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, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1055327
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7175 WEST JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.008
par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The approximate market value of stock held by non-affiliates was $7,450,000
based upon 1,510,000 shares held by such persons and the closing price on July
17, 1998 of $4 15/16. The number of shares outstanding of the Registrant's $.008
par value common stock at July 17, 1998 was 5,121,767.
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 1 of 21 Pages Exhibit Index Begins on Page 19
<PAGE>
PART I
Item 1. Business
--------
Capital Associates, Inc. ("the Company") is a commercial finance company engaged
in the leasing of a variety of equipment. The Company is principally engaged in
(i) the origination of equipment leases with equipment users, including the
acquisition of leases initially originated by other lessors (ii) the sale of
equipment leases to third parties, (iii) the management and servicing of
equipment leases retained by the Company or sold to private investors or other
lessors, (iv) the sale and remarketing of equipment as it comes off lease and
(v) the sale and servicing of new information technology equipment. During
fiscal years 1998 and 1997, the Company originated over $540 million of
equipment leases covering over 53,000 items of equipment. The principal market
for the Company's activities is the United States.
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 by (i) locating the retail
originations sales force in regional branch offices throughout the United
States, (ii) targeting a variety of specific industries and equipment types for
lease originations, (iii) originating leases on a wholesale basis (i.e.,
acquiring leases from other lessors), and (iv) originating leases through
relationships with equipment vendors. Funding sources are diversified by (x)
matching individual equipment originations with the investment needs of private
investors, (y) originating leases on a recurring basis on behalf of private
lease investment programs it manages on behalf of other lessors (lease
investment programs) and (z) funding lease transactions for its own portfolio
through securitization or permanent non-recourse financing.
The Company diversifies its own equipment lease portfolio (as well as the
equipment portfolio it manages for private investors) to include a variety of
equipment types 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 seeks to maintain a diversified lease
portfolio in order to minimize its credit and residual exposure to any single
lessee, industry or equipment category. As of May 31, 1998, no single industry
or lessee accounted for more than 10% of the Company's portfolio of leases.
During fiscal 1998, the Company acquired DBL, Inc. d/b/a Connecting Point
(subsequently renamed Capital Associates Technology Group or "CATG"). CATG
provides a wide range of information technology ("IT") services, including
procurement of software, PC's and networking equipment, and IT equipment
maintenance. CATG was acquired to obtain specific IT equipment expertise which
the Company hopes will provide (i) access to new markets which will allow the
Company to realize higher residual values and to support lease originations,
(ii) greater confidence in pricing and estimating residual values and (iii) the
ability to provide enhanced equipment expertise and evaluation services to our
customers.
The Company's principal sources of funding for its leasing transactions include
(i) a $51 million warehouse facility ("Warehouse Facility"), (ii) a $4 million
term loan ("Term Loan"), (iii) a $5 million working capital facility ("Working
Capital Facility"), (iv) permanent non-recourse financing, including
securitization of receivables, (v) sales of equipment leases to third parties or
lease investment programs it manages and (vi) the Company's internally generated
revenues. Historically, the Company sold a significant portion of its lease
originations to public limited partnership income funds ("PIF") in which it was
the general partner or co-general partner. During fiscal 1998, the Company
completed the offering of units in its most recent PIF, Capital Preferred Yield
Fund-IV, L.P. (CPYF-IV). The Company has elected not to organize additional
PIFs. As a result, future equipment sales to PIFs will reflect only the
reinvestment needs of the existing PIFs, and are expected to represent a smaller
amount of equipment sales.
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<PAGE>
Item 1. Business, continued
--------
Leasing Activities, continued
- ------------------
In the case of leases held for the Company's account, a typical lease
transaction requires a cash investment by the Company of 5% to 30% of the
original equipment cost, commonly known in the leasing industry as an "equity
investment". The balance of original equipment cost is financed with permanent
non-recourse borrowings, also referred to as discounted lease rentals or
securitization funding. Such borrowings are secured by a first lien on the
equipment and the related lease rental payments. The Company's equity investment
is typically financed with proceeds from its Working Capital Facility, Term
Loan, 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. The Company is pursuing additional lease investment
programs and is developing an expanded securitization program to finance its
leases. The Company hopes to complete the first funding under the securitization
program during the first quarter of fiscal 1999; however, such programs are
expensive to implement and are subject to significant delays and there can be no
assurance that it will ever be completed.
Of the equipment leases originated or acquired by the Company in fiscal years
1998 and 1997, the Company retained approximately 28% and 18%, sold 29% and 9%
to private leasing investment programs, sold 15% and 27% to the PIFs, and
syndicated 28% and 46% to unaffiliated third parties, respectively. Equipment
leases retained or serviced by the Company increased 22% to $828 million as of
May 31, 1998 from $680 million in June 1997. The Company serviced $118 million
and $22 million in assets (based on original equipment cost) for private leasing
investment programs in fiscal years 1998 and 1997, respectively. As of May 31,
1998, the Company had awards for future business amounting to approximately
$24.9 million, as compared to $14.2 million at May 31, 1997. On average
approximately 97% of the Company's awarded business was closed for fiscal year
1998.
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 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 remain in place at the end of the initial lease term. Typically,
equipment which remains in place produces better residual returns than equipment
sold or leased to a third party.
The Company generally purchases equipment that is subject to relatively
short-term leases (generally seven years or less). 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. In addition, the
lessee is required to insure the equipment against casualty loss, pay all
related maintenance expenses and pay property, sales and other taxes.
The Company has master leases in place with more than 500 customers. Master
leases are contracts that establish general terms and conditions under which the
Company conducts its leasing business and are frequently a prerequisite in
competing for new financing. Master leases simplify the approval process for
lessees and enable the Company to compete for new business at all levels of an
enterprise.
Underwriting Standards
- ----------------------
All leases are subject to review under the Company's underwriting standards. To
minimize credit risk, the Company has established credit underwriting standards
which specify that the Company's lessees 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 although not rated by a recognized credit rating
3 of 21
<PAGE>
Item 1. Business, continued
--------
Underwriting Standards, continued
- ----------------------
service or rated below Baa, are believed by the Company to be sufficiently
creditworthy to satisfy the financial obligations under the lease (a "non
investment grade credit"). As of May 31, 1998, approximately 99% of the
equipment owned by the Company was leased to companies that meet the above
criteria. As of May 31, 1998, the dollar-weighted average credit rating of the
Company's lessees was the equivalent of Baa. The Company originates leases for
the PIFs and for private investment programs in accordance with each program's
own lease underwriting standards. In the case of the PIF's, the underwriting
standards are similar to those of the Company. The Company's historical losses
associated with leases originated since 1991, including leases originated on
behalf of the PIFs and for private investment programs, are less than 1% of the
amount originated.
Residual values are established at lease inception equal to the estimated value
to be received from the equipment at the termination of the lease. In estimating
such values, the Company considers relevant facts regarding the equipment and
the lessee, including, for example, the equipment's remarketability, upgrade
potential and 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 quarterly assessments of its assets
to identify other-than-temporary losses in value. The Company records allowances
for losses as soon as any other-than-temporary declines in asset values are
known. 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 Company has established a Transaction Review Committee ("TRC"), which is
comprised of members of senior management. The TRC (1) reviews and approves all
aspects of material lease transactions, including credit ratings assigned to
lessees and certain pricing and residual value assumptions; (2) specifies lease
documentation requirements and deal structuring guidelines; (3) monitors asset
quality in order to estimate and assess the net realizable values at the end of
a lease terms for the Company's equipment; 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 be approved by the Executive Committee.
Equipment Remarketing Activities
- --------------------------------
Remarketing activities consist of lease portfolio management (i.e., managing
equipment under lease) and 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). In general, remarketing
equipment in place produces better residual returns than equipment sold or
re-leased to third-parties. 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 approximately $6.3
million, $6.0 million, and $3.0 million during fiscal years 1998, 1997 and 1996,
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 and acquiring 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, (4) operating its own general
equipment warehouse to further reduce warehousing costs, (5) eliminating scrap
inventory, 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.
4 of 21
<PAGE>
Item 1. Business, continued
--------
Private Investor Lease Investment Programs and PIFs
- ---------------------------------------------------
The majority of leases originated by the Company are sold to private investors
or to lease investment programs, collectively referred to as "Private
Investors". The Company records sales revenue 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 or to lease
investment programs was $179.4 million, $131.6 million and $91.0 million during
fiscal years 1998, 1997 and 1996, respectively.
The Company currently sponsors or co-sponsors five PIFs. The Company sells
certain equipment leases it originates to these PIFs. Revenue from the sale of
leased equipment to the PIFs was $48.6 million, $67.0 million and $72.2 million
during fiscal years 1998, 1997 and 1996, respectively. As discussed under
Leasing Activities, sales to PIF's are expected to decline significantly in the
future.
Various subsidiaries and affiliates of the Company are the general partners or
co-general partners of the PIFs. In addition, the Company contributed cash
and/or equipment to each PIF in exchange for a Class B limited partner interest
("Class B interest") in each PIF. Public investors purchase Class A limited
partnership units ("Class A Units") for cash, which the PIFs used to purchase
leased equipment. The Company receives fees for performing various services for
the PIFs (subject to certain dollar limits) including acquisition fees and
management fees, and is reimbursed for organizational and offering expenses
incurred in selling the Class A Units (subject to certain dollar limits). The
Company receives a Class B cash distribution from each PIF (subordinated to the
cash returns on the Class A Units). The general partner receives cash
distributions and reimbursement of certain operating expenses incurred in
connection with each PIFs operations.
Competition
- -----------
The business of equipment leasing is highly competitive. The Company competes
for customers with a number of international, national and regional finance and
leasing companies and banks. In addition, the Company's competitors include
equipment manufacturers that finance the sale or lease of their products
themselves. Many of the Company's competitors and potential competitors have
greater financial, marketing and operational resources than the Company and may
have a lower cost of funds than the Company and access to capital markets and to
other funding sources that may not be available to the Company.
Employees
- ---------
The Company had approximately 170 employees as of May 31, 1998 versus
approximately 110 employees as of May 31, 1997, 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 has seven regional or
satellite marketing offices. The Company also leases facilities in Ogden and
Salt Lake City, Utah where it markets and services information technology
equipment.
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<PAGE>
Item 3. Legal Proceedings
-----------------
The Company is involved in the following legal proceedings:
a. The Company was 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 alleged 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 a wholly owned subsidiary of the
Company. The three claims involved investments in LIFV of
approximately $625,000 and sought damages of $838,000 and special
punitive and exemplary damages (one claim specified $1,500,000 in such
damages while the other two claims did not specify an amount). All
three claims were brought by the same company on behalf of three
investors. Management believed that it had good and substantial
defenses against these claims and that the Company's subsidiary would
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.
In June 1998, the second of these claims, which alleged the same
claims and sought $176,000 in compensatory damages and an unspecified
amount in punitive damages, was heard and the arbitration panel again
found for the Company's subsidiary, so that no award was due to the
claimants under any of their claims. The claimants were assessed
$8,100 in forum fees by the NASD for the arbitration proceeding. Also
in June 1998, shortly after the decision in the second case, the
Company's subsidiary obtained a settlement of the third case by
payment to the claimant's representative of a de minimus settlement
amount which the Company believes was less than the travel costs which
would have been incurred related to the arbitration hearing.
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, 1998.
PART II
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.
The Nasdaq Stock Market, which began operation in 1971, is the world's first
electronic securities market and the fastest growing stock market in the U.S.
Nasdaq utilizes today's information technologies-computers and
telecommunications-to unite its participants in a screen-based, floorless
market. It enables market participants to compete with each other for investor
orders in each Nasdaq security and, through the use of Nasdaq Workstation II and
other automated systems, facilitates the trading and surveillance of thousands
of securities. This competitive marketplace, along with the many products and
services available to issuers and their shareholders, attracts today's largest
6 of 21
<PAGE>
Item 5. Market for the Registrant's Common Stock and Related Stockholder
----------------------------------------------------------------------
Matters, continued
-------
and fastest growing companies to Nasdaq. These include industry leaders in
computers, pharmaceuticals, telecommunications, biotechnology, and financial
services. More domestic and foreign companies list on Nasdaq than on all other
U.S. stock markets combined.
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 4 2 1/4
Second Quarter 4 1/4 2 13/16
Third Quarter 3 1/2 2 1/8
Fourth Quarter 5 3/8 2 15/16
1997 HIGH LOW
---- ---- ---
First Quarter 4 3/8 2 1/8
Second Quarter 4 1/4 2 1/8
Third Quarter 4 1/4 2 7/8
Fourth Quarter 3 13/16 2 1/2
On July 17, 1998, the date on which trading activity last occurred, the closing
sales price of the Company's common stock was $4 15/16. On July 17, 1998, there
were approximately 170 shareholders of record and at least 490 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.
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<PAGE>
Income Statement Data
- ---------------------
(in thousands, except per share and number of shares data)
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Equipment sales $ 248,258 $ 204,545 $ 166,242 $ 81,370 $ 122,469
Leasing 25,101 14,420 10,212 7,672 13,368
Interest 3,487 4,828 6,943 11,386 15,027
Other 4,228 3,741 3,284 4,516 4,101
--------- --------- --------- --------- ---------
281,074 227,534 186,681 104,944 154,965
--------- --------- --------- --------- ---------
Costs and expenses:
Equipment sales 240,702 200,018 161,797 70,866 114,440
Leasing 17,337 8,928 5,466 3,893 5,511
Operating and other expenses 11,830 9,568 8,332 11,603 12,307
Provision for losses 705 365 430 2,940 1,315
Interest - non-recourse debt 6,123 6,012 7,705 12,548 18,370
Interest - recourse debt 2,857 1,900 2,145 1,618 1,839
--------- --------- --------- --------- ---------
279,554 226,791 185,875 103,468 153,782
--------- --------- --------- --------- ---------
Income before income taxes 1,520 743 806 1,476 1,183
Income tax expense - 10 202 360 473
--------- --------- --------- --------- ---------
Net income $ 1,520 $ 733 $ 604 $ 1,116 $ 710
========= ========= ========= ========= =========
Earnings per common share:
BASIC $ .30 $ .15 $ .12 $ .22 $ .15
DILUTED $ .28 $ .14 $ .12 $ .21 $ .13
Weighted average number of common shares
outstanding:
BASIC 5,117,000 5,004,000 4,987,000 5,052,000 4,856,000
DILUTED 5,449,000 5,403,000 5,186,000 5,325,000 5,451,000
Balance Sheet Data
- ------------------
(in thousands) May 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Total assets $ 214,993 $ 146,517 $ 127,511 $ 158,956 $ 209,725
Recourse debt 49,088 20,712 17,538 24,520 18,767
Discounted lease rentals 104,311 61,466 63,749 98,216 160,842
Stockholders' equity 25,186 23,501 22,881 22,490 21,099
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations
---------------------
I. Results of Operations
---------------------
During fiscal years 1998, 1997, 1996, 1995, and 1994, the Company reported
net income of $1,520,000, $733,000, $604,000, $1,116,000, and $710,000,
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 (as a
percentage of revenue) in part due to improved back office efficiency.
During fiscal year 1998, as a result of continuing emphasis on improving
lease originations, operating efficiencies and competitive costs of
capital, the Company:
* generated profits for the sixth consecutive year and twenty-fourth
consecutive quarter
* continued to invest in its sales force through an extensive training
program and personnel expansion
* originated leases exceeding $300 million, the highest level during the
last five years
* closed a new $60 million bank facility
* expanded its financing capabilities by adding a new private investment
program
* acquired a full service computer marketing company, and a wholesale
forklift marketing company to enhance its expertise in regards to
these two equipment types
Significant factors which may impact the Company's profitability in the
future include the ability to develop and to 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. Operating results are also subject to
fluctuations resulting from several factors, including (i) seasonality of
lease originations, (ii) 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, and (iii) the level of income
obtained from the sale of leases in excess of lease equipment cost. The
Company will adjust its 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.
Presented below is a schedule showing new lease originations volume and
placement of new lease originations by fiscal year (in thousands).
Years Ended May 31,
--------------------------------
1998 1997 1996
--------- --------- ---------
Placement:
Equipment under lease sold to PIFs $ 47,000 $ 63,000 $ 67,000
Equipment under lease sold to private
investors 176,000 101,000 82,000
Leases added to the Company's lease
portfolio (a significant portion of
which will be/were sold during the
subsequent fiscal years) 87,000 67,000 43,000
--------- --------- ---------
Total lease origination volume $ 310,000 $ 231,000 $ 192,000
========= ========= =========
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Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
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 to fall with interest rates, although lease rate movements generally
lag interest rate movements.
The Company is able to originate a certain amount of leases with higher
lease rates. Such leases have generally been 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. In the
present market environment, the number of higher yielding transactions
having adequate credit quality is limited, and consequently, the volume of
leases available for sale 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. During fiscal year 1998, the Company completed the offering of
units in its most recent PIF, Capital Preferred Yield Fund-IV, L.P.
(CPYF-IV). The Company has elected not to organize additional PIFs and
future equipment sales to PIF's are expected to comprise a significantly
smaller percentage of total placements of new lease originations.
The Company continues to evaluate additional sources of capital (including
securitization, private debt placement and/or public debt or stock) which
will provide the liquidity necessary to 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 in closing new sources of capital
(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 that follows (in thousands):
<TABLE>
<CAPTION>
Condensed Condensed
Consolidated Consolidated
Statements of Income The Effect on Statements of Income The Effect on
for the Years Net Income for the Years Net Income
Ended May 31, of Changes Ended May 31, of Changes
--------------------- Between --------------------- Between
1998 1997 Years 1998 1997 Years
-------- -------- ------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 7,556 $ 4,527 $ 3,029 $ 4,527 $ 4,445 $ 82
Leasing margin 7,764 5,492 2,272 5,492 4,746 746
Other income 4,228 3,741 487 3,741 3,284 457
Operating and other expenses (11,830) (9,568) (2,262) (9,568) (8,332) (1,236)
Provision for losses (705) (365) (340) (365) (430) 65
Interest expense, net (5,493) (3,084) (2,409) (3,084) (2,907) (177)
Income taxes - (10) 10 (10) (202) 192
--------- -------- --------- -------- -------- --------
Net income $ 1,520 $ 733 $ 787 $ 733 $ 604 $ 129
========= ======== ========= ======== ======== ========
</TABLE>
10 of 21
<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 margin (including retail sales of
new information technology equipment by the Company's CATG subsidiary)
consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------------------------- Increase
1998 1997 (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 $ 48,648 $ 1,090 $ 66,987 $ 1,442 $ (18,339) $ (352)
Equipment under lease sold to private investors 179,408 2,204 131,600 1,768 47,808 436
--------- --------- --------- --------- --------- ---------
228,056 3,294 198,587 3,210 29,469 84
--------- --------- --------- --------- --------- ---------
Transactions subsequent to initial lease term
(remarketing revenue):
Sales of off-lease equipment 4,372 1,080 5,359 720 (987) 360
Sales-type leases 323 157 71 69 252 88
Excess collections (cash collections in excess
of the associated residual value from equipment
under lease sold to private investors) 1,622 1,622 528 528 1,094 1,094
--------- --------- --------- --------- --------- ---------
6,317 2,859 5,958 1,317 359 1,542
Deduct related provision for losses - (705) - (365) - (340)
--------- --------- --------- --------- --------- ---------
Realizations of value in excess of provision for
losses 6,317 2,154 5,958 952 359 1,202
Add back related provision for losses - 705 - 365 - 340
--------- --------- --------- --------- --------- ---------
6,317 2,859 5,958 1,317 359 1,542
CATG sales 13,885 1,403 - - 13,885 1,403
--------- --------- --------- --------- --------- ---------
Total equipment sales $ 248,258 $ 7,556 $ 204,545 $ 4,527 $ 43,713 $ 3,029
========= ========= ========= ========= ========= =========
Years Ended May 31,
--------------------------------------------- Increase
1997 1996 (Decrease)
--------------------- -------------------- -----------------------
Revenue Margin Revenue Margin Revenue Margin
--------- -------- --------- -------- --------- --------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 66,987 $ 1,442 $ 72,202 $ 1,539 $ (5,215) $ (97)
Equipment under lease sold to private investors 131,600 1,768 91,007 1,303 40,593 465
--------- ------- --------- ------- -------- ------
198,587 3,210 163,209 2,842 35,378 368
--------- ------- --------- ------- -------- ------
Transactions subsequent to initial lease term
(remarketing revenue):
Sales of off-lease equipment 5,359 720 2,121 859 3,238 (139)
Sales-type leases 71 69 359 191 (288) (122)
Excess collections (cash collections in excess
of the associated residual value from equipment
under lease sold to private investors) 528 528 553 553 (25) (25)
--------- ------- --------- ------- -------- ------
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
========= ======= ========= ======= ======== ======
</TABLE>
11 of 21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
Equipment Sales to PIFs
-----------------------
Equipment sales to the PIFs decreased during fiscal year 1998 as compared
to fiscal year 1997 and are expected to decrease further in fiscal year
1999 because three of the PIFs are in their planned liquidation stage and
two of the PIFs were recently liquidated. Once a PIF enters the liquidation
stage, it no longer acquires equipment under lease. Two PIFs are actively
acquiring leases compared to four PIFs which were actively acquiring leases
in 1997. The Company has elected not to organize future PIFs.
Equipment sales to PIFs decreased during fiscal year 1997 as compared to
fiscal year 1996 because three of the PIFs entered their planned
liquidation stage during 1997. By the end of 1997, only two PIFs were
actively acquiring leases compared to five PIFs at the end of 1996.
Equipment Sales to Private Investors
------------------------------------
Equipment sales to private investors increased in fiscal year 1998 compared
to fiscal year 1997, and in fiscal year 1997 compared to fiscal year 1996
principally because of the increased volume of lease originations. The
Company has, in recent years, invested in its lease origination sales force
through extensive training and personnel expansion, adopted a strategy of
vertical integration (i.e., the development of specialized equipment and
remarketing expertise) and established strategic alliances with investors
having a lower cost of capital enabling the Company to originate and to
sell leases at competitive prices.
The Company defers income related to its servicing obligation on certain
leases it sells. This income is amortized over the life of the lease and is
included in other income.
CATG Sales
----------
CATG sales consist primarily of new information technology hardware. In
conjunction with the sale of hardware, CATG also sells software and
services. Revenue from such sources is not material to total CATG sales.
