- --------- --------- --------- --------- ---------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 72,202 $ 1,539 $ 43,638 $ 1,047
Equipment under lease sold to
private investors 91,007 1,303 24,700 423
--------- --------- --------- --------- -------- ---------
163,209 2,842 68,338 1,470 $ 94,871 $ 1,372
--------- --------- --------- --------- -------- ---------
Transactions subsequent to initial lease termination:
Sales of off-lease equipment 2,121 859 2,505 1,269
Sales-type leases 359 191 1,227 765
Excess collections (cash collections in excess
of the associated residual value from equipment
under lease sold to private investors) 553 553 900 900
--------- --------- --------- ---------
3,033 1,603 4,632 2,934 (1,599) (1,331)
Deduct related provision for losses - (430) - (1,940)* - 1,510
--------- --------- --------- --------- -------- ---------
Realizations of value in excess of
provision for losses 3,033 1,173 4,632 994 (1,599) 179
Add back related provisions for losses - 430 - 1,940 - (1,510)
--------- --------- --------- --------- -------- ---------
3,033 1,603 4,632 2,934 (1,599) (1,331)
--------- --------- --------- --------- -------- ---------
Total equipment sales $ 166,242 $ 4,445 $ 72,970 $ 4,404 $ 93,272 $ 41
========= ========= ========= ========= ======== =========
</TABLE>
* Excludes $1,000 of bankrupt lessee credit losses occurring prior to the
expiration of the initial lease term (none for fiscal year 1996)
12 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
EQUIPMENT SALES, continued
Equipment Sales to PIFs
-----------------------
Equipment sales to the PIFs decreased during fiscal year 1997 as compared
to fiscal year 1996 and are expected to decrease further in fiscal year
1998 because during 1997 three of the PIFs entered the planned liquidation
stage. Once a PIF enters the liquidation stage, it no longer acquires
equipment under lease. Presently, two PIFs are actively acquiring leases
compared to four PIFs which were actively acquiring leases in 1996.
Equipment sales to PIFs increased during fiscal year 1996 as compared to
fiscal year 1995 principally because more leases were identified and closed
as a result of the increased productivity of the field lease originations
team (see further discussion below).
Equipment Sales to Private Investors
------------------------------------
Equipment sales to private investors increased principally because more
leases were identified and closed as a result of 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 and
vertical integration (i.e., the development of specialized equipment and
remarketing expertise) and due to establishment of a strategic alliance
with an investor having a lower cost of capital enabling the Company to
originate and sell leases at competitive prices.
Equipment sales to private investors margin as a percentage of equipment
sales revenue decreased primarily because leases sold to private investors
during fiscal year 1997 were generally held for a longer period of time
pending sale than in prior years. For the period of time a lease is held
pending sale, the Company records leasing revenue.
Remarketing of the Portfolio and Related Provision for Losses
-------------------------------------------------------------
The Company has been successful in realizing gains on the remarketing of
its equipment after the initial lease term for the past twenty consecutive
quarters. 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 after the expiration of the initial lease term) is recorded as
provision for losses. As shown in the tables above, the realizations from
sales exceeded the provision for losses for fiscal years 1997, 1996 and
1995, even without considering realizations from remarketing activities
recorded as leasing margin.
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 equipment's remarketability,
upgrade potential and the probability that the equipment will continue to
be installed in place at the end of the initial lease term. 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.
13 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Related Provision for Losses, continued
-------------------------------------------------------------
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. As shown in the table above,
(1) because the Company sold substantially all new lease originations to
its PIFs and retained very few lease originations for its own account
during the fiscal years preceding fiscal year 1995, and (2) in accordance
with GAAP, the Company does not consolidate the results of its PIFs,
generally fewer leases have matured and less equipment has been available
for remarketing each quarter since May 31, 1993. However, revenue from
remarketing sales increased during 1997, compared to 1996 primarily due to
the sale of approximately $1.5 million of earth moving equipment and the
early termination sale of approximately $2.5 million of manufacturing
equipment. Although fluctuations will occur as discussed in the preceding
sentence, in general, remarketing revenue and margin are expected to remain
at levels which are lower than fiscal 1996 and prior years. 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 immediately increase the pool of maturing leases because
new leases typically are not remarketed until after their initial term
(which averages approximately four years).
The Company's policy is to record allowances for losses as soon as any
other-than-temporary declines in asset values are known. However,
chargeoffs are recorded upon the termination or remarketing of the
underlying assets. As such, chargeoffs will primarily occur subsequent to
the recording of the allowances for losses.
The provision for losses recorded during fiscal year 1997 included the
following significant items:
* Approximately $275,000 for other-than-temporary declines in the value
of equipment which occurred primarily because lessees returned
equipment to the Company at the end of the lease. The Company had
previously expected to realize the carrying value of that equipment
through lease renewals and proceeds from sale of the equipment to the
original lessee. The fair market value of the equipment re-leased or
sold to a third party was considerably less than was anticipated.
* Approximately $90,000 as a result of a lease having a net book value of
$245,000 at February 28, 1997 with a lessee that filed for bankruptcy
protection under Chapter 11 of the Bankruptcy code during the third
quarter fiscal 1997.
The provision for losses recorded during fiscal year 1996 included the
following significant items:
* approximately $539,000 related to the sale of a note receivable on a
jet aircraft, and
* approximately $525,000 to write down the carrying value of certain
retained residuals.
* A reversal of approximately $750,000 recorded during fiscal year 1995
for estimated loss exposure (as discussed below).
14 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Related Provision for Losses, continued
-------------------------------------------------------------
The provision for losses recorded during fiscal year 1995 included the
following:
* 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 was returned to the Company
* 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.
The increase in equipment held for sale or re-lease primarily reflects one
aircraft which was returned to the Company upon lease termination. The
Company is presently evaluating re-lease opportunities and expects to
re-lease the aircraft during fiscal year 1998.
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Fiscal Years Ended May 31,
----------------------------------
1997 1996 1995
-------- -------- --------
Leasing revenue $ 14,420 $ 10,212 $ 7,672
Leasing costs and expenses (8,928) (5,466) (3,893)
Net non-recourse interest expense
on related discounted lease rentals (1,430) (989) (1,162)
-------- -------- --------
Leasing margin $ 4,062 $ 3,757 $ 2,617
======== ======== ========
Leasing margin ratio 28% 37% 34%
======== ======== ========
The increase in leasing revenue, leasing costs and expenses and leasing
margin was primarily due to growth in the Company's lease portfolio,
including leases subsequently sold to private investors. These revenue and
expense amounts are expected to increase further as the Company continues
to grow its lease portfolio.
15 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
LEASING MARGIN, continued
Leasing margin ratio fluctuates based upon (i) the mix of direct finance
leases and operating leases, (ii) remarketing activities, (iii) the method
used to finance leases added to the Company's lease portfolio, as described
above and (iv) the relative age and types of leases in the portfolio
(Operating leases have a relatively lower leasing margin early in the lease
term and an increasing leasing margin as the lease term passes. The
majority of leases added to CAI's portfolio have been operating leases).
Interest expense arising from non-recourse bank debt (discounted lease
rentals) is reflected in leasing margin, but interest arising from the
warehouse facility is not reflected in leasing margin.
OTHER INCOME
Other income consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal years ended May 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Fees and distributions from the Company-sponsored PIFs $ 2,453 $ 2,958 $ 2,908
Gain on sale of the investment in Corporate Express, Inc. stock - - 671
Cancellation of option agreement to acquire certain mining equipment - - 444
Interest on income tax refunds 117 - 178
Interest on MBank settlement and hold back 129 227 -
Recovery of sales and property tax amounts previously expensed 201 118 371
Interest on installment sale of equipment 769 - -
Other 318 208 (56)
------- ------- -------
$ 3,987 $ 3,511 $ 4,516
======= ======= =======
</TABLE>
The Company recorded an installment sale contract in connection with the
settlement agreement reached with respect to the Hemmeter Litigation (which
is discussed in Footnote 15 to Notes to Consolidated Financial Statements
to the 1996 Form 10-K). During fiscal year 1997, the Company received $2.5
million of cash payments related to the installment sale. Expected future
cash payments and interest income under the installment sale are $2.0
million and $1.3 million, respectively.
OPERATING AND OTHER EXPENSES
Operating and other expenses increased $1.2 million (15%) for fiscal year
1997 as compared to fiscal year 1996. The increase included (i) $400,000
for commissions related to the increase in business volume, (ii) $400,000
for expenses principally related to training, travel and employee
acquisitions and (iii) $400,000 for consulting fees and expenses of the
Company's majority shareholder.
Operating and other expenses decreased approximately $3.3 million (28%) for
fiscal year 1996 compared to fiscal year 1995 due to on-going efforts to
improve operating efficiency. The decrease included (i) $1.5 million of
capitalized initial direct costs due to lease origination volume and (ii)
$700,000 related to on-going efforts to minimize costs. The decrease also
included the following significant expense reductions:
* $500,000 of legal fees primarily related to the MBank litigation and
the Hemmeter litigation.
* $300,000 of warehouse and other lease portfolio and asset management
costs.
* $400,000 of current insurance costs.
16 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
INTEREST INCOME AND EXPENSE
Interest income arises when equipment financed with non-recourse debt is
sold to investors. The accompanying Consolidated Statements of Income
reflect an equal amount of non-recourse interest expense. The decline in
interest income (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 non-recourse interest expense on related discounted lease rentals
increased due to an increase in the average outstanding balance of related
discounted lease rentals. It is anticipated that net non-recourse interest
expense on related discounted lease rentals will increase in the future as
the Company adds additional leases financed with non-recourse debt to its
portfolio.
Recourse interest expense decreased during fiscal year 1997, as compared to
fiscal year 1996, due to the continuing reductions in the outstanding
balance Term Loan portion of the Company's Debt Facility.
