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, 1999
[ ] 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.
The approximate market value of stock held by non-affiliates was $3,810,000
based upon 1,270,000 shares held by such persons and the closing price on
September 8, 1999 of $3.00. The number of shares outstanding of the Registrant's
$.008 par value common stock at September 8, 1999 was 5,271,626.
Page 1 of 36 Pages Exhibit Index Begins on Page 33
<PAGE>
PART I
Item 1. Business
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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 1999 and 1998, the Company originated approximately $576 million of
equipment leases. The principal market for the Company's activities is the
United States.
Leasing Activities
- ------------------
The Company's lease origination strategy is transaction driven. With each lease
origination opportunity, the Company evaluates the prospective lessee's
creditworthiness and 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 approximately 538 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.
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 and (iii) originating leases on a wholesale basis (i.e.,
acquiring leases from other lessors). 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 (private
investment programs) and (z) funding lease transactions for its own portfolio
through securitization or permanent non-recourse financing.
The Company diversifies lease originations 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, 1999, 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
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<PAGE>
Item 1. Business, continued
--------
Leasing Activities, continued
- ------------------
procurement of new PC's and networking equipment and software, and maintenance
of IT equipment. In June 1999, CATG completed the purchase of substantially all
the assets of Sento Consulting Corporation ("Sento") for $50,000 cash and
$350,000 of contingent consideration based on the level of revenues during the
next thirty-six months. The acquisition of Sento expands CATG's product line to
include enterprise computing products, including high-end servers and data
storage devices. CATG provides the Company with enhanced equipment expertise and
evaluation services for our customers and the capability of acquiring new IT
equipment at favorable prices.
The Company's principal sources of funding for its leasing transactions include
(i) a $61.2 million warehouse facility ("Warehouse Facility"), (ii) a $6.9
million working capital facility ("Working Capital Facility"), (iii) permanent
non-recourse financing, including securitization of receivables, (iv) sales of
equipment leases to third parties or lease investment programs it manages and
(v) 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 the Company 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.
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 through
securitization funding or the discounting of lease rentals, also referred to as
discounted lease rentals. 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, securitization proceeds, or internally generated funds. The Company
recovers its equity investment from renewal rents received and/or sales proceeds
realized from the equipment after payment in full of the related permanent
non-recourse debt or securitization funding. The Company is pursuing additional
lease investment programs and is renewing its existing securitization program to
finance its leases.
Of the equipment leases originated or acquired by the Company in fiscal years
1999 and 1998, the Company retained approximately 41% and 28%, sold 19% and 29%
to private leasing investment programs, sold 5% and 15% to the PIFs, and
syndicated 35% and 28% to unaffiliated third parties, respectively. Equipment
leases retained or serviced by the Company increased 13% to $936 million as of
May 31, 1999 from $828 million in June 1998. The Company serviced $176 million
and $118 million in assets (based on original equipment cost) for private
leasing investment programs in fiscal years 1999 and 1998, respectively. As of
May 31, 1999, the Company had awards for future business amounting to
approximately $65.1 million, as compared to $24.9 million at May 31, 1998. On
average approximately 93% of the Company's awarded business was closed for
fiscal year 1999.
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 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, 1999, approximately 98% of the equipment owned by the
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<PAGE>
Item 1. Business, continued
--------
Underwriting Standards, continued
- ----------------------
Company was leased to companies that meet the above criteria. As of May 31,
1999, 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 lease underwriting
standards. In the case of the PIFs, the underwriting standards are similar to
those of the Company. The Company's historical losses associated with leases
originated since 1991, are approximately 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 factors regarding the equipment and
the lessee, including, for example, (i) the equipment's remarketability, (ii)
upgrade potential, and (iii) probability that the equipment will continue to be
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. Charge-offs are recorded upon the termination or remarketing
of the underlying assets. As such, charge-offs will primarily occur subsequent
to the recording of the allowances for losses.
The Company's Transaction Review Committee ("TRC"), which is comprised of
members of senior management, (1) reviews and approves all material aspects of
lease transactions, including credit ratings assigned to lessees and
certain pricing and residual value assumptions; (2) advises on lease
documentation requirements and deal structuring guidelines; (3) monitors asset
quality 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.
Private 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 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 $158.7 million, $179.4 million and $131.6 million during fiscal
years 1999, 1998 and 1997, respectively.
The Company currently sponsors or co-sponsors three PIFs. The Company sells
certain equipment leases it originates to these PIFs. Revenue from the sale of
leased equipment to the PIFs was $19.0 million, $48.6 million and $67.0 million
during fiscal years 1999, 1998 and 1997, 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 purchased 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 was 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.
4 of 36
<PAGE>
Item 1. Business, continued
--------
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 to a third party, or 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 release the equipment
to a different end-user/lessee, or sell the off-lease equipment to brokers or
dealers. Revenue from remarketing activities was approximately $3.0 million,
$5.7 million, and $5.7 million during fiscal years 1999, 1998 and 1997,
respectively.
The Company maximizes the remarketing proceeds from, and minimizes the
warehousing costs for, off-lease equipment by (1) remarketing IT equipment
through its Name Brand Computer Outlet subsidiary ("NBCO"), (2) employing
qualified and experienced remarketing personnel, (3) developing and acquiring
equipment remarketing expertise in order to maximize the profit from sales of
off-lease equipment, (4) minimizing the amount of off-lease equipment stored at
independently operated equipment warehouses, (5) operating its own storage
facilities to further reduce warehousing costs for off-lease material handling
and information technology equipment, (6) eliminating scrap inventory, and (7)
conducting on-site equipment inspections for on-lease equipment. 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.
NBCO was established in December of 1998 as a subsidiary of Capital Associates,
Inc. for the purpose of remarketing commercial quality used personal computers,
monitors and printers. NBCO's operation consists of a distribution facility
("the factory"), three retail stores located in the Denver metropolitan area and
one retail store located near Toledo, Ohio. The NBCO factory is a 50,000 square
foot facility located in Aurora, Colorado and is a full service personal
computer equipment receiving, reconditioning and upgrade center. NBCO also
remarkets computers through its website and employs a sales staff who target
small businesses, school districts, governmental operations and other large
users.
NBCO also acquires used personal computers, monitors and printers from a variety
of sources, including end-users and other lessors. The equipment is sold in
quantity to third parties or to consumers through NBCO's retail facilities.
These activities are referred to as Equipment Brokerage Sales.
Competition
- -----------
The Company competes mainly on the basis of its lease rates, terms offered in
its leasing transactions, reliability in meeting its commitments and customer
service. Lease rates are determined primarily by the Company's funding costs and
equipment residuals resulting from its remarketing capability. The Company's
continued ability to compete effectively may be materially affected by the
availability of funding options and of financing and the costs of such
financing. The Company competes with a large number of equipment lessors, many
of which have greater financial resources, greater economies of scale and lower
costs of capital than the Company.
Employees
- ---------
The Company had approximately 195 employees as of May 31, 1999 versus
approximately 170 employees as of May 31, 1998, none of whom were represented by
a labor union. The Company believes that its employee relations are good.
5 of 36
<PAGE>
Item 2. Properties
----------
The Company leases office facilities (approximately 25,000 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, four retail stores, 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.
Item 3. Legal Proceedings
-----------------
The Company is involved in the following legal proceedings:
a. Bank One Texas, N.A. v. Capital Associates International, Inc. and
Capital Associates, Inc., United States District Court for the
Northern District of Texas, Dallas Division, Civil Action No.
3-99CV0697-G
On March 2, 1999, Bank One Texas, N.A. ("Bank One") filed a complaint
against the Company seeking recovery from the Company of $1,324,715.02
together with interest at the lesser of 18% per annum or the maximum
amount permitted by law from December 30, 1991. To date, Bank One has
not served the complaint on the Company. Bank One is alleging in the
lawsuit that the Company breached the terms of its Purchase Agreement,
dated December 30, 1991, with Bank One pursuant to which Bank One
agreed to purchase from the Company, for an initial payment of
$1,324,715.02 (the "Bank One Payment"), certain furniture, fixtures
and equipment (the "FF&E") previously leased to MBank Dallas, N.A.
("MBank"). MBank defaulted on the lease in 1989 and was eventually
placed in receivership. Bank One filed a lawsuit over the ownership of
the FF&E and certain collateral for MBank's lease obligations (the
"MBank Collateral") in January 1992 (the "MBank Litigation"). See the
Company's Annual Reports on Form 10-K for the fiscal years ended May
31, 1994 and 1995, for the history of the MBank Litigation. In August
1995, all of the parties to the MBank Litigation, except Bank One,
settled their claims with respect to the MBank Collateral. The Company
received approximately $10.8 million as part of the settlement. Later
in August 1995, the Company, pursuant to the terms of the settlement
agreement, delivered $2.2 million to Bank One in repayment of the Bank
One Payment together with interest thereon. Bank One rejected the
tender and returned the $2.2 million to the Company while purporting
to reserve all rights to make a claim to such funds in the future. In
August 1998, the trial court held that Bank One was the owner of the
FF&E. Now, a year after the trial court's decision and more than four
years since it rejected the Company's tender, Bank One is seeking
recovery of the Bank One Payment plus interest thereon since December
30, 1991.
If Bank One pursues this lawsuit, the Company intends to (1) defend
vigorously the claims asserted against it by Bank One and (2) assert
vigorously all counterclaims it may have against Bank One. The Company
believes that, at very least, it has strong defenses to the running of
any additional interest on the Bank One Payment since Bank One
rejected the Company's tender in August 1995. The Company also
believes it may have credible defenses to the repayment of any portion
of the Bank One Payment or any of the interest thereon based on Bank
One's conduct over the past eight years.
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, or the matter noted above, 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, 1999.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
-----------------------------------------------------------------------
Matters
-------
The Company's common stock trades on the Nasdaq Stock Market ("NASDAQ") under
the symbol: CAII.
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.
2000 HIGH LOW
---- ---- ---
First Quarter (through September 8, 1999) 3 1/2 2 1/8
1999 HIGH LOW
---- ---- ---
First Quarter 5 3/8 2 1/2
Second Quarter 4 1/2 3 1/8
Third Quarter 5 3/4 2 3/4
Fourth Quarter 4 1/2 2 7/8
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
On September 8, 1999, the date on which trading activity last occurred, the
closing sales price of the Company's common stock was $3.00. On September 8,
1999, there were approximately 158 shareholders of record and at least 872
beneficial shareholders of the Company's outstanding common stock.
No dividends were paid during the periods indicated. The Company does not
anticipate that it will pay cash dividends on its common stock in the
foreseeable future. See Note 9 of 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.
On September 1, 1999, NASDAQ informed the Company that it was not in compliance
with the minimum requirements for continued listing of its common stock on the
Nasdaq National Market.
By letter dated August 31, 1999, NASDAQ informed the Company that it was not in
compliance with the $5 million market value of public float requirement for
continued listing of its Common Stock on the NASDAQ National Market (the "MVPF
Requirement"). As reported herein, the total number of shares of Common Stock
held by non-affiliates is 1,270,000 (24% of the outstanding shares), having a
market value of $3,810,000. The letter states that, unless it regains compliance
with the MVPF Requirement by November 30, 1999, the Company's Common Stock will
be de-listed at the opening of business on December 3, 1999. The letter goes on
to state that the Company may apply for listing on the NASDAQ SmallCap Market if
it satisfies the requirements for continued listing thereon. The Company does
not believe that it will be able to regain compliance with the MVPF Requirement
on or before November 30, 1999. The Company is currently reviewing its
alternatives, i.e., submitting an application for listing on the SmallCap
Market, listing its Common Stock on the NASDAQ Over-The-Counter Bulletin Board,
etc. The Company intends to timely file a Current Report on Form 8-K announcing
any change in the listing of its Common Stock.
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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 to the financial
statements appearing elsewhere.