CATG's revenue and margin have been included since November 1, 1997, the
date of acquisition.
Remarketing of the Portfolio and Related Provision for Losses
-------------------------------------------------------------
The Company has successfully realized gains on the remarketing of its
portfolio of equipment after the initial lease term for the past
twenty-four 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 is
recorded as provision for losses (which is typically not known until
remarketing after the expiration of the initial lease term). As shown in
the tables above, the realizations from sales exceeded the provision for
losses for fiscal years 1998, 1997 and 1996, even without considering
realizations from remarketing activities recorded as leasing margin.
Revenue and margins from remarketing sales (i.e., sales occurring after the
initial lease term) are affected by the number and the dollar amount of
equipment leases that mature in a particular year. 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.
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 leases to its portfolio. However, adding leases to the
Company's portfolio will not immediately increase the pool of maturing
leases because leased equipment is typically not remarketed until after its
initial lease term (which averages approximately four years).
12 of 21
<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 1998 included the
following significant items:
* Other-than-temporary declines in the value of equipment which occurred
primarily because lessees returned equipment to the Company at the end
of leases. The Company had previously expected to realize the carrying
value of such equipment through lease renewals and proceeds from sales
of the equipment to the original lessees. The fair market value of the
equipment re-leased or sold to third parties is considerably less than
was anticipated.
* Approximately $185,000 for two off-lease commuter aircraft. The Company
engaged MCC Financial Corporation ("MCC"), the Company's majority
stockholder and a commuter aircraft remarketer, to remarket the
aircraft. That agent determined that the aircraft could be released
within a reasonable remarketing period for an amount that would recover
the Company's full carrying value over time, or sold for cash
immediately but at a book loss. The Company elected to sell the
aircraft immediately after determining that the proceeds could be more
effectively redeployed in its vertical integration activities and for
the equity portion of a potential financing program for leases.
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.
* 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 related to a bankrupt lessee. During 1996,
the lease was restructured and the reserve was no longer needed.
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Fiscal Years Ended May 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Leasing revenue $ 25,101 $ 14,420 $ 10,212
Leasing costs and expenses (17,337) (8,928) (5,466)
-------- -------- --------
Leasing margin $ 7,764 $ 5,492 $ 4,746
======== ======== ========
Leasing margin ratio 31% 38% 46%
======== ======== ========
13 of 21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
LEASING MARGIN, continued
The increase in leasing revenue, leasing costs and expenses and leasing
margin was due to the increase in the volume of lease originations
warehoused pending sale to private investors and planned growth in the
Company's lease portfolio. These revenue and expense amounts are expected
to increase further as the Company continues to grow its lease portfolio,
and increase the amount of leases warehoused pending sale.
Leasing margin ratio fluctuates based upon (i) the mix of direct finance
leases and operating leases, (ii) remarketing activities, (iii) the
relative age and types of leases in the portfolio (operating leases have a
lower leasing margin early in the lease term, increasing as the term
passes. Leasing margin also includes leasing revenue and leasing cost
related to equipment remarketed (re-leased) after the expiration of the
initial lease term. The leasing margin ratio has decreased as the number of
new lease originations has increased compared to the number of remarketed
leases.
OTHER INCOME
Other income consists of the following (in thousands):
Fiscal Years Ended May 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Fees and distributions from PIFs $ 3,114 $ 2,453 $ 2,958
Fees from private leasing programs 451 38 -
Interest on installment sale of equipment 443 769 -
Other 220 481 326
------- ------- --------
$ 4,228 $ 3,741 $ 3,284
======= ======= =======
Fees and distributions from PIFs includes a net gain of $790,000 related to
the sale of substantially all the leases owned by two PIFs. For the reasons
discussed under EQUIPMENT SALES TO PIFS, the amount of fees and
distributions from PIF's is expected to decline in future years.
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 1998, the Company received
$650,000 of cash payments related to the installment sale. Expected future
cash payments and interest income under the installment sale are $1.4
million and $.9 million, respectively.
OPERATING AND OTHER EXPENSES
Operating and other expenses increased approximately $2.3 million (24%) for
fiscal year 1998 compared to fiscal year 1997. Approximately $1.5 million
of the increase was due to CATG expenses which have been included in the
consolidating financial statements since the acquisition date. The
remaining increase was due primarily to costs associated with the Company's
investment in its retail marketing infrastructure.
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 costs associated with the Company's investment in its retail marketing
infrastructure, and (iii) $400,000 for consulting fees and expenses of the
Company's majority shareholder.
14 of 21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
INTEREST EXPENSE, NET
Interest expense, net consists of the following:
1998 1997 1996
------- ------- -------
Interest income $(3,487) $(4,828) $(6,943)
Non-recourse interest expense 6,123 6,012 7,705
------- ------- -------
Net non-recourse interest expense 2,636 1,184 762
Recourse interest expense 2,857 1,900 2,145
------- ------- -------
Interest expense, net $ 5,493 $ 3,084 $ 2,907
======= ======= =======
The Company finances leases for its own portfolio primarily with
non-recourse debt. Interest income arises when equipment financed with
non-recourse debt is sold to investors. As a result, interest income
reported in the accompanying Consolidated Statements of Income reflect an
amount equal to non-recourse interest expense. Therefore, net non-recourse
interest expense on related discounted lease rentals pertains to the
Company's owned lease portfolio. Such amount increased due to an increase
in the average outstanding balance of related discounted lease rentals
related to growth in the Company's owned portfolio. It is anticipated that
net non-recourse interest expense on related discounted lease rentals will
continue to increase in the future as the Company adds additional leases
financed with non-recourse debt to its portfolio.
Recourse interest expense increased during fiscal year 1998 compared to
fiscal year 1997 primarily due to increased borrowings under the Company's
Warehouse Facility used to fund the growth in the number of leases the
Company holds for sale to private investors. Recourse interest expense
decreased during fiscal year 1997, as compared to fiscal year 1996, due to
the reductions in the outstanding balance of the Term Loan portion of the
Company's Debt Facility.
INCOME TAXES
As shown in the table in Note 11 to Notes to the Consolidated Financial
Statements, the Company's significant deferred tax assets consist of an ITC
carryforward of approximately $1.0 million (which expires from 1999 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 1998, 1997 and 1996 was approximately 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 1998, 1997 and 1996 was less than the
effective rate of 40% primarily due to the reduction in the valuation
allowance. The decrease in the valuation allowance recorded in fiscal 1998
represents the utilization of an ITC carryforward for which a valuation
allowance had been provided, and reduction in the uncertainty about future
utilization of ITC carryforwards prior to expiration. The reduction in the
valuation allowance was recorded during the quarter ended May 31, 1998 and
resulted in an income tax benefit of $464,000. 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.
15 of 21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
I. Results of Operations, continued
---------------------
INCOME TAXES, continued
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 net deferred income tax
assets, net of the valuation allowance.
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 9 to Notes to Consolidated Financial
Statements), rents, fees and distributions from its PIFs, and sales or
re-leases of equipment after the expiration of the initial lease terms. In
addition, the Company finances receivables of its CATG subsidiary under an
agreement with a specialized finance company. 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 was expanded during fiscal 1998 to a total of
$60 million. The term of the Bank Facility is one year. See Note 9 to Notes
to Consolidated Financial Statements for a description of the Company's
Bank Facility.
Historically, the Company sold a significant portion of its lease
originations to the PIFs. During fiscal 1998, the Company completed the
offering of units in the most recent PIF, Capital Preferred Yield Fund-IV.
The Company has elected not to organize additional PIFs. Consequently,
future equipment sales to PIFs will reflect only the reinvestment needs of
the existing PIFs, and therefore are expected to represent smaller amounts
of equipment sales margin and cash flow.
However, leases that in the past would have been originated for sale to the
PIF's are expected to be retained by the Company. This strategy is expected
to increase the Company owned leased portfolio. An increase in the size of
the Company's lease portfolio is expected to result in an increase in (a)
the Company's revenue and ultimate profitability and (b) the amount of
capital needed to fund leasing activities. Permanent non-recourse debt
generally provides financing for 80-95% of the cost of leased equipment.
Consequently, the Company continues to evaluate additional sources of
capital (including securitization, private debt placement and/or public
debt or stock) which will provide the liquidity necessary to 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.
Additional lease warehouse financing consisting of both recourse and
non-recourse facilities provides the Company with the funding necessary to
originate and to hold leases on a temporary basis in anticipation of sale
to Private Investors or until permanent funding is arranged for leases it
holds in its own portfolio.
16 of 21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
II. Liquidity and Capital Resources, continued
-------------------------------
The Company intends to securitize leases it adds to its portfolio. In a
securitization transaction, the Company sells and transfers a pool of
leases to a wholly-owned special purpose subsidiary ("SPS") of the Company.
The SPS simultaneously sells and transfers an interest in the leases to
multiple financing conduits, in return for cash advances against the
leases. The Company retains the right to receive any cash flows in excess
of those necessary to service repayment of the cash advances. The Company
is negotiating a new $50 million securitization program to increase the
availability of permanent funding for lease originations. The Company hopes
to complete the first funding under the securitization program during the
first quarter of fiscal 1999; however, such programs are expensive to
implement and are subject to significant delays and there can be no
assurance that it will ever be completed.
The Company finances receivables and inventory for its CATG subsidiary
under an agreement with Deutsche Financial Services. At May 31, 1998,
accounts receivable, net included $3,192,000 of receivables related to the
Company's CATG subsidiary which were eligible collateral under the
financing agreement.
Inflation has not had a significant impact upon the operations of the
Company.
YEAR 2000 ISSUES
The Company has conducted a comprehensive review of its computer systems to
identify systems that could be affected by the Year 2000 issue. The Year
2000 issue results from computer programs being written using two digits
rather than four to define the applicable year. Certain computer programs
which have time-sensitive software could recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in major system
failures or miscalculations. Certain of the Company's software have already
been updated to software which correctly accounts for the Year 2000. In
addition, the Company is engaged in a system conversion, whereby the
Company's main lease tracking and accounting software is being replaced
with new systems which will account for the Year 2000 correctly. The
Company does not expect any other changes required for the Year 2000 to
have a material effect on its financial position or results of operations.
In addition, the Company does not expect any Year 2000 issues relating to
its customers and vendors will have a material effect on its financial
position or results of operations. The Company expensed all amounts related
to its review of the Year 2000 issue. Amounts expended to date to address
the Year 2000 issue have been immaterial.
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, customer credit risk, competition from other lessors, speciality
finance lenders or banks and the availability and cost of financing
sources. 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.
17 of 21
<PAGE>
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.
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.
18 of 21
<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.
10.8(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"), incorporated by reference to exhibit 10.8(f) of the May
31, 1997 Form 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.
10.55 Consulting Agreement, effective as of June 1, 1996 by and among the
Company, CAII and William H. Buckland, incorporated by reference to
Exhibit 10.55 of the August 31, 1997 Form 10-Q.
10.56 Consulting Agreement, effective as of June 1, 1996 by and among the
Company, CAII and James D. Walker, incorporated by reference to
Exhibit 10.56 of the August 31, 1997 Form 10-Q.
10.57 Residual Sharing Note, dated as of June 1, 1997 by and among the
Company, CAII and William H. Buckland, incorporated by reference to
Exhibit 10.57 of the August 31, 1997 Form 10-Q.
10.58 Residual Sharing Note, dated as of June 1, 1997 by and among the
Company, CAII and James D. Walker, incorporated by reference to
Exhibit 10.58 of the August 31, 1997 Form 10-Q.
10.59 Loan and Security Agreement, dated as of November 26, 1997 by and
among the Company and CAII as Borrowers and CoreStates Bank, N.A., as
Agent and Issuing Bank and each of the Financial Institutions now or
hereafter shown on the Signature pages of this Agreement, incorporated
by reference to Exhibit 10.59 of the November 30, 1997 Form 10-Q.
10.60 First Amendment to Loan and Security Agreement, dated as of April 7,
1998 by and between Capital Associates, Inc., and Capital Associates
International, Inc. as Borrowers and CoreStates Bank, N. A. as Agent
and Issuing Bank and the four participating financial institutions.
10.61 Employment Agreement, dated as of April 7, 1998, by and among the
Company, CAII and James D. Walker.
19 of 21
<PAGE>
Item No. Exhibit Index
- -------- -------------
10.62 Business Financing Agreement, Addendum to Business Financing Agreement
and Agreement for Wholesale Financing, Corporate Guaranty and Addendum
to Guaranty, dated as of April 21, 1998 by and between Capital
Associates Technology Group, Inc. and Deutsche Financial Services
Corporation.
10.63 Second Amendment to Loan and Security Agreement, dated as of May 29,
1998 by and between Capital Associates, Inc., and Capital Associates
International, Inc. as Borrowers and CoreStates Bank, N. A. as Agent
and Issuing Bank and the four participating financial institutions.
21 List of Subsidiaries
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
20 of 21
<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: July 23, 1998 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 President, CEO and Chairman of the Board
- ----------------------
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/Robert A. Sharpe Director
- ----------------------
Robert A. Sharpe
/s/John Gordon
- ---------------------- Assistant Vice President and Controller
John Gordon (Principal Accounting Officer)
Each of the above signatures is
affixed as of July 21, 1998
21 of 21
<PAGE>
INDEX OF FINANCIAL STATEMENTS
AND SCHEDULE
Page
Financial Statements ------
- --------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of May 31, 1998 and 1997 F-3
Consolidated Statements of Income for
the Years Ended May 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended May 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1998, 1997 and 1996 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, 1998, 1997 and 1996 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
-------------------------
Denver, Colorado
July 14, 1998
F - 2
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and par value)
ASSETS
May 31,
-------------------
1998 1997
-------- --------
Cash and cash equivalents $ 17,684 $ 6,194
Receivable from affiliated limited partnerships 352 726
Accounts receivable, net 5,835 417
Inventory 1,141 1,331
Residual values, net, arising from equipment
under lease sold to private investors 4,277 4,334
Net investment in direct finance leases 31,181 7,700
Leased equipment, net 104,825 71,443
Investment in affiliated limited partnerships 3,589 6,642
Other 4,883 3,585
Deferred income taxes 3,600 2,300
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 37,626 41,845
--------- ---------
$ 214,993 $ 146,517
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse debt $ 49,088 $ 20,712
Accounts payable - equipment purchases 25,029 30,231
Accounts payable and other liabilities 11,379 10,607
Discounted lease rentals 104,311 61,466
--------- ---------
189,807 123,016
--------- ---------
Commitments and contingencies (Notes 9, 11, 16 and 17)
Stockholders' equity:
Common stock, $.008 par value, 15,000,000 shares
authorized, 5,165,000 and 5,157,000 shares issued 32 32
Additional paid-in capital 16,863 16,897
Retained earnings 8,374 6,854
Treasury stock, at cost (83) (282)
--------- ---------
Total stockholders' equity 25,186 23,501
--------- ---------
$ 214,993 $ 146,517
========= =========
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except shares and per share data)
Years Ended May 31,
-------------------------------------
1998 1997 1996
--------- ---------- ---------
Revenue:
Equipment sales to PIFs $ 48,648 $ 66,987 $ 72,202
Other equipment sales 199,610 137,558 94,040
Leasing 25,101 14,420 10,212
Interest 3,487 4,828 6,943
Other 4,228 3,741 3,284
--------- --------- ---------
Total revenue 281,074 227,534 186,681
--------- --------- ---------
Costs and expenses:
Equipment sales to PIFs 47,558 65,545 70,663
Other equipment sales 193,144 134,473 91,134
Leasing 17,337 8,928 5,466
Operating and other expenses 11,830 9,568 8,332
Provision for losses 705 365 430
Interest:
Non-recourse debt 6,123 6,012 7,705
Recourse debt 2,857 1,900 2,145
--------- --------- ---------
Total costs and expenses 279,554 226,791 185,875
--------- --------- ---------
Income before income taxes 1,520 743 806
Income tax expense - 10 202
--------- --------- ---------
Net income $ 1,520 $ 733 $ 604
========= ========= =========
Earnings per common share:
Basic $ .30 $ .15 $ .12
========= ========= =========
Diluted $ .28 $ .14 $ .12
========= ========= =========
Weighted average number of
common shares outstanding:
Basic 5,117,000 5,004,000 4,987,000
========= ========= =========
Diluted 5,449,000 5,403,000 5,186,000
========= ========= =========
See accompanying notes to 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, 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
Issuance of common stock under
incentive stock option plan 8,000 - 14 - - 9 14
Issuance of treasury shares upon
exercise of incentive stock options - - (82) - (98,000) 199 117
Income tax benefit from stock
compensation - - 34 - - - 34
Net income - - - 1,520 - - 1,520
---------- ----- -------- ------- ------- ------ --------
Balance at May 31, 1998 5,165,000 $ 32 $ 16,863 $ 8,374 42,000 $ (83) $ 25,186
========== ===== ======== ======= ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------------------------------
1998 1997 1996
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,520 $ 733 $ 604
--------- --------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 18,172 9,634 6,182
Recovery of investment in direct financing leases 5,200 3,786 6,362
Proceeds from the sales of leases, net 23,536 15,693 8,995
Provision for losses 705 365 430
Deferred income taxes (1,300) (400) (100)
Deferred financing costs (262) (100) (118)
MBank sale proceeds - - 10,800
Sales-type lease margin (157) (69) (191)
Decrease (increase) in accounts receivable (3,450) 1,651 (1,947)
Other 2,936 1,879 (1,427)
--------- --------- ----------
Total adjustments 45,380 32,439 28,986
--------- --------- ----------
Net cash provided by operating activities 46,900 33,172 29,590
--------- --------- ----------
Cash flows from investing activities:
Equipment purchased for leasing (71,495) (35,798) (23,979)
Investment in leased office facility and in capital expenditures (1,236) (452) (393)
Net receipts from affiliated public income funds 3,427 1,810 1,222
Acquisition, net of cash acquired (767) - -
--------- --------- ----------
Net cash used for investing activities (70,071) (34,440) (23,150)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 23,127 13,686 8,513
Principal payments on discounted lease rentals (14,716) (12,125) (5,821)
Proceeds from sales of common stock 14 14 25
Purchase of treasury shares - - (247)
Purchase of non-employee stock options - (138) -
Net borrowings (payments) on revolving credit facilities 25,953 7,507 (2,649)
Net borrowings (payments) on Term Loan 283 (4,333) (4,333)
--------- --------- ----------
Net cash provided by (used for) financing activities 34,661 4,611 (4,512)
--------- --------- ----------
Net increase in cash and cash equivalents 11,490 3,343 1,928
Cash and cash equivalents at beginning of year 6,194 2,851 923
--------- --------- ----------
Cash and cash equivalents at end of year $ 17,684 $ 6,194 $ 2,851
========= ========= ==========
Supplemental schedule of cash flow information:
Recourse interest paid $ 2,857 $ 1,900 $ 2,145
Non-recourse interest paid 2,892 1,514 983
Income taxes paid 928 183 2,264
Income tax refunds received 91 602 83
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from equipment
sales transactions 7,583 24,266 14,095
Assumption of discounted lease rentals in lease acquisitions 46,236 22,499 19,324
Fair value of assets acquired, including cash 5,284 - -
Liabilities assumed and incurred in acquisition 4,017 - -
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
NATURE OF OPERATIONS
Capital Associates, Inc. ("the Company") is a commercial finance company
engaged in the leasing of a variety of equipment. The Company is
principally engaged in (i) the origination of equipment leases with
equipment users, including the acquisition of leases initially originated
by other lessors (ii) the sale of equipment leases to third parties, (iii)
the management and servicing of equipment leases retained by the Company or
sold to private investors or other lessors, (iv) the sale and remarketing
of equipment as it comes off lease and (v) the sale and servicing of new
information technology equipment. During fiscal years 1998 and 1997, the
Company originated over $540 million of equipment leases covering over
53,000 items of equipment. The principal market for the Company's
activities is the United States.
During fiscal 1998, the Company acquired DBL, Inc. d/b/a Connecting Point
(subsequently renamed Capital Associates Technology Group or "CATG"). CATG
provides a wide range of information technology ("IT") services, including
procurement of software and PC's and networking equipment, and IT equipment
maintenance. CATG was acquired to obtain specific IT equipment expertise
which the Company hopes will provide (i) access to new markets which will
allow the Company to realize higher residual values and to support lease
originations, (ii) greater confidence in pricing and estimating residual
values and (iii) the ability to provide enhanced equipment expertise and
evaluation services to our customers.
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 the Company, these are principally the
estimates of residual values, collectibility of accounts receivable and
valuation of inventory. 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 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.
F - 7
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
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.
INVENTORY
Inventory consists of the following:
1998 1997
------ ------
Retail inventory $ 985 $ 89
Equipment held for sale or re-lease 156 1,242
------ ------
$1,141 $1,331
====== ======
Retail inventory consists primarily of information technology hardware and
is stated at the lower of cost (first-in, first-out method) or market.
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.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing
income available to common stockholders by all dilutive potential common
shares outstanding during the period.
STOCK OPTION PLAN
The Company accounts 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 is 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
allows entities to apply the provisions of APB Opinion No. 25, as the
Company has elected to do, 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.
F - 8
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("Statement
128"), which became effective for periods ending after December 15, 1997.
Statement 128 changes the computation and presentation requirements for
earnings per share for entities with publicly held common stock or
potential common stock. Under such requirements the Company is required to
present both basic earnings per share and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing
income available to common stockholders by all dilutive potential common
shares outstanding during the period. The adoption of Statement 128 by the
Company as of December 31, 1997, did not have a material effect on
previously presented earnings per share amounts for previous years.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is
defined as all recognized changes in equity during a period from
transactions and other events and circumstances except those resulting from
investments by owners and distributions to owners. Net income and items
that previously have been recorded directly in equity are included in
comprehensive income. Statement 130 affects only the reporting and
disclosure of comprehensive income but does not affect recognition or
measurement of income. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company adopted Statement 130 in the fourth quarter of fiscal year 1998.
The adoption did not have an impact on its financial reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
provides guidance for reporting information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial reports of public companies.