INCOME TAXES
As shown in the table in Note 10 to Notes to the Consolidated Financial
Statements, the Company's significant deferred tax assets consist of an ITC
carryforward of $1.3 million (which expires from 1998 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 and AMT credit
carryforward that may be utilized to reduce tax liability is significantly
limited due to the computation of AMT liability. As a result of the future
expiration of 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.
Income tax expense is provided on income at the appropriate statutory rates
applicable to such earnings. The appropriate statutory federal and state
income tax rate for fiscal years 1997, 1996 and 1995 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 fiscal years 1997 and 1996 was less than the effective rate of 40%
primarily due to the reduction in the valuation allowance. The reduction of
the valuation allowance recorded in fiscal 1997 represents the utilization
of an ITC carryforward and the receipt of a state income tax refund for
which a valuation allowance had been provided. The reduction of the
valuation allowance recorded in fiscal 1996 represents the utilization of
an ITC carryforward for which a valuation allowance had been provided.
During fiscal year 1996, 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 within a three year period ("a change in
control"). Upon a change in control, provisions of the Internal Revenue
Code limit the amount of ITC carryforwards and AMT carryforwards that could
be utilized to reduce income tax liability in any year. 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 and therefore, the change in control and
resulting limitation on the ITC and AMT carryforward is not expected to
reduce the recoverability of the amount of the deferred income tax assets,
net of the valuation allowance.
17 of 23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
II. Liquidity and Capital Resources
-------------------------------
The Company's activities are principally funded by proceeds from sales of
on-lease equipment (to its PIFs or private investors), non-recourse debt,
recourse bank debt (see Note 8 to Notes to Consolidated Financial
Statements), rents, fees and distributions from its PIFs, sales or
re-leases of equipment after the expiration of the initial lease terms and
other cash receipts from non-recurring items such as settlements of legal
proceedings. Management believes the Company's ability to generate cash
from operations is sufficient to fund operations, as shown in the
accompanying Consolidated Statements of Cash Flows.
The Company's Bank Facility has been extended through November 30, 1997.
See Note 8 to Notes to Consolidated Financial Statements for a description
of the Company's Bank Facility.
The Company began offering units of its latest PIF, CPYF IV, for sale
during April 1996. During fiscal year 1998, the Company has up to $22
million of Class A units in CPYF IV available for sale, which will
represent a source of liquidity and acquisition fee income for the Company.
Two of the Company's PIFs, including CPYF IV, are using a portion of their
available cash to purchase additional equipment from the Company. The
Company expects to sell approximately $55 million of equipment to these
PIFs during fiscal year 1998. Five of the Company's PIFs are in their
liquidation stage and are no longer purchasing material amounts of
equipment. For two of those PIFs, the Company is evaluating whether it
would be in the best interests of Class A unit holders to accelerate the
liquidation of the PIF's portfolio of leases. Should liquidation be
accelerated, the Company will immediately realize its Class B investment in
the PIFs.
Inflation has not had a significant impact upon the operations of the
Company.
III. New Accounting Pronouncements
-----------------------------
See Recently Issued Financial Accounting Standards under Note 1 to Notes to
the Consolidated Financial Statements for a discussion about the impact of
new accounting pronouncements on the Company's financial position or
results of operations.
IV. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
---------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may
be deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to
factors that could cause actual future results to differ both adversely and
materially from currently anticipated results, including, without
limitation, the level of lease originations, realization of residual
values, the availability and cost of financing sources and the ultimate
outcome of any contract disputes. Certain specific risks associated with
particular aspects of the Company's business are discussed in detail
throughout Parts I and II of this report when and where applicable.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
See the Index to Financial Statements and Schedule appearing at Page F-1 of this
Report.
Item 9. Disagreements on Accounting and Financial Disclosure
----------------------------------------------------
None.
18 of 23
<PAGE>
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 Schedule and Reports on Form 8-K
--------------------------------------------------------------
(a) and (d) Financial Statements and Schedule
---------------------------------
The financial statements and schedule listed on the accompanying Index of
Financial Statements and Schedule (page F-1) are filed as part of this Annual
Report.
(b) Reports on Form 8-K
-------------------
None
(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 1997 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.
19 of 23
<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").
4.2(a) Certificate of Incorporation as filed on October 17, 1986,
incorporated by reference to 4.2(a) of the December 15, 1995 Form S-3.
4.2(b) Certificate of Amendment to Certificate of Incorporation, as filed on
March 3, 1987, incorporated by reference to 4.2(a) of the December 15,
1995 Form S-3.
4.2(c) Certificate of Amendment of Certificate of Incorporation, as filed on
November 2, 1995, incorporated by reference to 4.2(a) of the December
15, 1995 Form S-3.
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.
20 of 23
<PAGE>
Item No. Exhibit Index
- -------- -------------
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").
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.
10.8(f) Extension and Amendment of Second Amended and Restated Dennis J. Lacey
Executive Employment Agreement executed on July 1, 1997 and effective
as of October 1, 1997, by and between Dennis J. Lacey, the Company and
Capital Associates International, Inc. ("CAII") (the "Lacey Employment
Agreement").
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.
21 of 23
<PAGE>
Item No. Exhibit Index
- -------- -------------
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.
10.50 Termination Agreement effective as of August 31, 1995 by and among
Jack Durliat, Gary M. Jacobs and CAI and CAII, incorporated by
reference to Exhibit 10.50 of the November 30, 1995 Form 10-Q.
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, incorporated by reference to Exhibit 10.51 of the
February 29, 1996 Form 10-Q.
10.52 Assignment and Assumption, dated as of February 2, 1996, between The
Daiwa Bank, Limited, Assignor, and The Sumitomo Bank, Limited,
Assignee, incorporated by reference to Exhibit 10.52 of the February
29, 1996 Form 10-Q.
10.53 Third Amendment to Credit Agreement and Notes, dated as of December 3,
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, incorporated by reference to Exhibit 10.53 of the
November 30, 1996 Form 10-Q.
11 Statement regarding Computation of Per Share Earnings
21 List of Subsidiaries, incorporated by reference to Exhibit 21 of the
May 31, 1996 Form 10-K.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
22 of 23
<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.
CAPITAL ASSOCIATES, INC.
Dated: August 12, 1997 By: /s/Anthony M. DiPaolo
----------------------
Anthony M. DiPaolo
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
--------- -----
/s/James D. Walker Chairman of the Board and Director
- ------------------
James D. Walker
/s/William H. Buckland Director
- ----------------------
William H. Buckland
/s/James D. Edwards Director
- -------------------
James D. Edwards
/s/Gary M. Jacobs Director
- -----------------
Gary M. Jacobs
/s/Dennis J. Lacey President, Chief Executive Officer and Director
- ------------------
Dennis J. Lacey
/s/Robert A. Sharpe Director
- -------------------
Robert A. Sharpe
/s/Joseph F. Bukofski Assistant Vice President and Controller
- --------------------- (Principal Accounting Officer)
Joseph F. Bukofski
Each of the above signatures is
affixed as of August 12, 1997
23 of 23
<PAGE>
INDEX OF FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Financial Statements
- --------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
May 31, 1997 and 1996 F-3
Consolidated Statements of Income for
the Years Ended May 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in
Stockholders' Equity for the Years
Ended May 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 to F-23
Schedule
- --------
Independent Auditors' Report F-24
Schedule II - Valuation and Qualifying
Accounts and Reserves for the Years
Ended May 31, 1997, 1996 and 1995 F-25
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, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
-------------------------
Denver, Colorado
July 11, 1997
F - 2
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and par value)
ASSETS
May 31,
----------------------
1997 1996
--------- ---------
Cash and cash equivalents $ 6,194 $ 2,851
Receivable from affiliated limited partnerships 726 1,849
Accounts receivable, net 417 945
Equipment held for sale or re-lease 1,242 177
Residual values, net, arising from equipment under
lease sold to private investors 4,334 3,374
Net investment in direct finance leases 7,700 14,967
Leased equipment, net 71,443 45,285
Investment in affiliated limited partnerships 6,642 8,759
Other 3,674 3,497
Deferred income taxes 2,300 1,900
Discounted lease rentals assigned to lenders arising
from equipment sale transactions 41,845 43,907
--------- ---------
$ 146,517 $ 127,511
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse bank debt $ 20,712 $ 17,538
Accounts payable - equipment purchases 30,231 14,071
Accounts payable and other liabilities 10,607 9,272
Discounted lease rentals 61,466 63,749
--------- ---------
123,016 104,630
--------- ---------
Commitments and contingencies (Notes 10, 14 and 15)
Stockholders' equity:
Common stock, $.008 par value, 15,000,000 shares
authorized, 5,157,000 and 5,139,000 shares issued 32 32
Additional paid-in capital 16,897 17,026
Retained earnings 6,854 6,121
Treasury stock, at cost (282) (298)
--------- ---------
Total stockholders' equity 23,501 22,881
--------- ---------
$ 146,517 $ 127,511
========= =========
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 shares and per share data)
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Equipment sales to affiliated limited partnerships $ 66,987 $ 72,202 $ 43,638
Other equipment sales 137,558 94,040 37,732
Leasing 14,420 10,212 7,672
Interest 4,582 6,716 11,386
Other 3,987 3,511 4,516
--------- --------- ---------
Total revenue 227,534 186,681 104,944
--------- --------- ---------
Costs and expenses:
Equipment sales 200,018 161,797 70,866
Leasing 8,928 5,466 3,893
Operating and other expenses 9,568 8,332 11,603
Provision for losses 365 430 2,940
Interest:
Non-recourse debt 6,012 7,705 12,548
Recourse debt 1,900 2,145 1,618
--------- --------- ---------
Total costs and expenses 226,791 185,875 103,468
--------- --------- ---------
Net income before income taxes 743 806 1,476
Income tax expense 10 202 360
--------- --------- ---------
Net income $ 733 $ 604 $ 1,116
========= ========= =========
Earnings per common and dilutive common equivalent share:
Primary $ .14 $ .12 $ .21
========= ========= =========
Fully diluted $ .14 $ .11 $ .21
========= ========= =========