Income Statement Data
- ---------------------
(in thousands, except per share and number of shares data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Equipment sales $ 193,914 $ 248,258 $ 204,545 $ 166,242 $ 81,370
Leasing 42,614 25,101 14,420 10,212 7,672
Interest 2,219 3,487 4,828 6,943 11,386
Other 4,623 4,228 3,741 3,284 4,516
--------- ---------- ---------- ---------- ----------
243,370 281,074 227,534 186,681 104,944
--------- ---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 187,733 240,702 200,018 161,797 70,866
Leasing 27,260 17,337 8,928 5,466 3,893
Operating and other expenses 15,513 11,830 9,568 8,332 11,603
Provision for losses 555 705 365 430 2,940
Interest - non-recourse debt 8,503 6,123 6,012 7,705 12,548
Interest - recourse debt 3,409 2,857 1,900 2,145 1,618
--------- ---------- ---------- ---------- ----------
242,973 279,554 226,791 185,875 103,468
--------- ---------- ---------- ---------- ----------
Income before income taxes 397 1,520 743 806 1,476
Income tax expense - - 10 202 360
--------- ---------- ---------- ---------- ----------
Net income $ 397 $ 1,520 $ 733 $ 604 $ 1,116
========= ========== ========== ========== ==========
Earnings per common share:
Basic $ .08 $ .30 $ .15 $ .12 $ .22
Diluted $ .07 $ .28 $ .14 $ .12 $ .21
Weighted average number of
common shares outstanding:
Basic 5,173,000 5,117,000 5,004,000 4,987,000 5,052,000
Diluted 5,399,000 5,449,000 5,403,000 5,186,000 5,325,000
Balance Sheet Data
(in thousands) May 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- ---------- ----------
Total assets $ 246,741 $ 214,093 $ 146,517 $ 127,511 $ 158,956
Recourse debt 50,060 49,088 20,712 17,538 24,520
Discounted lease rentals 125,639 104,311 61,466 63,749 98,216
Stockholders' equity 25,615 25,186 23,501 22,881 22,490
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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I. Results of Operations
---------------------
During fiscal years 1999, 1998, 1997, 1996, and 1995, the Company reported
net income of $397,000, $1,520,000, $733,000, $604,000, and $1,116,000,
respectively. Net income for 1999 and 1998 includes the results for its
CATG subsidiary subsequent to its acquisition effective November 1, 1997.
Excluding the results for CATG, the Company had net income of $1,439,000
and $1,799,000 for 1999 and 1998, respectively. The Company's profits
during these five years were achieved primarily as a result of expanding
and improving its lease originations, asset management, remarketing and
leased equipment sales activities and the sale of other corporate assets
and the settlement of litigation.
During fiscal year 1999 the Company:
* generated profits for the seventh consecutive year
* renewed it's senior secured debt facility with an increase in the
commitment amount under the Warehouse Credit Facility and the Working
Capital Facility to $61,250,000 and $6,900,000, respectively
* continued to invest in its sales force through an extensive training
program and personnel expansion
* originated leases exceeding $266 million
* closed a new $50 million lease securitization facility
* added two new private investment programs
* established a new subsidiary to remarket off-lease commercial quality
used personal computers, monitors and printers
* increased net investment in direct finance leases and leased
equipment, net by $56 million.
Significant factors which may impact the Company's profitability in the
future include the amount of capital available to the Company, it's success
in developing and retaining the field sales force, the cost of capital and
the ability to increase lease origination levels while achieving
profitability targets. Several factors cause operating results to
fluctuate, including (i) the level of fee income obtained from the sale of
leases in excess of lease equipment cost, (ii) the seasonality of lease
originations, (iii) the volume of leases maturing in a particular period
and the resulting gain on remarketing, and (iv) variations in the relative
percentages of the Company's leases originated and held which are
classified as DFLs or OLs. The Company varies the volume of originated
leases held relative to leases sold to private investors when and as the
Company determines that it would be in its best interests, taking into
account cash flow needs, profit opportunities, portfolio concentration,
residual risk and its fiduciary duty to originate leases for its PIFs.
Leasing is an alternative to financing equipment with debt. Therefore, the
ultimate profitability of the Company's leasing transactions is dependent,
in part, on the general level of interest rates. Lease rates tend to rise
and to fall with interest rates, although lease rate movements generally
lag interest rate movements.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
The Company originates leases with the intention of either selling the
lease to PIFs or private investors or holding the lease through maturity.
Leases originated and held for sale are referred to as "warehouse leases",
or "warehouse portfolio". Leases the Company intends to hold to maturity
are referred to as "Company-owned leases or "Company-owned portfolio". The
Company generally holds warehouse leases for one to six months before sale
to private investors. Leases held to maturity are generally more profitable
than leases sold to private investors, i.e., aggregate leasing margin
earned over the life of the lease is generally greater than the fee earned
from sale to private investors (which includes rents retained in excess of
interest expense during the holding period). However, the majority of the
Company's leases are ultimately sold to PIFs or private investors because
(i) the Company lacks the capital resources to hold until maturity all
leases it originates and (ii) in order to achieve profitable results of
operations, since revenue from a sale of a lease to a private investor is
recorded in the period of sale while leasing revenue associated with a
Company-owned lease is recorded over time based on the underlying lease
term. Many sales to private investors are structured to enable the Company
to share in some of the additional profit associated with holding a lease
to maturity. The Company's strategy is to retain an interest in the
residual value of leases sold to private investors where it believes
additional profit may be available through remarketing upon lease maturity.
The Company's retained interest in leases it has sold to private investors
is reflected in the accompanying Consolidated Balance Sheets as "Residual
value, net, arising from equipment under lease sold to private investors",
(also referred to as "retained residuals"). Presented below is a schedule
showing new lease originations volume and placement of new lease
originations by fiscal year (in thousands).
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Placement:
Equipment under lease sold to PIFs $ 14,000 $ 47,000 $ 63,000
Equipment under lease sold to private investors 144,000 176,000 101,000
Leases added to the Company's lease portfolio (a significant portion
of which will be/were sold during the subsequent fiscal years) 108,000 87,000 67,000
--------- --------- ---------
Total lease origination volume $ 266,000 $ 310,000 $ 231,000
========= ========= =========
</TABLE>
The Company continues to evaluate additional sources of capital which will
provide the liquidity necessary to add leases to its own portfolio. The
goal of such financing is to 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. Additionally, many such leases have been
sold to the PIFs because, as the 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. Consequently, the Company has limited 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. Should the Company be successful in identifying and in
closing new sources of capital (for which no assurance can be given), it
intends to further grow its own lease portfolio.
10 of 36
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
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>
YEARS ENDED MAY 31, YEARS ENDED MAY 31,
------------------------- -----------------------
CAI CONSOLIDATED 1999 1998 CHANGE 1998 1997 CHANGE
---------------- ---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 6,181 $ 7,556 $ (1,375) $ 7,556 $ 4,527 $ 3,029
Leasing margin 15,354 7,764 7,590 7,764 5,492 2,272
Other income 4,623 4,228 395 4,228 3,741 487
Operating and other expenses (15,513) (11,830) (3,683) (11,830) (9,568) (2,262)
Provision for losses (555) (705) 150 (705) (365) (340)
Interest expense, net (9,693) (5,493) (4,200) (5,493) (3,084) (2,409)
Income taxes - - - - (10) 10
--------- --------- -------- -------- -------- --------
Net income $ 397 $ 1,520 $ (1,123) $ 1,520 $ 733 $ 787
========= ========= ======== ======== ======== ========
YEARS ENDED MAY 31, YEARS ENDED MAY 31,
------------------------- -----------------------
CAI WITHOUT CATG 1999 1998 CHANGE 1998 1997 CHANGE
---------------- ---------- ---------- --------- --------- --------- ---------
Equipment sales margin $ 3,731 $ 6,152 $ (2,421) $ 6,152 $ 4,527 $ 1,625
Leasing margin 15,354 7,764 7,590 7,764 5,492 2,272
Other income 4,623 4,228 395 4,228 3,741 487
Operating and other expenses (12,465) (10,348) (2,117) (10,348) (9,568) (780)
Provision for losses (479) (635) 156 (635) (365) (270)
Interest expense, net (9,325) (5,361) (3,964) (5,361) (3,084) (2,277)
Income taxes - - - - (10) 10
-------- -------- -------- -------- -------- --------
Net income $ 1,439 $ 1,800 $ (361) $ 1,800 $ 733 $ 1,067
======== ======== ======== ======== ======== ========
YEARS ENDED MAY 31, YEAR ENDED SEVEN MONTHS
------------------------- MAY 31, ENDED MAY 31,
CATG 1999 1998 CHANGE 1998 1997 CHANGE
---- ---------- ---------- --------- ---------- ------------- ---------
Equipment sales margin $ 2,450 $ 1,404 $ 1,046 $ 1,404 $ - $ 1,404
Operating and other expenses (3,048) (1,482) (1,566) (1,482) - (1,482)
Provision for losses (76) (70) (6) (70) - (70)
Interest expense, net (368) (132) (236) (132) - (132)
-------- -------- -------- -------- -------- --------
Net loss $ (1,042) $ (280) $ (762) $ (280) $ - $ (280)
======== ======== ======== ======== ======== ========
</TABLE>
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):
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
EQUIPMENT SALES, continued
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------- Increase
1999 1998 (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 $ 18,996 $ 437 $ 48,648 $ 1,090 $ (29,652) $ (653)
Equipment under lease sold to private investors 143,910 2,013 179,408 2,204 (35,498) (191)
--------- -------- --------- -------- --------- --------
162,906 2,450 228,056 3,294 (65,150) (844)
--------- -------- --------- -------- --------- --------
Transactions subsequent to initial lease
term (remarketing revenue):
Sales of off-lease equipment 2,360 363 3,723 885 (1,363) (522)
Sales-type leases 56 56 322 156 (266) (100)
Excess collections (cash collections in excess
of the associated residual value from equipment
under lease sold to private investors) 570 570 1,622 1,622 (1,052) (1,052)
--------- -------- --------- -------- --------- --------
2,986 989 5,667 2,663 (2,681) (1,674)
Deduct related provision for losses - (555) - (705) - 150
--------- -------- --------- -------- --------- --------
Realizations of value in excess of provision for
losses 2,986 434 5,667 1,958 (2,681) (1,524)
Add back related provision for losses - 555 - 705 - (150)
--------- -------- --------- -------- --------- --------
2,986 989 5,667 2,663 (2,681) (1,674)
Equipment brokerage sales 874 292 650 196 224 96
CATG sales 27,148 2,450 13,885 1,403 13,263 1,047
--------- -------- --------- -------- --------- --------
Total equipment sales $ 193,914 $ 6,181 $ 248,258 $ 7,556 $ (54,344) $ (1,375)
========= ======== ========= ======== ========= ========
Years Ended May 31,
-------------------------------------------- Increase
1999 1998 (Decrease)
--------------------- -------------------- ---------------------
Revenue Margin Revenue Margin Revenue Margin
--------- -------- --------- -------- --------- --------
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 3,723 885 5,142 679 (1,419) 206
Sales-type leases 322 156 71 69 251 87
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
--------- -------- --------- --------- --------- --------
5,667 2,663 5,741 1,276 (74) 1,387
Deduct related provision for losses - (705) - (365) - (340)
--------- -------- --------- -------- --------- --------
Realizations of value in excess of provision for
losses 5,667 1,958 5,741 911 (74) 1,047
Add back related provision for losses - 705 - 365 - 340
--------- -------- --------- -------- --------- --------
5,667 2,663 5,741 1,276 (74) 1,387
Equipment brokerage sales 650 196 217 41 433 155
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
========= ========= ========= ======== ========= ========
</TABLE>
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Equipment Sales to PIFs
-----------------------
In February 1998, the Company sold the remaining publicly offered units in
Capital Preferred Yield Fund-IV, L.P. The Company has elected not to
organize additional PIFs and only two PIFs are in their reinvestment stage
and are actively acquiring leases. Consequently, equipment sales margin
arising from equipment under lease sold to PIF's has declined and will
continue to decline. In addition, fees and distributions from the PIF's
(reported as "Other Income") has also declined.