An operating segment is defined as a component of a business that engages
in business activities from which it may earn revenue and incur expenses, a
component whose operating results are regularly reviewed by the company's
chief operating decision maker, and a component for which discrete
financial information is available. Statement 131 establishes quantitative
thresholds for determining operating segments of a company. Statement 131
is effective for fiscal years beginning after December 15, 1997, with
earlier application permitted. The Company plans to adopt Statement 131 in
the first quarter of 1999 by reporting operating segment information on
Form 10-Q for its leasing and equipment retailing segments.
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.
F - 9
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
EQUIPMENT LEASING AND SALES, continued
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.
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.
F - 10
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
EQUIPMENT LEASING AND SALES, continued
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.
SERVICING FEES - The Company defers income related to its servicing
obligation on certain leases it sells. This income is amortized over
the life of the lease and is included in other income.
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.
REVENUE RECOGNITION FOR SALES OF INFORMATION TECHNOLOGY HARDWARE AND
SOFTWARE
Revenue is recognized upon shipment to the customer, if the Company has no
significant obligations to the customer after delivery.
F - 11
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
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 customers, the expected courses of action by lessees with
regard to leased equipment at termination of the initial lease term,
changes in technology 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Acquisition
-----------
Effective November 1, 1997, CAII acquired all of the outstanding shares of
DBL, Inc. d/b/a Connecting Point. DBL, Inc. has been renamed (and is doing
business as) Capital Associates Technology Group ("CATG"). The purchase
price consisted of $1,200,000 in cash (paid in December 1997) and a
$2,140,000 four year note. The Company may be required to make additional
payments of up to $221,750 per year ending October 31, 2001, contingent
upon the results of CATG's operations over the course of that period.
The $2,140,000 note payable to the sellers earns interest at the rate of
10% per annum and is payable in monthly installments of $58,000 beginning
December 12, 1997 through November 12, 2000, and $42,057 beginning December
12, 2000 and continuing through November 12, 2001. The outstanding balance
at May 31, 1998 was $1,902,000. Interest expense for fiscal 1998 was
approximately $119,000.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based on their fair values at the
date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired of approximately $1.7 million (which will
increase for any future contingent cash payment), has been recorded as
goodwill (included in other assets), and is being amortized on a
straight-line basis over 15 years. The amount of goodwill amortized during
the fiscal 1998 was approximately $67,000.
The following unaudited pro-forma information combines the consolidated
results of operations of the Company and CATG as if the acquisition had
occurred at the beginning of fiscal 1998 and 1997 after giving effect to
certain pro-forma adjustments, including adjustments to reflect the
amortization of the excess of the purchase price over the fair values of
the net assets acquired and increased interest expense. The pro-forma
financial information is presented for informational purposes only and is
not necessarily indicative of the results of operations as they would have
been had the acquisition been effected on the assumed dates.
F - 12
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisition, continued
-----------
Years Ended May 31,
-------------------------
1998 1997
--------- ---------
In thousands, except per share data (unaudited)
Revenue $ 292,000 $ 250,000
Net income 1,400 500
Earnings per common share:
Basic .27 .10
Diluted .26 .09
3. Residual Values and Other Receivables Arising from Equipment Under Lease
---------------------------------------------------------------------------
Sold to Private Investors
-------------------------
As of May 31, 1998 and 1997, the equipment types for which the Company
recorded the present value of the estimated residual values and other
receivables arising from sales of equipment under lease to private
investors were (in thousands):
Description 1998 1997
----------- ------- -------
Material handling $ 2,134 $ 1,869
Furniture and fixtures 605 1,220
Mining and manufacturing 10 881
Aircraft 71 160
Other miscellaneous equipment 360 204
------- -------
Total equipment residuals 3,180 4,334
Notes receivable due directly from investors 1,097 -
------- -------
$ 4,277 $ 4,334
======= =======
Residual values arising from equipment under lease sold to private
investors were net of an allowance for losses of $64,000 and $157,000 as of
May 31, 1998 and 1997, respectively.
4. Net Investment in DFLs
----------------------
The components of the Company's net investment in DFLs as of May 31, 1998
and 1997 were (in thousands):
1998 1997
-------- --------
Minimum lease payments receivable $ 32,264 $ 8,133
Estimated residual values 4,217 692
IDC 336 72
Less unearned income (5,636) (1,197)
-------- -------
$ 31,181 $ 7,700
======== =======
F - 13
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Leased Equipment, net
---------------------
The Company's investment in equipment under OLs, by major classes, as of
May 31, 1998 and 1997 were (in thousands):
1998 1997
-------- --------
Material handling equipment $ 36,312 $ 25,083
Computers and peripheral computer equipment 45,861 21,776
Other technology and communication equipment 19,349 21,701
Furniture and fixtures 11,213 7,227
Other 8,017 4,885
Aircraft 343 1,327
IDC 1,128 831
--------- ---------
122,223 82,830
Less accumulated depreciation (16,811) (10,680)
Less allowance for losses (587) (707)
--------- ---------
$ 104,825 $ 71,443
========= =========
Depreciation expense related to leased equipment was $16,907,000,
$8,662,000, and $5,205,000 for fiscal years 1998, 1997 and 1996,
respectively.
6. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases on
equipment owned by the Company as of May 31, 1998, are as follows (in
thousands):
Years Ending May 31, DFLs OLs
-------------------- -------- ---------
1999 $ 13,610 $ 40,003
2000 10,736 33,127
2001 4,752 20,426
2002 1,726 10,167
2003 703 2,801
Thereafter 737 1,870
-------- ---------
$ 32,264 $ 108,394
======== =========
7. Significant Customer and Concentration of Credit Risk
-----------------------------------------------------
During 1998, no lessee accounted for more than 10% of leasing revenue.
During fiscal year 1997 and 1996, leasing revenue 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 30%, 77% and 88% of total other equipment sales revenue
during fiscal years 1998, 1997 and 1996, respectively.
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
F - 14
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Significant Customer and Concentration of Credit Risk, continued
-----------------------------------------------------
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, 1998, approximately 99% of
equipment under OLs and DFLs owned by the Company was leased to companies
meeting the above credit criteria.
8. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at May 31, 1998 bear interest at rates
between 6% and 16% with a weighted average rate of 8.5%. Aggregate
maturities of such non-recourse obligations are (in thousands):
Years Ending May 31:
1999 $ 48,801
2000 36,787
2001 14,322
2002 2,863
Thereafter 1,538
---------
$ 104,311
=========
9. Recourse Bank Debt
------------------
On November 26, 1997, the Company obtained a new $60 million senior,
secured debt facility (the "Senior Facility") in the form of a term loan,
an acquisition term loan, working capital revolving credit loans ("Working
Capital Facility") and warehouse revolving credit loans ("Warehouse Credit
Facility"). The lender group consists of the agent bank, First Union
National Bank, and participating lenders, BankBoston, N.A., US Bank,
Norwest Bank Colorado, N.A., and European America Bank (the "Lender
Group"). In April 1998, the Lender Group agreed to combine the Term Loan
and Acquisition Term Loan into a single term loan ("Term Loan"). The term
of the Senior Facility expires on November 25, 1998 and may be renewed
annually at the Lender's sole discretion. Interest on the Senior Facility
is tied to the Lender Group's prime rate or the LIBOR rate (8.5% and 5.7%,
respectively at May 31, 1998) plus the Applicable Margin. The principal
terms of the Warehouse Credit Facility and Working Capital Facility are as
follows:
Warehouse Working
(Dollars in thousands) Credit Facility Capital Facility
--------------- ----------------
Maximum Amount $ 51,000 $ 5,000
Borrowings at May 31, 1998 38,027 5,000
Potential availability at May 31, 1998 12,973 0
Applicable Prime Rate Margin 0.0% .25%
Applicable LIBOR Rate Margin 2.5% 2.75%
The Term Loan commitment amount is $4 million with a four-year amortization
schedule to a balloon payment of $2 million after two years. The Term Loan
was initially funded in the amount of $2.8 million. As of May 31, 1998, the
Term Loan balance was $2,450,000 as a result of scheduled quarterly
principal repayments. In July 1998, the Lender Group funded the remaining
Term Loan commitment of $1.2 million. The Term Loan bears interest at Prime
plus .75%, and principal and interest are payable quarterly in arrears.
F - 15
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Recourse Bank Debt, continued
------------------
The Company is required to pay a quarterly commitment fee equal to .375% of
the unused portion of the Working Capital Facility and the Warehouse Credit
Facility. The Senior Facility is collateralized by all assets of the
Company, except for the assets which collateralize the loan from Deutsche
Financial Services ("Deutsche") described below. The Senior Facility
contains certain provisions which limit the Company as to additional
indebtedness, sale of assets, liens, guarantees, and distributions.
Additionally, the Company must maintain certain specified financial ratios.
The Senior Facility replaces the terminated Bank Facility, which expired
under its terms as of November 30, 1997.
As of May 31, 1998, the Company was in compliance with the terms of the
Senior Facility.
On May 29, 1998, the Company obtained $6 million in committed revolving
credit financing from Deutsche for its CATG subsidiary. The loan is
collateralized by specific accounts receivable and inventory generated or
purchased by CATG. The facility is renewable annually at Deutsche's
discretion. The outstanding balance related to this portion of the facility
at May 31, 1998 was approximately $1,709,000, which is due on demand. The
interest rate associated with this facility is Deutsche's Prime rate (8.5%
at May 31, 1998) plus 0.5%.
The Company is required to pay an annual facility fee of 0.125% of the
total commitment. Balances outstanding under the facility are guaranteed by
Capital Associates International, Inc. This guaranty obligations is
subordinate to the Company's obligations to the Lender Group. The facility
contains provisions which require CATG to maintain certain minimum levels
of capitalization and liquidity. In addition, the agreement contains a
minimum capitalization requirement for the Company.
As of May 31, 1998, both the Company and its CATG subsidiary were in
compliance with the terms of the Deutsche facility.
10. Related Parties
---------------
PIFs
The Company sponsors or co-sponsors seven PIFs (five of which purchased
equipment under lease from the Company during fiscal year 1998). 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 for the years ended May 31,
were as follows (in thousands):
1998 1997 1996
-------- ------- -------
Equipment sales margin $ 1,090 $ 1,442 $ 1,539
Fees and distributions
(included in other income) 3,114 2,453 2,958
Investment contributions in subordinated
limited partnership interests 220 280 260
F - 16
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Parties, continued
---------------
OTHER RELATED PARTIES
MCC Financial Corporation 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 1998 and 1997, the Company paid approximately
$650,000 and $810,000, respectively, under these agreements including
$150,000 for relocation expenses of one director (who is Chairman of the
Board of Directors, President and CEO of the Company) in connection with
his relocation to Company headquarters in 1997.
11. Income Taxes
------------
The components of the income tax expense (benefit) charged to continuing
operations were (in thousands):
1998 1997 1996
--------- ------ -------
Current:
Federal $ 1,100 $ 240 $ 653
State and local 200 170 (351)
-------- ------ ------
1,300 410 302
-------- ------ ------
Deferred:
Federal (1,100) (100) (501)
State and local (200) (300) 401
-------- ------ ------
(1,300) (400) (100)
-------- ------ ------
Total tax provision $ 0 $ 10 $ 202
======== ====== ======
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:
1998 1997 1996
------ ------ ------
Computed "expected" tax expense $ 515 $ 250 $ 272
State tax provisions, net of federal
benefits 85 40 50
Reduction in valuation allowance for
deferred income tax assets (600) (280) (120)
------ ------ ------
$ 0 $ 10 $ 202
====== ====== ======
Income taxes are provided on income from continuing operations at the
appropriate federal and state statutory rates applicable to such earnings.
F - 17
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes, continued
------------
Components of income tax expense attributable to net income before income
taxes is as follows (in thousands):
1998 1997 1996
-------- ------- --------
Current:
Taxes on net income before carryforwards $ 1,600 $ 710 $ 832
Benefit of investment tax credit ("ITC")
carryforward utilized (300) (300) (530)
-------- ------ ------
1,300 410 302
-------- ------ ------
Deferred:
Tax effect of net change in temporary
differences (1,000) (420) (510)
ITC carryforward utilized 300 300 530
Decrease in valuation allowance for
deferred income tax assets (600) (280) (120)
-------- ------ ------
(1,300) (400) (100)
-------- ------ ------
Provision for income taxes $ 0 $ 10 $ 202
======== ====== ======
Significant components of the Company's deferred tax liabilities and assets
as of May 31, 1998 and 1997, were as follows (in thousands):
1998 1997
-------- --------
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 $ 1,000 $ -
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 1,100 1,700
-------- -------
Total deferred income tax liabilities 2,100 1,700
-------- -------
Deferred income tax assets:
Other assets and liabilities, net 2,000 600
Investment tax credit carryforwards 1,000 1,300
AMT credit carryforwards 3,300 3,300
-------- -------
Total deferred income tax assets 6,300 5,200
Valuation allowance for deferred income tax assets (600) (1,200)
-------- -------
Net deferred income tax assets 5,700 4,000
-------- -------
Net deferred income tax asset $ 3,600 $ 2,300
======== =======
At May 31, 1998, the Company has an ITC carryforward of approximately $1.0
million, which expires from 1999 through 2001, and AMT credits of
approximately $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.
F - 18
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes, continued
------------
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 valuation allowance was reduced in fiscal
1998 and fiscal 1997 to reflect the utilization of ITC carryforward for
which the valuation allowance had previously been provided (approximately
$300,000 in each fiscal year). In addition, the valuation allowance was
reduced by an additional $300,000 in fiscal 1998 to reflect a reduction in
uncertainty about the utilization of ITC carryforward in future years. The
reductions in the valuation allowance for fiscal years 1998 and 1997 were
recorded in the respective fiscal fourth quarter and resulted in income tax
benefits of $464,000 and $227,000, respectively. 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 net deferred
tax assets.
12. Preferred Stock and Earnings Per Common Share
---------------------------------------------
PREFERRED STOCK
The Company has authority to issue 2,500,000 shares of preferred stock at
$0.008 par value. At May 31, 1998, no shares of preferred stock had been
issued.
EARNINGS PER COMMON SHARE
The following is a reconciliation of the weighted average number of common
shares used in the calculation of basic and diluted earnings per share for
the years ended May 31:
1998 1997 1996
--------- --------- ---------
Weighted average number of common
shares - basic 5,117,000 5,004,000 4,987,000
Common stock options (utilizing
treasury stock method) 332,000 399,000 199,000
--------- --------- ---------
Weighted average number of common
shares-assuming dilution 5,449,000 5,403,000 5,186,000
========= ========= =========
Common stock options totaling 293,500 were not included in the diluted
earnings per share calculation for the year ended May 31, 1998 because
their effect would have been anti-dilutive.
13. Stock Options
-------------
The Company has a qualified incentive stock option plan whereby stock
options may be granted to employees to purchase shares of the Company's
common stock at prices equal to 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 eighteen
months 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.
F - 19
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Stock Options, continued
-------------
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. Options generally
become exercisable over a four-year period and have a term of ten years.
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 of options at the grant date
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:
<TABLE>
<CAPTION>
1998 1997 1996
------------ --------- ---------
<S> <C> <C> <C> <C>
Net income As Reported $ 1,520,000 $ 733,000 $ 604,000
Pro forma $ 1,261,000 $ 667,000 $ 576,000
Basic earnings per share As Reported $ 0.30 $ 0.15 $ 0.12
Pro forma $ 0.25 $ 0.13 $ 0.12
Earnings per share assuming dilution As Reported $ 0.28 $ 0.14 $ 0.12
Pro forma $ 0.23 $ 0.12 $ 0.11
</TABLE>
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 1998, 1997 and 1996,
respectively: no dividend yield; expected volatility of 142%, 111% and
164%; risk free interest rates of 5.62%, 6.58% and 6.40%; and expected
lives of five years.
Additional information on shares subject to options is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ------------------------ --------------------------
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 649,000 $ 1.47 693,000 $ 1.23 1,047,000 $ 1.10
Granted 349,000 3.99 90,000 2.88 130,000 1.62
Exercised (112,000) 1.18 (19,000) .81 (32,000) .94
Purchased - - (104,000) 1.13 (401,000) .94
Forfeited (5,000) 2.97 (11,000) 2.10 (51,000) 1.24
--------- --------- -----------
Outstanding at the end of the year 881,000 2.50 649,000 1.47 693,000 1.23
========= ========= ===========
Options exercisable at year-end 542,000 606,000 641,000
Weighted-average fair value of
options granted during the year $ 3.60 $ 2.35 $ 1.53
</TABLE>
F - 20
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Stock Options, continued
-------------
The following table summarizes information about stock options outstanding
at May 31, 1998:
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 71,000 3.5 years $ 0.73 71,000 $ 0.73
$ 1.01 - $ 2.00 334,000 3.8 years 1.26 334,000 1.26
$ 2.01 - $ 3.00 127,000 7.1 years 2.65 97,000 2.54
$ 3.01 - $ 4.00 55,000 9.0 years 3.25 40,000 3.25
$ 4.01 - $ 5.00 294,000 9.9 years 4.13 - -
------- -------
881,000 6.6 years 2.50 542,000 1.57
======= =======
14. Employee Benefit Plan
---------------------
The Company has a defined contribution retirement plan whereby employees
who have completed six months of service may contribute up to 15% of their
annual salaries. The Company will match 50% of non-highly compensated
employees contributions subject to a maximum of the lesser of (i) 4% of the
employee's eligible compensation or (ii) $1,000. The Company contributed
approximately $45,000 for the years ended May 31, 1998, 1997 and 1996,
respectively.
15. 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, 1998 and 1997 are (in thousands, except per share data):
Fiscal Year 1998: Total Revenue Net Income Basic Income Per Share
----------------- ------------- ---------- ----------------------
First quarter $ 42,038 $ 141 $ .03
Second quarter 73,239 735 .15
Third quarter 82,309 515 .10
Fourth quarter 83,488 129 .03
Fiscal Year 1997: Total Revenue Net Income Basic Income Per 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 - 21
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Legal Proceedings
-----------------
The Company is involved in the following legal proceedings:
a. The Company was 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 alleged 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 a wholly owned subsidiary of the
Company. The three claims involved investments in LIFV of
approximately $625,000 and sought damages of $838,000 and special
punitive and exemplary damages (one claim specified $1,500,000 in such
damages while the other two claims did not specify an amount). All
three claims were brought by the same company on behalf of three
investors. Management believed that it had good and substantial
defenses against these claims and that the Company's subsidiary would
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.
In June 1998, the second of these claims, which alleged the same
claims and sought $176,000 in compensatory damages and an unspecified
amount in punitive damages, was heard and the arbitration panel again
found for the Company's subsidiary, so that no award was due to the
Claimants under any of their claims. The claimants were assessed
$8,100 in forum fees by the NASD for the arbitration proceeding. Also
in June 1998, shortly after the decision in the second case, the
Company's subsidiary obtained a settlement of the third case by
payment to the claimant's representative of a de minimus settlement
amount which the Company believes was less than travel costs which
would have been incurred related to the arbitration hearing.
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.
17. 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 $650,000, $502,000, and $425,000 for fiscal years 1998, 1997
and 1996, respectively.
Minimum future rental payments required by such leases are as follows (in
thousands):
Years Ending May 31,
1999 $ 592
2000 445
2001 447
-------
$ 1,484
=======
F - 22
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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, 1998 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, 1998, discounted lease rentals and discounted lease rentals
assigned to lenders arising from equipment sale transactions of
$104,311,000 and $37,626,000, respectively, have fair values of
$109,240,000 and $42,555,000, respectively. The fair values were estimated
utilizing market rates of comparable debt having similar maturities and
credit quality as of May 31, 1998.
19. Year 2000 Issues
----------------
The Company has conducted a comprehensive review of its computer systems to
identify systems that could be affected by the Year 2000 issue. The Year
2000 issue results from computer programs being written using two digits
rather than four to define the applicable year. Certain computer programs
which have time-sensitive software could recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in major system
failures or miscalculations. Certain of the Company's software have already
been updated to software which correctly accounts for the Year 2000. In
addition, the Company is engaged in a system conversion, whereby the
Company's main lease tracking and accounting software is being replaced
with new systems which will account for the Year 2000 correctly. The
Company does not expect any other changes required for the Year 2000 to
have a material effect on its financial position or results of operations.
In addition, the Company does not expect any Year 2000 issues relating to
its customers and vendors will have a material effect on its financial
position or results of operations. The Company expensed all amounts related
to its review of the Year 2000 issue. Amounts expended to date to address
the Year 2000 issue have been immaterial.
F - 23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Directors
Capital Associates, Inc.:
Under date of July 14, 1998, we reported on the consolidated balance sheets of
Capital Associates, Inc. and subsidiaries as of May 31, 1998 and 1997, 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, 1998, as
contained in the Company's annual report on Form 10-K for the year 1998. 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 14, 1998
F - 24
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
for the Years Ended May 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ------------- ----------
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions<F1> Period
----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended May 31, 1998:
Allowance for doubtful accounts:
- - accounts receivable $ 30 $ 60 $ - $ 90
Allowance for losses:
- - residual values arising from equipment
under lease sold to private investors 157 - (93) 64
- - leased equipment 707 645 (765) 587
------- ----- -------- -------
$ 894 $ 705 $ (858) $ 741
======= ===== ======== =======
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)<F2> (1,202) 1,120
------- ----- -------- -------
$ 4,118 $ 430 $ (3,126) $ 1,422
======= ===== ======== =======
<FN>
<F1> Principally charge-offs of assets against the established allowances.
<F2> Includes $750,000 recovery from litigation settlement.
</FN>
</TABLE>
See accompanying independent auditors' report.
F - 25
EXHIBIT 10.60
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This First Amendment to Loan and Security Agreement ("Amendment")
entered into as of April 7, 1998, by and among CAPITAL ASSOCIATES, INC. and
CAPITAL ASSOCIATES INTERNATIONAL, INC. (each a Borrower and collectively
"Borrowers"), CORESTATES BANK, N.A., a national banking corporation, in its
capacity as agent ("Agent") and as lender and each of the lenders listed on the
signature pages hereof and the First Amended Schedule A attached to the Loan
Agreement, in their capacity as lenders (singly, each is a "Lender" and
collectively, all are "Lenders").
BACKGROUND
----------
A. On or about November 26, 1997, Borrowers, Agent and Lenders entered
into a certain Loan and Security Agreement ("Loan Agreement") pursuant to which
Lenders agreed to make advances to Borrowers up to a maximum aggregate amount of
$60,000,000, evidenced by Borrowers' delivery of certain Notes to Lenders.