Weighted average number of common and dilutive
common equivalent shares outstanding
used in computing earnings per share:
Primary 5,403,000 5,186,000 5,325,000
========= ========= =========
Fully diluted 5,414,000 5,393,000 5,337,000
========= ========= =========
</TABLE>
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, 1994 4,880,000 $ 60 $ 16,689 $ 4,401 16,000 $ (51) $ 21,099
Issuance of common stock under:
- incentive stock option plan 82,000 1 14 - - - 15
- non-qualified stock option plan 145,000 2 200 - - - 202
Income tax benefit from stock
compensation - - 58 - - - 58
Net income - - - 1,116 - - 1,116
--------- ---- -------- ------- ------- ------ --------
Balance at May 31, 1995 5,107,000 63 16,961 5,517 16,000 (51) 22,490
Issuance of common stock under:
- incentive stock option plan 27,000 - 19 - - - 19
- non-qualified stock option plan 5,000 - 6 - - - 6
Income tax benefit from stock
compensation - - 9 - - - 9
One-for-two reverse stock split - (31) 31 - - - -
Purchase of treasury shares - - - - 129,000 (247) (247)
Net income - - - 604 - - 604
--------- ---- -------- ------- ------- ------ --------
Balance at May 31, 1996 5,139,000 32 17,026 6,121 145,000 (298) 22,881
Issuance of common stock under:
- incentive stock option plan 6,000 - 4 - - - 4
- non-qualified stock option plan 12,000 - 10 - - - 10
Issuance of treasury shares upon
exercise of incentive stock options - - (16) - (5,000) 16 -
Income tax benefit from stock
compensation - - 11 - - - 11
Non-employee stock option buyout - - (138) - - - (138)
Net income - - - 733 - - 733
--------- ---- -------- ------- ------- ------ --------
Balance at May 31, 1997 5,157,000 $ 32 $ 16,897 $ 6,854 140,000 $ (282) $ 23,501
========= ==== ======== ======= ======= ====== ========
</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,
--------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 733 $ 604 $ 1,116
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,634 6,182 4,860
Recovery of investment in direct financing leases 3,786 6,362 6,913
Cost of sales 15,693 8,995 4,813
Provision for losses 365 430 2,940
Deferred income taxes (400) (100) (2,630)
Deferred financing costs (100) (118) (594)
Margin on MBank sale - - (6,100)
MBank sale proceeds - 10,800 -
Gain on sale of a portion of the investment in Corporate Express, Inc. - - (671)
Sales-type lease margin (69) (191) (765)
Decrease (increase) in accounts receivable 1,651 (1,947) 1,062
Other 1,879 (1,427) 3,390
--------- --------- ---------
Total adjustments 32,439 28,986 13,218
--------- --------- ---------
Net cash provided by operating activities 33,172 29,590 14,334
--------- --------- ---------
Cash flows from investing activities:
Equipment purchased for leasing (35,798) (23,979) (17,000)
Investment in leased office facility and in capital expenditures (452) (393) (178)
Net receipts from affiliated public income funds 1,810 1,222 1,961
Sale of a portion of the investment in Corporate Express, Inc. - - 677
--------- --------- ---------
Net cash used for investing activities (34,440) (23,150) (14,540)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 13,686 8,513 2,306
Principal payments on discounted lease rentals (12,125) (5,821) (9,219)
Proceeds from sales of common stock 14 25 217
Purchase of treasury shares - (247) -
Purchase of non-employee stock options (138) - -
Net borrowings (payments) on revolving credit facilities 7,507 (2,649) 13,638
Payments on Term Loan (4,333) (4,333) (7,885)
--------- --------- ---------
Net cash provided by (used for) financing activities 4,611 (4,512) (943)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,343 1,928 (1,149)
Cash and cash equivalents at beginning of year 2,851 923 2,072
--------- --------- ---------
Cash and cash equivalents at end of year $ 6,194 $ 2,851 $ 923
========= ========= =========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,900 $ 2,145 $ 1,535
Non-recourse interest paid 1,514 983 1,112
Income taxes paid 183 2,264 1,444
Income tax refunds received 602 83 923
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from equipment
sales transactions 24,266 14,095 3,123
Assumption of discounted lease rentals in lease acquisitions 22,499 19,324 5,550
Increase in residual values arising from equipment sale transactions 1,130 897 2,727
</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
-----------------------------
NATURE OF OPERATIONS
Capital Associates, Inc. ("CAI" or the "Company") was incorporated as a
holding company in October 1986. Its principal operating subsidiary, Capital
Associates International, Inc. ("CAII"), is primarily 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. The principal market for the Company's
activities is the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. For leasing entities, this is principally the estimate of
residual values, as discussed below. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CAI and its
subsidiaries. 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
No. 109"). 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.
F - 7
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
GENERAL ACCOUNTING PRINCIPLES, continued
-----------------------------
EQUIPMENT HELD FOR SALE OR RE-LEASE
Equipment held for sale or re-lease, recorded at the lower of cost or market
value less cost to sell, consists of equipment previously leased to end
users which has been returned to the Company following lease expiration. The
May 31, 1997 carrying value consists primarily of one aircraft.
EARNINGS PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARE
Primary and fully diluted earnings per common and dilutive common equivalent
share are computed by dividing net income by the weighted average number of
shares of common stock and dilutive common stock equivalents (consisting
solely of common stock options) outstanding during the period.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
STOCK OPTION PLAN
Prior to June 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB Opinion No. 25"), and
related interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On June 1, 1996, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in fiscal year 1996 and
future fiscal years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During fiscal 1997, the Company adopted SFAS No. 125, Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS No. 125"). SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The adoption of SFAS No. 125 did not have a
material impact on the Company's financial position or results of
operations.
SFAS No. 128, Earnings per Share ("SFAS No. 128"), which requires the
disclosure of basic earnings per share and diluted earnings per share was
issued during March 1997. SFAS No. 128 is effective for financial statements
for both interim and annual periods ending after December 15, 1997.
Therefore, the Company expects to adopt SFAS No. 128 in fiscal 1998 and
anticipates it will not have a material impact on the Company's calculation
of future earnings per share.
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
LEASE ACCOUNTING - Statement of Financial Accounting Standards No. 13,
Accounting for Leases, 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 (i) the direct financing or the
operating lease method for substantially all of the Company's lease
originations and (ii) the sales-type or the operating lease method for
substantially all lease activity for an item of equipment subsequent to 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 (i.e., "non-recourse debt" or "discounted lease rentals")
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 consolidated statements of income.
Initial direct costs ("IDC") are capitalized and amortized over the
lease term in proportion to the recognition of earned income.
Amortization of IDC is recorded as leasing costs in the accompanying
consolidated statements of 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.
OPERATING LEASES ("OLS") - 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. Leasing revenue consists principally of monthly
rentals. 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
consolidated statements of 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. 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.
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
Transactions Subsequent to Lease Inception
NON-RECOURSE DISCOUNTING OF RENTALS - The Company may assign the future
rentals from leases to financial institutions at fixed interest rates on
a non-recourse basis. In return for such assigned future rentals, the
Company receives the discounted value of the rentals 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 may
sell title to leased equipment that in some cases is subject to existing
discounted lease rentals 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. 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 (i.e., discounted lease rentals), 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 to 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.
INTEREST INCOME - Interest income, as shown in the accompanying
consolidated statements of income, includes interest on discounted
lease rentals assigned to lenders arising from equipment sale
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.
F - 10
<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
Transactions Subsequent to Initial Lease Termination
After the initial term of equipment under lease expires, the equipment
is either sold or re-leased. When the equipment is sold, the remaining
net book value of equipment sold is removed and gain or loss recorded.
When the equipment is re-leased, 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 (i) future rentals and (ii) 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.
Recoverability of an asset value is measured by a comparison of the carrying
amount of the asset to future net cash flows expected to be generated by the
asset. If a loss is indicated, the loss to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. Asset chargeoffs are recorded upon the termination or remarketing
of the underlying assets. Assets are reviewed quarterly to determine the
adequacy of the allowance for losses.
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 Arising from Equipment Under Lease Sold to Private Investors
----------------------------------------------------------------------------
As of May 31, 1997 and 1996, the equipment types for which the Company
recorded the present value of the estimated residual values arising from
sales of equipment under lease to private investors were (in thousands):
Description 1997 1996
----------- -------- --------
Material handling $ 1,869 $ 876
Furniture and fixtures 1,220 1,220
Mining and manufacturing 881 922
Aircraft 160 136
Other miscellaneous equipment 204 220
------ -------
Total equipment residuals $ 4,334 $ 3,374
======= =======
F - 11
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Residual Values Arising from Equipment Under Lease Sold to Private
----------------------------------------------------------------------------
Investors, continued
---------
Residual values arising from equipment under lease sold to private investors
were net of an allowance for losses of $157,000 and $258,000 as of May 31,
1997 and 1996, respectively.
In certain sale transactions, the Company agreed to hold backs related to
the lessee's performance. Pursuant to such agreements, a portion of the
sales proceeds was placed in an interest-bearing escrow account until such
time as the performance objectives are met. Escrowed amounts related to
these transactions were $642,000 and $645,000 at May 31, 1997 and 1996,
respectively, and are included in other assets in the accompanying
consolidated balance sheets.
During fiscal year 1997, the Company received two promissory notes in
connection with the settlement of litigation, which are also included in
other assets in the accompanying consolidated balance sheets. The carrying
values of these notes were $719,000 at May 31, 1997.