Equipment sales to the PIFs decreased during fiscal year 1998 as compared
to fiscal year 1997 because three of the PIFs were in their planned
liquidation stage and two of the PIFs had been liquidated in 1998. Once a
PIF enters the liquidation stage, it no longer acquires equipment under
lease. Two PIFs were actively acquiring leases in 1998 as compared to four
PIFs which were actively acquiring leases in 1997.
Equipment Sales to Private Investors
------------------------------------
Equipment sales to private investors decreased in fiscal year 1999 compared
to fiscal year 1998 principally because 1998 results reflect a large,
one-time portfolio acquisition the majority of which was sold to private
investors. Equipment sales to private investors increased in fiscal year
1998 compared to fiscal year 1997 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 leases it
sells. This income is amortized over the life of the lease and is included
in Other Income.
Equipment Brokerage Sales
-------------------------
NBCO acquires used personal computers, monitors and printers from a variety
of sources, including end-users and other lessors. The equipment is sold in
quantity to third parties or to consumers through NBCO's retail facilities.
Revenue from equipment brokerage sales increased during fiscal year 1999 as
a result of sales to consumers through NBCO's retail facilities. Prior to
1999, equipment brokerage sales generally consisted of quantity sales to
third parties. Equipment brokerage sales increased in fiscal year 1998
compared to fiscal year 1997 because in 1998 the Company dedicated
personnel to pursuing such sales. Prior to 1998, Company personnel were
devoted only part-time to this activity.
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-eight 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
13 of 36
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Related Provision for Losses, continued
-------------------------------------------------------------
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 1999, 1998 and 1997, even without considering
realizations from remarketing activities recorded as leasing margin.
Remarketing revenue and the related margins from 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 (the
average lease term is 3 to 5 years). Remarketing revenue and margin
declined in 1999 as a result of a low-level of leases maturing during the
period. That low level of leases reflects the Company's low level of leases
originated during the mid-1990's. Because lease originations have been
increasing since that time, leases maturing subsequent to 1999 are also
increasing, therefore the Company expects remarketing revenue and margin to
increase during fiscal year 2000.
The provision for losses of $555,000 recorded during fiscal year 1999
consisted of:
* $479,000 attributable to leases having a net book value of $671,000
with a lessee who filed for bankruptcy protection under Chapter 11 of
the Bankruptcy Code during the third quarter fiscal 1999 and has begun
the process of liquidating its business. The carrying value of the
leased equipment was reduced to reflect the Company's best estimate of
its recoverable value upon liquidation.
* $76,000 arising from the write-off of bad debts for CATG.
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.
14 of 36
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Related Provision for Losses, continued
-------------------------------------------------------------
* 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.
CATG
CATG activities consist primarily of the sale 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 in the
accompanying financial statements since November 1, 1997, the date of
acquisition.
Since its acquisition, the Company has invested significant time and
capital resources into CATG in order to extend its capabilities beyond
CATG's traditional regional market to CAI's customers throughout the United
States. The costs associated with this effort primarily include additional
salaries and wages, training, and travel and expenses. CATG has not yet
realized a material amount of revenue from this effort. Consequently, costs
in excess of revenues from the national effort have resulted in an increase
in net loss from operations of approximately $600,000 for fiscal year 1999
compared to fiscal year 1998. In addition, in the fourth quarter 1999, a
charge of $500,000 was recorded to reflect adjustments to equipment
purchases payable. CATG interest expense increased approximately $200,000
because (i) the prior year results reflected less than twelve months
results and (ii) the acquisition term loan utilized to finance the
acquisition of CATG closed on May 31, 1999. Prior to that time, CAI had
temporarily financed the acquisition of CATG utilizing internally generated
funds and did not allocate any internal interest expense to CATG. CAI is
presently evaluating its strategic options for improving CATG's operating
results.
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Years Ended May 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Leasing revenue $ 42,614 $ 25,101 $ 14,420
Leasing costs and expenses (27,260) (17,337) (8,928)
-------- -------- --------
Leasing margin $ 15,354 $ 7,764 $ 5,492
======== ======== ========
The increase in leasing revenue, leasing costs and expenses and leasing
margin is due to the increase in the volume of lease originations
warehoused pending sale to private investors and growth in the Company's
lease portfolio. Subject to the Company's ability to obtain additional
funding, 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 may fluctuate 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
and the majority of leases added to CAI's portfolio have been operating
leases).
15 of 36
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
OTHER INCOME
Other income consists of the following (in thousands):
Years Ended May 31,
------------------------------
1999 1998 1997
------- ------- -------
Fees and distributions from PIFs $ 2,757 $ 3,114 $ 2,453
Fees from private leasing programs 1,068 451 38
Interest on installment sale of equipment 198 443 769
Gain on sale of installment sale note 423 - -
Other 177 220 481
------- ------- -------
$ 4,623 $ 4,228 $ 3,741
======= ======= =======
For the reasons discussed under EQUIPMENT SALES TO PIFs, the amount of fees
and distributions from PIF's declined in 1999 and 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 Note 12 of Notes to Consolidated Financial Statements to
the 1996 Form 10-K). During fiscal years 1999 and 1998, the Company
received $483,000 and $650,000, respectively, of cash payments related to
the installment sale note. In the third quarter of fiscal 1999, the Company
sold the installment sale contract, which had a carrying value of $246,000,
to the parent company of the debtor for $669,000.
OPERATING AND OTHER EXPENSES
Operating and other expenses increased approximately $3.7 million (31%) for
fiscal year 1999 compared to fiscal year 1998. Approximately $1.6 million
of the increase was due to an increase in CATG expenses. Approximately
$1,000,000 of the increase in CATG expenses reflects a full year of
operations in 1999 compared to seven months of operations reflected in 1998
and $600,000 of the increase reflects costs associated with building CATG's
national sales capabilities. The remaining increase was due primarily to
costs associated with the Company's investment in its retail marketing
infrastructure (i.e., personnel training costs associated with new sales
representatives) and NBCO subsidiary. Operating and other expenses also
includes a charge of $130,000 to reflect the write-off of costs associated
with an unsuccessful subordinated debt offering.
Operating and other expenses increased $2.3 million (24%) for fiscal year
1998 as compared to fiscal year 1997. Approximately $1.5 million of the
increase in fiscal 1998 was due to CATG expenses which have been included
in the consolidating financial statements since the acquisition date of
November 1, 1997. The remaining increase was due primarily to costs
associated with the Company's investment in its retail marketing
infrastructure.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
INTEREST EXPENSE, NET
Interest expense, net consists of the following (in thousands):
1999 1998 1997
---- ---- ----
Interest income $ (2,219) $ (3,487) $ (4,828)
Non-recourse interest expense 8,503 6,123 6,012
-------- -------- --------
Net non-recourse interest expense 6,284 2,636 1,184
Recourse interest expense 3,409 2,857 1,900
-------- -------- --------
Interest expense, net $ 9,693 $ 5,493 $ 3,084
======== ======== ========
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 includes an
amount equal to the non-recourse interest expense on financed equipment
sold to investors. Therefore, net non-recourse interest expense on related
discounted lease rentals pertains to the Company's owned lease portfolio.
Such amount increased due to growth in the Company's owned portfolio. It is
anticipated that net non-recourse interest expense 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 1999 compared to
fiscal year 1998 primarily due to (i) increased borrowings under the
Company's Senior Facility used to fund the growth in the number of leases
the Company holds for sale to private investors, and (ii) leases held in
the Company's own portfolio financed through its Securitization facility
(which has a recourse component). 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.
INCOME TAXES
As shown in the table in Note 12 of Notes to the Consolidated Financial
Statements, the Company's significant deferred tax assets consist of ITC
carryforwards of approximately $600,000 (which expire in fiscal years 2000
and 2001), NOL carryforwards of approximately $700,000 (which expire from
2013 through 2014) and alternative minimum tax ("AMT") credits of $4.6
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
(see discussion below). 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 1999, 1998 and 1997 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 1999, 1998 and 1997 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
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
I. Results of Operations, continued
---------------------
INCOME TAXES
1999 and 1998 represented 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 as the
Company continued to report net income from operations. The reductions in
the valuation allowance recorded during the years ended May 31, 1999 and
May 31, 1998 resulted in income tax benefits of $100,000 and $464,000,
respectively. The reduction of the valuation allowance recorded in fiscal
1997 represented the utilization of an ITC carryforward and the receipt of
a state income tax refund for which a valuation allowance had been
provided.
During fiscal year 1996, a transaction was completed in which the Company's
largest shareholder obtained more than fifty percent of the ownership and
voting rights of the Company within a three year period ("a change in
control"). Upon a change in control, provisions of the Internal Revenue
Code limit the amount of ITC carryforwards and AMT carryforwards that could
be utilized to reduce income tax liability in any year. However, the
Company had previously established a valuation allowance for deferred taxes
due to uncertainty that the full amount of the ITC carryforward would be
utilized prior to expiration and therefore, the change in control and
resulting limitation on the ITC and AMT carryforward is not expected to
reduce the recoverability of the amount of the 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
and Securitization proceeds, recourse bank debt (see Note 10 of Notes to
Consolidated Financial Statements), rents, fees and distributions from its
PIFs and private investors, 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 primarily 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.
On December 20, 1998, Capital Associates International Inc. ("CAII")
obtained $15 million in committed non-recourse financing from NationsBanc
Leasing Corporation. CAII may use the committed financing at its discretion
to finance leases under a warehousing arrangement. The loan is secured by
lease transactions financed under the facility only. The loan was primarily
underwritten utilizing the underlying credit quality of the leases pledged
as collateral under the facility. The interest rate option associated with
the facility is Prime rate minus 0.25% or LIBOR plus 2.5% (7.75% & 4.90% at
May 31, 1999, respectively). The Company is required to pay a fee of 0.2%
of the unused commitment quarterly. The outstanding balance under the
facility at May 31, 1999 was $1.3 million. The loan is included with
"Discounted lease rentals" in the accompanying consolidated Balance Sheets.
The facility contains general operating and reporting requirements,
however, no formal financial covenants are required of CAII. As of May 31,
1999, CAII was in compliance with the terms of the 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.
18 of 36
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
II. Liquidity and Capital Resources, continued
-------------------------------
Leases that, in the past, would have been originated for sale to the PIF's
are now being retained by the Company. This strategy is expected to
increase the Company-owned leased portfolio. Increases in the size of the
Company's lease portfolio are 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. The Company finances leases for its own
portfolio on a long-term basis utilizing the Securitization facility
described in Note 9 to Notes to Consolidated Financial Statements.
Securitization generally provides financing for 90-95% of the cost of
leased equipment. The remaining cost of the equipment (also referred to as
"equity capital") is financed utilizing availability under the Company's
recourse debt facility and/or cash from operations.
In addition, the Company has significantly increased the amount of leases
it is holding in its warehouse portfolio. The Company generally finances
leases it holds pending sale utilizing borrowings under the Warehouse
Credit Facility portion of its Senior Facility equal to 95% of the cost of
the leased equipment, and equity capital for the remainder of the cost. In
addition, the Company has originated certain leases intended for sale to
investors which are not eligible for financing under the Warehouse Credit
Facility. In such cases, equity capital is utilized to finance 100% of the
cost of the leased equipment.
The Company has significantly increased its investment in its portfolio
(comprising both the Company-owned and warehouse portfolios) during the
most recent two fiscal years, as reflected in the following balances, as of
May 31 of its most recent three fiscal year ends:
Years Ended May 31,
--------------------------------
1999 1998 1997
--------- --------- --------
Net investment in direct finance leases $ 42,116 $ 31,181 $ 7,700
Leased equipment, net 150,338 104,825 71,443
--------- --------- --------
$ 192,454 $ 136,006 $ 79,143
========= ========= ========
The increasing investment in the portfolio has also caused an increase in
accounts receivable at May 31, 1999 compared to May 31, 1998. The trend of
increasing investment in leases has continued through August 31, 1999. The
increases in leases and related accounts receivable have required
significant investment of equity capital.