B. Borrowers have requested that Lenders and Agent amend the Loan
Agreement pursuant to the terms hereof and Agent and Lenders have agreed to do
so subject to the terms hereof.
C. All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Loan Agreement.
NOW, THEREFORE, with the foregoing background incorporated by
reference, the parties hereto, intending to be legally bound, hereby agree as
follows:
<PAGE>
1. AMENDMENT TO LOAN AGREEMENT:
a. Section 1.1 of the Loan Agreement is hereby amended by
deleting the definition of "Senior Management Team" in its entirety and
replacing it with the following:
SENIOR MANAGEMENT TEAM - Richard Abernethy, Anthony DiPaolo and
Jack Olmstead.
b. Section 7.11 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
7.11 CHANGE OF MANAGEMENT: Borrower shall not at any time
permit two current members of Borrowers' Senior Management Team
to cease to be involved in the day to day operations of the
Borrowers.
2. Each Surety, parties to a certain Surety Agreement dated as of
November 27, 1997 in favor of Agent for the benefit of the Lenders, by execution
hereof in their capacity as Sureties, hereby consent to the amendments set forth
in this Amendment, and acknowledge that the Surety Agreement remains in full
force and effect and that each remain, jointly and severally liable for
Obligations of Borrowers to Lenders.
3. a. Borrowers represent and warrant that as of the date hereof
no Event of Default or Unmatured Event of Default has occurred or is existing
under the Loan Documents.
b. The execution and delivery by each Borrower of this
Amendment and performance by it of the transactions herein contemplated (i) are
and will be within its powers, (ii) have been authorized by all necessary
corporate action, and (iii) are not and will not be in contravention of any
2
<PAGE>
order of any court or other agency of government, of law or any other indenture,
agreement or undertaking to which such Borrower is a party or by which the
Property of such Borrower is bound, or be in conflict with, result in a breach
of or constitute (with due notice and/or lapse of time) a default under any such
indenture, agreement or undertaking or result in the imposition of any lien,
charge or encumbrance of any nature on any of the properties of such Borrower.
c. This Amendment and each other agreement, instrument or
document executed and/or delivered in connection herewith, shall be valid,
binding and enforceable in accordance with its respective terms.
4. This Amendment shall be governed by, construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
5. Except as expressly provided herein, all terms and conditions
of the Loan Documents remain in full force and effect, unless such terms or
conditions are no longer applicable by their terms. To the extent the provisions
of this Amendment are expressly inconsistent with the provisions of the Loan
Documents, the provisions of this Amendment shall control.
6. This Amendment may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original, and such
counterparts together shall constitute one and the same respective agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered as of the day and year first above written.
BORROWERS:
CAPITAL ASSOCIATES, INC.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No. 84-1055327
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No. 84-0724694
AGENT:
CORESTATES BANK, N.A.
By: /s/Hugh W. Connelly
----------------------------------
Title: Vice President
4
<PAGE>
LENDERS:
CORESTATES BANK, N.A., as Lender and
Issuing Bank
By: /s/Hugh W. Connelly
----------------------------------
Title: Vice President
NORWEST BANK COLORADO, N.A.
By: /s/Carol A. Ward
----------------------------------
Title: Vice President
BANKBOSTON, N.A.
By: /s/Dierdre M. Holland
----------------------------------
Title: Vice President
EUROPEAN AMERICAN BANK
By: /s/Christopher M. Czaja
----------------------------------
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION,
D/B/A COLORADO NATIONAL BANK
By: /s/Ralph P. Atkinson
----------------------------------
Title: Vice President
5
<PAGE>
SURETIES:
CAI EQUIPMENT LEASING II CORP.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1133179
CAI EQUIPMENT LEASING III CORP.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1184608
CAI EQUIPMENT LEASING IV CORP.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1248788
CAI EQUIPMENT LEASING V CORP.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1348277
6
<PAGE>
CAI PARTNERS MANAGEMENT COMPANY
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1066243
CAPITAL EQUIPMENT CORPORATION
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-0913965
CAI EQUIPMENT LEASING VI CORP.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1435874
CAI LEASE SECURITIZATION I CORP.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1250490
CAI LEASING CANADA, LTD.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1150068
7
<PAGE>
CAPITAL ASSOCIATES INTERNATIONAL
de MEXICO S. de R.L. de C.V.
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: N/A
WHITEWOOD EQUIPMENT CORPORATION f/k/a
WHITEWOOD CREDIT CORPORATION
By: /s/Anthony M. DiPaolo
----------------------------------
Title: President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1032253
CAI SECURITIES CORPORATION
By: /s/Anthony M. DiPaolo
----------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------
(Corporate Seal)
Fed. Tax ID No.: 68-0002657
8
EXHIBIT 10.61
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement") is made
as of the 7th day of April, 1998, in Lakewood, Colorado, by and between CAPITAL
ASSOCIATES, INC., a Delaware corporation and CAPITAL ASSOCIATES INTERNATIONAL,
INC., a Colorado corporation (hereinafter collectively referred to as the
"Corporations"), and James D. Walker (hereinafter referred to as "Mr. Walker").
1. EMPLOYMENT. The Corporations hereby employ Mr. Walker and Mr. Walker hereby
accepts employment with the Corporations upon the terms and conditions
hereinafter set forth.
2. TERM. Subject to the provisions set forth in SECTION 6 of this Agreement,
the original term of this Agreement shall commence on the 7th day of April, 1998
and continue to the end of the Corporations' fiscal year, May 31, 2001,
Thereafter, the Term of this Agreement shall be automatically renewed for
successive one (1) year periods unless prior written notice to the contrary is
given by the Corporations or Mr. Walker to the other on or before sixty (60)
days prior to the expiration of the original Term hereof or each such successive
one (1) year renewed Term(s), as the case may be.
3. DUTIES.
a. OFFICES. Mr. Walker is engaged as President and Chief Executive Officer
of the Corporations, which is in addition to his existing offices as Director
and Chairman of the Board of the Corporations, 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 Corporations. Mr.
Walker also agrees to perform such other executive services as shall from time
to time be reasonably assigned to him by the Boards of Directors of the
Corporations ("Boards").
b. EXTENT OF SERVICE. Mr. Walker shall diligently devote his business time,
attention and energies to the performance of his duties under this Agreement and
shall exert his best efforts in furtherance of the business of the Corporations;
provided, however, that it is hereby acknowledged by the Corporations that Mr.
Walker continues his employment with MCC Financial Corporation ("MCC"), which
holds approximately 57% of the common stock of Capital Associates, Inc. Mr.
Walker will continue to devote a portion of his business time toward his duties
and obligations at MCC. In the event any issues or actions occur that present an
apparent conflict of interest between the Corporations and MCC, Mr. Walker
hereby agrees to remove himself so as to permit others with no such conflicting
relationship to resolve such issues or actions or, in the alternative, represent
only the Corporations in such matters. Mr. Walker also agrees to exert his best
efforts to preserve for the benefit of the Corporations the good will of the
Corporations' clients and those who may have business relations with it.
1
<PAGE>
4. COMPENSATION.
a. BASE SALARY DURING EMPLOYMENT. Commencing on the Effective Date, Mr.
Walker's base salary shall be $ 325,000.00 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 Boards (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 Corporations, (b) the market value of Capital Associates,
Inc. common stock as reflected from time to time on the NASDAQ NMS, 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 the
Corporations' prevailing payroll policies.
b. INCENTIVE COMPENSATION. In addition, to compensate Mr. Walker for his
contributions to the overall success of the Corporations as reflected in their
earnings and in enhanced value to stockholders, and to the extent that the
Corporations reach the goals in the Business Plan for each fiscal year,
incentive compensation will be in such form and amount as the Compensation
Committee of the Board shall determine, in its sole discretion. For each of the
fiscal years covered by the Term of this Agreement, Mr. Walker will be entitled
to receive a bonus payment of 4% (the "Base Incentive Payment Percentage") of
the Corporations's pre-tax earnings for each such fiscal year (the "Base
Incentive Payment"). The Base Incentive Payment will be adjusted either up or
down by adjusting the Base Incentive Payment Percentage in an amount equal to
the percentage change in the average closing price of the Corporations's stock
for the last four months of the applicable fiscal year as compared to the same
period in the prior fiscal year; provided, however, that in no event shall the
Base Incentive Payment Percentage be adjusted lower than 3% or higher than 6%.
The timing of the payment of the Base Incentive Payment shall be the same as
similar payments made to other employees of the Corporations. For the
Corporations' fiscal year ending May 31, 1998, the Base Incentive Payment shall
be pro-rated to cover the portion of the fiscal year Mr. Walker serves as
President and Chief Executive Officer, April 7, 1998 through May 31, 1998.
c. STOCK OPTION. Pursuant to a stock option agreement in the form attached
as EXHIBIT A to this Agreement and incorporated herein by this reference, Mr.
Walker will be granted, on and as of the commencement of each of the
Corporations fiscal years during the Term hereof, an option (the "Stock Option")
under the Corporations 1996 Stock Option Plan, to purchase up to 10,000 shares
of common stock of the Capital Associates, Inc. ("Stock"), the terms and
conditions of which are set forth in the Stock Option Agreement attached as
EXHIBIT A hereto. This Stock Option commitment on the part of the Corporations
will not be in lieu or preclude any other grants the Corporations may decide to
provide Mr. Walker.
d. DIRECTORS FEES. Mr. Walker, as Chairman of the Board, will continue to
receive Directors Fees under and pursuant to the current policies of the
Corporations for Director's compensation.
2
<PAGE>
e. OTHER BENEFITS DURING EMPLOYMENT. Mr. Walker will continue to look to
and participate in MCC's SEP/IRA plans and employee benefit programs for
insurance (life, medical, dental, prescriptions, disability , etc.) which are
offered to the employees of MCC. All of the benefits described in the preceding
sentence shall be in accordance with current personnel policy.
f. EXPENSES. Mr. Walker is authorized to incur reasonable expenses for
promoting the business of the Corporations, including expenses for meals,
travel, and other similar items. The Corporations shall reimburse the Mr. Walker
for all such expenses upon the presentation by the Mr. Walker, from time to
time, of an itemized accounting for such expenditures.
g. SEVERANCE. Upon termination of his employment with the Corporations,
Mr. Walker may be entitled to the severance benefits in accordance with SECTION
6.c., below.
h. PERSONAL TIME. Mr. Walker shall be entitled to take two hundred sixteen
(216) hours of paid personal time per year; provided, however, that the Mr.
Walker shall not take more than two (2) consecutive weeks of personal time,
unless due to illness, in any single instance.
5. O&D INSURANCE AND INDEMNIFICATION. Mr. Walker will be entitled to the same
officer and director liability insurance and indemnification as other officers
and directors of the Corporations for any period during which Mr. Walker served
or serves in such capacities. The Corporations hereby agree to indemnify,
protect, defend and hold Mr. Walker harmless to the fullest extent permitted by
the Delaware and Colorado General Corporation Laws, as the same now exist or may
hereafter be amended, with regard to the performance of his duties to the
Corporations as Director, Chairman of the Board, President and Chief Executive
Officer.
6. TERMINATION.
a. DISABILITY. In the event that during the term of this Agreement, Mr.
Walker shall become disabled by accident or by illness so as to be unable to
perform the duties required of him/her under this Agreement for a period of
ninety (90) consecutive days, then the Corporations may, at the expiration of
such ninety (90) day period, suspend the Mr. Walker's services and the
Corporations' obligation and duties under this Agreement for the continuing
period of his disability by notice to him in writing and, if the Mr. Walker does
not resume the duties required of him/her within ninety (90) days of the date he
first became so disabled, this Agreement and all of the rights, duties, and
obligations hereunder shall terminate except that the restrictions imposed on
Mr. Walker as set forth in SECTION 7 of this Agreement and the remedies
available to the Corporations as set forth in such Sections shall remain in
effect.
b. "For Cause" Termination. Anything herein to the contrary
notwithstanding, upon the happening of any one of the following events, the
Corporations may terminate this Agreement by giving Mr. Walker written notice of
3
<PAGE>
of such termination: (i) an act or omission of Mr. Walker constituting Cause (as
defined below); or (ii) a violation by Mr. Walker of any of the provisions of
SECTION 7. hereof. For the purpose of clause (i) of this SECTION 6.b., "Cause"
shall mean (A) conviction in a court of law of any crime or offense involving
money or other property of the Corporations or any of its affiliates, or (B) the
determination by the Corporations, acting in good faith, that Mr. Walker has
knowingly and willfully committed an offense described in clause (A) above or
committed an act of fraud with respect to money or other property of the
Corporations or an affiliate of the Corporations. Termination pursuant to this
SECTION 6.b. shall be effective five (5) days after the date of such notice or
as otherwise provided therein.
The Corporations' right of termination pursuant to this SECTION 6.b. shall be in
addition to the rights and remedies available to the Corporations at law or in
equity and such rights and remedies shall survive termination of this Agreement.
In the event of termination of this Agreement pursuant to this SECTION 6.b., Mr.
Walker shall have no right to receive any compensation for any period subsequent
to the date of such termination, except for any pro-rated or other amounts
earned prior to such termination.
c. TERMINATION OTHER THAN "FOR CAUSE." In the event of termination of this
Agreement for any reason other than as set forth in SECTION 6.b., Mr. Walker
shall be entitled to receive the greater of (i) three (3) times the annual Base
Salary, or (ii) the Base Salary for the remainder of the Term, plus the
pro-rated amount of the Incentive Compensation for the fiscal year in which such
termination occurs.
A "Change of Control" of the Corporations (as defined in the immediately
following paragraph) shall be deemed a termination of Mr. Walker other than "for
cause" for purposes of determining Mr. Walker's payment under SECTION 6.c., and
Mr. Walker's Stock Options shall immediately vest upon such Change of Control.
However, Mr. Walker may choose not to exercise his Stock Option in full in
connection with the Change of Control, if the Surviving Corporation
issues/grants replacement stock options to acquire shares of stock of the
Surviving Corporation to Walker, having comparable value and substantially the
same terms as Mr. Walker's Stock Option.
A "Change of Control" shall be deemed to occur upon the happening of any of the
following events: (i) 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; (ii) any change of control of the Corporations 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"); (iii) individuals who then constitute the
Board of the Capital Associates, Inc. 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 such
directors on the Board prior to such election or nomination; (iv) the approval
4
<PAGE>
by the stockholders of the Capital Associates, Inc. of any merger or
consolidation of Capital Associates, Inc. with any other corporation or entity
or the sale or other disposition of all or substantially all the assets of the
Corporations to any other 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 Corporations being referred to herein as the "Surviving
Corporation"), and (v) any person (within the meaning of Section 13(d) of the
Exchange Act), other than MCC, becomes the beneficial owner (directly or
indirectly) of securities of the Corporations representing 50% or more of the
combined voting power of the Corporations's then outstanding securities entitled
to vote generally in the election of directors.
d. VOLUNTARY TERMINATION BY MR. WALKER. In the event Mr. Walker voluntarily
terminates his employment with the Corporations during the Term of this
Agreement, Mr. Walker shall receive no severance payments.
e. EXPENSE REIMBURSEMENT. In the event Mr. Walker's employment is
terminated (without regard to the reason for such termination), Mr. Walker will
be reimbursed for reasonable expenses, including travel and entertainment
expenses, incurred by him on behalf of the Corporations while he was an employee
of the Corporations and for which he submits to the Corporations properly
completed expense report/reimbursement forms on or before the 15th business day
following his termination date.
f. OTHER PAYMENTS. In the event Mr. Walker is terminated by the
Corporations other than "for cause" (or is treated as if terminated other than
"for cause") during the Term of this Agreement, Mr. Walker shall receive the
following termination benefits from the Corporations, in addition to the
termination payments referenced in SECTION 2, above:
(i) The Corporations agree to pay to MCC all costs necessary to maintain in
full force and effect the SEP/IRA plans and all medical, health and other
similar insurance on behalf of Mr. Walker and his immediate family, on the
terms and conditions in effect for Mr. Walker on the Termination Date for
the period for which Mr. Walker receives severance payments as set forth in
SECTION 6. c., above and COBRA benefits thereafter commencing on the first
anniversary date of his termination date.
(ii) The Corporations will pay to Mr. Walker his share of any bonuses
declared by the Compensation Committee, prorated based upon the aggregate
dollar amounts of the bonus and Mr. Walker's employment for the portion of
the year prior to his termination date; provided, however, that Mr. Walker
acknowledges that nothing contained herein shall obligate the Compensation
Committee to declare any such bonus or give Mr. Walker a legal right to
enforce the declaration of such bonus.
7. NON-DISCLOSURE AND NON-USE OF CONFIDENTIAL INFORMATION. Except as set forth
below, Mr. Walker agrees that all Confidential Information (as defined below)
and all physical embodiments thereof are confidential to the Corporations. Mr.
Walker agrees that he will not at any time, directly or indirectly, use,
5
<PAGE>
disclose or make available to any person, concern or entity any Confidential
Information, except with the prior written consent of the Corporations or as may
be required by law.
"Confidential Information" shall be broadly defined to include any and all data
and information relating to the business of the Corporations, 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 Corporations; (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
Corporations' debt or equity products; (ix) marketing plans and data; (x) trade
secrets; and (xi) any other information that Mr. Walker knows or should know is
treated as confidential by the Corporations. "Confidential Information" shall
not include any data or information that has been voluntarily disclosed to the
public by the Corporations or that otherwise enters the public domain by lawful
means.
8. AGREEMENT NOT TO SOLICIT EMPLOYEES OR OTHERS. Mr. Walker agrees that,
through and including the third annual anniversary of his Termination Date, he
will not, directly or indirectly, (i) 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 Corporations, whether or
not such employment is pursuant to a written agreement, is for a specified term
or is "at will," (ii) induce or attempt to induce any customer, to cease doing
business with the Corporations, or in any way interfere with the relationship
between any such party and the Corporations, and (iii) retain as an employee any
former part-time or full-time employee of the Corporations within six months
following such employee's termination of employment with the Corporations.
9. AGREEMENT INCLUSIVE. This Agreement supersedes any and all consulting,
employment or other agreements, whether written or oral by and between the Mr.
Walker and the Corporations and any and all such prior Agreements are hereby
canceled effective as at the date of this Agreement.
10. BENEFIT. This Agreement shall inure to the benefit of and be binding upon
the Corporations, its successors and assigns, including, but not limited to, (i)
any corporation(s) which may acquire all or substantially all of Corporations'
assets and business, (ii) any corporation(s) with or into which the Corporations
may be consolidated or merged; (iii) any corporation(s) that is the successor
corporation(s) in a share exchange, and Mr. Walker's heirs, guardians and
personal and legal representatives. Mr. Walker may assign any of his financial
or monetary rights under this Agreement to an immediate family member (i.e.,
wife or children). Mr. Walker 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 Board. The Corporations
may not assign any of its rights or obligations under this Agreement without the
prior written consent of Mr. Walker.
6
<PAGE>
11. REMEDIES. The Corporations and Mr. Walker will be entitled to enforce their
respective 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 Corporations and Mr. Walker
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.
12. 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.
13. GOVERNING LAW. This Agreement shall be governed by and construed in all
respects in accordance with the laws of the State of Colorado.
14. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties, and may be amended, waived, changed, modified, extended or rescinded
only by a writing signed by the party against whom any such amendment, waiver,
change, modification, extension or rescission is sought.
15. NOTICES. All notices and communications hereunder shall be in writing and
shall be deemed given upon personal delivery or three (3) days after deposit
with the U. S. Postal Service, postage prepaid, by registered or certified mail,
return receipt requested, and, if intended for the Corporations, shall be
addressed to the attention of the Legal Department, Capital Associates, Inc., at
7175 West Jefferson Avenue - Suite 4000, Lakewood, Colorado 80235, or at such
other address of which the Corporations shall have given notice to the Mr.
Walker in the manner herein provided, and if intended for the Mr. Walker, shall
be addressed to him at 7175 West Jefferson Avenue Suite 4000, Lakewood, Colorado
80235 or at such other address of which the Mr. Walker shall have given notice
to the Corporations in the manner herein provided.
16. 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.
7
<PAGE>
17. 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.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date first
above written.
"CORPORATIONS"
Capital Associates, Inc.,
a Delaware corporation
By: /s/Anthony M. DiPaolo
----------------------------
Name: Anthony M. DiPaolo
----------------------------
Its: Senior Vice President
----------------------------
Capital Associates International, Inc.,
a Colorado corporation
By: /s/Anthony M. DiPaolo
----------------------------
Name: Anthony M. DiPaolo
----------------------------
Its: Senior Vice President
----------------------------
"MR. WALKER"
/s/James D. Walker
----------------------------
James D. Walker
The foregoing agreement and been reviewed and approved by the Special Committee
of Non-Employee Directors of the Corporations this 12th day of May, 1998
/s/James D. Edwards
- ---------------------------
James D. Edwards, Chairman
8
<PAGE>
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
DATED AS OF APRIL 7, 1998
BY AND BETWEEN
CAPITAL ASSOCIATES, INC.
AND
CAPITAL ASSOCIATES INTERNATIONAL, INC. (THE "CORPORATIONS")
AND
JAMES D. WALKER ("MR. WALKER")
STOCK OPTIONS.
During the term of this Agreement, Mr. walker shall be entitled to the following
stock option grants under the 1996 Stock Option Plan of Capital Associates, Inc.
or any replacements or substitutions thereof (the "Plan"). The Plan is for the
benefit of the Employees of the Corporations and due to the special capacity of
Mr. Walker in and to the Corporations and to make Mr. Walker's transition to an
employee of the Corporations equitable, the following grants and vesting are
hereby agreed to by the Corporations:
1. AUTOMATIC ANNUAL OPTION GRANTS. During the term of this Agreement,
Mr. Walker, who is serving as a member of the Board of Directors of the
Corporations (the "Board") shall automatically be granted on the first day of
each of the Corporations' fiscal years (the "Grant Date"), an option to purchase
5,000 Shares of the common stock of Capital Associates, Inc., par value $.008
per share.
2. EXECUTIVE COMMITTEE ANNUAL OPTION GRANTS. In addition, Mr. Walker, who is
serving as member of the Executive Committee shall automatically be granted on
each Grant Date an additional option to purchase 5,000 Shares.