Future payments from the sale proceeds hold backs and promissory notes are
as follows (in thousands):
Years ending Sales Proceeds Promissory
May 31, Hold Backs Notes
------------ -------------- ----------
1998 $ 42 $ 644
1999 28 483
2000 730 85
2001 - 661
2002 - 165
------- -------
Total payments 800 2,038
Less future interest income (158) (1,319)
------- -------
Carrying value at May 31, 1997 $ 642 $ 719
======= =======
3. Net Investment in DFLs
----------------------
The components of the Company's net investment in DFLs as of May 31, 1997
and 1996 were (in thousands):
1997 1996
-------- --------
Minimum lease payments receivable $ 8,133 $ 15,234
Estimated residual values 692 2,139
IDC 72 124
Less unearned income (1,197) (2,530)
-------- --------
$ 7,700 $ 14,967
======== ========
F - 12
<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, 1997 and 1996 were (in thousands):
1997 1996
-------- --------
Material handling equipment $ 25,083 $ 29,793
Computers and peripheral computer equipment 21,776 3,220
Other technology and communication equipment 21,701 8,807
Furniture and fixtures 7,227 3,825
Other 4,885 4,466
Aircraft 1,327 4,901
IDC 831 487
-------- --------
82,830 55,499
Less accumulated depreciation (10,680) (9,094)
Less allowance for losses (707) (1,120)
-------- --------
$ 71,443 $ 45,285
======== ========
Depreciation on leased equipment was $8,662,000, $5,205,000 and $3,771,000
for fiscal years 1997, 1996 and 1995, respectively.
5. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases on
equipment owned by the Company as of May 31, 1997, are as follows (in
thousands):
Years Ending May 31, DFLs OLs
-------------------- ------- --------
1998 $ 3,297 $ 20,566
1999 2,663 18,345
2000 1,683 13,619
2001 284 9,142
2002 105 7,569
Thereafter 101 1,991
------- --------
$ 8,133 $ 71,232
======= ========
6. Significant Customer and Concentration of Credit Risk
-----------------------------------------------------
During fiscal year 1997 and 1996, payments from one lessee accounted for 13%
and 11%, respectively, of total leasing revenue. In addition, other
equipment sales revenue related to equipment leased to that lessee accounted
for 77% and 88% of total other equipment sales revenue during fiscal years
1997 and 1996, respectively. No lessee accounted for 10% or more of the
Company's revenues in fiscal year 1995.
F - 13
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Significant Customer and Concentration of Credit Risk, continued
-----------------------------------------------------
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, 1997, substantially all equipment under OLs and DFLs owned
by the Company was leased to companies meeting the above credit criteria.
7. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at May 31, 1997 bear interest at rates
between 5% to 15% with a weighted average rate of 8.8%. Aggregate maturities
of such non-recourse obligations are (in thousands):
Years Ending May 31:
1998 $ 33,418
1999 21,024
2000 6,711
2001 313
--------
$ 61,466
========
8. Recourse Bank Debt
------------------
The Company extended its recourse bank debt and revolving credit facilities
(the "Bank Facility") on November 27, 1996. The lender group currently
consists of Norwest Bank Colorado, National Association, Agent, Norwest
Equipment Finance, Inc., Collateral Agent, The Sumitomo Bank, Limited and
The First National Bank of Boston. The Borrower under the Bank Facility is
Capital Associates International, Inc. ("CAII"), a wholly-owned subsidiary
of the Company.
The Bank Facility consists of three components, a term loan facility (the
"Term Loan"), a revolving working capital credit facility (the "Working
Capital Facility") and a revolving warehousing credit 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 Total Borrowings
----------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Maturity Date November 30, 1997 November 30, 1997 November 30, 1997 N/A
Maximum amount N/A $ 7,500 Lesser of $ 22,805 N/A
or borrowing base
Borrowings at May 31, 1997 $ 2,167 - $ 18,545 $ 20,712
======= ------- ======== ========
Potential availability at May 31, 1997 N/A $ 7,500 $ - $ 7,500
======= ======= ======== ========
Borrowings at May 31, 1996 $ 6,500 $ - $ 11,038 $ 17,538
======= ======= ======== ========
Interest rate at May 31, 1997 Prime* plus .75% Prime* plus .75% Prime* plus .50%
* Agent's Prime at May 31, 1997 was 8.25%.
</TABLE>
F - 14
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Recourse Bank Debt, continued
------------------
The Bank 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 guaranteed CAII's obligations under the Bank
Facility and have pledged all of their assets, with limited exceptions, to
collateralize their guarantees. The Bank Facility restricts CAII's ability
to pay dividends or loan or advance funds to the Company.
As of May 31, 1997, the Company was in compliance with the terms of the Bank
Facility.
9. Related Parties
---------------
PIFs:
The Company sponsors or co-sponsors seven PIFs (five of which purchased
equipment under lease from the Company during fiscal year 1997). The
Company, through its PIF general partner subsidiaries, acts as either a
general partner or co-general partner of each PIF for which it receives
general partner distributions and management fees. The Company, through
CAII, also acts as the Class B limited partner of each PIF for which it
receives Class B limited partner distributions. The Class B limited partner
is required to make subordinated limited partnership investments in the
PIFs. The Class B limited partner has a maximum remaining obligation to make
further cash contributions of approximately $0.2 million, relating solely to
CPYF IV. Amounts related to the PIFs were as follows (in thousands):
1997 1996 1995
-------- -------- --------
Equipment sales margin $ 1,442 $ 1,539 $ 1,047
Fees and distributions 2,453 2,958 2,908
Investment contributions in subordinated
limited partnership interests 280 260 230
OTHER RELATED PARTIES
MCC Financial acquired voting control of the Company during fiscal year
1996. Two executive officers of that company are directors of the Company
and members of the Executive Committee of the Board of Directors of the
Company. The Company has entered into various agreements with these
directors for certain consulting fees and payments of other expenses. During
fiscal years 1997 and 1996, the Company paid $810,000 and $387,000,
respectively, under these agreements and for directors' fees, including in
1997, $150,000 for relocation expenses of one director (who is Chairman of
the Board of Directors of the Company) in connection with his relocation to
Company headquarters.
F - 15
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
------------
The components of the income tax expense (benefit) charged to continuing
operations were (in thousands):
1997 1996 1995
------ ------ --------
Current:
Federal $ 240 $ 653 $ 1,990
State and local 170 (351) 1,000
------ ------ --------
410 302 2,990
------ ------ --------
Deferred:
Federal (100) (501) (1,800)
State and local (300) 401 (830)
------ ------ --------
(400) (100) (2,630)
------ ------ --------
Total tax provision $ 10 $ 202 $ 360
====== ====== ========
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense $ 250 $ 272 $ 502
State tax provisions, net of federal benefits 40 50 88
Reduction in valuation allowance for deferred income tax assets (280) (120) (230)
----- ----- -----
$ 10 $ 202 $ 360
===== ===== =====
</TABLE>
Income taxes are provided on income from continuing operations at the
appropriate federal and state statutory rates applicable to such earnings.
Components of income tax expense attributable to net income before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Taxes on net income before carryforwards $ 710 $ 832 $ 9,390
Benefit of loss carryforwards utilized - - (5,800)
Benefit of investment tax credit ("ITC")
carryforward utilized (300) (530) (600)
------ ------ --------
410 302 2,990
------ ------ --------
Deferred:
Tax effect of net change in temporary differences (420) (510) (7,200)
Loss carryforwards utilized - - 5,800
ITC carryforward utilized 300 530 600
Alternative Minimum Tax ("AMT"), net of
utilization of investment tax credit carryforward - - (1,600)
Increase (decrease) in valuation allowance for
deferred income tax assets (280) (120) (230)
------ ------ --------
(400) (100) (2,630)
------ ------ --------
Provision for income taxes $ 10 $ 202 $ 360
====== ====== ========
</TABLE>
F - 16
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes, continued
------------
Significant components of the Company's deferred tax liabilities and assets
as of May 31, 1997 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<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 $ - $ 2,000
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 1,700 1,300
-------- --------
Total deferred income tax liabilities 1,700 3,300
-------- --------
Deferred income tax assets:
Other assets and liabilities, net 600 1,800
Investment tax credit carryforwards 1,300 1,600
AMT credit carryforwards 3,300 3,300
-------- --------
Total deferred income tax assets 5,200 6,700
Valuation allowance for deferred income tax assets (1,200) (1,500)
-------- --------
Net deferred income tax assets 4,000 5,200
-------- --------
Net deferred income tax asset $ 2,300 $ 1,900
======== ========
</TABLE>
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 Company believes that it is more likely
than not that the results of future operations will generate sufficient
taxable income to realize the remaining deferred tax assets. The reduction
in the valuation allowance recorded in fiscal 1997 of $280,000 represents
the utilization of an ITC carryforward and receipt of a state income tax
refund for which a valuation allowance had been provided. The reduction in
the valuation allowance recorded in fiscal 1996 of $120,000, represents the
utilization of an ITC carryforward for which a valuation allowance had
previously been provided.
At May 31, 1997, the Company has an ITC carryforward of $1.3 million, which
expires from 1998 through 2001, and AMT credits of $3.3 million. Under
present federal 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. Due to a change in control, provisions of the Internal Revenue
Code limit the annual future ITC carryforward and AMT credit carryforward
utilization to approximately $300,000 per year.
11. 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, 1997, no shares of preferred stock had been
issued.
F - 17
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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 the market price of the Company's stock on
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.
Effective on May 31, 1996, the Company purchased 401,000 outstanding options
issued to current employees at a cost to the Company of $557,000, which was
equal to the difference of $2.45 and the exercise price of each option
purchased. The cost was included in operating and other expenses in the
accompanying consolidated statements of income for the fiscal year ended May
31, 1996.