During 1999, the Company significantly increased its Equipment Brokerage
Sales. Such sales entail the acquisition of inventory for sale to third
parties and for sale to consumers through the NBCO retail stores. At May
31, 1999, inventory held for equipment brokerage sale amounted to
approximately $1 million. The Company finances the inventory utilizing
availability under its Working Capital Facility. Utilization of the Working
Capital Facility directly reduces the amount of "equity capital" available
to invest in leases.
To enable the Company to continue to add leases to its portfolio, it must
increase the availability of equity capital. Its primary strategy is to
sell existing leases in its warehouse portfolio to private investors in
order to "free-up" previously invested equity capital. In addition, the
Company is evaluating additional sources of capital which will provide the
liquidity necessary to continue to add leases to its portfolio, including
the sale of Company-owned leases, the sale of retained residuals, a public
debt offering and the sale of non-leasing related assets. There can be no
assurance that the Company will be successful in selling existing leases to
private investors, or in raising additional equity capital.
19 of 36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
II. Liquidity and Capital Resources, continued
-------------------------------
The Company's Senior Facility was expanded during fiscal 1999 to
approximately $71 million. The terms of the Senior Facility are
substantially unchanged and expire on November 26, 2000. See Note 10 to
Notes to Consolidated Financial Statements for a description of the
Company's Senior Facility. As of May 31, 1999, the Company was not in
compliance with the Interest Coverage Covenant, as defined, for which it
received a waiver from its Lenders in August 1999. The waiver included a
temporary reduction in the minimum interest coverage ratio for the fiscal
quarters ended May 31, 1999, August 31, 1999 and November 30, 1999 and
amended (in a manner favorable to the Company) certain definitions used in
calculating certain of the Company's financial covenants. After that time,
the minimum interest coverage ratio will return to its prior level. In
connection with the execution of the waiver, Messrs. Buckland and Walker
loaned the Company $350,000 on a subordinated basis. See Part III, Item 13,
below for discussion of the terms of this loan. No assurance can be given
that the Company will be able to achieve the level of profitability
necessary to remain in compliance with the Interest Coverage Covenant in
the future. Should the Company not remain in compliance, it would
constitute an Event of Default, as defined in the bank agreement, and there
is no assurance that the Lenders would again grant a waiver. In the event
of a default there is no assurance that the Lenders would continue to
provide advances to the Company. Should the Lenders no longer provide
advances to the Company, its ability to continue to operate its business
would be significantly impaired.
The Company finances receivables and inventory for its CATG subsidiary
under an agreement with Deutsche Financial Services. At May 31, 1999,
accounts receivable, net included $4,502,000 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 internal
information technology ("IT") 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.
The Company is in the process of upgrading or replacing all components of
its IT systems which were identified as being affected by the Year 2000
issue. At the present time, the Company has completed upgrades and testing
of the upgrades for all components of its IT systems except its primary
application software which controls the Company's financial records, asset
management detail, and billing records. The Company has fully identified
all aspects of the application software which have Year 2000 issues and has
commenced the process of upgrading the software. The Company expects that
the new upgrades will be fully operational by December 31, 1999, and
therefore will be fully Year 2000 compliant. 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. As such, the Company has
not developed any specific contingency plans in the event it fails to
complete the upgrades by December 31, 1999. However, should the Company be
unsuccessful in completing the necessary upgrades by December 31, 1999, the
Company does not expect there will be a material adverse effect on the
Company's financial position or results of operations. The Company believes
it could continue to operate utilizing manual procedures until all system
upgrades are completed. However, there could be a negative impact on the
Company's ability to realize expected cash flows from leased equipment on a
timely basis due to billing or collection problems which could arise
related to Year 2000 issues. While it is expected that the Company's
ability to ultimately realize all expected cash flows will not be impacted,
delays in collecting cash flows would have a negative impact on the
liquidity and financial resources.
20 of 36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
II. Liquidity and Capital Resources, continued
-------------------------------
YEAR 2000 ISSUES, continued
To date, costs associated with Year 2000 readiness have been immaterial.
The Company expects that any additional costs of being Year 2000 compliant
will be immaterial.
Some risks associated with the Year 2000 problem are beyond the Company's
ability to control, including the extent to which lessees, suppliers and
service providers can address their Year 2000 problems. The Company has
received correspondence from substantially all significant lessees,
suppliers and service providers representing their expected readiness in
regards to the ability to do business after December 31, 1999. The Company
cannot estimate, therefore, the impact on it if third parties are not Year
2000 compliant. The failure by a lessee or supplier to adequately address
the Year 2000 issue could hurt the lessor or supplier and disrupt the
Company's business. The most likely worst case Year 2000 scenario is if one
or more lessee's business is disrupted by Year 2000 problems and is unable
to remit lease payments on a timely basis. Such a situation could
negatively impact the Company's cash flow and liquidity for a period of
time. However, because substantially all of the Company's leases are with
lessees of substantial credit-worthiness, it is expected that such a
disruption would be temporary, and therefore not have a material impact on
the Company's financial position or results of operations.
III. New Accounting Pronouncements
-----------------------------
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 adopted Statement 131 in the
first quarter of 1999 by reporting operating segment information on Form
10-Q for its leasing and equipment retailing segments.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133, an Amendment of FASB
Statement 133. Statement 137 effectively extends the required application
of Statement 133 to fiscal years beginning after June 15, 2000, with
earlier application permitted. The Company expects to adopt Statement 133
in the first quarter of 2000. The Company does not expect the adoption of
Statement 133 or Statement 137 to have an impact on its financial
reporting.
21 of 36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
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, specialty
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.
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 following table sets forth (i) the names of the directors of the Company,
(ii) their ages at the Record Date and (iii) their tenure on the Board of
Directors:
DIRECTORS
Name Age Position(s) with Company Director Since
---- --- ------------------------ --------------
William H. Buckland 54 Director 1995
James D. Edwards 59 Director 1987
Gary M. Jacobs 52 Director 1978-1990 and 1994
Robert A. Sharpe II 41 Director 1996
James D. Walker 54 Chairman of the Board, 1994
President, Chief Executive
Officer and Director
Mr. Buckland has been Chairman of the Board, President and Chief Executive
Officer of MCC Financial Corporation, an aircraft and equipment lessor ("MCC"),
since May 1998. From May 1988 to May 1998, Mr. Buckland was Chairman of the
Board, Secretary and Treasurer of MCC. From May 1988 to present, Mr. Buckland
has been and continues to be a director and 50% stockholder of MCC. Immediately
prior to the purchase of MCC in 1988, Mr. Buckland held, from 1978 to 1988, a
number of executive positions at Fairchild Industries, Inc. Mr. Buckland is also
a director of MCC Aircraft Leasing I, Inc., MCC World Aviation Associates, Inc.,
and Capital Associates International, Inc., a wholly-owned subsidiary of the
Company ("CAII").
22 of 36
<PAGE>
Item 10. Directors and Executive Officers, continued
--------------------------------
DIRECTORS, continued
Mr. Edwards has been retired since 1995. From May 1989 to May 1995, Mr. Edwards
was President, Chief Executive Officer and a director of Tricord Systems, Inc.,
a computer hardware and software development firm. From 1987 to 1989, Mr.
Edwards was President and Chief Executive Officer of Telwatch, Inc., a
telecommunications firm. From 1983 to 1987, Mr. Edwards held various executive
positions with AT&T, including President of AT&T Computer Systems. Prior to
1983, Mr. Edwards held executive positions with IBM Corporation, Xerox
Corporation and Bausch & Lomb. Mr. Edwards is also a director of Chatcom, Inc.,
Lexicor, Red Hill, Dezignz and CAII.
Mr. Jacobs has been Executive Vice President and Secretary of Corporate Express,
Inc., an office products supply company ("CEI"), since July 1995. From 1992 to
July 1995, Mr. Jacobs was also Chief Financial Officer of CEI. From 1990 through
November 1992, Mr. Jacobs served as the President and Chief Executive Officer of
Boulder Retail Finance Corporation, an investment firm controlled by Mr. Jacobs.
From 1978 through mid-1990, Mr. Jacobs served as Executive Vice President and in
various other senior executive positions with the Company and CAII. Prior to
joining the Company, Mr. Jacobs served as a director of finance for Storage
Technology Corporation, a company which manufactures computer peripheral
devices. Mr. Jacobs served as a director of the Company and CAII from 1978
through mid-1990 and is currently a director of Boulder Retail Finance
Corporation and CAII.
Mr. Sharpe has been Executive Vice President of Fairchild Fasteners, a fastener
manufacturer, since July 1996. From July 1994 through June 1996, Mr. Sharpe was
Vice President, Corporate Development of Smithfield Foods, Inc, a food
processor. Prior to joining Smithfield Foods, Inc., Mr. Sharpe had a ten year
career in corporate banking. From 1987 through June 1994, Mr. Sharpe served in a
number of capacities at NationsBank Corporation, a bank holding company,
including Senior Vice President in charge of Mid-Atlantic Corporate Banking
relationships. Mr. Sharpe is also a director of the Fairchild Corporation and
CAII.
Mr. Walker has been the President and Chief Executive Officer of the Company
since April 1998. From May 1988 to May 1998, Mr. Walker was President and Chief
Executive Officer of MCC. From May 1988 to present, Mr. Walker has been and
continues to be a director and 50% stockholder of MCC. Prior to that time, Mr.
Walker was involved in equipment lease management with Equipment Leasing and
Financing Corp. (President 1987- 1988),Thomson McKinnon Securities, Regional
Vice President - Lease Originations from 1986 to 1987 and Finalco, Inc. starting
as Marketing Representative in 1981 and becoming Senior Vice President of
Marketing. Prior to that, Mr. Walker held marketing and engineering positions
with IBM Corporation and TRW, Inc. Mr. Walker is also a director of MCC Aircraft
Leasing I, Inc., MCC World Aviation Associates, Inc. and CAII.
DIRECTOR COMPENSATION
The Board amended and restated the Company's Board of Directors Compensation
Policy in Fiscal 1996 (the "Amended Policy"), effective on and as of October 26,
1995. Pursuant to the Amended Policy, the Company pays each director (1) a
$3,750 quarterly retainer ($5,000 for the Chairman of the Board), (2) $1,000 for
each Board meeting attended, (3) $1,000 for each committee meeting (other than
Executive Committee meetings) attended, (4) consulting fees for consulting
services at a rate approved by the Board, and (5) all reasonable out-of-pocket
expenses of attending such meetings and performing any consulting services for
the Company.
Pursuant to a Consulting Agreement with Mr. Buckland, dated as of June 1, 1996,
the Company paid Mr. Buckland $112,500 for services rendered during Fiscal 1999.
Mr. Walker became an employee of the Company effective April 7, 1998 at which
time his Consulting Agreement with the Company, dated June 1, 1996, terminated
and he entered into an Employment Agreement with the Company (the terms of which
are described in Part III, Item 11, below). Messrs. Buckland and Walker earned
no incentive compensation during Fiscal 1999.
23 of 36
<PAGE>
Item 10. Directors and Executive Officers, continued
--------------------------------
DIRECTOR COMPENSATION, continued
For Fiscal 1997, the Board's Special Compensation Committee decided to provide
incentive compensation to each of Messrs. Buckland and Walker through the
Company's assignment to each of a 2.70735 percent interest in the residual
proceeds derived from certain equipment leased to General Motors. Such residual
proceeds will be realized and paid over approximately seven (7) years. The
assignments of these interests is evidenced by non-recourse residual sharing
notes from the Company. In Fiscal 1997, the Company accrued estimated expenses
of $50,500, for each of the residual sharing notes, reducing the Company's book
value for these residuals to reflect this assigned interest to Messrs. Buckland
and Walker.