3. VESTING. No portion of any option granted under the Plan during any fiscal
year of the Corporations shall be exercisable and vest, in whole or in part,
prior to the close of business on the last day of such fiscal year.
4. INCORPORATION OF THE PLAN. All others terms, conditions and provisions of
the Plan are hereby incorporated by this reference.
EXHIBIT 10.62
BUSINESS FINANCING AGREEMENT
This Business Financing Agreement ("Agreement") is made as of April 21, 1998
between DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS") and CAPITAL ASSOCIATES
TECHNOLOGY GROUP, INC., A Corporation ("Dealer"), having a principal place of
business located at 2236 Washington Blvd., Ogden, UT 84401
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1. DEFINITIONS
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1.1 SPECIAL DEFINITIONS. The following terms will have the following
meanings in this Agreement, Agreement for Wholesale Financing and in
the Other Agreements:
"ACCOUNTS": all accounts, leases, contract rights, chattel
paper, choses in action and instruments, including any lien or
other security interest that secures or may secure any of the
foregoing, plus all books, invoices, documents and other
records in any form evidencing or relating to any of the
foregoing, now owned or hereafter acquired by Dealer.
"ACCOUNTS RECEIVABLE FACILITY": a credit facility extended
pursuant to this Agreement.
"AGREEMENT FOR WHOLESALE FINANCING": any Agreement for
Wholesale Financing, as amended from time to time, which
Dealer has executed in conjunction with inventory financing
extended by DFS.
"AVERAGE CONTRACT BALANCE": the amount determined by dividing:
(a) the sum of the Daily Contract Balances (as defined in
SECTION 2.1.1) for a billing period; by, (b) the actual number
of days in such billing period.
"DEFAULT": the events or occurrences enumerated in SECTION 6.
"ENTITY": any individual, association, firm, corporation,
partnership, limited liability company, trust, governmental
body, agency or instrumentality whatsoever.
"GUARANTOR": a guarantor of any of the Obligations.
"INVENTORY": all of Dealer's presently owned and hereafter
acquired goods which are held for sale or lease.
"OBLIGATIONS": all liabilities and indebtedness now or
hereafter arising, owing, due or payable from Dealer to DFS
(and any of its subsidiaries and affiliates), including any
third party claims against Dealer satisfied or acquired by
DFS, whether primary or secondary, joint or several, direct,
contingent, fixed or otherwise, and whether or not evidenced
by instruments or evidences of indebtedness, and all
covenants, agreements (including consent to binding
arbitration), warranties, duties and representations, whether
such Obligations arise under this Agreement, the Other
Agreements or any other agreements previously, now or
hereafter executed by Dealer and delivered to DFS or by
operation of law.
"OTHER AGREEMENTS": all security agreements (including the
Agreement for Wholesale Financing), mortgages, leases,
instruments, documents, guarantees, schedules, certificates,
contracts and similar agreements heretofore, now or hereafter
executed by Dealer and delivered to DFS or delivered by or on
behalf of Dealer to a third party and assigned to DFS by
operation of law or otherwise.
"PRIME RATE": the rate of interest which Chase Manhattan Bank
publicly announces from time to time as its prime rate or
reference rate; provided, however, that for purposes of this
Agreement, the interest rate charged to Dealer will at no time
be computed on a Prime Rate of less than Six percent ( 6% per
annum. The Prime Rate will change and take effect for purposes
of this Agreement on the day that Chase Manhattan Bank
announces any change in its Prime Rate or reference rate.
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2. CREDIT FACILITY/INTEREST RATES/FEES
-----------------------------------
2.1 ACCOUNTS RECEIVABLE FACILITY. Subject to the terms of this
Agreement, DFS agrees to provide to Dealer an Accounts Receivable
Facility of Six Million DOLLARS ($ 6,000,000.00). DFS will not be
obligated to advance funds if a Default has occurred hereunder.
2.1.1 INTEREST. Dealer agrees to pay interest to DFS on the Daily
Contract Balance at a rate equal to the Prime Rate plus one
half of one percent ( .50% %) per annum. Such interest will:
(i) be computed based on a 360 day year; (ii) be calculated
each day by multiplying the Daily Rate (as defined below) by
the Daily Contract Balance (as defined below); and (iii)
accrue from the date that DFS authorizes any Electronic
Transfer (as defined in SECTION 3.10 herein) or otherwise
makes an advance under the Accounts Receivable Facility until
DFS receives the full and final payment of the principal debt
which Dealer owes to DFS, subject to the terms of SECTION 3.8
herein. The "Daily Rate" is the quotient of the applicable
annual rate provided herein divided by 360. The "Daily
Contract Balance" is the amount of the outstanding principal
debt which Dealer owes to DFS on the Accounts Receivable
Facility at the end of each day (including the amount of all
Electronic Transfers authorized) after DFS has credited the
payments which it has received on the Accounts Receivable
Facility, subject to the terms of SECTION 3.8 herein.
2.1.2 FEES. Dealer agrees to pay to DFS an advance fee equal to zero
percent ( 0%) on each advance to Dealer under the Accounts
Receivable Facility.
2.1.3 MAXIMUM INTEREST. Dealer acknowledges that DFS intends to
strictly conform to the applicable usury laws governing this
Agreement. Regardless of any provision contained herein or in
any other document executed or delivered in connection
herewith or therewith, DFS shall never be deemed to have
contracted for, charged or be entitled to receive, collect or
apply as interest on this Agreement (whether termed interest
herein or deemed to be interest by judicial determination or
operation of law), any amount in excess of the maximum amount
allowed by applicable law, and, if DFS ever receives, collects
or applies as interest any such excess, such amount which
would be excessive interest will be applied first to the
reduction of the unpaid principal balances of advances under
this Agreement, and, second, any remaining excess will be paid
to Dealer. In determining whether or not the interest paid or
payable under any specific contingency exceeds the highest
lawful rate, Dealer and DFS shall, to the maximum extent
permitted under applicable law: (a) characterize any
non-principal payment (other than payments which are expressly
designated as interest payments hereunder) as an expense or
fee rather than as interest; (b) exclude voluntary
pre-payments and the effect thereof; and (c) spread the total
amount of interest throughout the entire term of this
Agreement so that the interest rate is uniform throughout such
term.
2.2 PAYMENTS. DFS will send Dealer a monthly billing statement(s)
identifying all charges due on Dealer's account with DFS. The
interest and fee charges specified on each billing statement will be:
(a) due and payable in full immediately on receipt, and (b) an
account stated, unless DFS receives Dealer's written objection
thereto within fifteen (15) days after it is mailed to Dealer. If DFS
does not receive, by the 25th day of any given month, payment of all
charges accrued to Dealer's account with DFS during the immediately
preceding month, Dealer will (to the extent allowed by law) pay DFS a
late fee ("Late Fee") equal to the greater of $5 or 5% of the amount
of such finance charges (payment of the Late Fee does not waive the
default caused by the late payment). Dealer will also pay DFS $100
for each of Dealer's checks returned unpaid for insufficient funds
(an "NSF check") (such $100 payment repays DFS' estimated
administrative costs; it does not waive the default caused by the NSF
check). DFS may adjust the billing statement at any time to conform
to applicable law and this Agreement. Dealer waives the right to
direct the application of any payments hereafter received by DFS on
account of the Obligations. DFS will have the continuing exclusive
right to apply and reapply any and all such payments in such manner
as DFS may deem advisable notwithstanding any entry by DFS upon its
books and records.
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2.3 ONE LOAN. DFS may combine all of DFS' advances to Dealer or on
Dealer's behalf, whether under this Agreement or any Other
Agreements, and whether provided by one or more of DFS' branch
offices, together with all finance charges, fees and expenses related
thereto, to make one debt owed by Dealer.
3. ACCOUNTS RECEIVABLE FACILITY - ADDITIONAL PROVISIONS
----------------------------------------------------
3.1 SCHEDULES. Dealer will, no less than weekly or as otherwise agreed
to, furnish DFS with a schedule of Accounts ("Schedule") which will:
(a) describe all Accounts created or acquired by Dealer since the
last Schedule furnished DFS; (b) inform DFS of any rejection of goods
by any obligor, delays in delivery of goods, non-performance of
contracts and of any assertion of any claim, offset or counterclaim
by any obligor; and (c) inform DFS of any adverse information
relating to the financial condition of any obligor.
3.2 AVAILABLE CREDIT. On receipt of each Schedule, DFS will credit Dealer
with such amount as DFS may deem advisable up to eighty-five percent
( 85 %) of the net amount of the eligible Accounts listed in such
Schedule. DFS will loan Dealer such amounts so credited or a part
thereof as requested provided that at no time will such outstanding
loans exceed Dealer's maximum Accounts Receivable Facility from time
to time established by DFS. No loans need be made by DFS if the
Dealer is in Default.
3.3 INELIGIBLE ACCOUNTS. DFS will have the sole right to determine
eligibility of Accounts and, without limiting DFS' discretion in that
regard, the following Accounts will be deemed ineligible: (a)
Accounts created from the sale of goods and services on non-standard
terms and/or that allow for payment to be made more than thirty (30)
days from the date of sale; (b) Accounts unpaid more than ninety (90)
days from date of invoice; (c) all Accounts of any obligor with fifty
percent (50%) or more of the outstanding balance unpaid for more than
ninety (90) days from the date of invoice; (d) Accounts for which the
obligor is an officer, director, shareholder, partner, member, owner,
employee, agent, parent, subsidiary, affiliate of, or is related to
Dealer or has common shareholders, officers, directors, owners,
partners or members; (e) consignment sales; (f) Accounts for which
the payment is or may be conditional; (g) Accounts for which the
obligor is not a commercial or institutional entity or is not a
resident of the United States or Canada; (h) Accounts with respect to
which any warranty or representation provided in SUBSECTION 3.4 is
not true and correct; (i) Accounts which represent goods or services
purchased for a personal, family or household purpose; (j) Accounts
which represent goods used for demonstration purposes or loaned by
the Dealer to another party; (k) Accounts which are progress payment,
barter, or contra accounts; and (l) any and all other Accounts which
DFS deems to be ineligible. If DFS determines that any Account is or
becomes an ineligible Account, immediately upon notice thereof from
DFS, Dealer will pay to DFS an amount equal to the monies loaned by
DFS for such ineligible Account.
3.4 WARRANTIES AND REPRESENTATIONS. For each Account which Dealer lists
on any Schedule, Dealer warrants and represents to DFS that at all
times: (a) such Account is genuine; (b) such Account is not evidenced
by a judgment or promissory note or similar instrument or agreement;
(c) it represents an undisputed bona fide transaction completed in
accordance with the terms of the invoices and purchase orders
relating thereto; (d) the goods sold or services rendered which
resulted in the creation of such Account have been delivered or
rendered to and accepted by the obligor; (e) the amounts shown on the
Schedules, Dealer's books and records and all invoices and statements
delivered to DFS with respect thereto are owing to Dealer and are not
contingent; (f) no payments have been or will be made thereon except
payments turned over to DFS; (g) there are no offsets, counterclaims
or disputes existing or asserted with respect thereto and Dealer has
not made any agreement with any obligor for any deduction or discount
of the sum payable thereunder except regular discounts allowed by
Dealer in the ordinary course of its business for prompt payment; (h)
there are no facts or events which in any way impair the validity or
enforceability thereof or reduce the amount payable thereunder from
the amount shown on the Schedules, Dealer's books and records and the
invoices and statements delivered to DFS with respect thereto; (i)
all persons acting on behalf of obligors thereon have the authority
to bind the obligor; (j) the goods sold or transferred giving rise
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thereto are not subject to any lien, claim, encumbrance or security
interest which is superior to that of DFS; and (k) there are no
proceedings or actions known to Dealer which are threatened or
pending against any obligor thereon which might result in any
material adverse change in such obligor's financial condition.
3.5 NOTES. Loans made pursuant to this Agreement need not be evidenced
by promissory notes unless otherwise required by DFS in DFS' sole
discretion.
3.6 CERTAIN CHARGES. Dealer will: (a) reimburse DFS for all charges made
by banks, including charges for collection of checks and other items
of payment, and (b) pay DFS' fees for transfers of funds to or from
the Dealer; provided however, that Dealer will not pay for Wire
Transfer fees. DFS may, from time to time, announce its fees for
transfers of funds to or from the Dealer, including the issuance of
Electronic Transfers.
3.7 COLLECTIONS. Unless otherwise directed by DFS, to expedite
collection of Accounts for the benefit of DFS, Dealer shall notify
all of its obligors to make payment of the Accounts to one or more
lock-boxes under the sole control of DFS. The lock-box, and all
accounts into which the proceeds of any such lock-box(es) are
deposited, shall be established at banks selected by the Dealer and
satisfactory to DFS in its sole discretion. Dealer shall issue to any
such banks an irrevocable letter of instruction, in form and
substance acceptable to DFS, directing such banks to deposit all
payments or other remittances received in the lock-box to such
account or accounts as DFS shall direct, for application against the
outstanding balance of the Obligations. All funds deposited in the
lock-box or any such account immediately shall become the property of
DFS, and any disbursements of the proceeds in the lock-box or any
such account will only be made to DFS. Dealer shall obtain the
agreement of such banks to waive any offset rights against the funds
so deposited. DFS assumes no responsibility for such lock-box
arrangement, including, without limitation, any claim of accord and
satisfaction or release with respect to deposits which any banks
accept thereunder. All remittances which Dealer receives in payment
of any Accounts, and the proceeds of any of the other Collateral,
shall be: (i) kept separate and apart from Dealer's own funds so that
they are capable of identification as DFS' property; (ii) held by
Dealer as trustee of an express trust for DFS' benefit; and (iii)
shall be immediately deposited in such accounts designated by DFS.
All proceeds received or collected by DFS with respect to Accounts,
and reserves and other property of Dealer in possession of DFS at any
time or times hereafter, may be held by DFS without interest to
Dealer until all Obligations are paid in full or applied by DFS on
account of the Obligations. DFS may release to Dealer such portions
of such reserves and proceeds as DFS may determine. Upon the
occurrence and during the continuance of a Default, DFS may notify
the obligors that the Accounts have been assigned to DFS, collect the
Accounts directly in its own name and charge the collection costs and
expenses, including attorneys' fees, to Dealer. DFS has no duty to
protect, insure, collect or realize upon the Accounts to preserve
rights in them.
3.8 COLLECTION DAYS. All payments and all amounts received on any
Account will be credited by DFS to Dealer's account (subject to final
collection thereof) after allowing three (3) business days for
collection of checks or other instruments.
3.9 POWER OF ATTORNEY. Dealer irrevocably appoints DFS (and any person
designated by it) as Dealer's true and lawful Attorney with full
power to at any time, in the discretion of DFS (whether or not
Default has occurred) to: (a) endorse the name of Dealer upon any of
the items of payment or proceeds and deposit the same in the account
of DFS for application to the Obligations; (b) sign the name of
Dealer to verify the accuracy of the Accounts; (c) sign the name of
Dealer on any document or instrument that DFS shall deem necessary or
appropriate to perfect and maintain perfected the security interests
in the Collateral under this Agreement and the Other Agreements; and
(d) initiate and settle any insurance claim and endorse Dealer's name
on any check, instrument or other item of payment. In the event of a
Default, Dealer irrevocably appoints DFS (and any person designated
by it) as Dealer's true and lawful Attorney with full power to at any
time, in the discretion of DFS to: (i) demand payment, enforce
payment and otherwise exercise all of Dealer's rights, and remedies
with respect to the collection of any Accounts; (ii) settle, adjust,
compromise, extend or renew any Accounts; (iii) settle, adjust or
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compromise any legal proceedings brought to collect any Accounts;
(iv) sell or assign any Accounts upon such terms, for such amounts
and at such time or times as DFS may deem advisable; (v) discharge
and release any Accounts; (vi) prepare, file and sign Dealer's name
on any Proof of Claim in Bankruptcy or similar document against any
obligor; (vii) endorse the name of Dealer upon any chattel paper,
document, instrument, invoice, freight bill, bill of lading or
similar document or agreement relating to any Account or goods
pertaining thereto; and (viii) take control in any manner of any item
of payments or proceeds and for such purpose to notify the Postal
Authorities to change the address for delivery of mail addressed to
Dealer to such address as DFS may designate. The power of attorney is
for value and coupled with an interest and is irrevocable so long as
any Obligations remain outstanding and by DFS exercising such right,
DFS shall not waive any right against Dealer until the Obligations
are paid in full.
3.10 CONTINUING REQUIREMENTS. Advances hereunder will be made by DFS, at
Dealer's direction, by paper check, electronic transfer by Automated
Clearing House ("ACH"), Fed Wire Funds Transfer ("Fed Wire") or such
other electronic means as DFS may announce from time to time (ACH,
Fed Wire and such other electronic transfer are collectively referred
to as "Electronic Transfers"). If Dealer does not request advances be
made in a specific method of transfer, DFS may determine from time to
time in its sole discretion what method of transfer to use. Dealer
will: (a) if from time to time required by DFS, immediately upon
their creation, deliver to DFS copies of all invoices, delivery
evidences and other such documents relating to each Account; (b) not
permit or agree to any extension, compromise or settlement or make
any change to any Account; (c) affix appropriate endorsements or
assignments upon all such items of payment and proceeds so that the
same may be properly deposited by DFS to DFS' account; (d)
immediately notify DFS in writing which Accounts may be deemed
ineligible as defined in SUBSECTION 3.3; (e) mark all chattel paper
and instruments now owned or hereafter acquired by it to show that
the same are subject to DFS' security interest and immediately
thereafter deliver such chattel paper and instruments to DFS with
appropriate endorsements and assignments to DFS; (f) within ten (10)
days after the end of each month, provide DFS with a detailed aging
of its Accounts for each month, together with the names and addresses
of all obligors.
3.11 RELEASE. Dealer releases DFS from all claims and causes of action
which Dealer may now or hereafter have for any loss or damage to it
claimed to be caused by or arising from: (a) any failure of DFS to
protect, enforce or collect, in whole or in part, any Account; (b)
DFS' notification to any obligors thereon of DFS' security interest
in any of the Accounts; (c) DFS' directing any obligor to pay any sum
owing to Dealer directly to DFS; and (d) any other act or omission to
act on the part of DFS, its officers, agents or employees, except for
willful misconduct. DFS will have no obligation to preserve rights to
Accounts against prior parties. Dealer waives all rights of offset
and counterclaims Dealer may have against DFS.
3.12 REVIEW. Dealer grants DFS an irrevocable license to enter Dealer's
business locations during normal business hours with 24 hour notice(
no notice will be required hereunder if a Default has occurred) to
Dealer to: (a) account for and inspect all Collateral; (b) verify
Dealer's compliance with this Agreement; and (c) review, examine, and
make copies of Dealer's books, records, files and business procedures
and practices. Dealer further agrees to pay DFS a review fee of Seven
Hundred Fifty DOLLARS ($ 750.00 ) for any such review, inspection or
examination made by DFS. DFS may, without notice to Dealer and at any
time or times hereafter, verify the validity, amount or any other
matter relating to any Account by mail, telephone, or other means, in
the name of Dealer or DFS.
4. SECURITY - COLLATERAL
---------------------
4.1 GRANT OF SECURITY INTEREST. To secure payment of all of Dealer's
current and future Obligations and to secure Dealer's performance of
all of the provisions under this Agreement and the Other Agreements,
Dealer grants DFS a security interest in all of Dealer's inventory,
accounts, contract rights, chattel paper, security agreements,
instruments, deposit accounts, reserves, documents, and general
intangibles; and all judgments, claims, insurance policies, and
payments owed or made to Dealer thereon; all whether now owned or
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hereafter acquired, all attachments, accessories, accessions,
returns, repossessions, exchanges, substitutions and replacements
thereto, and all proceeds thereof. All such assets are collectively
referred to herein as the "Collateral." All of such terms for which
meanings are provided in the Uniform Commercial Code of the
applicable state are used herein with such meanings. Dealer covenants
with DFS that DFS may realize upon all or part of any Collateral in
any order it desires and any realization by any means upon any
Collateral will not bar realization upon any other collateral.
Dealer's liability under this Agreement is direct and unconditional
and will not be affected by the release or nonperfection of any
security interest granted hereunder. All Collateral financed by DFS,
and all proceeds thereof, will be held in trust by Dealer for DFS,
with such proceeds being payable in accordance with this Agreement.
5. WARRANTIES AND REPRESENTATIONS
------------------------------
5.1 AFFIRMATIVE WARRANTIES AND REPRESENTATIONS. Except as otherwise
specifically provided in the Other Agreements, Dealer warrants and
represents to DFS that: (a) Dealer has good title to all Collateral;
(b) DFS' security interest in the Accounts will at all times
constitute a perfected, first security interest in such Accounts and
will not become subordinate to the security interest, lien,
encumbrance or claim of any Entity; (c) Dealer will execute all
documents DFS requests to perfect and maintain DFS' security interest
in the Collateral and to fully consummate the transactions
contemplated under this Agreement and the Other Agreements; (d)
Dealer will at all times be duly organized, existing, in good
standing, qualified and licensed to do business in each state,
county, or parish, in which the nature of its business or property so
requires; (e) Dealer has the right and is duly authorized to enter
into this Agreement; (f) Dealer's execution of this Agreement does
not constitute a breach of any agreement to which Dealer is now or
hereafter becomes bound; (g) there are and will be no actions or
proceedings pending or threatened against Dealer which might result
in any material adverse change in Dealer's financial or business
condition or which might in any way adversely affect any of Dealer's
assets; (h) Dealer will maintain the Collateral in good condition and
repair; (i) Dealer has duly filed and will duly file all tax returns
required by law; (j) Dealer has paid and will pay when due all taxes,
levies, assessments and governmental charges of any nature; (k)
Dealer will maintain a system of accounting in accordance with
generally accepted accounting principles and account records which
contain such information in a format as may be requested by DFS; (l)
Dealer will keep and maintain all of its books and records pertaining
to the Accounts at its principal place of business designated in this
Agreement; (m) Dealer will promptly supply DFS with such information
concerning it or any Guarantor as DFS hereafter may reasonably
request; (n) Dealer will give DFS thirty (30) days prior written
notice of any change in Dealer's identity, name, form of business
organization, ownership, management, principal place of business,
Collateral locations or other business locations; and before moving
any books and records to any other location; (o) Dealer will observe
and perform all matters required by any lease, license, concession or
franchise forming part of the Collateral in order to maintain all the
rights of DFS thereunder; (p) Dealer will advise DFS of the
commencement of material legal proceedings against Dealer or any
Guarantor; (q) Dealer will comply with all applicable laws and will
conduct its business in a manner which preserves and protects the
Collateral and the earnings and incomes thereof; and (r) Dealer will
keep the Collateral insured for its full insurable value under an
"all risk" property insurance policy with a company acceptable to
DFS, naming DFS as a lender loss-payee and containing standard
lender's loss payable and termination provisions. Dealer will provide
DFS with written evidence of such property insurance coverage and
lender's loss-payee endorsement.