During July 1996, the Company purchased 104,000 outstanding options issued
to non-employees at a cost to the Company of $138,000, which was equal to
the difference of $2.45 and the exercise price of each option purchased. The
cost was reflected as a charge to additional paid-in capital in the
accompanying May 31, 1997 consolidated balance sheets.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly and since the Company awards stock options at fair market
value, no compensation cost has been recognized for its stock options in the
financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its options under SFAS No. 123, the
Company's net income and earnings per common and dilutive common equivalent
share would have been reduced to the pro forma amounts indicated below:
1997 1996
--------- ---------
Net income As Reported $ 733,000 $ 604,000
Pro forma $ 667,000 $ 576,000
Primary earnings per share As Reported $ 0.14 $ 0.12
Pro forma $ 0.12 $ 0.11
Fully diluted earnings per share As Reported $ 0.14 $ 0.11
Pro forma $ 0.12 $ 0.11
For purposes of calculating the compensation cost in accordance with SFAS
No. 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and 1996,
respectively: no dividend yield; expected volatility of 111% and 164%; risk
free interest rates of 6.58% and 6.40%; and expected lives of five years.
F - 18
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stock Options, continued
-------------
Additional information on shares subject to options is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
options price options price options price
--------- --------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 693,000 $ 1.23 1,047,000 $ 1.10 1,132,000 $ 1.02
Granted 90,000 2.88 130,000 1.62 246,000 1.63
Exercised (19,000) .81 (32,000) .94 (227,000) .96
Purchased (104,000) 1.13 (401,000) .94 - -
Forfeited (11,000) 2.10 (51,000) 1.24 (104,000) 1.83
--------- ---------- ----------
Outstanding at the end of the year 649,000 1.47 693,000 1.23 1,047,000 1.10
========= ========== ==========
Options exercisable at year-end 606,000 641,000 835,000
Weighted-average fair value of options
granted during the year $ 2.35 $ 1.53
</TABLE>
The following table summarizes information about stock options outstanding
at May 31, 1997:
Options outstanding Options exercisable
------------------------------- --------------------
Weighted-
average Weighted Weighted
Number remaining average Number average
Range of of contractual exercise of exercise
exercise prices options life price options price
----------------- ------- ----------- -------- ------- --------
$ 0.01 - $ 1.00 128,000 4.5 years $ 0.71 128,000 $ 0.71
$ 1.01 - $ 2.00 375,000 5.0 years 1.29 373,000 1.29
$ 2.01 - $ 3.00 146,000 8.0 years 2.62 105,000 2.48
------- -------
649,000 5.5 years 1.47 606,000 1.37
======= =======
13. Quarterly Financial Data (unaudited)
------------------------------------
The following information has not been reviewed by the Company's independent
auditors. Summarized quarterly financial data for the years ended May 31,
1997 and 1996 are (in thousands, except per share data):
Total Net Income Per Common and
Fiscal year 1997: Revenue Income Common Equivalent Share
----------------- ------- ------ -----------------------
First quarter $ 36,967 $ 138 $ .03
Second quarter 69,611 246 .05
Third quarter 74,002 298 .06
Fourth quarter 46,954 51 .01
F - 19
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Quarterly Financial Data (unaudited), continued
------------------------------------
Total Net Income Per Common and
Fiscal year 1996: Revenue Income Common Equivalent Share
----------------- ------- ------ -----------------------
First quarter $ 31,210 $ 57 $ .01
Second quarter 33,718 60 .01
Third quarter 59,089 136 .03
Fourth quarter 62,664 351 .07
14. Legal Proceedings
-----------------
The Company is involved in the following legal proceedings:
a. The Company is involved in certain arbitration proceedings pursuant to
the requirements of the National Association of Securities Dealers
("NASD"), representing three claims against CAI Securities Corporation,
a wholly owned subsidiary of the Company. All three claims allege breach
of fiduciary duty, breach of contract, negligence and misrepresentation
with regard to the sale of limited partnership units in Leastec Income
Fund V ("LIFV"), a limited partnership whose general partner is an
affiliate of the Company. The three claims involve investments in LIFV
of approximately $625,000 and seek damages of $838,000 and special
punitive and exemplary damages (one claim specifies $1,500,000 in such
damages while the other two claims do not specify an amount). All three
claims have been brought by the same company on behalf of three
investors. Management has been of the belief that it has good and
substantial defenses against these claims and that the Company's
subsidiary will prevail. In July 1997, one of the cases, seeking
$500,000 in damages and $1,500,000 in punitive damages, was heard by an
NASD arbitration panel and that arbitration panel has now determined
that there was no breach of fiduciary duty, no breach of contract, no
negligence and no misrepresentation with regard to the sale of limited
partnership units of LIFV and the subsequent financial reporting thereof
and that no award is due the claimant under any of his claims. The
claimant was assessed $7,300 in forum fees by the NASD for the
arbitration proceeding.
b. The Company is involved in other routine legal proceedings incidental to
the conduct of its business. Management believes that none of these
legal proceedings will have a material adverse effect on the financial
condition or operations of the Company
15. Commitments
-----------
The Company leases office space under long-term and short-term
non-cancelable operating leases. The leases contain renewal options and
provide for annual escalation for utilities, taxes and service costs. Rent
expense was $502,000, $425,000 and $783,000 for fiscal years 1997, 1996 and
1995, respectively.
F - 20
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Commitments, continued
-----------
Minimum future rental payments required by such leases are as follows (in
thousands):
Year Ending May 31,
1998 $ 452
1999 395
2000 367
-------
$ 1,214
=======
16. 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, 1997 for cash and cash equivalents, accounts
receivable, recourse bank debt, accounts payable-equipment purchases and
accounts payable and other liabilities 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, 1997, discounted lease rentals and discounted lease rentals
assigned to lenders arising from equipment sale transactions of $61,466,000
and $41,845,000, respectively, have fair values of $57,817,000 and
$39,361,000, respectively. The fair values were estimated utilizing market
rates of comparable debt having similar maturities and credit quality as of
May 31, 1997.
F - 21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Directors
Capital Associates, Inc.:
Under date of July 11, 1997, we reported on the consolidated balance sheets of
Capital Associates, Inc. and subsidiaries as of May 31, 1997 and 1996, 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, 1997, as
contained in the Company's annual report on Form 10-K for the year 1997. 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 LLP
/s/KPMG Peat Marwick LLP
------------------------
Denver, Colorado
July 11, 1997
F - 22
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
for the years ended May 31, 1997, 1996 and 1995
(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, 1997:
- ------------------------
Allowance for doubtful accounts:
- - accounts receivable $ 44 $ - $ - $ (14) $ 30
Allowance for losses:
- - residual values arising from equipment
under lease sold to private investors 258 - - (101) 157
- - leased equipment 1,120 365 - (778) 707
------- ------- ------ -------- -------
$ 1,422 $ 365 $ - $ (893) $ 894
======= ======= ====== ======== =======
Year ended May 31, 1996:
- ------------------------
Allowance for doubtful accounts:
- - accounts receivable $ 48 $ - $ - $ (4) $ 44
Allowance for losses:
- - residual values arising from equipment
under lease sold to private investors 1,654 524 - (1,920) 258
- - leased equipment 2,416 (94)(2) - (1,202) 1,120
------- ------- ------ -------- -------
$ 4,118 $ 430 $ - $ (3,126) $ 1,422
======= ======= ====== ======== =======
Year ended May 31, 1995:
- ------------------------
Allowance for doubtful accounts:
- - accounts receivable $ 343 $ - $ (260) $ (35) $ 48
Allowance for losses:
- - residual values arising from equipment
under lease sold to private investors 6,934 532 - (5,812) 1,654
- - leased equipment 1,741 2,408 - (1,733) 2,416
------- ------- ------ -------- -------
$ 9,018 $ 2,940 $ (260) $ (7,580) $ 4,118
======= ======= ====== ======== =======
</TABLE>
(1) Principally charge-offs of assets against the established allowances.
(2) Includes $750,000 recovery from litigation settlement.
See accompanying independent auditors' report.
F - 23
<PAGE>
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Year Ended May 31,
-----------------------------------
1997 1996 1995
--------- ---------- -----------
Shares outstanding at
beginning of period 4,994,000 5,091,000 4,864,000
Repurchases of common stock - (129,000) -
Shares issued during the
period (weighted average) 10,000 25,000 188,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 729,000 999,000 953,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (266,000) (626,000) (680,000)
Effect of non-employee stock option buyout (64,000) - -
Effect of employee stock option buyout - (174,000) -
--------- --------- -----------
Total shares, primary 5,403,000 5,186,000 5,325,000
========= ========= ===========
Net income $ 733,000 $ 604,000 $ 1,116,000
========= ========= ===========
Income per common and common
equivalent share, primary $ .14 $ .12 $ .21
========= ========= ===========
F - 24
<PAGE>
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Year Ended May 31,
-----------------------------------
1997 1996 1995
--------- ---------- -----------
Shares outstanding at
beginning of period 4,994,000 5,091,000 4,864,000
Repurchases of common stock - (129,000) -
Shares issued during the period
(weighted average) 10,000 25,000 188,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 729,000 999,000 953,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (248,000) (338,000) (668,000)
Effect of non-employee stock option buyout (71,000) - -
Effect of employee stock option buyout - (255,000) -
--------- --------- -----------
Total shares, fully diluted 5,414,000 5,393,000 5,337,000
========= ========= ===========
Net income $ 733,000 $ 604,000 $ 1,116,000
========= ========= ===========
Income per common and common
equivalent share, fully diluted $ .14 $ .11 $ .21
========= ========= ===========
F - 25
EXHIBIT 10.8(f)
EXTENSION AND AMENDMENT
OF
SECOND AMENDED AND RESTATED DENNIS J. LACEY
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXTENSION AND AMENDMENT AGREEMENT ("Agreement") is made and entered into as
of the 27th day of June, 1997, having an "Effective Date" of October 1, 1997, by
and between Capital Associates, Inc., a Delaware corporation ("CAI") and Capital
Associates International, Inc. a Colorado corporation ("CAII") (CAI and CAII
being collectively referred to herein as the "Company") and Dennis J. Lacey
("Lacey").