For Fiscal 1998 and 1999, the Consulting Agreements provide incentive
compensation of 4% (the "Base Incentive Payment Percentage") of the Company's
pre-tax earnings for each such fiscal year. The Base Incentive Payment
Percentage is to be adjusted up or down by the percentage change in the average
closing price of the Company's stock for the last four months of the applicable
fiscal year, as compared to the same period in the prior fiscal year, but in no
event will the Base Incentive Payment Percentage be adjusted lower than 3% or
higher than 6%.
For Fiscal 1998, the total incentive compensation earned by Mr. Buckland was
$96,000 and by Mr. Walker was $82,000. Mr. Walker's incentive compensation
payment was pro-rated to the date his Consulting Agreement was terminated, April
7, 1998. Of those amounts, payment of one-third has been deferred to June 1,
2001 so that Messrs. Buckland and Walker have received for Fiscal 1998, $64,000
and $54,667, respectively, and will receive the balance of $32,000 and $27,333,
respectively, on June 1, 2001, provided each is still a director and/or employee
on that date.
The following table sets forth the amount of quarterly retainer fees, meeting
fees, Executive Committee fees, consulting fees and total fees paid to directors
during Fiscal 1999:
<TABLE>
<CAPTION>
Quarterly Prior Year Consulting
Directors Retainer Meeting Fees Fees Fees Total (1)
- -------------------- -------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
William H. Buckland $ 15,000 $ 9,000 (3) -0- $ 112,500 $ 136,500
James D. Edwards $ 15,000 $ 9,000 (3) -0- -0- $ 24,000
Gary M. Jacobs $ 15,000 $ 8,000 (4) -0- -0- $ 23,000
Robert A. Sharpe II $ 15,000 $ 8,000 (4) -0- -0- $ 23,000
James D. Walker $ 20,000 (2) $ 9,000 (3) $ 6,250 -0- $ 32,250
</TABLE>
(1) These amounts do not include (a) expense reimbursements paid to the
directors during Fiscal 1999 and (b) the value of stock options that were
granted to the directors in Fiscal 1999 and prior fiscal years.
(2) As Chairman of the Board, Mr. Walker's quarterly retainer is $5,000. At Mr.
Walker's instructions, the Company paid $5,000 of accrued Board fees
otherwise payable to Mr. Walker to MCC World Aviation Associates, Inc., a
corporation owned 50% by Mr. Buckland and 50% by Mr. Walker.
(3) Consists of $1,000 per meeting for 4 regular Board meetings and 4 committee
meetings.
(4) Consists of $1,000 per meeting for 4 regular Board meetings and 4 committee
meetings, and (c) 2 special committee meetings.
24 of 36
<PAGE>
Item 10. Directors and Executive Officers, continued
--------------------------------
DIRECTOR COMPENSATION, continued
For Fiscal 1998, the Company granted under the its Non-Employee Director Stock
Option Plan (the "Non-Employee Director Plan") to each of Messrs. Edwards,
Jacobs and Sharpe an option to acquire 5,000 shares of Common Stock at an
exercise price of $3.25 per share and to each of Messrs. Buckland and Walker an
option to acquire 10,000 shares at an exercise price of $ 3.25 per share (the
"1998 Director Options"). All of the 1998 Director Options vested in full on May
31, 1998, and will expire in June 2008. The Board determined that it was
beneficial to the Company that Mr. Walker became an employee of the Company on
April 7, 1998, and waived the forfeiture of his 1998 Director Options.
For Fiscal 1999, the Company granted under the Non-Employee Director Plan to
each of Messrs. Edwards, Jacobs and Sharpe an option to acquire 5,000 shares of
Common Stock at an exercise price of $4.125 per share and to Mr. Buckland an
option to acquire 45,000 shares at an exercise price of $4.125 per share (the
"1999 Director Options"). All of the 1999 Director Options vested in full on May
31, 1999, provided each recipient remains as a director and will expire in June
2009. Per Mr. Walker's Employment Agreement, the Company granted Mr. Walker an
option to acquire 10,000 shares of Common Stock under the Employee Stock Option
Plan, at an exercise price of $4.125 per share, which vested in full on May 31,
1999 and will expire in June 2009.
In November 1998, Mr. Edwards exercised stock options for 86,250 shares of
common stock with an average exercise price of $1.53 by paying the par value in
cash of $690.00 and issuing a note payable to the Company equal to approximately
$131,000, the remainder of the exercise price. The note bears interest at the
rate of 4.5% compounded semi-annually and is due November 3, 2002.
The Company believes that the transactions, described above, were on terms no
less favorable to the Company than could have been obtained in arm's length
transactions. All transactions or loans between the Company and its directors,
officers, principal stockholders and their affiliates have been, and similar
future transactions or loans will be, approved in advance by disinterested
directors and have been or will be on terms believed by the Company to be no
less favorable to the Company than those which could be obtained in arm's length
transactions.
COMPENSATION AND OPERATIONS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Edwards and Walker are directors of the Company. In April 1998, Mr.
Walker became an employee of the Company. Mr. Edwards has never been an employee
of the Company. Messrs. Edwards and Walker also are directors of CAII. Messrs.
Buckland and Walker are directors and 50% stockholders of MCC and MCC World
Aviation Associates, Inc. ("MCC World"), which own of record 2,833,369 and
23,706 shares, respectively, of Common Stock. Mr. Buckland is also an officer of
MCC and MCC World. See "Certain Transactions" below. The Company leased from MCC
office space for its Southeast Region Office and paid MCC rent in the amount of
$23,000 for Fiscal 1999. Mr. Walker is now President and Chief Executive Officer
and a director of CAII.
EXECUTIVE OFFICERS
The following table sets forth (i) the names of the executive officers of the
Company (ii) their ages as of the Record Date and (iii) their positions with the
Company:
Name of Individual Age Capacities in Which Served
- -------------------- --- -------------------------------------------------
James D. Walker 54 Chairman of the Board, President, Chief Executive
Officer and Director
Anthony M. DiPaolo 40 Senior Vice President - Chief Financial Officer
and Treasurer
John F. Olmstead 56 Senior Vice President - Capital Markets Group and
Assistant Secretary
Richard H. Abernethy 45 Vice President - Portfolio Management
25 of 36
<PAGE>
Item 10. Directors and Executive Officers, continued
--------------------------------
EXECUTIVE OFFICERS, continued
See "DIRECTORS" above for a description of Mr. Walker's background and the
positions held by Mr. Walker with the Company.
Mr. DiPaolo has been Senior Vice President - Chief Financial Officer and
Treasurer of the Company since March 1997. Mr. DiPaolo joined the Company in
July 1990 and has held various positions in the accounting and finance areas of
the Company. Prior to July 1990, he held the offices of Chief Financial Officer
for the Mile High Kennel Club, Inc. and Vice President - Controller for VICORP
Restaurants, Inc. and was an audit manager for Coopers & Lybrand. Mr. DiPaolo is
an officer, but not a director, of CAII.
Mr. Olmstead has been Vice President - Capital Markets Group and Assistant
Secretary of the Company since September 1991. Mr. Olmstead joined the Company
as a Vice President in December 1988. From 1969 through 1983, Mr. Olmstead was a
co-owner of Finalco, Inc., an independent leasing company, and served as a
senior officer of Finalco Corporation. From 1983 through the present, Mr.
Olmstead has served as Chairman of the Board of Neo-Kam Industries, Inc.,
Matchless Metal Polish Company, Inc., and ACL, Inc. Mr. Olmstead is an officer,
but not a director, of CAII.
Mr. Abernethy has been Vice President - Portfolio Management of the Company
since October 1997. Mr Abernethy joined CAII in April 1992, as the Equipment
Valuation Manager. From September 1994 to October 1997, Mr. Abernethy was Vice
President - Asset Management of the Company. Prior to joining CAII, Mr.
Abernethy was employed by Barclays Leasing for six years where he served as
Equipment Manager with similar duties. Mr. Abernethy is not an officer or
director of the Company but does serve as an officer of CAII.
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") requires the Company's directors, officers and persons who own more than
ten percent of a registered class of the Company's equity securities ("10%
Holders") to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Directors, officers and 10% Holders are required by SEC regulations to furnish
the Company with copies of all of the Section 16(a) reports they file.
To the Company's knowledge, during Fiscal 1999 all Section 16(a) filing
requirements applicable to its directors, officers and 10% Holders were timely
made by such persons.
Item 11. Executive Compensation
----------------------
THE WALKER EMPLOYMENT AGREEMENT. The Company entered into an Employment
Agreement with Mr. Walker, dated as of April 7, 1998 (the "Walker Employment
Agreement"), whereby: (1) Mr. Walker's employment with the Company as President
and Chief Executive Officer (in addition to his existing office as Chairman of
the Board) commenced on April 7, 1998, and continues until May 31, 2001 and,
thereafter, the term will be automatically renewed for successive one year terms
unless either provides the other notice to terminate 60 days prior to the end of
the then current term; (2) Mr. Walker's annual base salary is $325,000; (3) Mr.
Walker is to receive incentive compensation equal to 4% of the Company's pre-tax
earnings (subject to the Company achieving certain minimum profitability
targets), which percentage can be increased or decreased by the percentage
change in the average closing price of the Company's common stock for the last
four months of the current fiscal year as compared to the same period in the
prior fiscal year, but in no event will it be adjusted lower than 3% or higher
than 6% (he earned no incentive compensation for fiscal 1999); (4) Mr. Walker
will be granted stock options annually, equal to those granted to the
non-employee Directors (see Part III, Item 10, above); (5) Mr. Walker's
Director's fees will continue, including the additional fee for Mr. Walker's
service as Chairman of the Board (see Part III, Item 10, above); (6) payments
are to be made to MCC to reimburse it for certain group benefit plans and MCC's
SEP/IRA plans provided to Mr. Walker; (7) reimbursement is made to Mr. Walker of
his reasonable expenses incurred in carrying out his duties; and (8) payment is
to be made to Mr. Walker of severance benefits in the event of his involuntary
26 of 36
<PAGE>
Item 11. Executive Compensation, continued
----------------------
termination without cause or due to a change of control of the Company, equal to
the greater of (i) three times his annual base salary or (ii) his base salary to
the end of the term of the Walker Employment Agreement, plus the pro rated
amount of the incentive compensation Mr. Walker would have received for the
fiscal year in which such termination occurs. The Walker's Employment Agreement
also acknowledges Mr. Walker's duties as an officer and director of MCC and his
duties in the event of a conflict of interest between the Company and MCC, and
requires Mr. Walker to abide by certain non-disclosure and non-use of the
Company's confidential information and his agreement not to solicit employees or
customers of the Company.