5.2 NEGATIVE COVENANTS. Dealer will not at any time (without DFS' prior
written consent): (a) grant to or in favor of any Entity a security
interest in or permit to exist a lien, claim or encumbrance in the
Accounts which is superior to the interest of DFS; (b) other than in
the ordinary course of its business, sell, lease or otherwise dispose
of or transfer any of its assets; (c) merge or consolidate with
another Entity; (d) acquire the assets or ownership interest of any
other Entity; (e) enter into any transaction not in the ordinary
course of business; (f) guarantee or indemnify or otherwise become in
any way liable with respect to the obligations of any Entity, except
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by endorsement of instruments or items of payment for deposit to the
general account of Dealer or which are transmitted or turned over to
DFS on account of the Obligations except for any Guaranty of the
obligations of the Dealer's parent to the provider(s) of Dealer's
parent's working capital credit facility; (g) redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of
Dealer's capital stock; (h) make any change in Dealer's capital
structure or in any of its business objectives or operations which
might in any way adversely affect the ability of Dealer to repay the
Obligations; (i) make any distribution of Dealer's assets not in the
ordinary course of business; (j) incur any debts outside of the
ordinary course of business except renewals or extensions of existing
debts and interest thereon; and (k) make any loans, advances,
contributions or payments of money or in goods to any affiliated
entity or to any officer, director, stockholder, member or partner of
Dealer or of any such entity (except for compensation for personal
services actually rendered, or dividends to the Dealer's parent).
5.3 FINANCIAL STATEMENTS. Dealer will deliver to DFS: (a) within ninety
(90) days after the end of each of Dealer's fiscal years, a
reasonably detailed balance sheet as of the last day of such fiscal
year and a reasonably detailed income statement covering Dealer's
operations for such fiscal year, in a form satisfactory to DFS; (b)
within forty-five (45) days after the end of each of Dealer's fiscal
quarters, a reasonably detailed balance sheet as of the last day of
such quarter and an income statement covering Dealer's operations for
such quarter in a form satisfactory to DFS; (c) within ten (10) days
after request therefor by DFS, any other report requested by DFS
relating to the Collateral or the financial condition of Dealer.
Dealer warrants and represents to DFS that all financial statements
and information relating to Dealer or any Guarantor which have been
or may hereafter be delivered by Dealer or any Guarantor to DFS are
true and correct and have been and will be prepared in accordance
with generally accepted accounting principles consistently applied
and, with respect to such previously delivered statements or
information, there has been no material adverse change in the
financial or business condition of Dealer or any Guarantor since the
submission to DFS, either as of the date of delivery, or, if
different, the date specified therein, and Dealer acknowledges DFS'
reliance thereon.
6. DEFAULT
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6.1 DEFINITION. Dealer will be in default under this Agreement if: (a)
Dealer breaches any terms, warranties or representations contained
herein or in any Other Agreements and such breach is not cured within
three (3) days of Dealer's receipt of written notice of such breach;
(b) any Guarantor of Dealer's debts to DFS breaches any terms,
warranties or representations contained in any guaranty or Other
Agreements and such breach is not cured within three (3) days of
Dealer's receipt of written notice of such breach; (c) any
representation, statement, report, or certificate made or delivered
by Dealer or any Guarantor to DFS is not accurate when made and such
breach is not cured within three (3) days of Dealer's receipt of
written notice of such breach; (d) Dealer fails to pay any of the
Obligations when due and payable; (e) Dealer abandons any Collateral
and such breach is not cured within three (3) days of Dealer's
receipt of written notice of such breach; (f) Dealer or any Guarantor
is or becomes in default in the payment of any debt owed to any third
party in excess of $50,000.00 and such breach is not cured within
three (3) days of Dealer's receipt of written notice of such breach;
(g) a money judgment issues against Dealer or any Guarantor in excess
of $50,000.00 and such breach is not cured within three (3) days of
Dealer's receipt of written notice of such breach;; (h) an
attachment, sale or seizure issues or is executed against any assets
of Dealer or of any Guarantor; (i) Dealer or any Guarantor shall
cease existence as a corporation, partnership, limited liability
company or trust, as applicable; (j) Dealer or any Guarantor ceases
or suspends business; (k) Dealer, any Guarantor or any member while
Dealer's business is operated as a limited liability company, as
applicable, makes a general assignment for the benefit of creditors;
(l) Dealer, any Guarantor or any member while Dealer's business is
operated as a limited liability company, as applicable, becomes
insolvent or voluntarily or involuntarily becomes subject to the
Federal Bankruptcy Code, any state insolvency law or any similar law;
(m) any receiver is appointed for any assets of Dealer, any Guarantor
AR000010 8/97 7
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or any member while Dealer's business is operated as a limited
liability company, as applicable; (n) any guaranty of Dealer's debt
to DFS is terminated;(o) Dealer or any Guarantor misrepresents
Dealer's or such Guarantor's financial condition or organizational
structure.
6.2 RIGHTS OF DFS. In the event of a Default:
(a) DFS may at any time at DFS' election, without notice or demand
to Dealer, do any one or more of the following: declare all or
any of the Obligations immediately due and payable, together
with all costs and expenses of DFS' collection activity,
including, without limitation, all reasonable attorneys' fees;
exercise any or all rights under applicable law (including,
without limitation, the right to possess, transfer and dispose
of the Collateral); and/or cease extending any additional credit
to Dealer (DFS' right to cease extending credit shall not be
construed to limit the discretionary nature of this credit
facility).
(b) Dealer will segregate and keep the Collateral in trust for DFS,
and in good order and repair, and will not sell, rent, lease,
consign, otherwise dispose of or use any Collateral, nor further
encumber any Collateral.
(c) Upon DFS' oral or written demand, Dealer will immediately
deliver the Collateral to DFS, in good order and repair, at a
place specified by DFS, together with all related documents; or
DFS may, in DFS' sole discretion and without notice or demand to
Dealer, take immediate possession of the Collateral together
with all related documents.
(d) DFS may, without notice, apply a default finance charge to
Dealer's outstanding principal indebtedness equal to the default
rate specified in Dealer's financing program with DFS, if any,
or if there is none so specified, at the lesser of 3% per annum
above the rate in effect immediately prior to the Default, or
the highest lawful contract rate of interest permitted under
applicable law.
(e) DFS may, without notice to Dealer and at any time or times
enforce payment and collect, by legal proceedings or otherwise,
Accounts in the name of Dealer or DFS; and take control of any
cash or non-cash items of payment or proceeds of Accounts and of
any rejected, returned, repossessed or stopped in transit goods
relating to Accounts. DFS may at its sole election and without
demand enter, with or without process of law, any premises where
Collateral might be and, without charge or liability to DFS
therefor do one or more of the following: (i) take possession of
the Collateral and use or store it in said premises or remove it
to such other place or places as DFS may deem convenient; (ii)
take possession of all or part of such premises and the
Collateral and place a custodian in the exclusive control
thereof until completion of enforcement of DFS' security
interest in the Collateral or until DFS' removal of the
Collateral and, (iii) remain on such premises and use the same,
together with Dealer's materials, supplies, books and records,
for the purpose of performing all acts necessary and incidental
to the collection or liquidation of such Collateral.
All of DFS' rights and remedies are cumulative. DFS' failure to
exercise any of DFS' rights or remedies hereunder will not waive
any of DFS' rights or remedies as to any past, current or future
Default.
6.3 SALE OF COLLATERAL. Dealer agrees that if DFS conducts a private
sale of any Collateral by requesting bids from 10 or more dealers or
distributors in that type of Collateral, any sale by DFS of such
Collateral in bulk or in parcels within 120 days of: (a) DFS' taking
possession and control of such Collateral; or (b) when DFS is
otherwise authorized to sell such Collateral; whichever occurs last,
to the bidder submitting the highest cash bid therefor, is a
commercially reasonable sale of such Collateral under the Uniform
Commercial Code. Dealer agrees that the purchase of any Collateral by
a vendor, as provided in any agreement between DFS and the vendor, is
a commercially reasonable disposition and private sale of such
Collateral under the Uniform Commercial Code, and no request for bids
shall be required. Dealer further agrees that 7 or more days prior
written notice will be commercially reasonable notice of any public
or private sale (including any sale to a vendor). Dealer irrevocably
waives any requirement that DFS retain possession and not dispose of
any Collateral until after an arbitration hearing, arbitration award,
confirmation, trial or final judgment. If DFS disposes of any such
AR000010 8/97 8
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Collateral other than as herein contemplated, the commercial
reasonableness of such disposition will be determined in accordance
with the laws of the state governing this Agreement.
7. MISCELLANEOUS
-------------
7.1 TERMINATION. This Agreement will continue in full force and effect
and be non-cancellable by Dealer (except that it may be terminated by
DFS upon thirty (30) days written notice to Dealer or in the exercise
of its rights and remedies upon Default by Dealer) for a period of
one (1) year from the first day of the first month following the date
hereof and for successive one (1) year periods thereafter, subject to
termination as to future transactions at the end of any such period
on at least sixty (60) days prior written notice by Dealer to DFS. If
such notice of termination is given by Dealer to DFS, such notice
will be ineffective unless Dealer pays to DFS all Obligations on or
before the termination date. Any termination of this Agreement by
Dealer or DFS will have the effect of accelerating the maturity of
all Obligations not then otherwise due.
7.1.1 TERMINATION PRIVILEGE. Despite anything to the contrary in
SECTION 7.1 of this Agreement, this Agreement may be
terminated by Dealer at any time upon sixty (60) days prior
written notice and payment to DFS of the following sum (in
addition to payment of all Obligations, whether or not by
their terms then due) which sum represents liquidated damages
for the loss of the bargain and not as a penalty, and the same
is hereby acknowledged by Dealer: (1) the product of (a) one
half of one percent (.50%) multiplied by (b) the highest
Average Contract Balance for the last 10 months (or entire
term of this Agreement if less than 12 months) prior to the
effective date of termination, multiplied by (2) the number of
months remaining in the original or renewal term; granted,
however that such liquidated damages will only be payable in
the event termination occurs during the first ten (1O) month
term of this Agreement. This sum will also be paid by Dealer
if the Agreement is terminated on account of Dealer's Default.
7.1.2 EFFECT OF TERMINATION. Dealer will not be relieved from any
Obligations to DFS arising out of DFS' advances or commitments
made before the effective termination date of this Agreement.
DFS will retain all of its rights, interests and remedies
hereunder until Dealer has paid all of Dealer's Obligations to
DFS. All waivers set forth within this Agreement will survive
any termination of this Agreement.
7.2 COLLECTION. Checks and other instruments delivered to DFS on
account of the Obligations will constitute conditional payment until
such items are actually paid to DFS.
7.3 DEMAND, ETC. Dealer irrevocably waives notice of: DFS' acceptance
of this Agreement, presentment, demand, protest, nonpayment,
nonperformance, and dishonor. Dealer and DFS irrevocably waive all
rights to claim any punitive and/or exemplary damages. Dealer waives
all notices of default and non-payment at maturity of any or all of
the Accounts.
7.4 REIMBURSEMENT. Dealer will assume and reimburse DFS upon demand for
all expenses incurred by DFS in connection with the preparation of
this Agreement and the Other Agreements (including fees and costs of
outside counsel) and all filing and recording fees and taxes payable
in connection with the filing or recording of all documents under
this Agreement and the Other Agreements; provided, however, that such
reimbursement by Dealer hereunder will not exceed the sum of ONE
THOUSAND DOLLARS ($1,000.00).
7.5 ADDITIONAL OBLIGATIONS. DFS, without waiving or releasing any
Obligation or Default, may perform any Obligations that Dealer fails
or refuses to perform. All sums paid by DFS on account of the
foregoing and any expenses, including reasonable attorneys' fees,
will be a part of the Obligations, payable on demand and secured by
the Collateral.
7.6 NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT
INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBTS ARE NOT ENFORCEABLE.
TO PROTECT DEALER AND DFS FROM MISUNDERSTANDING OR DISAPPOINTMENT,
ALL AGREEMENTS COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING
AND THE OTHER AGREEMENTS, WHICH IS THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS
SPECIFICALLY PROVIDED HEREIN OR AS THE PARTIES MAY LATER AGREE IN
WRITING TO MODIFY IT. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE
PARTIES. DFS may, from time to time, announce in writing to Dealer
AR000010 8/97 9
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its policies and procedures regarding its administration of this
facility, including, without limitation, DFS' fees for the transfer
of funds to or from Dealer, including Electronic Transfers; any
subsequent use by Dealer of this facility following any such
announcement shall constitute Dealer's acceptance of such revised
policies and procedures. Time is of the essence regarding Dealer's
performance of its obligations to DFS notwithstanding any course of
dealing or custom on DFS' part to grant extensions of time. DFS will
have the right to refrain from or postpone enforcement of this
Agreement or any Other Agreements between DFS and Dealer without
prejudice and the failure to strictly enforce these agreements will
not be construed as having created a course of dealing between DFS
and Dealer contrary to the specific terms of the agreements or as
having modified, released or waived the same. The express terms of
this Agreement will not be modified by any course of dealing, usage
of trade, or custom of trade which may deviate from the terms hereof.
7.7 SEVERABILITY. If any provision of this Agreement or the Other
Agreements or the application thereof is held invalid or
unenforceable, the remainder of this Agreement and the Other
Agreements will not be impaired or affected and will remain binding
and enforceable.
7.8 SUPPLEMENT. If Dealer and DFS have heretofore executed Other
Agreements in connection with all or any part of the Collateral, this
Agreement shall supplement each and every Other Agreement previously
executed by and between Dealer and DFS, and in that event this
Agreement shall neither be deemed a novation nor a termination of any
such previously executed Other Agreement nor shall execution of this
Agreement be deemed a satisfaction of any obligation secured by such
previously executed Other Agreement. In the event of any conflict
between the terms of this Agreement and any previously executed
Business Financing Agreement between DFS and Dealer, the terms of
this Agreement shall control.
7.9 SECTION TITLES. The Section titles used in this Agreement are for
convenience only and do not define or limit the contents of any
Section.
7.10 BINDING EFFECT. Dealer cannot assign its interest in this Agreement
or any Other Agreements without DFS' prior written consent, although
DFS may assign or participate DFS' interest, in whole or in part,
without Dealer's consent. This Agreement and the Other Agreements
will protect and bind DFS' and Dealer's respective heirs,
representatives, successors and assigns.
7.11 NOTICES. Except as otherwise stated herein, all notices, arbitration
claims, responses, requests and documents will be sufficiently given
or served if mailed or delivered: (a) to Dealer at Dealer's principal
place of business specified above; and (b) to DFS at 655 Maryville
Centre Drive, St. Louis, Missouri 63141-5832, Attention: General
Counsel, or such other address as the parties may hereafter specify
in writing.
7.12 RECEIPT OF AGREEMENT. Dealer acknowledges that it has received a
true and complete copy of this Agreement. Dealer acknowledges that it
has read and understood this Agreement. Notwithstanding anything
herein to the contrary: (a) DFS may rely on any facsimile copy,
electronic data transmission or electronic data storage of any
Schedule, statement, financial statements or other reports, and (b)
such facsimile copy, electronic data transmission or electronic data
storage will be deemed an original, and the best evidence thereof for
all purposes, including, without limitation, under this Agreement or
any Other Agreements, and for all evidentiary purposes before any
arbitrator, court or other adjudicatory authority.
7.13 INFORMATION. DFS may provide to any third party any credit,
financial or other information on Dealer that DFS may from time to
time possess. DFS may obtain from any third party any credit,
financial or other information regarding Dealer that such third party
may from time to time possess.
8. BINDING ARBITRATION
-------------------
8.1 ARBITRABLE CLAIMS. Except as otherwise specified below, all actions,
disputes, claims and controversies under common law, statutory law or
in equity of any type or nature whatsoever (including, without
limitation, all torts, whether regarding negligence, breach of
fiduciary duty, restraint of trade, fraud, conversion, duress,
interference, wrongful replevin, wrongful sequestration, fraud in the
inducement, usury or any other tort, all contract actions, whether
regarding express or implied terms, such as implied covenants of good
faith, fair dealing, and the commercial reasonableness of any
AR000010 8/97 10
<PAGE>
Collateral disposition, or any other contract claim, all claims of
deceptive trade practices or lender liability, and all claims
questioning the reasonableness or lawfulness of any act), whether
arising before or after the date of this Agreement, and whether
directly or indirectly relating to: (a) this Agreement or any Other
Agreements and/or any amendments and addenda hereto or thereto, or
the breach, invalidity or termination hereof or thereof; (b) any
previous or subsequent agreement between DFS and Dealer; (c) any act
committed by DFS or by any parent company, subsidiary or affiliated
company of DFS (the "DFS Companies"), or by any employee, agent,
officer or director of an DFS Company whether or not arising within
the scope and course of employment or other contractual
representation of the DFS Companies provided that such act arises
under a relationship, transaction or dealing between DFS and Dealer;
and/or (d) any other relationship, transaction or dealing between DFS
and Dealer (collectively the "Disputes"), will be subject to and
resolved by binding arbitration.
8.2 ADMINISTRATIVE BODY. All arbitration hereunder will be conducted in
accordance with the Commercial Arbitration Rules of The American
Arbitration Association ("AAA"). If the AAA is dissolved, disbanded
or becomes subject to any state or federal bankruptcy or insolvency
proceeding, the parties will remain subject to binding arbitration
which will be conducted by a mutually agreeable arbitral forum. The
parties agree that all arbitrator(s) selected will be attorneys with
at least five (5) years secured transactions experience. The
arbitrator(s) will decide if any inconsistency exists between the
rules of any applicable arbitral forum and the arbitration provisions
contained herein. If such inconsistency exists, the arbitration
provisions contained herein will control and supersede such rules.
The site of all arbitration proceedings will be in the Division of
the Federal Judicial District in which AAA maintains a regional
office that is closest to Dealer.
8.3 DISCOVERY. Discovery permitted in any arbitration proceeding
commenced hereunder is limited as follows. No later than thirty (30)
days after the filing of a claim for arbitration, the parties will
exchange detailed statements setting forth the facts supporting the
claim(s) and all defenses to be raised during the arbitration, and a
list of all exhibits and witnesses. No later than twenty-one (21)
days prior to the arbitration hearing, the parties will exchange a
final list of all exhibits and all witnesses, including any
designation of any expert witness(es) together with a summary of
their testimony; a copy of all documents and a detailed description
of any property to be introduced at the hearing. Under no
circumstances will the use of interrogatories, requests for
admission, requests for the production of documents or the taking of
depositions be permitted. However, in the event of the designation of
any expert witness(es), the following will occur: (a) all information
and documents relied upon by the expert witness(es) will be delivered
to the opposing party, (b) the opposing party will be permitted to
depose the expert witness(es), (c) the opposing party will be
permitted to designate rebuttal expert witness(es), and (d) the
arbitration hearing will be continued to the earliest possible date
that enables the foregoing limited discovery to be accomplished.
8.4 EXEMPLARY OR PUNITIVE DAMAGES. The Arbitrator(s) will not have the
authority to award exemplary or punitive damages.
8.5 CONFIDENTIALITY OF AWARDS. All arbitration proceedings, including
testimony or evidence at hearings, will be kept confidential,
although any award or order rendered by the arbitrator(s) pursuant to
the terms of this Agreement may be entered as a judgment or order in
any state or federal court and may be confirmed within the federal
judicial district which includes the residence of the party against
whom such award or order was entered. This Agreement concerns
transactions involving commerce among the several states. The Federal
Arbitration Act, Title 9 U.S.C. Sections 1 et seq., as amended
("FAA") will govern all arbitration(s) and confirmation proceedings
hereunder.
8.6 PREJUDGMENT AND PROVISIONAL REMEDIES. Nothing herein will be
construed to prevent DFS' or Dealer's use of bankruptcy,
receivership, injunction, repossession, replevin, claim and delivery,
sequestration, seizure, attachment, foreclosure, dation and/or any
other prejudgment or provisional action or remedy relating to any
Collateral for any current or future debt owed by either party to the
other. Any such action or remedy will not waive DFS' or Dealer's
right to compel arbitration of any Dispute.
AR000010 8/97 11
<PAGE>
8.7 ATTORNEYS' FEES. If either Dealer or DFS brings any other action for
judicial relief with respect to any Dispute (other than those set
forth in SECTION 8.6), the party bringing such action will be liable
for and immediately pay all of the other party's costs and expenses
(including attorneys' fees) incurred to stay or dismiss such action
and remove or refer such Dispute to arbitration. If either Dealer or
DFS brings or appeals an action to vacate or modify an arbitration
award and such party does not prevail, such party will pay all costs
and expenses, including attorneys' fees, incurred by the other party
in defending such action. Additionally, if Dealer sues DFS or
institutes any arbitration claim or counterclaim against DFS in which
DFS is the prevailing party, Dealer will pay all costs and expenses
(including attorneys' fees) incurred by DFS in the course of
defending such action or proceeding.
8.8 LIMITATIONS. Any arbitration proceeding must be instituted: (a) with
respect to any Dispute for the collection of any debt owed by either
party to the other, within two (2) years after the date the last
payment was received by the instituting party; and (b) with respect
to any other Dispute, within two (2) years after the date the
incident giving rise thereto occurred, whether or not any damage was
sustained or capable of ascertainment or either party knew of such
incident. Failure to institute an arbitration proceeding within such
period will constitute an absolute bar and waiver to the institution
of any proceeding, whether arbitration or a court proceeding, with
respect to such Dispute.
8.9 SURVIVAL AFTER TERMINATION. The agreement to arbitrate will survive
the termination of this Agreement.
9. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT IS
FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT
TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A
JUDGE WITHOUT A JURY. DEALER AND DFS WAIVE ANY RIGHT TO A JURY TRIAL IN ANY
SUCH PROCEEDING.
10. Governing Law. Dealer acknowledges and agrees that this and all Other
Agreements between Dealer and DFS have been substantially negotiated, and
will be substantially performed, in the state of Colorado. Accordingly,
Dealer agrees that all Disputes will be governed by, and construed in
accordance with, the laws of such state, except to the extent inconsistent
with the provisions of the FAA which shall control and govern all
arbitration proceedings hereunder.
IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of the
date first set forth hereinabove.
THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE
WAIVER PROVISIONS.
Capital Associates Technology Group, Inc.
A Utah Corporation
f/k/a DBL, Inc.
-----------------------------------------
Dealer's Name
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: /s/John Rowntree By: /s/Anthony M. DiPaolo
------------------------------ ------------------------------------
Print Name: John Rowntree Print Name: Anthony M. DiPaolo
------------------------------ ------------------------------------
Title: Credit Manager Title: SVP, CFO and Treasurer
------------------------------ ------------------------------------
By:
------------------------------------
Print Name:
------------------------------------
Title:
------------------------------------
ATTEST:
/s/Philip J. Teigen
------------------------------------
Secretary
Print Name: Philip J. Teigen
------------------------------------
AR000010 8/97 12
<PAGE>
SECRETARY'S CERTIFICATE OF RESOLUTION
I certify that I am the Secretary or Assistant Secretary of the corporation
named below, and that the following completely and accurately sets forth certain
resolutions of the Board of Directors of the corporation adopted at a special
meeting thereof held on due notice (and with shareholder approval, if required
by law), at which meeting there was present a quorum authorized to transact the
business described below, and that the proceedings of the meeting were in
accordance with the certificate of incorporation, charter and by-laws of the
corporation, and that they have not been revoked, annulled or amended in any
manner whatsoever.
Upon motion duly made and seconded, the following resolution was
unanimously adopted after full discussion:
"RESOLVED, That the several officers, directors, and agents of this
corporation, or any one or more of them, are hereby authorized and empowered on
behalf of this corporation: to obtain financing from Deutsche Financial Services
Corporation ("DFS") in such amounts and on such terms as such officers,
directors or agents deem proper; to enter into financing, security, pledge and
other agreements with DFS relating to the terms upon which such financing may be
obtained and security and/or other credit support is to be furnished by this
corporation therefor; from time to time to supplement or amend any such
agreements; execute and deliver any and all assignments and schedules; and from
time to time to pledge, assign, mortgage, grant security interests, and
otherwise transfer, to DFS as collateral security for any obligations of this
corporation to DFS, whenever and however arising, any assets of this
corporation, whether now owned or hereafter acquired; the Board of Directors
hereby ratifying, approving and confirming all that any of said officers,
directors or agents have done or may do with respect to the foregoing."
I do further certify that the following are the names and specimen
signatures of the officers and agents of said corporation so empowered and
authorized, namely:
President: Brent W. Richardson /s/Brent W. Richardson
------------------------- -----------------------------
(Print Name) (Signature)
Vice-President: James D. Walker /s/James D. Walker
------------------------- -----------------------------
(Print Name) (Signature)
Secretary: Philip J. Teigen /s/Philip J. Teigen
------------------------- -----------------------------
(Print Name) (Signature)
SVP, CFO & Treasurer: Anthony M. DiPaolo /s/Anthony M. DiPaolo
------------------------- -----------------------------
(Print Name) (Signature)
Assistant Treasurer: John F. Sandoval /s/John F. Sandoval
------------------------- -----------------------------
(Print Name) (Signature)
IN WITNESS WHEREOF, I have executed and affixed the seal of the
corporation on the date stated below.
Dated: April 21, 1998 /s/Philip J. Teigen
-----------------------------
(Assistant) Secretary
Philip J. Teigen
Capital Associates Technology
Group, Inc.
-----------------------------
(SEAL) Corporate Name
AR000010 8/97 13
<PAGE>
ADDENDUM TO BUSINESS FINANCING AGREEMENT AND
AGREEMENT FOR WHOLESALE FINANCING
This Addendum is made to (i) that certain Business Financing Agreement
executed on the 21st day of April, 1998, between CAPITAL ASSOCIATES TECHNOLOGY
GROUP, INC. ("Dealer") and DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS"), as
amended ("BFA") and (ii) that certain Agreement for Wholesale Financing between
Dealer and DFS dated July 15, 1991, as amended ("AWF").
FOR VALUE RECEIVED, DFS and Dealer agree as follows:
1. Section 3.2 of the BFA is hereby amended to read as follows, and, to
the extent applicable, the following provision shall also amend the AWF
(capitalized terms shall have the same meaning as defined in the BFA unless
otherwise indicated):
"3.2 AVAILABLE CREDIT; PAYDOWN. On receipt of each Schedule, DFS will
credit Dealer with such amount as DFS may deem advisable up to the
remainder of (a) eighty-five percent (85%) of the net amount of
eligible Accounts listed in such Schedule, minus (b) an amount equal to
one hundred percent (100%) of Dealer's outstanding indebtedness under
Dealer's Agreement for Wholesale Financing (the 'AWF') with DFS as in
effect from time to time (the 'Reserve Amount') (the remainder of (a)
minus (b) is referred to herein as the 'Available Credit').
In addition, in the event Dealer's outstanding loans under Dealer's
accounts receivable credit facility as set forth in SECTION 2.1 of this
Agreement at any time exceed Dealer's Available Credit, Dealer will
immediately pay to DFS an amount not less than the difference between
(i) Dealer's outstanding loans under Dealer's accounts receivable
credit facility as set forth in SECTION 2.1 of this Agreement, and (ii)
Dealer's Available Credit.
Furthermore, as an amendment to the AWF, in the event Dealer's Reserve
Amount exceeds at any time (a) eighty-five percent (85%) of the net
amount of Dealer's eligible Accounts, minus (b) Dealer's outstanding
loans under Dealer's accounts receivable credit facility as set forth
in; SECTION 2.1 of this Agreement, Dealer will immediately pay to DFS,
as a reduction of Dealer's total current outstanding indebtedness to
DFS under the AWF, the difference between (i) Dealer's Reserve Amount,
and (ii) (a) eighty-five percent (85%) of the net amount of Dealer's
eligible Accounts minus (b) Dealer's outstanding loans under Dealer's
accounts receivable credit facility as set forth in SECTION 2.1 of this
Agreement. DFS will loan Dealer, on request, such amount so credited or
a part thereof as requested provided that at no time will such
outstanding loans exceed Dealer's maximum accounts receivable credit
facility as set forth in SECTION 2.1 of this Agreement. No loans need
be made by DFS if the Dealer is in Default."
2. The following paragraph is hereby incorporated into the BFA as if
fully and originally set forth therein:
FACILITY FEE. Dealer agrees to pay DFS an annual facility fee in
connection with the Accounts Receivable Facility, payable in advance,
upon the execution of this Agreement, and on each anniversary thereof
through the term of this Agreement, each in an amount equal to one
hundred twenty-five one-thousandths of one percent (0.125%) of the
Accounts Receivable Facility (or such greater amount as shall from time
to time represent the sum of the maximum credit available under this
Agreement.) Once received by DFS, an annual facility fee shall not be
refundable by DFS for any reason; provided, however, that in the event
DFS terminates this Agreement on other than the anniversary date and
Dealer is not then in Default then DFS shall refund to Dealer a portion
of the facility fee equal to the number of whole months remaining in
the current annual term (or renewal term) of this Agreement multiplied
by an amount equal to one twelfth (1/12) of the facility fee paid by
Dealer for that term."
<PAGE>
3. The following paragraph is incorporated into the AWF and BFA as if
fully and originally set forth therein:
"Dealer will at all times maintain:
(a) a Tangible Net Worth and Subordinated Debt in the combined amount
of not less than Nine Hundred Thousand Dollars ($900,000.00);
(b) a ratio of Debt minus Subordinated Debt to Tangible Net Worth and
Subordinated Debt of not more than five and seventy-five one-hundredths
to one (5.75:1); and
(c) a ratio of Current Tangible Assets to current liabilities of not
less than one and twenty one-hundredths to one (1.20:1).
For purposes of this paragraph: (i) 'Tangible Net Worth' means the book
value of Dealer's assets less liabilities, excluding from such assets
all Intangibles; (ii) 'Intangibles' means and includes general
intangibles (as that term is defined in the Uniform Commercial Code);
accounts receivable and advances due from officers, directors,
employees, stockholders and affiliates; leasehold improvements net of
depreciation; licenses; good will; prepaid expenses; escrow deposits;
covenants not to compete; the excess of cost over book value of
acquired assets; franchise fees; organizational costs; finance reserves
held for recourse obligations; capitalized research and development
costs; and such other similar items as DFS may from time to time
determine in DFS' sole discretion; (iii) 'Debt' means all of Dealer's
liabilities and indebtedness for borrowed money of any kind and nature
whatsoever, whether direct or indirect, absolute or contingent, and
including obligations under capitalized leases, guaranties or with
respect to which Dealer has pledged assets to secure performance,
whether or not direct recourse liability has been assumed by Dealer;
(iv) 'Subordinated Debt' means all of Dealer's Debt which is
subordinated to the payment of Dealer's liabilities to DFS by an
agreement in form and substance satisfactory to DFS; and (v) 'Current
Tangible Assets' means Dealer's current assets less, to the extent
otherwise included therein, all Intangibles. The foregoing terms will
be determined in accordance with generally accepted accounting
principles consistently applied, and on a non-consolidated basis."
4. Paragraph 8 of the AWF is hereby restated in its entirety to appear
as it did in the original AWF without giving effect to any Amendment thereto.
All other terms and provisions of the BFA and AWF, to the extent
consistent with the foregoing, are hereby ratified and will remain unchanged and
in full force and effect.
<PAGE>
IN WITNESS WHEREOF, Dealer and DFS have both read this Addendum to the
Business Financing Agreement and Agreement for Wholesale Financing, understand
all the terms and provisions hereof and agree to be bound thereby and subject
thereto as of this day of April 21, 1998.
CAPITAL ASSOCIATES INTERNATIONAL, INC.
ATTEST: By: /s/Anthony M. DiPaolo
---------------------------------
Anthony M. DiPaolo
/s/Philip J. Teigen Title: Sr.V.P. - CFO and Treasurer
- ------------------------------- -------------------------------
Secretary
Philip J. Teigen
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: /s/John Rowntree
----------------------------------
Title: Credit Manager
----------------------------------
<PAGE>
GUARANTY
TO: DEUTSCHE FINANCIAL SERVICES CORPORATION
In consideration of financing provided or to be provided by you to CAPITAL
ASSOCIATES TECHNOLOGY GROUP, INC. ("Dealer"), and for other good and valuable
consideration received, we jointly, severally, unconditionally and absolutely
guaranty to you, from property held separately, jointly or in community, the
immediate payment when due of all current and future liabilities owed by Dealer
to you, whether such liabilities are direct, indirect or owed by Dealer to a
third party and acquired by you ("Liabilities"). We will pay you on demand the
full amount of all sums owed by Dealer to you, together with all costs and
expenses (including, without limitation, reasonable attorneys' fees). We also
indemnify and hold you harmless from and against all (a) losses, costs and
expenses you incur and/or are liable for (including, without limitation,
reasonable attorneys' fees) and (b) claims, actions and demands made by Dealer
or any third party against you, which in any way relate to any relationship or
transaction between you and Dealer.
Our guaranty will not be released, discharged or affected by, and we hereby
irrevocably consent to, any: (a) change in the manner, place, interest rate,
finance or other charges, or terms of payment or performance in any current or
future agreement between you and Dealer, the release, settlement or compromise
of or with any party liable for the payment or performance thereof or the
substitution, release, non-perfection, impairment, sale or other disposition of
any collateral thereunder; (b) change in Dealer's financial condition; (c)
interruption of relations between Dealer and you or us; (d) claim or action by
Dealer against you; and/or (e) increases or decreases in any credit you may
provide to Dealer. We will pay you even if you have not: (i) notified Dealer
that it is in default of the Liabilities, and/or that you intend to accelerate
or have accelerated the payment of all or any part of the Liabilities, or (ii)
exercised any of your rights or remedies against Dealer, any other person or any
current or future collateral. This Guaranty is assignable by you and will inure
to the benefit of your assignee. If Dealer hereafter undergoes any change in its
ownership, identity or organizational structure, this Guaranty will extend to
all current and future obligations which such new or changed legal entity owes
to you.
We irrevocably waive: notice of your acceptance of this Guaranty,
presentment, demand, protest, nonpayment, nonperformance, notice of breach or
default, notice of intent to accelerate and notice of acceleration of any
indebtedness of Dealer, any right of contribution from other guarantors,
dishonor, the amount of indebtedness of Dealer outstanding at any time, the
number and amount of advances made by you to Dealer in reliance on this Guaranty
and any claim or action against Dealer; all other demands and notices required
by law; all rights of offset and counterclaims against you or Dealer; all
defenses to the enforceability of this Guaranty (including, without limitation,
fraudulent inducement). We further waive all defenses based on suretyship or
impairment of collateral, and defenses which the Dealer may assert on the
underlying debt, including but not limited to, failure of consideration, breach
of warranty, fraud, payment, statute of frauds, bankruptcy, lack of legal
capacity, statute of limitations, lender liability, deceptive trade practices,
accord and satisfaction and usury. We also waive all rights to claim, arbitrate
for or sue for any punitive or exemplary damages. In addition, we hereby
irrevocably subordinate to you any and all of our present and future rights and
remedies: (a) of subrogation against Dealer to any of your rights or remedies
against Dealer, (b) of contribution, reimbursement, indemnification and
restoration from Dealer; and (c) to assert any other claim or action against
Dealer directly or indirectly relating to this Guaranty, such subordinations to
last until you have been paid in full for all Liabilities. All of our waivers
and subordinations herein will survive any termination of this Guaranty.
We have made an independent investigation of the financial condition of
Dealer and give this Guaranty based on that investigation and not upon any
US000700 3/96 1
<PAGE>
representation made by you. We have access to current and future Dealer
financial information which enables us to remain continuously informed of
Dealer's financial condition. We represent and warrant to you that we have
received and will receive substantial direct or indirect benefit by making this
Guaranty and incurring the Liabilities. We will provide you with financial
statements on us each year within ninety (90) days after the end of Dealer's
fiscal year end. We warrant and represent to you that all financial statements
and information relating to us or Dealer which have been or may hereafter be
delivered by us or Dealer to you are true and correct and have been and will be
prepared in accordance with generally accepted accounting principles
consistently applied and, with respect to previously delivered statements and
information, there has been no material adverse change in the financial or
business condition of us or Dealer since the submission to you, either as of the
date of delivery, or if different, the date specified therein, and we
acknowledge your reliance thereon. This Guaranty will survive any federal and/or
state bankruptcy or insolvency action involving Dealer. We are solvent and our
execution of this Guaranty will not make us insolvent. If you are required in
any action involving Dealer to return or rescind any payment made to or value
received by you from or for the account of Dealer, this Guaranty will remain in
full force and effect and will be automatically reinstated without any further
action by you and notwithstanding any termination of this Guaranty or your
release of us. Any delay or failure by you, or your successors or assigns, in
exercising any of your rights or remedies hereunder will not waive any such
rights or remedies. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT
OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR
RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT US AND YOU FROM MISUNDERSTANDING
OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED
IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT
BETWEEN US, EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR AS WE MAY LATER AGREE IN
WRITING TO MODIFY IT. Notwithstanding anything herein to the contrary: (a) you
may rely on any facsimile copy, electronic data transmission or electronic data
storage of this Guaranty, any agreement between you and Dealer, any Statement of
Transaction, billing statement, invoice from a vendor, financial statements or
other report, and (b) such facsimile copy, electronic data transmission or
electronic data storage will be deemed an original, and the best evidence
thereof for all purposes, including, without limitation, under this Guaranty or
any other agreement between you and us, and for all evidentiary purposes before
any arbitrator, court or other adjudicatory authority. We may terminate this
Guaranty by a written notice to you, the termination to be effective sixty (60)
days after you receive and acknowledge it, but the termination will not
terminate our obligations hereunder for Liabilities arising prior to the
effective termination date. We have read and understood all terms and provisions
of this Guaranty. We acknowledge receipt of a true copy of this Guaranty and of
all agreements between you and Dealer. The meanings of all terms herein are
equally applicable to both the singular and plural forms of such terms.
BINDING ARBITRATION. Except as otherwise specified below, all actions,
disputes, claims and controversies under common law, statutory law or in equity
of any type or nature whatsoever (including, without limitation, all torts,
whether regarding negligence, breach of fiduciary duty, restraint of trade,
fraud, conversion, duress, interference, wrongful replevin, wrongful
sequestration, fraud in the inducement, usury or any other tort, all contract
actions, whether regarding express or implied terms, such as implied covenants
of good faith, fair dealing, and the commercial reasonableness of any collateral
disposition, or any other contract claim, all claims of deceptive trade
practices or lender liability, and all claims questioning the reasonableness or
lawfulness of any act), whether arising before or after the date of this
Guaranty, and whether directly or indirectly relating to: (a) this Guaranty
and/or any amendments and addenda hereto, or the breach, invalidity or
termination hereof; (b) any previous or subsequent agreement between you and us;
(c) any act committed by you or by any parent company, subsidiary or affiliated
company of you (the "DFS Companies"), or by an employee, agent, officer or
director of a DFS Company, whether or not arising within the scope and course of
employment or other contractual representation of the DFS Companies provided
that such act arises under a relationship, transaction or dealing between you
US000700 3/96 2
<PAGE>
and Dealer or you and us; and/or (d) any other relationship, transaction,
dealing or agreement between you and Dealer or you and us (collectively the
"Disputes"), will be subject to and resolved by binding arbitration.
All arbitration hereunder will be conducted in accordance with The
Commercial Arbitration Rules of The American Arbitration Association ("AAA"). If
the AAA is dissolved, disbanded or becomes subject to any state or federal
bankruptcy or insolvency proceeding, the parties will remain subject to binding
arbitration which will be conducted by a mutually agreeable arbitral forum. The
parties agree that all arbitrator(s) selected will be attorneys with at least
five (5) years secured transactions experience. The arbitrator(s) will decide if
any inconsistency exists between the rules of any applicable arbitral forum and
the arbitration provisions contained herein. If such inconsistency exists, the
arbitration provisions contained herein will control and supersede such rules.
The site of all arbitrations will be in the Division of the Federal Judicial
District in which AAA maintains a regional office that is closest to Dealer.
Discovery permitted in any arbitration proceeding commenced hereunder is
limited as follows: No later than thirty (30) days after the filing of a claim
for arbitration, the parties will exchange detailed statements setting forth the
facts supporting the claim(s) and all defenses to be raised during the
arbitration, and a list of all exhibits and witnesses. No later than twenty-one
(21) days prior to the arbitration hearing, the parties will exchange a final
list of all exhibits and all witnesses, including any designation of any expert
witness(es) together with a summary of their testimony; a copy of all documents
and a detailed description of any property to be introduced at the hearing.
Under no circumstances will the use of interrogatories, requests for admission,
requests for the production of documents or the taking of depositions be
permitted. However, in the event of the designation of any expert witness(es),
the following will occur: (a) all information and documents relied upon by the
expert witness(es) will be delivered to the opposing party, (b) the opposing
party will be permitted to depose the expert witness(es), (c) the opposing party
will be permitted to designate rebuttal expert witness(es), and (d) the
arbitration hearing will be continued to the earliest possible date that enables
the foregoing limited discovery to be accomplished.
The Arbitrator(s) will not have the authority to award exemplary or
punitive damages.
All arbitration proceedings, including testimony or evidence at hearings,
will be kept confidential, although any award or order rendered by the
arbitrator(s) pursuant to the terms of this Guaranty may be entered as a
judgment or order in any state or federal court and may be entered as a judgment
or order within the federal judicial district which includes the residence of
the party against whom such award or order was entered. This Guaranty concerns
transactions involving commerce among the several states. The Federal
Arbitration Act ("FAA") will govern all arbitration(s) and confirmation
proceedings hereunder.
Nothing herein will be construed to prevent your or our use of bankruptcy,
receivership, injunction, repossession, replevin, claim and delivery,
sequestration, seizure, attachment, foreclosure, cation and/or any other
prejudgment or provisional action or remedy relating to any collateral for any
current or future debt owed by either party to the other. Any such action or
remedy will not waive your or our right to compel arbitration of any Dispute.
If either we or you bring any other action for judicial relief with respect
to any Dispute (other than those set forth in the immediately preceding
paragraph), the party bringing such action will be liable for and immediately
pay all of the other party's costs and expenses (including attorneys' fees)
incurred to stay or dismiss such action and remove or refer such Dispute to
arbitration. If either we or you bring or appeal an action to vacate or modify
US000700 3/96 3
<PAGE>
an arbitration award and such party does not prevail, such party will pay all
costs and expenses, including attorneys' fees, incurred by the other party in
defending such action. Additionally, if we sue you or institute any arbitration
claim or counterclaim against you in which you are the prevailing party, we will
pay all costs and expenses (including attorneys' fees) incurred by you in the
course of defending such action or proceeding.
Any arbitration proceeding must be instituted: (a) with respect to any
Dispute for the collection of any debt owed by either party to the other, within
two (2) years after the date the last payment was received by the instituting
party; and (b) with respect to any other Dispute, within two (2) years after the
date the incident giving rise thereto occurred, whether or not any damage was
sustained or capable of ascertainment or either party knew of such incident.
Failure to institute an arbitration proceeding within such period will
constitute an absolute bar and waiver to the institution of any proceeding with
respect to such Dispute. Except as otherwise stated herein, all notices,
arbitration claims, responses, requests and documents will be sufficiently given
or served if mailed or delivered: (i) to us at our address below; (ii) to you at
655 Maryville Centre Drive, St. Louis, Missouri 63141-5832, Attention: General
Counsel; or such other address as the parties may specify from time to time in
writing.
The agreement to arbitrate will survive the termination of this Guaranty.
IF THIS GUARANTY IS FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL
PROCEEDING WITH RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT
JURISDICTION BY A JUDGE WITHOUT A JURY. WE WAIVE ANY RIGHT TO A JURY TRIAL IN
ANY SUCH PROCEEDING.