RECITALS
A. The Company and Lacey entered into that certain Second Amended and Restated
Dennis J. Lacey Executive Employment Agreement, dated as of October 1, 1995,
which includes an Exhibit A to Second Amended and Restated Dennis J. Lacey
Executive Employment Agreement Severance Benefits (collectively the "Lacey
Agreement") and except for those terms and conditions amended hereby, the
terms and conditions of the Lacey Agreement are hereby incorporated herein
by this reference as Exhibit A.
B. The Company and Lacey now desire to amend certain provisions of the Lacey
Agreement and extend the Lacey Agreement for an additional two (2) years
through September 30, 1999.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and the covenants set forth
herein, and in the Lacey Agreement, and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties,
intending to be legally bound, hereby agree as follows.
1. ADDITIONAL LONG TERM BONUS. Section 7. of the Lacey Agreement is hereby
amended by the addition of a new second paragraph to that Section which
states:
"Lacey shall also be entitled to an additional bonus to encourage the
development and attainment of certain long term goals for the Company.
Such long term goals shall cover a period of 3, 4 or 5 fiscal years of
the Company, but shall be structured to be paid annually by setting
incremental annual goals which lead to the accomplishment of the
Company's long term goals. The long term goals, the annual incremental
goals and the each year's incremental cash bonus to be paid upon the
achievement of the annual incremental goals, shall be set forth in a
Long Term Bonus Plan developed by the Executive Committee and adopted
by the Compensation Committee. The term of the Long Term Bonus Plan
shall not be construed as extending the term of the Lacey Agreement."
1
<PAGE>
2. AUTOMOBILE ALLOWANCE. Section 8. of the Lacey Agreement is hereby amended to
provide a $1,000 per month automobile allowance.
3. "CHANGE OF CONTROL" TERMINATION. Section 2. (B) of Exhibit A to Second
Amended and Restated Dennis J. Lacey Executive Employment Agreement
Severance Benefits is hereby amended by the addition of the following
paragraph after the third full paragraph of that Section, which states:
"In the event the continuation of employment circumstances described in
the second full paragraph of this Section 2. (B) do not occur so that
Lacey is deemed terminated due to a "Change of Control" (and other than
for cause), the termination payments contemplated and provided for in
the first full paragraph of this Section 2. (B) shall not be paid to
Lacey, and in lieu thereof, the Company shall pay to Lacey within five
(5) business days of the date of such termination, one lump sum payment
equal to 100% of Lacey's Base Salary for a two (2) year period, which
shall not be subject to any off set due to any other compensation that
Lacey may earn within the two (2) years following such termination;
provided and on the condition that Lacey agrees "not to compete"
against the Company during this two year term. The term "not to
compete" as used herein shall mean that Lacey will not engage in any
facet of the equipment leasing business in any form (except that which
is contemplated in Section 5. of this Exhibit A), and this shall
include, without limitation, that Lacey will not become a shareholder,
officer, employee or agent of any equipment leasing company or entity,
or a company or entity that owns and/or manages an equipment leasing
business, nor shall he act as an equipment leasing consultant for any
equipment leasing company or entity (other than the Company). In
addition, Lacey must comply with the obligations of Sections 6. and 7.
of this Exhibit A."
4. EXTENSION.
Section 3. of the Lacey Agreement is hereby amended by deletion of the year
"1997" in the third line and in lieu thereof the insertion of the year
"1999."
Section 5. of the Lacey Agreement is hereby amended by deletion of the year
"1997" where it appears in two places and, in lieu thereof, the insertion of
the year "1999."
5. STOCK OPTIONS. Section 12. of the Lacey Agreement is hereby amended by the
addition of a third paragraph, which states:
"As stock options are granted to the non-employee directors of the
Company under the Company's Non-Employee Director Stock Option Plan,
Mr. Lacey shall be granted the same quantity of stock options under the
Company's stock option plan for employees."
2
<PAGE>
6. COUNTERPARTS. The last sentence of Section 19 of the Lacey Agreement is
hereby amended by deleting the last full sentence of Section 19.
7. RATIFICATION. Except as amended by this Agreement, all other terms and
conditions of the Lacey Agreement are hereby ratified and confirmed.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date set forth next to the signatures below, to be effective on
the Effective Date.
/s/Dennis Lacey
- -------------------------------
DENNIS J. LACEY
Date: 7-1-97
------------------------
CAPITAL ASSOCIATES, INC.
By: /s/J. D. Walker
---------------------------
J. D. Walker
Its: Chairman of the Board
-------------------------
Date: July 1, 1997
------------------------
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By: /s/J. D. Walker
---------------------------
J. D. Walker
Its: Chairman of the Board
-------------------------
Date: July 1, 1997
------------------------
3
<PAGE>
SECOND AMENDED AND RESTATED DENNIS J. LACEY
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Second Amended and Restated Dennis J. Lacey Executive Employment
Agreement (this "Agreement"), dated as of October 1, 1995 (the "Effective
Date"), is made by and between (1) Capital Associates, Inc. ("CAI"), and Capital
Associates International, Inc. ("CAII") (CAI and CAII being collectively
referred to herein as the "Company"), and (2) Dennis J. Lacey ("Lacey").
RECITALS
--------
WHEREAS, the Company and Lacey previously entered into that certain
Dennis J. Lacey Executive Employment Agreement (the "Initial Employment
Agreement"), which became effective on and as of September 7, 1991;
WHEREAS, the Company and Lacey previously entered into that certain
Amendment No. 1 to the Dennis J. Lacey Executive Employment Agreement
("Amendment No. 1"), which became effective on and as of September 7, 1992;
WHEREAS, as part of Amendment No. 1, the parties extended the term of
the Initial Employment Agreement for an additional 24 months, commencing on and
as of September 7, 1992;
WHEREAS, the Company and Lacey previously entered into that certain
Amendment No. 2 to the Dennis J. Lacey Executive Employment Agreement
("Amendment No. 2"), which became effective on and as of April 9, 1993;
WHEREAS, the Company and Lacey previously entered into that certain
Amendment No. 3 to the Dennis J. Lacey Executive Employment Agreement
("Amendment No. 3"), which became effective on and as of April 9, 1993;
WHEREAS, the Company and Lacey previously entered into that certain
First Amended and Restated Dennis J. Lacey Executive Employment Agreement
("First Amended Employment Agreement"), dated as of June 15, 1993;
WHEREAS, the Company and Lacey previously entered into that certain
Amendment No. 1 to First Amended and Restated Dennis J. Lacey Executive
Employment Agreement ("Amendment No. 1 to First Amended Employment Agreement"),
dated as of August 26, 1994;
1
<PAGE>
WHEREAS, the parties now desire to amend and restate the First Amended
Employment Agreement, as previously amended by Amendment No. 1 to First Amended
Employment Agreement;
WHEREAS, all references to the "Second Amended Employment Agreement"
in Exhibit A hereto shall hereinafter be deemed to refer to this Agreement; and
WHEREAS, except as expressly set forth in this Agreement and Exhibit A
hereto, on and as of the Effective Date, this Agreement and Exhibit A hereto
shall supersede and supplant the First Amended Employment Agreement, as
previously amended by Amendment No. 1 to First Amended Employment Agreement, and
Exhibit A thereto, in its entirety, effective on and as of the Effective Date.
NOW, THEREFORE, in consideration of the promises and the covenants set
forth herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
AGREEMENT
---------
i. Employment Agreement. This Agreement sets forth (A) the
terms and conditions on which the Company has previously agreed
to employ, and is currently employing, Lacey and (B) the terms on
which Lacey has agreed to continue to provide services as an
employee t o the Company during the Term of this Agreement. The
nature of the services to be provided by Lacey under this
Agreement are set forth in the section of this Agreement entitled
"Title and Duties."
ii. Effective Date. The "Effective Date" shall be October 1,
1995.
iii. Term. The "Term" of this Agreement shall commence on and as
of the Effective Date and shall expire UPON THE EARLIEST TO OCCUR
OF (A) the close of business on September 30, 1997, unless
renewed by the parties for one or more additional twelve-month
periods (there being no limit on the number of subsequent twelve-
month renewals, or renewals for whole twelve-month multiples, of
this Agreement to which the parties may agree), (B) a date
mutually agreed to by the parties or (C) termination of Lacey's
employment by the Company or Lacey.
iv. Title and Duties. For the period August 31, 1991, through
September 6, 1991 (the "Interim Period"), Lacey served, at the
request of the Board of Directors of CAI (the "Board"), as Acting
President, Acting Chief Executive Officer and Chief Financial
Officer of CAI and CAII.
2
<PAGE>
Commencing on September 7, 1991, at the request of the Board, Lacey
assumed the positions of President and Chief Executive Officer of CAI and CAII
with the powers, authority, duties and responsibilities specified at any time
and from time to time by a majority of the Board and as set forth in the Bylaws
of the Company.
On and as of the Effective Date, Lacey shall continue to serve as
President and Chief Executive Officer of CAI and CAII with the powers,
authority, duties and responsibilities specified at any time and from time to
time by a majority of the Board and as set forth in the Bylaws of the Company.
v. TERMINATION OF EMPLOYMENT. A majority of the Board may (A)
terminate Lacey's employment at any time, (B) determine not to
renew this Agreement effective on and as of September 30, 1997,
and/or (C) if this Agreement is renewed for a period beyond
September 30, 1997, determine not to renew such extension of this
Agreement on and as of the expiration date of such extension,
subject in the case of (A) (B) and (C) to the terms and
conditions set forth in "Severance" below and the section of
Exhibit A hereto entitled "Severance Benefits."
vi. BASE SALARY DURING EMPLOYMENT. Commencing on the Effective
Date, Lacey's base salary shall be $250,000 per year on an
annualized basis ("Base Salary"), subject to increase at any time
during the Term of this Agreement by the Compensation Committee
of the Board (the "Compensation Committee"), in its sole and
absolute discretion. In determining whether an increase in the
Base Salary is appropriate at any time during the Term of this
Agreement, the Compensation Committee shall consider, among other
things, (A) profitability of the Company, (B) Stock (as defined
below) price and (C) such other factors as the Compensation
Committee deems appropriate, in its sole and absolute discretion.