SUMMARY COMPENSATION TABLE. The following table provides certain summary
information for Fiscal 1999, Fiscal 1998 and Fiscal 1997, concerning
compensation awarded or paid to, or earned by, the Company's current Chief
Executive Officer, each of the three other highest paid executive officers of
the Company and one executive officer who resigned his offices in April 1999
(collectively referred to herein as the "Named Executive Officers"):
<TABLE>
<CAPTION>
| Long-Term Compensation
|--------------------------------------
Annual Compensation | Awards (15) | Payouts
------------------------------------------- |-----------------------|--------------
Fiscal | |
Year Other |Restricted Securities|
Ended Annual | Stock Underlying| LTIP
Name and Position 5/31 Salary Bonus (2) Compensation | Awards Options | Payouts
- --------------------- ------ ------------- ------------ ------------- |---------- ----------|--------------
<S> <C> <C> <C> <C> <C> <C> | <C>
James D. Walker, | |
President, Chief 1999 $ 250,000 $ -0- $ 1,600 (6) | -0- -0- | $ -0-
Executive, Chairman 1998 $ 42,500 $ 14,000 (3) $ -0- | -0- 35,000 | $ -0-
of the Board 1997 $ -0- $ -0- $ -0- | -0- -0- | $ -0-
| |
Anthony M. DiPaolo | |
Senior Vice President 1999 $ 156,800 (1) $ -0- $ -0- | -0- -0- | $ -0-
Chief Financial 1998 $ 138,030 (1) $ 45,000 (4) $ -0- | -0- 25,000 | $ -0-
Officer & Treasurer 1997 $ 110,722 (1) $ 20,000 $ -0- | -0- -0- | $ 45,335 (7)
| |
John F. Olmstead, | |
Senior Vice 1999 $ 174,300 (1) $ -0- $ -0- | -0- -0- | $ -0-
President, Capital 1998 $ 173,304 (1) $ 45,000 (5) $ 1,600 (6) | -0- 25,000 | $ -0-
Markets Group & 1997 $ 164,300 (1) $ 40,000 $ -0- | -0- -0- | $ 81,527 (8)
Assistant Secretary | |
| |
Richard H. Abernethy 1999 $ 105,000 $ -0- $ -0- | -0- -0- | $ -0-
Vice President, 1998 N/A N/A N/A | N/A N/A | N/A
Portfolio Management 1997 N/A N/A N/A | N/A N/A | N/A
| |
John A. Reed, Senior 1999 $ 170,715 (10) $ -0- $ -0- | -0- -0- (13)| $ -0-
Vice President, 1998 $ 152,045 (11) $ 6,000 $ 1,600 (12) | -0- 15,000 | $ -0-
Administration (9) 1997 $ 88,126 $ 17,000 $ -0- | -0- -0- | $ 21,225 (14)
</TABLE>
27 of 36
<PAGE>
Item 11. Executive Compensation, continued
----------------------
(1) Includes an accrual of $6,800 in each of Fiscal 1999, 1998 and 1997 for
premium paid on behalf of the Executive Officer, for a universal life
insurance policy pursuant to an insurance benefit plan (the "Insurance
Plan"). The amount of the annual premium allowance under the Insurance Plan
is determined by a formula based on the value of certain benefits
relinquished by the Executive Officers under the Company's 401(k) plan,
from which such officers voluntarily withdrew during the fiscal year ended
May 31, 1991 in order to prevent the Company's 401(k) plan from being "top
heavy" under applicable Treasury regulations.
(2) All bonuses were paid in the following fiscal year.
(3) $9,333 paid in Fiscal 1999 and payment of the remaining one-third ($4,667)
is deferred to June 1, 2001, provided Mr. Walker continues as an employee
of the Company through that date.
(4) $30,000 paid in Fiscal 1999 and payment of the remaining one-third
($15,000) is deferred to June 1, 2001, provided Mr. DiPaolo continues as an
employee of the Company through that date.
(5) $30,000 paid in Fiscal 1999 and payment of the remaining one-third
($15,000) is deferred to June 1, 2001, provided Mr. Olmstead continues as
an employee of the Company through that date.
(6) Travel expense paid with respect to employee's spouse accompanying employee
on business travel.
(7) In Fiscal 1997, Mr. DiPaolo received $45,335 of proceeds (net of the option
exercise prices) from the sale of options to acquire 40,000 shares of
Common Stock to the Company pursuant to the Stock Option Repurchase
Program.
(8) In Fiscal 1997, Mr. Olmstead received $81,527 of proceeds (net of the
option exercise prices) from the sale of options to acquire 56,250 shares
of Common Stock to the Company pursuant to the Stock Option Repurchase
Program.
(9) In April 1999, Mr. Reed resigned from his office with the Company.
(10) Includes $39,082 in commissions and $21,635 in separation pay.
(11) Includes $54,526 in commissions
(12) Travel expense paid with respect to employee's companion accompanying
employee on business travel.
(13) During 1999, Mr. Reed exercised options underlying 5,000 shares of Common
Stock and sold all such shares.
(14) In Fiscal 1997, Mr. Reed received $21,255 of proceeds (net of the option
exercise prices) from the sale of options to acquire 20,000 shares of
Common Stock to the Company pursuant to the Stock Option Repurchase
Program.
(15) There were no stock option grants to Named Executive Officers in Fiscal
1999.
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named Executive
Officers concerning the exercise of stock options during Fiscal 1999 and
unexercised stock options held as of the end of Fiscal 1999:
28 of 36
<PAGE>
Item 11. Executive Compensation, continued
----------------------
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Number of Unexercised Value of Unexercised In-the-
Shares Value Options at Year End money Options at Year End (2)
Acquired on Realized on ---------------------------- -----------------------------
Name Exercise(1) Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James D. Walker -0- $ -0- 81,367 -0- $ 35,100 -0-
Anthony M. DiPaolo -0- $ -0- 16,250 18,750 $ 27,000 -0-
John F. Olmstead -0- $ -0- 25,000 18,750 $ 39,200 -0-
Richard H. Abernethy -0- $ -0- 7,500 11,250 $ 5,200 -0-
John A. Reed (3) 5,000 $ 16,600 -0- -0- $ -0- -0-
</TABLE>
(1) See "Executive Officers - Summary Compensation Table" above for information
concerning sales of stock options by Named Executive Officers to the
Company during Fiscal 1999.
(2) The value of unexercised in-the-money options at the end of Fiscal 1997 is
based on the closing price of the Common Stock as reported on the
NASDAQ/NMS at May 31, 1999 ($3.375 per share), less the exercise price per
share of the options.
(3) In April 1999, Mr. Reed resigned from his offices with the Company.
STOCK OPTION REPURCHASE PROGRAM
Effective as of May 31, 1996, the Company adopted and implemented its Stock
Option Repurchase Program, pursuant to which it repurchased 401,367 stock
options granted under its employee stock option plan from 33 employees at a
price of $2.45 per option share less the exercise price of the repurchased stock
options (a total repurchase price, net of option exercise amounts, of $557,240).
See "Executive Compensation - Summary Compensation Table" to determine the Named
Executive Officers who participated in this program.
LONG-TERM INCENTIVE PLANS
See "Summary Compensation Table" above for a discussion of long-term incentive
plan awards in Fiscal 1998. See also "Stock Option Repurchase Program" above for
information concerning sales of stock options by the Named Executive Officers to
the Company during Fiscal 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth, as of the Record Date, the number of shares and
percentage of the outstanding Common Stock beneficially owned by each person
known by the Company to own more than 5% of the outstanding Common Stock ("Major
Stockholders"):
29 of 36
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management,
---------------------------------------------------------------------
continued
Beneficial Ownership(4)
Number of Shares Percent
---------------- -------
James D. Walker (1) 1,509,905 28.21%
7175 West Jefferson Avenue, Suite 4000
Lakewood, Colorado 80235
William H. Buckland (1) 1,507,205 28.17%
8180 Greensboro Drive, Suite 1000
McLean, Virginia 22102
ROI Capital Management, Inc. (2) 700,550 13.29%
17 East Sir Francis Drake Boulevard - #225
Larkspur, California 94939
Gary M. Jacobs (3) 355,904 6.71%
2995 Baseline Road
Boulder, Colorado 80303
(1) Messrs. Buckland and Walker, who otherwise are unrelated to each other,
each own 50% of the issued and outstanding capital stock of MCC and MCC
World Aviation Associates, Inc. ("MCC World"). MCC and MCC World, each
having the address of 8180 Greensboro Drive, Suite 1000, McLean, Virginia
22102, are record owners of 2,833,369 and 23,706 shares, respectively, of
Common Stock, which represents 53.74% and 0.4% respectively of the issued
and outstanding Common Stock. Messrs. Buckland and Walker also own 78,667
and 81,367 vested stock options, respectively, for the purchase of Common
Stock.
(2) As disclosed in the Schedule Forms 13G filed with the United States
Securities and Exchange Commission on February 19, 1999.
(3) Includes (a) 30,971 shares of Common Stock that Mr. Jacobs is entitled to
acquire upon the exercise of vested stock options, (b) 3,000 shares held in
the name of Mr. Jacobs' minor children for which he disclaims beneficial
ownership and (c) 321,933 shares held of record.
(4) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within sixty (60) days from the Record Date upon
the exercise of options. The record ownership of each beneficial owner is
determined by assuming that stock options that are held by such person and
that are exercisable within sixty (60) days from the Record Date have been
exercised. The total outstanding shares used to calculate each beneficial
owner's percentage includes such stock options.
The following table sets forth, as of the Record Date, the number of shares and
percentage of the outstanding Common Stock beneficially owned by directors who
are not Major Stockholders, the Named Executive Officers and the directors and
executive officers as a group:
30 of 36
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management,
---------------------------------------------------------------------
continued
Management Ownership(6)
---------------------------
Holder Number of Shares Percent
------ ---------------- -------
Richard H. Abernethy (1) 7,550 0.14%
Anthony M. DiPaolo (2) 23,250 0.44%
James D. Edwards (3) 86,250 1.63%
John F. Olmstead (4) 47,500 0.90%
Robert A. Sharpe II (5) 17,959 0.34%
Directors and Executive Officers 182,459 3.46%
(other than Major Stockholders)
as a Group (5 persons)
(1) Includes 7,500 shares of Common Stock that Mr. Abernethy is entitled to
acquire upon the exercise of vested stock options. This does not include
11,250 shares subject to unvested stock options granted to Mr. Abernethy.
(2) Includes 16,250 shares of Common Stock that Mr. DiPaolo is entitled to
acquire upon the exercise of vested stock options. This does not include
18,750 shares subject to unvested stock options granted to Mr. DiPaolo.
(3) In November 1998, Mr. Edwards exercised stock options for 86,250 shares of
common stock with an average exercise price of $1.53 by paying the par
value in cash of $690.00 and issuing a note payable to the Company equal to
approximately $131,000, the remainder of the exercise price. The note bears
interest at the rate of 4.5% compounded semi-annually and is due November
3, 2002.
(4) Includes 25,000 shares of Common Stock that Mr. Olmstead is entitled to
acquire upon the exercise of vested stock options. This does not include
18,750 shares subject to unvested stock options granted to Mr. Olmstead.
(5) Includes 17,959 shares of Common Stock that Mr. Sharpe is entitled to
acquire upon the exercise of vested stock options.
(6) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within sixty (60) days from the Record Date upon
the exercise of options. The record ownership of each beneficial owner is
determined by assuming that options that are held by such person and that
are exercisable within sixty (60) days from the Record Date have been
exercised. The total outstanding shares used to calculate each beneficial
owner's percentage includes such options.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
In November 1995, MCC acquired voting control of the Company through a private
stock purchase transaction and the delivery to MCC of proxies for shares of
Common Stock subject to purchase in the future pursuant to agreements (the
"Stock Purchase Agreements") executed by and among MCC, Messrs. Jack Durliat and
Gary M. Jacobs, who, at that time, were two of the Company's largest
stockholders. Messrs. Buckland and Walker are each 50% owners of MCC. Pursuant
to these Stock Purchase Agreements, MCC acquired 65,120 shares of Common Stock
for a purchase price of $3.30 per share, or an aggregate amount of $214,896. In
January 1995, MCC purchased 75,000 shares of Common Stock for a purchase price
of $2.00 per share, or an aggregate amount of $150,000. In addition, MCC
acquired (1) the right to purchase an additional 1,245,000 shares of Common
Stock in the future for an aggregate purchase price of approximately $4.5
million and (2) proxies from Messrs. Durliat and Jacobs to vote such shares,
pending their purchase. In January 1996, 1997 and 1998, MCC completed the
purchase of 550,000, 437,500 and 257,500 shares, respectively, of Common Stock
for a purchase price of $3.30, $3.70 and $4.02 per share, respectively, or an
aggregate amount of $4,468,900.
31 of 36
<PAGE>
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
During Fiscal 1999, 1998 and 1997, the Company paid the following amounts to the
Messrs. Buckland and Walker, who are each 50% stockholders of MCC, for Executive
Committee fees and under their consulting agreements:
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
Mr. Buckland $ 112,500 $ 187,500 $ 187,500
Mr. Walker * 218,750 250,000**
*In April 1998, Mr. Walker became an employee of the Company and was paid for
the balance of 1998 and 1999 pursuant to the terms of his employment agreement
discussed above.