We acknowledge and agree that this Guaranty and all agreements between
Dealer and you have been substantially negotiated, and will be performed, in the
state of Colorado. Accordingly, we agree that all Disputes will be governed by,
and construed in accordance with, the laws of such state, except to the extent
inconsistent with the provisions of the FAA which will control and govern all
arbitration proceedings hereunder.
THIS GUARANTY CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGES
WAIVER PROVISIONS.
Date: April 21, 1998
--------------------------------
CORPORATE GUARANTOR:
Capital Associates International, Inc.
(Name of Corporate Guarantor)
By: /s/Anthony M. DiPaolo
----------------------------------
[Print Name: Anthony M. DiPaolo ]
----------------------------------
Title: Sr.V.P.- CFO and Treasurer
----------------------------------
By: /s/Philip J. Teigen
----------------------------------
[Print Name: Philip J. Teigen ]
----------------------------------
Title: Secretary
----------------------------------
Address of Guarantor(s):
7175 West Jefferson Avenue, Suite 4000
---------------------------------------
Lakewood, Colorado 80235
---------------------------------------
---------------------------------------
US000700 3/96 4
<PAGE>
SECRETARY'S CERTIFICATE
I hereby certify that I am the Secretary or Assistant Secretary of Capital
Associates International, Inc. ("Guarantor") and that execution of the above
Guaranty was ratified, approved and confirmed by the Shareholders at a meeting,
if necessary, and pursuant to a resolution of the Board of Directors of
Guarantor at a meeting of the Board of Directors duly called, and which is
currently in effect, which resolution was duly presented, seconded and adopted
and reads as follows:
"BE IT RESOLVED that any officer of this corporation is hereby authorized
to execute a guaranty of the obligations of CAPITAL ASSOCIATES TECHNOLOGY GROUP,
INC. ("Dealer") to Deutsche Financial Services Corporation on behalf of the
corporation, which instrument may contain such terms as the above named persons
may see fit including, but not limited to a waiver of notice of the acceptance
of the guaranty; presentment; demand; protest; notices of nonpayment,
nonperformance, dishonor, the amount of indebtedness of Dealer outstanding at
any time, any legal proceedings against Dealer, and any other demands and
notices required by law; and any right of contribution from other guarantors."
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal on this 21st day of April, l998.
(SEAL) Secretary: /s/Philip J. Teigen
---------------------------
Philip J. Teigen
US000700 3/96 5
<PAGE>
ADDENDUM TO GUARANTY
This Addendum is made to that certain Guaranty entered into by and between
CAPITAL ASSOCIATES INTERNATIONAL, INC. ("Guarantor") and DEUTSCHE FINANCIAL
SERVICES CORPORATION ("DFS") on April 21, 1998, as amended ("Guaranty).
FOR VALUE RECEIVED, DFS and Guarantor agree that the following paragraph is
incorporated into the Guaranty as if fully and originally set forth therein:
"Guarantor will at all times maintain a Tangible Net Worth and Subordinated
Debt in the combined amount of not less than Twelve Million Dollars
($12,000,000.00).
For purposes of this paragraph: (i) 'Tangible Net Worth' means the book
value of Guarantor's assets less liabilities, excluding from such assets
all Intangibles; (ii) 'Intangibles' means and includes general intangibles
(as that term is defined in the Uniform Commercial Code); accounts
receivable and advances due from officers, directors, employees,
stockholders and affiliates; leasehold improvements net of depreciation;
licenses; good will; prepaid expenses; escrow deposits; covenants not to
compete; the excess of cost over book value of acquired assets; franchise
fees; organizational costs; finance reserves held for recourse obligations;
capitalized research and development costs; and such other similar items as
DFS may from time to time determine in DFS' sole discretion; (iii) 'Debt'
means all of Guarantor's liabilities and indebtedness for borrowed money of
any kind and nature whatsoever, whether direct or indirect, absolute or
contingent, and including obligations under capitalized leases, guaranties,
or with respect to which Guarantor has pledged assets to secure
performance, whether or not direct recourse liability has been assumed by
Guarantor; and (iv) 'Subordinated Debt' means all of Guarantor's Debt which
is subordinated to the payment of Guarantor's liabilities to DFS by an
agreement in form and substance satisfactory to DFS. The foregoing terms
shall be determined in accordance with generally accepted accounting
principles consistently applied, and, if applicable, on a consolidated
basis."
All other terms and provisions of the Guaranty, to the extent not
inconsistent with the foregoing, are ratified and remain unchanged and in full
force and effect.
1
<PAGE>
IN WITNESS WHEREOF, Guarantor and DFS have executed this Addendum on this
21st day of April 1998.
CAPITAL ASSOCIATES INTERNATIONAL, INC.
ATTEST:
By: /s/Anthony M. DiPaolo
-----------------------------------
/s/Philip J. Teigen Title: Sr.V.P. - CFO and Treasurer
- --------------------------------- -------------------------------
Secretary Anthony M. DiPaolo
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: /s/John Rowntree
-----------------------------------
Titl Credit Manager
-----------------------------------
2
EXHIBIT 10.63
Second Amendment to Loan And Security Agreement
-----------------------------------------------
This Second Amendment to Loan and Security Agreement ("Amendment") entered
into as of May 29, 1998, by and among Capital Associates, Inc. and Capital
Associates International, Inc. (each a Borrower and collectively "Borrowers"),
First Union National Bank, successor by merger to CoreStates Bank, N.A., a
national banking corporation, in its capacity as agent ("Agent") and as lender
and Issuing Bank and each of the lenders listed on the signature pages hereof
and Schedule A attached to the Loan Agreement, in their capacity as lenders
(singly, each is a "Lender" and collectively, all are "Lenders").
Background
----------
A. On or about November 26, 1997, Borrowers, Agent and Lenders entered
into a certain Loan and Security Agreement, as amended by that certain First
Amendment to Loan and Security Agreement dated as of April 7, 1998
(collectively, the "Loan Agreement"), pursuant to which Lenders agreed to make
advances to Borrowers up to a maximum aggregate amount of $60,000,000, evidenced
by Borrowers' delivery of certain Notes to Lenders.
B. The Acquisition Term Loan (as defined in the Loan Agreement) has not
been advanced to Borrowers due to a change in circumstances which has resulted
in the inability of Borrowers to satisfy certain conditions precedent to the
making of such Acquisition Term Loan.
C. Borrowers have requested that Lenders and Agent amend the Loan
Agreement to increase the Term Loan by the anticipated amount of the Acquisition
Term Loan pursuant to the terms hereof and Agent and Lenders have agreed to do
so subject to the terms hereof.
D. All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Loan Agreement.
Now, Therefore, with the foregoing background incorporated by reference,
the parties hereto, intending to be legally bound, hereby agree as follows:
1. Amendment To Loan Agreement:
a. Due to a change in circumstances which has resulted in certain
conditions precedent to the making of the Acquisition Term Loan not being able
to be satisfied, Borrowers have requested, and Agent and Lenders have consented,
that the amount of the Term Loan be increased by $1,200,000 (the anticipated
amount of the Acquisition Term Loan) and that the repayment terms of the Term
Loan be modified to reflect a revised amortization. Upon effectiveness of this
Amendment, each Lender shall advance to Borrowers an amount equal to its Pro
Rata Percentage of the $1,200,000 increase in the Term Loan such that the
aggregate principal balance, as of the effective date of this Amendment, of the
Term Loan shall be $3,825,000.
<PAGE>
The Term Loan shall be repaid in successive quarterly
installments in accordance with the terms of the Amended and Restated Term Note
(as defined below). Each quarterly payment under the Term Loan shall be due and
payable on the last Business Day of each fiscal quarter, commencing on the last
Business Day of May, 1998. The Term Loan shall be repaid in full on the earlier
of the Maturity Date or the last Business Day of November, 1999 and shall be
secured by all of the Collateral. Borrowers shall execute and deliver their
promissory note to each Lender for the total principal amount of such Lender's
Pro Rata Percentage of the Term Loan (collectively as may be amended, modified
or replaced from time to time, the "Amended and Restated Term Loan Notes"). The
Amended and Restated Term Loan Notes shall evidence Borrowers' joint and
several, absolute and unconditional obligation to repay such Lender for its Pro
Rata Percentage of the Term Loan made by such Lender under the Credit Facility,
with interest as herein and therein provided. The Term Loan shall be deemed
evidenced by the Amended and Restated Term Loan Notes, which are deemed
incorporated herein by reference and made a part hereof.
b. All references in the Loan Documents to "Acquisition Term
Note(s)" and "Acquisition Term Loan" shall be deemed to refer, unless context
indicates otherwise, to the "Amended and Restated Term Loan Note(s)" and the
"Term Loan" respectively. Accordingly, without limitation, Section 2.7(d)(ii) of
the Loan Agreement shall remain in full force and effect, provided however, that
all payments owing under such subsection shall be applied to the Term Loan.
c. All references in the Loan Documents to "Term Loan Note(s)"
shall be deemed to refer to "Amended and Restated Term Note(s)."
d. Connecting Point has changed its name and is now known as
Capital Associates Technology Group, Inc. Therefore, all references in the Loan
Documents to Connecting Point shall be deemed to also refer to Capital
Associates Technology Group, Inc. For the purpose of this Amendment, Capital
Associates Technology Group, Inc. may also be referred to as "CATG ".
e. Section 1.1 of the Loan Agreement is hereby amended by
deleting the definition of "Sureties" in its entirety and replacing it with the
following:
SURETIES - Collectively, CAI Equipment Leasing II Corp., CAI Equipment
Leasing III Corp., CAI Equipment Leasing IV Corp., CAI Partners
Management Company, Capital Equipment Corporation, CAI Equipment
Leasing V Corp., CAI Equipment Leasing VI Corp., CAI Leasing Canada,
Ltd., CAI-Mexico, Whitewood Equipment Corporation f/k/a Whitewood
Credit Corporation, CAI Securities Corporation and CAI Lease
Securitization I Corp., and Capital Associates Technology Group, Inc.
2
<PAGE>
f. Section 7.1 of the Loan Agreement is hereby amended by
inserting a new Subsection 7.1(c) as follows:
7.1(c) Notwithstanding anything to the contrary contained herein, under
no circumstances shall either Borrower or any Surety enter into any
merger, consolidation, reorganization or recapitalization with Capital
Associates Technology Group, Inc."
g. Section 7.2 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
7.2 LIENS AND ENCUMBRANCES: Neither Borrower nor any Surety shall:
(i) execute a negative pledge agreement with any Person covering any of
the Collateral, or (ii) cause or permit or agree or consent to cause or
permit in the future (upon the happening of a contingency or otherwise)
the Collateral, whether now owned or hereafter acquired, to be subject
to a Lien or be subject to any claim except for Permitted Liens. As
used herein, "Permitted Liens" means (A) Liens securing taxes,
assessments or governmental charges or levies or the claims or demands
of mate rialmen, mechanics, carriers, warehousemen, landlords, and
other like persons, provided the payment thereof is not at the time
required by Section 6.1, (B) Liens on Securitization Certificates
securing only the corresponding Securitization Residual Financing, (C)
such Liens as are described on Exhibit 7.2 attached hereto and made a
part hereof, and (D) Liens granted in favor of Deutsche Financial
Services Corporation with respect to certain assets of Capital
Associates Technology Group, Inc."
h. Section 7.3 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
7.3 NEGATIVE PLEDGE: Neither Borrower shall pledge, grant or permit any
Lien to exist on the common stock of its Subsidiaries except with
respect to the Liens granted hereunder to Agent for the benefit of
Lenders and with respect to subordinated Liens on the stock of Capital
Associates Technology Group, Inc. granted to Connecting Point Sellers.
i. Section 7.5 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
7.5 GUARANTEES: Except with respect to the obligations of Borrowers
described on Exhibit 5.10 and with respect to Borrowers' subordinated
guaranty of the Deutsche Financial Services Corporation credit facility
established for the benefit of Capital Associates Technology Group,
Inc.
3
<PAGE>
and, excepting the endorsement in the ordinary course of business of
negotiable instruments for deposit or collection, neither Borrower
shall become or be liable, directly or indirectly, primary or
secondary, matured or contingent, in any manner, whether as guarantor,
surety, accommodation maker, or otherwise, for the existing or future
indebtedness of any kind of any Person.
j. Section 7.6(b) of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
(b) Neither Borrower shall borrow money from, or incur indebtedness to,
any Person other than in the form of Nonrecourse Debt or pursuant to a
Securitization Residual Financing or pursuant to an anticipated public
subordinated debt offering in a maximum amount not to exceed Twenty-
Four Million ($24,000,000.00) Dollars through Legg Mason Wood Walker,
Inc. pursuant to terms and conditions satisfactory to Agent and Lenders
in their sole discretion.
2. Before each Lender shall advance to Borrowers an amount equal to its
Pro Rata Percentage of the $1,200,000 increase in the Term Loan, Borrowers will
deliver to Agent the following (dated and signed) in form and substance
satisfactory to Agent and its counsel:
a. A surety agreement pursuant to which CATG agrees to guaranty,
as surety, all of the Obligations under the Loan Agreement ("CATG Surety
Agreement");
b. A security agreement pursuant to which CATG shall grant to
Agent for the benefit of Lenders and Issuing Bank, a security interest in all
its then-owned and thereafter acquired assets which Lien shall be a first Lien
except with respect to a first Lien granted in favor of Deutsche Financial
Services Corporation with respect to certain assets ("CATG Security Agreement").
The Lien shall secure all of CATG's obligations under the CATG Surety Agreement
and the CATG Security Agreement shall also contain, inter alia, an agreement
that no other party (other than Deutsche Financial Services Corporation) shall
be granted a Lien on any of CATG's assets;
c. A subordination agreement in favor of Agent for the benefit of
Lenders from the Connecting Point Sellers subordinating their interest in CATG
stock to the first Lien granted in favor of Agent for the benefit of Lenders;
d. A subordination agreement from Deutsche Financial Services
Corporation with respect to the guaranty by Borrowers, or either of them, of the
indebtedness owed by CATG to Deutsche Financial Services Corporation;
e. An Amended and Restated Term Note in favor of each Lender
properly executed;
4
<PAGE>
f. Certified copies of (A) Resolution of CATG's Board of
Directors authorizing execution and delivery of the CATG Surety Agreement and
the CATG Security Agreement and the performance by it of all transactions
contemplated thereby, (B) CATG's Bylaws and Articles of Incorporation, and (C)
an Incumbency Certificate of CATG;
g. Good Standing Certificate of CATG issued by the Secretary of
State or other appropriate official of CATG's jurisdiction of incorporation and
each jurisdiction where the conduct of CATG's business activities or the
ownership of its Properties necessitates qualification;
h. The favorable written opinion of Borrowers' counsel in
connection with the CATG acquisition opining that the acquisition has been
consummated and the enforceability and authorization of the Loan Documents to
which it is a party;
i. The fully executed Acquisition Agreement with all completed
schedules;
j. An Officer's Certificate from the Borrowers certifying
compliance with the terms and conditions of the Loan Agreement, that no material
adverse change has occurred since November 26, 1997, that no Event of Default or
Unmatured Event of Default has occurred under the Loan Agreement and that all of
the representations and warranties contained in the Loan Agreement remain true
and correct in all material respects;
k. Evidence that CATG has insurance coverage as is otherwise
required for Borrowers as set forth in Section 6.2 of the Loan Agreement and a
certificate naming Agent, for the benefit of Lenders, as Lender Loss Payee;
l. UCC, state and federal tax lien and judgment searches
against CATG and any and all necessary UCC-3 Termination Statements
corresponding to existing filings against CATG;
m. A collateral assignment of rights and representations under
the Acquisition Agreement;
n. A certified copy of the subordinated promissory note issued in
favor of the Connecting Point Sellers, as sellers under the Acquisition
Agreement and the Subordination Agreement from the Connecting Point Sellers; and
o. Evidence that the transactions contemplated by Acquisition
Agreement have been consummated.
5
<PAGE>
3. Each Surety, parties to a certain Surety Agreement dated as of
November 27, 1997 in favor of Agent for the benefit of the Lenders, by execution
hereof in their capacity as Sureties, hereby consent to the amendments set forth
in this Amendment, and acknowledge that the Surety Agreement remains in full
force and effect and that each remain, jointly and severally liable for
Obligations of Borrowers to Lenders.
4 a. Borrowers represent and warrant that as of the date hereof no
Event of Default or Unmatured Event of Default has occurred or is existing under
the Loan Documents.
b. The execution and delivery by each Borrower of this Amendment
and performance by it of the transactions herein contemplated (i) are and will
be within its powers, (ii) have been authorized by all necessary corporate
action, and (iii) are not and will not be in contravention of any order of any
court or other agency of government, of law or any other indenture, agreement or
undertaking to which such Borrower is a party or by which the Property of such
Borrower is bound, or be in conflict with, result in a breach of or constitute
(with due notice and/or lapse of time) a default under any such indenture,
agreement or undertaking or result in the imposition of any lien, charge or
encumbrance of any nature on any of the properties of such Borrower.
c. This Amendment, each Amended and Restated Term Note and each
other agreement, instrument or document executed and/or delivered in connection
herewith, shall be valid, binding and enforceable in accordance with its
respective terms.
5. This Amendment shall be governed by, construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
6. Except as expressly provided herein, all terms and conditions of the
Loan Documents remain in full force and effect, unless such terms or conditions
are no longer applicable by their terms. To the extent the provisions of this
Amendment are expressly inconsistent with the provisions of the Loan Documents,
the provisions of this Amendment shall control.
7. This Amendment may be executed in any number of counterparts, each
of which when so executed shall be deemed to be an original, and such
counterparts together shall constitute one and the same respective agreement.
===============================
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered as of the day and year first above written.
BORROWERS:
Capital Associates, Inc.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal) Secretary
Fed. Tax ID No. 84-1055327
Capital Associates International, Inc.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal) Secretary
Fed. Tax ID No. 84-0724694
AGENT:
First Union National Bank, Successor by
Merger to CoreStates Bank, N.A.
By: /s/Hugh W. Connelly
-------------------------------------
Title: Vice President
7
<PAGE>
LENDERS:
First Union National Bank, Successor by
Merger to CoreStates Bank, N.A., as Lender
and Issuing Bank
By: /s/Hugh W. Connelly
-------------------------------------
Title: Vice President
Norwest Bank Colorado, N.A.
By: /s/Carol A. Ward
-------------------------------------
Title: Vice President
BankBoston, N.A.
By: /s/Dierdre M. Holland
-------------------------------------
Title: Vice President
European American Bank
By: /s/Christopher M. Czaja
-------------------------------------
Title: Vice President
U.S. Bank National Association, f/k/a
Colorado National Bank
By: /s/Ralph P. Atkinson
-------------------------------------
Title: Vice President
8
<PAGE>
SURETIES:
CAI Equipment Leasing II Corp.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1133179
CAI Equipment Leasing III Corp.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1184608
CAI Equipment Leasing IV Corp.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1248788
CAI Equipment Leasing V Corp.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1348277
9
<PAGE>
CAI Partners Management Company
By: /s/Anthony M. DiPaolo
------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1066243
Capital Equipment Corporation
By: /s/Anthony M. DiPaolo
------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-0913965
CAI Equipment Leasing VI Corp.
By: /s/Anthony M. DiPaolo
------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1435874
CAI Lease Securitization I Corp.
By: /s/Anthony M. DiPaolo
------------------------------------
Title: President
Attest: /s/Philip J. Teigen
------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1250490
10
<PAGE>
CAI Leasing Canada, Ltd.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1150068
Capital Associates International de Mexico
S. de R.L. de C.V.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: N/A
Whitewood Equipment Corporation, f/k/a
Whitewood Credit Corporation
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 84-1032253
CAI Securities Corporation
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 68-0002657
11
<PAGE>
Capital Associates Technology Group, Inc.
By: /s/Anthony M. DiPaolo
-------------------------------------
Title: Senior Vice President
Attest: /s/Philip J. Teigen
-------------------------------------
(Corporate Seal)
Fed. Tax ID No.: 87-0395770
12
Exhibit 21
LIST OF SUBSIDIARIES
OF
CAPITAL ASSOCIATES, INC.
NAME PLACE OF INCORPORATION
- ---- ----------------------
Capital Associates International, Inc. Colorado
CAI Equipment Leasing I Corporation Colorado
CAI Equipment Leasing II Corporation Colorado
CAI Equipment Leasing III Corporation Colorado
CAI Equipment Leasing IV Corporation Colorado
CAI Equipment Leasing V Corporation Colorado
CAI Equipment Leasing VI Corporation Colorado
CAI Leasing Canada, Limited Alberta, Canada
CAI Partners Management Company Colorado
CAI Securities Corporation California
CAI - UBK Equipment Corporation Colorado
Capital Equipment Corporation Colorado
Whitewood Credit Corporation Colorado
CAI Lease Securitization-I Corporation Delaware
Capital Associates International de Mexico s. de R.L. de C.V. Mexico
Capital Associates Technology Group, Inc. Utah
CAI-RBE Equipment Corp. Colorado
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
THE BOARD OF DIRECTORS
CAPITAL ASSOCIATES, INC.:
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 33-59570 and No. 33- 68514) and Form S-3 (No. 33-65059) of Capital
Associates, Inc. of our reports dated July 14, 1998, relating to the
consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of
May 31, 1998 and 1997, 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, 1998, and the related schedule, which reports
appear in the May 31, 1998 Annual Report on Form 10-K of Capital Associates,
Inc.
KPMG Peat Marwick LLP
/s/KPMG Peat Marwick LLP
-------------------------
Denver, Colorado
July 22, 1998
<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-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 17,684
<SECURITIES> 0
<RECEIVABLES> 5,745
<ALLOWANCES> 90
<INVENTORY> 1,141
<CURRENT-ASSETS> 0
<PP&E> 104,825
<DEPRECIATION> 0
<TOTAL-ASSETS> 214,993
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 25,237
<TOTAL-LIABILITY-AND-EQUITY> 214,993
<SALES> 248,258
<TOTAL-REVENUES> 281,074
<CGS> 240,702
<TOTAL-COSTS> 279,554
<OTHER-EXPENSES> 11,830
<LOSS-PROVISION> 705
<INTEREST-EXPENSE> 8,980
<INCOME-PRETAX> 1,520
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,520
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
</TABLE>