Base Salary shall be payable in accordance with prevailing
Company payroll policies.
vii. BONUS DURING EMPLOYMENT. The dollar amount and timing of
payment of all annual bonuses (the "Bonus"), if any, payable to
Lacey for any fiscal year of the Company that ends on the last
day of, or at any time during, the Term of this Agreement (a
"Fiscal Year") shall be determined by the Compensation Committee.
The Bonus, if any, payable for any Fiscal Year will be paid no
later than 45 days after the completion and certification of the
audited financial statements of CAI for such Fiscal Year and will
be payable to Lacey notwithstanding his employment status with
the Company at the time the Bonus (i) is authorized by the
Compensation Committee or (ii) is payable to Lacey.
viii. OTHER BENEFITS DURING EMPLOYMENT. Lacey shall be entitled
to participate in all Company employee benefit programs
including, but not limited to, the following: (A) insurance
(life, medical, dental, prescription, etc.); (B) a $500 per month
automobile allowance; (C) vacation and sabbatical in accordance
3
<PAGE>
with prevailing Company policy; (D) 401K plan and/or other
qualified and nonqualified pension, profit sharing and other
retirement plan participation to the extent available under law;
and (E) any and all other benefits offered to Company employees.
All of the benefits described in the preceding sentence shall be
in accordance with prevailing Company policy at the time the
benefit is extended to Lacey.
The Company previously agreed, and hereby confirms its agreement, that
it will continue to pay, on Lacey's behalf, throughout the Term of this
Agreement, the "excess" life insurance premiums and "excess" long-term
disability insurance premiums set forth in Exhibit B hereto.
ix. EXPENSE REIMBURSEMENT DURING EMPLOYMENT. Lacey will be
reimbursed for reasonable business expenses incurred by him on
behalf of the Company (not including legal fees incurred by Lacey
in connection with the negotiation and execution of this
Agreement), upon submission of properly completed Company expense
report/reimbursement forms.
x. O&D INSURANCE AND INDEMNIFICATION. Lacey will be entitled
to the same officer and director liability insurance and
indemnification as other officers and directors of the Company
for any period during which Lacey served or serves in such
capacities.
xi. SEVERANCE. Upon termination of his employment with the
Company, Lacey shall be entitled to the severance benefits set
forth in Exhibit A hereto.
xii. STOCK OPTION. Pursuant to a stock option agreement in the
form attached as Exhibit C to this Agreement and incorporated by
reference, Lacey is granted, on and as of the Effective Date, an
option (the "Stock Option") to purchase up to 150,000 shares of
common stock of the Company ("Stock"), the terms and conditions
of which are set forth in the stock option agreement attached as
Exhibit C hereto.
On and as of September 6, 1991, the Company granted Lacey (A) 100,000
shares of Stock, subject to certain repurchase rights on the part of the Company
(the "First Stock Award"), all of which were immediately vested, and (B) 500,000
additional shares of Stock, subject to a vesting schedule (the "Second Stock
Award"). The Company's repurchase rights with respect to the First Stock Award
expired on March 31, 1992. On and as of August 28, 1992, the Company granted
Lacey an additional 25,000 shares of Stock (the "Third Stock Award"). On and as
of January 14, 1993, the Company granted Lacey an additional 25,000 shares of
Stock (the "Fourth Stock Award"). On and as of April 8, 1993, the Company
4
<PAGE>
advised Lacey that he had "earned" 50,000 Second Stock Award shares, which have
been delivered to Lacey. The Company previously filed a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), on Form S-8
covering (1) all of the shares comprising the First, Second, Third and Fourth
Stock Awards plus (2) an additional 150,000 shares of Stock (all of the shares
described in (1) and (2) are referred to herein as the "Registered Stock").
Effective as of the Effective Date, the Company and Lacey hereby agree to
terminate, and Lacey hereby relinquishes, any and all right, title or interest
Lacey may have in and to, or to receive, all or any portion of the remaining
450,000 "unearned" Second Stock Award shares.
xiii. COMPLETE AGREEMENT. This Agreement with exhibits embodies
the complete agreement and understanding between the Company and
Lacey and, as of the Effective Date, supersedes all prior
understandings, agreements or representations by or between them
with respect to the matters addressed herein.
xiv. ASSIGNMENT. Lacey may assign any of his financial or
monetary rights under this Agreement to an immediate family
member (i.e., wife or children). Lacey may not assign any of his
rights under this Agreement to anyone other than a family member
or any of his obligations under this Agreement, without the prior
written consent of the Company. The Company may not assign any of
its rights or obligations under this Agreement without the prior
written consent of Lacey.
xv. REMEDIES. The Company and Lacey will be entitled to enforce
their rights under this Agreement specifically to recover damages
by reason of any breach of any provision of this Agreement and to
exercise all other rights to which they may be entitled. The
Company and Lacey agree that monetary damages may not be an
adequate remedy for breach of the provisions of this Agreement
and that either of them may, in their sole discretion, apply to
any court for specific performance and/or injunctive relief in
order to enforce or prevent violations of this Agreement.
xvi. CHOICE OF LAW. This Agreement shall be governe by and
construed in accordance with the laws of the State of Colorado,
exclusive of the provisions of such laws relating to conflicts of
law.
xvii. MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute
a waiver of any other provisions hereof (whether or not similar)
nor shall such waiver constitute a continuing waiver.
5
<PAGE>
xviii. SEVERABILITY. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable
for any reason whatsoever (A) the validity, legality and
enforceability of the remaining provisions of this Agreement
(including, without limitation, each portion of any section of
this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired
thereby, and (B) to the fullest extent possible, the provisions
of this Agreement (including, without limitation, each portion of
any section of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
xix. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to
be an original and all of which together shall constitute one and
the same Agreement. Only one such counterpart signed by the party
against whom enforceability is sought needs to be produced to
evidence the existence of this Agreement. Signatures may be
exchanged by telecopy, with original signatures to follow. Each
party to this Agreement agrees that it will be bound by its own
telecopied signature and that it accepts the telecopied
signatures of the other parties to this Agreement. The original
signature pages shall be forwarded to Ballard Spahr Andrews &
Ingersoll, c/o John L. Ruppert, Esq., 1225 17th Street, Suite
2300, Denver, Colorado 80202, and Mr. Ruppert will provide all
parties with a copy of an originally executed Agreement.
xx. BINDING EFFECT. This Agreement shall be binding upon each
party hereto and such party's heirs, successors and assigns.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the Effective Date.
The Board of Directors of
Capital Associates, Inc.
/s/Dennis Lacey By: /s/J. D. Walker
- -------------------------- ---------------------------
Dennis J. Lacey J. D. Walker
Dated: ------------------ Title: Director
------------------------
Dated: 5 Oct. 95
------------------------
The Board of Directors of
Capital Associates
International, Inc.
By: /s/J. D. Walker
---------------------------
J. D. Walker
Title: Director
------------------------
Dated: 5 Oct. 95
-------------------------
7
<PAGE>
EXHIBIT A
TO SECOND AMENDED AND RESTATED
DENNIS J. LACEY
EXECUTIVE EMPLOYMENT AGREEMENT
SEVERANCE BENEFITS
------------------
This Exhibit A is a part of that certain Second Amended and Restated
Dennis J. Lacey Executive Employment Agreement, dated as of October 1, 1995 (the
"Second Amended Employment Agreement"), by and among Capital Associates, Inc.
("CAI"), Capital Associates International, Inc. ("CAII") (CAI and CAII being
collectively referred to herein as the "Company") and Dennis J. Lacey ("Lacey"),
and all provisions of the Second Amended Employment Agreement are applicable
hereto to the extent not otherwise inconsistent with the terms of this Exhibit
A. To the extent of any conflict between the terms of the Second Amended
Employment Agreement and this Exhibit A, the terms of this Exhibit A shall
govern.
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Second Amended Employment Agreement.
1. GROUNDS FOR TERMINATION. The grounds for termination of Lacey's
employment with the Company are set forth in the section of the Second Amended
Employment Agreement entitled "Termination of Employment."
2. TERMINATION PAYMENTS.
(A) TERMINATION OF LACEY'S EMPLOYMENT BY THE COMPANY "FOR CAUSE." In
the event the Company terminates Lacey's employment with the Company "for cause"
during the Term of the Second Amended Employment Agreement, Lacey shall receive
no termination payment(s).
"For cause" shall mean (i) dishonesty or fraud; (ii) commission of an
act involving moral turpitude; (iii) commission of a felony; (iv) deliberate
injury or attempted deliberate injury to the Company; (v) dereliction or neglect
of duty, as determined by the Board in its sole and absolute discretion; (vi)
intentional or willful failure to carry out the legally approved instructions of
the Board, as determined by the Board in its sole and absolute discretion; or
(vii) material breach of confidentiality, non-solicitation, and other negative
covenants of the Second Amended Employment Agreement.