**In Fiscal 1997, the Company paid Mr. Walker $150,000 for relocation expenses.
On August 11, 1999, the Company borrowed $350,000 from Messrs. Buckland and
Walker and issued a subordinated note to each in the face amount of $175,000.
The notes bear interest at 7% per year plus additional contingent interest at 9%
per year based on the performance of certain residual interests owned by the
Company. Principal and interest (which accrues quarterly) are due on August 11,
2002, subject to certain prepayment obligations. The notes are subordinated to
all existing recourse bank debt.
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 1999 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.
32 of 36
<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.
10.57 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,
incorporated by reference to Exhibit 10.60 of the May 31, 1998 Form
10-K.
10.61 Employment Agreement, dated as of April 7, 1998, by and among the
Company, CAII and James D. Walker, incorporated by reference to
Exhibit 10.61 of the May 31, 1998 Form 10-K.
33 of 36
<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, incorporated by reference to Exhibit 10.62 of the May 31,
1998 Form 10-K.
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,
incorporated by reference to Exhibit 10.63 of the May 31, 1998 Form
10-K.
10.64 Amendment to the Business Financing Agreement and Agreement for
Wholesale Financing dated July 15, 1991 between Capital Associates
Technology Group, Inc. and Deutsche Financial Services Corporation,
incorporated by reference to Exhibit 10.64 of the August 31, 1998 Form
10-Q.
10.65 Credit Agreement dated as of August 19, 1998 among CAI Lease
Securitization-II Corp., as Borrower, Capital Associates
International, Inc., as Servicer, Concord Minutemen Capital Company,
LLC, as Senior Lender and Key Corporate Capital Inc., as Junior
Lender, as Residual Lender and as Agent, incorporated by reference to
Exhibit 10.65 of the August 31, 1998 Form 10-Q.
10.66 Lease Receivables Sale and Contribution Agreement dated as of August
19, 1998 between CAI Lease Securitization-II Corp. as the Buyer and
Capital Associates International, Inc. as the Originator, incorporated
by reference to Exhibit 10.66 of the August 31, 1998 Form 10-Q.
10.67 Custody Agreement between CAI Lease Securitization-II Corp. as
Borrower, Capital Associates International, Inc. as the Originator,
Key Corporate Capital Inc. as Agent and Bankers Trust Company dated
August 19, 1998 requesting Bankers Trust Company to act as Collateral
Custodian and hold financial instruments on behalf of all parties,
incorporated by reference to Exhibit 10.67 of the August 31, 1998 Form
10-Q.
10.68 International Swap Dealers Association, Inc. (ISDA) Master Agreement
dated as of August 24, 1998 between KeyBank National Association and
CAI Lease Securitization-II Corp., incorporated by reference to
Exhibit 10.68 of the August 31, 1998 Form 10-Q.
10.69 Schedule to the ISDA Master Agreement dated as of August 19, 1998
between KeyBank National Association and CAI Lease Securitization-II
Corp., incorporated by reference to Exhibit 10.69 of the August 31,
1998 Form 10-Q.
10.70 Third Amendment to Loan and Security Agreement dated as of November
25, 1998 by and between Capital Associates, Inc. and Capital
Associates International, Inc. as borrowers and First Union National
Bank, as Agent and Issuing Bank and the four participating financial
institutions, incorporated by reference to Exhibit 10.70 of the
November 30, 1998 Form 10-Q.
10.71 Promissory Note, dated as of November 4, 1998, in the original amount
of $131,069.25 made by James D. Edwards, Director of Capital
Associates, Inc. and Capital Associates International, Inc. and
payable to the order of Capital Associates, Inc. in payment of a
portion of the exercise price for the purchase of CAI common stock,
par value $.008 per share, upon the exercise by Mr. Edwards of a
portion of his stock options, incorporated by reference to Exhibit
10.71 of the November 30, 1998 Form 10-Q.
34 of 36
<PAGE>
Item No. Exhibit Index
10.72 Security Agreement and Stock Pledge Agreement, dated as of November 4,
1998, pledging 86,250 shares of CAI common stock, par value $.008 per
share, executed by James D. Walker, Director of Capital Associates,
Inc. and Capital Associates International, Inc. and delivered to
Capital Associates, Inc. to secure payment and performance of Mr.
Edwards promissory note to Capital Associates International, Inc, in
the original principal amount of $131,069.25, incorporated by
reference to Exhibit 10.72 of the November 30, 1998 Form 10-Q.
10.73 Fourth Amendment to Loan and Security Agreement dated as of December
22, 1998 by and between Capital Associates, Inc. and Capital
Associates International, Inc. as borrowers and First Union National
Bank, as Agent and Issuing Bank and the four participating financial
institutions, incorporated by reference to Exhibit 10.73 of the
February 28, 1999 Form 10-Q.
10.74 Warehousing Loan and Security Agreement dated as of December 20, 1998
by and between Capital Associates International, Inc. as borrowers and
NationsBanc Leasing Corporation as Lender with respect to a $15
million Lease-Collateralized Loan Facility, incorporated by reference
to Exhibit 10.74 of the February 28, 1999 Form 10-Q.
10.75 Fifth Amendment to Loan and Security Agreement dated as of August 11,
1999 by and between Capital Associates, Inc. and Capital Associates
International, Inc. as borrowers and First Union National Bank, as
Agent and Issuing Bank and the four participating financial
institutions.
10.76 Subordination Agreement dated as of August 13, 1999 by and between
Capital Associates, Inc. and Capital Associates International, Inc. as
borrowers and James D. Walker and First Union National Bank, as Agent
and Issuing Bank and the four participating financial institutions.
10.77 Subordination Agreement dated as of August 13, 1999 by and between
Capital Associates, Inc. and Capital Associates International, Inc. as
borrowers and William H. Buckland and First Union National Bank, as
Agent and Issuing Bank and the four participating financial
institutions.
21 List of Subsidiaries
23 Consent of KPMG LLP
27 Financial Data Schedule
35 of 36
<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: September 13, 1999 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/Dana T. Martin Assistant Vice President and Controller
- ----------------------- (Principal Accounting Officer)
Dana T. Martin
Each of the above signatures is
affixed as of September 13, 1999
36 of 36
<PAGE>
INDEX OF FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Financial Statements
- --------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of May 31, 1999 and 1998 F-3
Consolidated Statements of Income for
the Years Ended May 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended May 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-24
Schedule
- --------
Independent Auditors' Report F-25
Schedule II - Valuation and Qualifying Accounts and Reserves
for the Years Ended May 31, 1999, 1998 and 1997 F-26
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Capital Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Associates, Inc. and subsidiaries as of May 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
-----------------------
KPMG LLP
Denver, Colorado
September 10, 1999
F-2
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and par value)
ASSETS
May 31,
----------------------
1999 1998
--------- ---------
Cash and cash equivalents $ 7,926 $ 17,684
Receivable from affiliated limited partnerships 744 352
Accounts receivable, net 7,992 5,835
Inventory 2,578 1,141
Residual values, net, arising from equipment under
lease sold to private investors 4,469 4,277
Net investment in direct finance leases 42,116 31,181
Leased equipment, net 150,338 104,825
Investment in affiliated limited partnerships 1,957 3,589
Other 5,448 4,883
Deferred income taxes 3,400 2,500
Discounted lease rentals assigned to lenders arising
from equipment sale transactions 19,773 37,626
--------- ---------
$ 246,741 $ 213,893
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse debt $ 50,060 $ 49,088
Accounts payable - equipment purchases 29,806 25,029
Accounts payable and other liabilities 15,621 10,279
Discounted lease rentals 125,639 104,311
--------- ---------
221,126 188,707
--------- ---------
Commitments and contingencies (Notes 9, 11, 16 and 17)
Stockholders' equity:
Common stock, $.008 par value, 15,000,000 shares
authorized, 5,254,000 and 5,165,000 shares issued 42 41
Additional paid-in capital 16,829 16,854
Retained earnings 8,771 8,374
Treasury stock, at cost (27) (83)
--------- ---------
Total stockholders' equity 25,615 25,186
--------- ---------
$ 246,741 $ 213,893
========= =========
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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenue:
Equipment sales to PIFs $ 18,996 $ 48,648 $ 66,987
Other equipment sales 174,918 199,610 137,558
Leasing 42,614 25,101 14,420
Interest 2,219 3,487 4,828
Other 4,623 4,228 3,741
---------- ---------- ----------
Total revenue 243,370 281,074 227,534
---------- ---------- ----------
Costs and expenses:
Equipment sales to PIFs 18,559 47,558 65,545
Other equipment sales 169,174 193,144 134,473
Leasing 27,260 17,337 8,928
Operating and other expenses 15,513 11,830 9,568
Provision for losses 555 705 365
Interest:
Non-recourse debt 8,503 6,123 6,012
Recourse debt 3,409 2,857 1,900
---------- ---------- ----------
Total costs and expenses 242,973 279,554 226,791
---------- ---------- ----------
Income before income taxes 397 1,520 743
Income tax expense - - 10
---------- ---------- ----------
Net income $ 397 $ 1,520 $ 733
========== ========== ==========
Earnings per common share:
Basic $ .08 $ .30 $ .15
========== ========== ==========
Diluted $ .07 $ .28 $ .14
========== ========== ==========
Weighted average number of common
shares outstanding:
Basic 5,173,000 5,117,000 5,004,000
========== ========== ==========
Diluted 5,399,000 5,449,000 5,403,000
========== ========== ==========
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, 1996 5,139,000 $ 41 $ 17,017 $ 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 41 16,888 6,854 140,000 (282) 23,501
Issuance of common stock under
incentive stock option plan 8,000 - 14 - - - 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 41 16,854 8,374 42,000 (83) 25,186
Issuance of common stock under:
incentive stock option plan 3,000 - 31 - - - 31
non-qualified stock option plan 86,000 1 131 - - - 132
Issuance of treasury shares upon
exercise of incentive stock options - - (56) - (24,000) 56 -
Note receivable from sale of stock - - (131) - - - (131)
Net income - - - 397 - - 397
---------- ------ -------- ------- -------- ------ --------
Balance at May 31, 1999 5,254,000 $ 42 $ 16,829 $ 8,771 18,000 $ (27) $ 25,615
========== ====== ======== ======= ======== ====== ========
</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,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 397 $ 1,520 $ 733
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 29,088 18,172 9,634
Recovery of investment in direct financing leases 13,404 5,200 3,786
Proceeds from the sales of leases, net 48,433 23,536 15,693
Provision for losses 555 705 365
Deferred income tax benefit (900) (200) (400)
Deferred financing costs (245) (262) (100)
Sales-type lease margin (56) (157) (69)
Decrease (increase) in accounts receivable (2,549) (3,450) 1,651
Other (2,060) 1,836 1,879
--------- --------- ---------
Total adjustments 85,670 45,380 32,439
--------- --------- ---------
Net cash provided by operating activities 86,067 46,900 33,172
--------- --------- ---------
Cash flows from investing activities:
Equipment purchased for leasing (101,191) (71,495) (35,798)
Investment in leased office facility and in capital expenditures (562) (1,236) (452)
Net receipts from affiliated public income funds 1,632 3,427 1,810
Acquisition, net of cash acquired - (767) -
--------- --------- ---------
Net cash used for investing activities (100,121) (70,071) (34,440)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from securitization 24,708 - -
Principal payments on securitization (3,930) - -
Proceeds from discounting of lease rentals 34,404 23,127 13,686
Principal payments on discounted lease rentals (48,515) (14,716) (12,125)
Proceeds from sales of common stock 32 14 14
Purchase of non-employee stock options - - (138)
Net borrowings (payments) on revolving credit facilities (1,975) 25,953 7,507
Net borrowings (payments) on Term Loan (428) 283 (4,333)
--------- --------- ---------
Net cash provided by financing activities 4,296 34,661 4,611
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (9,758) 11,490 3,343
Cash and cash equivalents at beginning of year 17,684 6,194 2,851
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,926 $ 17,684 $ 6,194
========= ========= =========
Supplemental schedule of cash flow information:
Recourse interest paid $ 3,409 $ 2,857 $ 1,900
Non-recourse interest paid 6,291 2,892 1,514
Income taxes paid 175 928 183
Income tax refunds received 308 91 602
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from equipment
sales transactions 8,018 7,583 24,266
Assumption of discounted lease rentals in lease acquisitions 43,905 46,236 22,499
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 1999 and 1998, the
Company originated $266 million and $310 million, respectively, of
equipment leases. The principal market for the Company's activities is the
United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. For 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.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities 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 Statement of Financial Accounting Standard ("SFAS") No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-7
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
INVENTORY
Inventory consists of the following (in thousands):
1999 1998
------ -------
Retail inventory $ 1,195 $ 666
Equipment brokerage inventory 1,032 319
Equipment held for sale or re-lease 351 156
------- -------
$ 2,578 $ 1,141
======= =======
Retail inventory consists primarily of new information technology hardware
and is stated at the lower of cost (first-in, first-out method) or market.