(B) TERMINATION OF LACEY'S EMPLOYMENT BY THE COMPANY OTHER THAN "FOR
CAUSE." In the event the Company terminates Lacey's employment with the Company
other than "for cause" during the Term of the Second Amended Employment
Agreement, Lacey shall receive termination payments equal to 100% of his Base
Salary as of the effective date of the termination of his employment with the
1
<PAGE>
Company (his "Termination Date"). All payments under this paragraph (B) shall be
paid to Lacey in twelve (12) equal monthly installments, with the first payment
occurring on the Termination Date followed by eleven (11) successive monthly
payments in the same amount on the first eleven (11) monthly anniversary dates
of the Termination Date; provided, however, that any remaining termination
payment installment shall be reduced by any payments Lacey receives by achieving
gainful employment during the installment payment period.
A "Change of Control" of the Company (as defined in the immediately
following paragraph) shall be deemed a termination of Lacey other than "for
cause"; provided, however, that a Change of Control shall not be deemed a
termination of Lacey other than "for cause" if (i) the Company remains in
existence after the Change of Control and the Company retains Lacey in an
executive level position for the remaining Term of the Second Amended Employment
Agreement with substantially comparable accountability and substantially
equivalent compensation to his accountability and compensation immediately prior
to the Change of Control or (b) if the Company does not remain in existence
following the Change of Control, the "Surviving Company" (as defined in the
immediately following paragraph) after the Change of Control retains Lacey in an
executive level position for the remaining Term of the Second Amended Employment
Agreement with substantially comparable accountability and substantially
equivalent compensation to his accountability and compensation immediately prior
to the Change of Control and, if Lacey chooses not to exercise his Stock Option
in full in connection with the Change of Control, issues/grants replacement
stock options to acquire shares of stock of the Surviving Company to Lacey
having comparable value and substantially the same terms as Lacey's Stock Option
(as defined in paragraph 12 of the Second Amended Employment Agreement).
A "Change of Control" shall be deemed to occur upon the happening of
any of the following events: (1) the Board adopts a resolution to the effect
that a change of control has occurred or is anticipated to occur and such change
of control does in fact occur; (2) any change of control of the Company of a
nature that is required to be reported on Form 8-K under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"); (3) individuals who, on the
Effective Date, constitute the Board cease for any reason to constitute at least
a majority thereof unless the election, or the nomination for election, of each
new director was approved by a vote of at least two-thirds of the directors on
the Board prior to such election or nomination, including two-thirds of any
directors then still in office who were directors on the Effective Date; (4) the
approval by the stockholders of the Company of any merger or consolidation of
the Company with any other corporation or entity or the sale or other
disposition of all or substantially all the assets of the Company to any other
2
<PAGE>
person, corporation or entity (such other corporation or entity in the case of a
merger, consolidation or sale of all or substantially all of the assets of the
Company being referred to herein as the "Surviving Company"), and (5) any person
(within the meaning of Section 13(b) of the Exchange Act) becomes the beneficial
owner (directly or indirectly) of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding securities
entitled to vote generally in the election of directors; provided, however, that
the acquisition by MCC Financial Corporation or its affiliates or subsidiaries
of securities of the Company representing 50% or more of the combined voting
power of the Company's then outstanding securities entitled to vote generally in
the election of directors shall not be considered a "Change of Control" for
purposes of this paragraph 2(B).
(C) VOLUNTARY TERMINATION BY LACEY. In the event Lacey voluntarily
terminates his employment with the Company during the Term of his Second Amended
Employment Agreement, Lacey shall receive no termination payments.
(D) INVOLUNTARY TERMINATION (I.E., DEATH, PERMANENT DISABILITY,
INCOMPETENCE, ETC.) BY LACEY. In the event Lacey involuntarily terminates his
employment with the Company during the Term of his Second Amended Employment
Agreement, such termination shall be treated for all purposes of the Second
Amended Employment Agreement and this Exhibit A as a termination of Lacey's
employment by the Company other than "for cause," as described in paragraph (B)
above.
3. EXPENSE REIMBURSEMENT. In the event Lacey's employment is
terminated (without regard to the reason for such termination), Lacey will be
reimbursed for reasonable expenses, including travel and entertainment expenses,
incurred by him on behalf of the Company while he was an employee of the Company
and for which he submits to the Company properly completed expense
report/reimbursement forms on or before the 15th business day following his
Termination Date.
4. OTHER PAYMENTS. In the event Lacey is terminated by the Company
other than "for cause" (or is treated as if terminated other than "for cause")
during the Term of his Second Amended Employment Agreement, Lacey shall receive
the following termination benefits from the Company, in addition to the
termination payments referenced in paragraph 2. above:
(A) The Company agrees to maintain in full force and effect all
medical, health and other similar insurance on behalf of Lacey and his immediate
family, on the terms and conditions in effect for Lacey on the Termination Date
for the period for which Lacey receives termination payments as set forth in
clause (B) of "Termination Payments" above and COBRA benefits thereafter
3
<PAGE>
commencing on the first anniversary date of his Termination Date.
(B) The Company will pay to Lacey his share of any bonuses declared by
the Compensation Committee, prorated based upon the aggregate dollar amounts of
the bonus and Lacey's employment for the portion of the year prior to his
Termination Date; provided, however, that Lacey acknowledges that nothing
contained herein shall obligate the Compensation Committee to declare any such
bonus or give Lacey a legal right to enforce the declaration of such bonus.
5. CONSULTING OR PART-TIME ACTIVITIES. Following his termination by
the Company other than "for cause," Lacey will, if requested by the Company, be
available to provide consulting services to the Company, as and when needed (not
to exceed ten (10) hours per week, as determined by the Company in its sole
discretion), for a period of twelve (12) full months following the date of
termination of his employment with the Company (the "Initial Consulting
Period"), unless he shall become gainfully employed during such Initial
Consulting Period at which time any remaining consulting service obligation
described herein shall immediately terminate. The Company agrees to reimburse
Lacey for all pre-approved, actual out-of-pocket expenses incurred by Lacey in
connection with this arrangement during the Initial Consulting Period. If
Lacey's consulting services are requested after the expiration of the Initial
Consulting Period, Lacey agrees to negotiate in good faith with the Company to
agree on terms pursuant to which such services will be provided.
Following his termination from the Company "for cause" or following
his voluntary termination, Lacey will have no obligation to provide consulting
services to the Company.
6. AGREEMENT NOT TO SOLICIT EMPLOYEES OR OTHERS. Lacey agrees that,
through and including the third annual anniversary of the date of termination of
his employment with the Company, he will not, directly or indirectly, (A)
solicit, induce, interfere with or hire away, or assist any third party in
soliciting, diverting, interfering with or hiring away any part-time or
full-time employee of the Company, whether or not such employment is pursuant to
a written agreement, is for a specified term or is "at will," (B) induce or
attempt to induce any customer, to cease doing business with the Company, or in
any way interfere with the relationship between any such party and the Company,
and (C) retain as an employee any former part-time or full-time employee of the
Company within six months following such employee's termination of employment
with the Company.
7. OWNERSHIP, NON-DISCLOSURE AND NON-USE OF CONFIDENTIAL INFORMATION.
4
<PAGE>
(A) Except as set forth below, Lacey agrees that all Confidential
Information (as defined below) and all physical embodiments thereof are
confidential to the Company. Lacey agrees that he will not at any time, directly
or indirectly, use, disclose or make available to any person, concern or entity
any Confidential Information, except with the prior written consent of the
Company or as may be required by law.
(B) "Confidential Information" shall be broadly defined to include any
and all data and information relating to the business of the Company, including
without limitation: (i) information and material relating to lessee and investor
relations; (ii) lease and financing documentation; (iii) financial and
accounting affairs of the Company; (iv) business agreements with vendors and
lenders; (v) pricing information; (vi) customer lists; (vii) business plans and
strategies; (viii) any and all information relating to present or proposed
Company debt or equity products; (ix) marketing plans and data; (x) trade
secrets; and (xi) any other information that Lacey knows or should know is
treated as confidential by the Company. "Confidential Information" shall not
include any data or information that has been voluntarily disclosed to the
public by the Company or that otherwise enters the public domain by lawful
means.
IN WITNESS WHEREOF, this Exhibit A has been executed by the parties
hereto as of the Effective Date of the Second Amended Employment Agreement.
The Board of Directors of
Capital Associates, Inc.
/s/Dennis Lacey By: /s/J. D. Walker
- -------------------------- ---------------------------
Dennis J. Lacey J. D. Walker
Dated: ------------------ Title: Director
------------------------
Dated: 5 Oct. 95
------------------------
The Board of Directors of
Capital Associates
International, Inc.
By: /s/J. D. Walker
---------------------------
J. D. Walker
Title: Director
------------------------
Dated: 5 Oct. 95
-------------------------
5
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
THE BOARD OF DIRECTORS
CAPITAL ASSOCIATES, INC.:
We consent to incorporation by reference in the registration statements on Forms
S-8 (No. 33-59570 and No. 33- 68514) and Form S-3 (No. 33-65059) of Capital
Associates, Inc. of our reports dated July 11, 1997, relating to the
consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of
May 31, 1997 and 1996, 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, 1997, and the related schedule, which reports
appear in the May 31, 1997 Annual Report on Form 10-K of Capital Associates,
Inc.
KPMG Peat Marwick LLP
/s/KPMG Peat Marwick LLP
------------------------
Denver, Colorado
August 12, 1997
<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-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 6,194
<SECURITIES> 0
<RECEIVABLES> 1,143
<ALLOWANCES> 30
<INVENTORY> 1,242
<CURRENT-ASSETS> 0
<PP&E> 71,443
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,517
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 23,469
<TOTAL-LIABILITY-AND-EQUITY> 146,517
<SALES> 204,545
<TOTAL-REVENUES> 227,534
<CGS> 200,018
<TOTAL-COSTS> 226,791
<OTHER-EXPENSES> 9,568
<LOSS-PROVISION> 365
<INTEREST-EXPENSE> 7,912
<INCOME-PRETAX> 743
<INCOME-TAX> 10
<INCOME-CONTINUING> 733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 733
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