Equipment brokerage inventory consists primarily of used equipment that has
been acquired for resale and is recorded at the lower of cost or market
value less cost to sell. Equipment held for sale or re-lease consists of
equipment recorded at the lower of cost or market value less cost to sell
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. SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), 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.
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
F-8
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
------------------------------------------
EQUIPMENT LEASING AND SALES, continued
expiration of the initial lease term. For all types of leases, the
determination of profit considers the estimated value of the equipment at
lease termination, referred to as the residual value. After the origination
of a lease, the Company may engage in financing of lease receivables on a
non-recourse basis (i.e., "non-recourse debt" or "discounted lease
rentals") and/or equipment sale transactions to reduce or recover its
investment in the equipment.
The Company's accounting methods and their financial reporting effects are
described below:
LEASE INCEPTION
DIRECT FINANCING LEASES ("DFLs") - The cost of equipment is recorded as net
investment in DFLs. Leasing revenue, which is recognized over the term of
the lease, consists of the excess of lease payments plus the estimated
residual value over the equipment's cost. Earned income is recognized
monthly to provide a constant yield and is recorded in leasing revenue in
the accompanying consolidated statements of income. Initial direct costs
("IDC") are capitalized and amortized over the lease term in proportion to
the recognition of earned income. Amortization of IDC is recorded as
leasing costs in the accompanying consolidated statements of income.
Residual values are established at lease inception equal to the estimated
value to be received from the equipment following termination of the
initial lease (which in certain circumstances includes anticipated re-lease
proceeds) as determined by the Company. In estimating such values, the
Company considers all relevant information and circumstances regarding the
equipment and the lessee.
OPERATING LEASES ("OLs") - The cost of equipment is recorded as leased
equipment and is depreciated on a straight-line basis over the lease term
to an amount equal to the estimated residual value at the lease termination
date. Leasing revenue consists principally of monthly rentals. IDC are
capitalized and amortized over the lease term in proportion to the
recognition of rental income. Depreciation expense and amortization of IDC
are recorded as leasing costs in the accompanying consolidated statements
of income. Residual values are established at lease inception equal to the
estimated value to be received from the equipment following termination of
the initial lease (which in certain circumstances includes anticipated
re-lease proceeds) as determined by the Company. In estimating such values,
the Company considers all relevant information and circumstances regarding
the equipment and the lessee. Because revenue, depreciation expense and the
resultant profit margin before interest expense are recorded on a
straight-line basis, and interest expense on discounted lease rentals is
incurred on the interest method, profit is skewed toward lower returns in
the early years of the term of an OL and higher returns in later years.
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.
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
SECURITIZATION OF LEASES - Cash proceeds from securitization financing are
recorded on the balance sheet as discounted lease rentals. See Note 9 to
Notes to Consolidated Financial Statements for a description of the
Company's Securitization Facility.
SALES TO PRIVATE INVESTORS OF EQUIPMENT UNDER LEASE - The Company may sell
title to leased equipment that in some cases is subject to existing
discounted lease rentals in equipment sale transactions with third-party
investors. In such transactions, the investors obtain ownership of the
equipment as well as rights to equipment rentals. Upon sale, the Company
records equipment sales revenue equal to the sales price of the equipment
which may include a residual interest retained by the Company (recorded as
an asset at present value using an appropriate interest rate) and records
equipment sales cost equal to the carrying value of the related assets
(including remaining unamortized IDC). Income is recorded on residual
interests retained by the Company after cumulative cash collections on such
residuals exceed the recorded asset amount. Fees for remarketing equipment
associated with such transactions are reflected in operations as realized.
Other accounts arising from private equity sales include:
DISCOUNTED LEASE RENTALS, ETC. - Pursuant to FASB Technical Bulletin No.
86-2, although private investors and PIFs may acquire the equipment sold
to them by the Company subject to the associated non-recourse debt
(i.e., discounted lease rentals), the debt is not removed from the
balance sheet unless such debt has been legally assumed by the
third-party investors. If not legally assumed, a corresponding asset
("discounted lease rentals assigned to lenders arising from equipment
sale transactions") is recorded representing the present value of the
end user rentals receivable relating to such transactions. Interest
income is recorded on the discounted lease rentals and an equal amount
of interest expense on the related liability is recorded in the
accompanying statements of income.
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.
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
EQUIPMENT BROKERAGE SALES
The Company's NBCO subsidiary purchases various types of used equipment for
resale. The cost of the equipment is recorded as inventory. When the
equipment is sold, the inventory value is removed and a gain or loss is
recorded. Revenue is recognized upon receipt of cash from the customer, if
the Company has no significant obligations to the customer after delivery.
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.
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"). CATG provides a
wide range of information technology ("IT") services, including procurement
of software and PC's and networking equipment, and IT equipment
maintenance. 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.
F-11
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisition, continued
-----------
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, 1999 was $1,375,000. Interest expense for fiscal 1999 was
approximately $169,000.
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. Goodwill amortized during the fiscal
1999 was approximately $117,000. Accumulated amortization of goodwill was
approximately $188,000 at May 31, 1999.
3. Residual Values and Other Receivables Arising from Equipment Under Lease
---------------------------------------------------------------------------
Sold to Private Investors
-------------------------
As of May 31, 1999 and 1998, 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 1999 1998
----------- ------- -------
Material handling $ 2,388 $ 2,134
Computer equipment 782 500
Mining and manufacturing 771 10
Furniture and fixtures 43 105
Other miscellaneous equipment 285 431
------- -------
Total equipment residuals 4,269 3,180
Notes receivable due directly from investors 200 1,097
------- -------
$ 4,469 $ 4,277
======= =======
Residual values arising from equipment under lease sold to private
investors were net of an allowance for losses of $3,000 and $64,000 as of
May 31, 1999 and 1998, respectively.
4. Net Investment in DFLs
----------------------
The components of the Company's net investment in DFLs as of May 31, 1999
and 1998 were (in thousands):
1999 1998
-------- --------
Minimum lease payments receivable $ 38,812 $ 32,264
Estimated residual values 9,601 4,217
IDC 452 336
Less unearned income (6,749) (5,636)
-------- --------
$ 42,116 $ 31,181
======== ========
F-12
<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, 1999 and 1998 were (in thousands):
1999 1998
--------- ---------
Information technology $ 86,793 $ 45,861
Material handling 40,067 36,312
Other technology and communication 19,541 19,349
Manufacturing 13,532 -
Furniture and fixtures 10,113 11,213
Other 11,060 8,017
Aircraft 339 343
IDC 1,567 1,128
--------- ---------
183,012 122,223
Less accumulated depreciation (31,647) (16,811)
Less allowance for losses (1,027) (587)
--------- ---------
$ 150,338 $ 104,825
========= =========
Depreciation expense related to leased equipment was $26,630,000,
$16,907,000, and $8,662,000 for fiscal years 1999, 1998 and 1997,
respectively.
6. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases on
equipment owned by the Company as of May 31, 1999, are as follows (in
thousands):
Years Ending May 31, DFLs OLs
-------------------- -------- --------
2000 $ 17,078 $ 48,129
2001 10,894 37,491
2002 5,855 21,368
2003 3,216 10,240
2004 1,607 7,657
Thereafter 162 1,175
-------- ---------
$ 38,812 $ 126,060
======== =========
7. Significant Customer and Concentration of Credit Risk
-----------------------------------------------------
During 1999 and 1998, no lessee accounted for more than 10% of leasing
revenue. During fiscal year 1997, leasing revenue from one lessee accounted
for 13% of total leasing revenue. In addition, other equipment sales
revenue related to equipment leased to that lessee accounted for 34%, 30%
and 77% of total other equipment sales revenue during fiscal year 1999,
1998 and 1997, respectively.
F-13
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Significant Customer and Concentration of Credit Risk, continued
-----------------------------------------------------
The Company leases various types of equipment to companies in diverse
industries throughout the United States. To minimize credit risk, the
Company generally leases equipment to (i) companies that have a credit
rating of not less than Baa as determined by Moody's Investor Services,
Inc., or comparable credit ratings as determined by other recognized credit
rating services, or (ii) companies, which although not rated by a
recognized credit rating service or rated below Baa, are believed by the
Company to be sufficiently creditworthy to satisfy the financial
obligations under the lease. At May 31, 1999, approximately 98% 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, 1999 bear interest at rates
between 6% and 16% with a weighted average rate of 8.6%. Aggregate
maturities of such non-recourse obligations are (in thousands):
Years Ending May 31:
2000 $ 59,619
2001 40,037
2002 15,408
2003 6,504
Thereafter 4,071
---------
$ 125,639
=========
On December 20, 1998, Capital Associates International Inc. ("CAII")
obtained $15 million in committed non-recourse financing from NationsBanc
Leasing Corporation. CAII may use the committed credit at its discretion to
finance leases under a warehousing arrangement. The loan is secured by
lease transactions financed under the facility only. The loan was primarily
underwritten utilizing the underlying credit quality of the leases pledged
as collateral under the facility.
The interest rate option associated with the facility is Prime rate minus
0.25% or LIBOR plus 2.5% (7.75% & 4.90% at May 31, 1999, respectively). The
Company is required to pay a non-usage fee of 0.2% of the unused commitment
quarterly. The outstanding balance under the facility at May 31, 1999 was
$1.3 million. The loan is included with "Discounted lease rentals" in the
accompanying consolidated Balance Sheets.
The facility contains general operating and reporting requirements,
however, no formal financial covenants are required of CAII. As of May 31,
1999, CAII was in compliance with the terms of the facility.
9. Securitization Facility
-----------------------
The Company established a securitization facility (the "Securitization
Facility") in August 1998 through a wholly-owned special purpose subsidiary
("SPS") which purchases from the Company equipment subject to lease and
related lease rental payments. The SPS in turn borrows from Concord
Minuteman Capital Company, LLC, a commercial paper conduit entity, as
Senior Lender, and Key Corporate Capital, Inc., as Junior Lender, based on
the present value of the lease rental payments after being discounted by
various factors. The Securitization Facility includes a firm commitment
allowing the Company to add leases during its initial term of 364 days. The
Securitization Facility is comprised of a senior loan with a maximum
principal amount of $50,000,000 ("Senior Loan"), a junior loan with a
maximum principal amount of $5,000,000 ("Junior Loan") and a residual loan
with a maximum principal amount of $10,000,000 ("Residual Loan").
F-14
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Securitization Facility, continued
-----------------------
The Senior Loan and the Junior Loan are each a revolving securitization
supported by a security interest in the SPS's ownership of leases and the
related lease rental payments. The SPS is required to enter into interest
rate hedges to provide protection against increasing interest rates
attributable to the outstanding Senior and Junior Loans. The Senior Loan
and the Junior Loan are each repaid out of the collections from the rental
payments attributable to the leases and are recourse only to the extent of
the underlying leases. The Senior and Junior Loans are included with
"Discounted lease rentals" in the accompanying Consolidated Balance Sheets.
The Residual Loan by Key Corporate Capital, Inc. is secured by the residual
value of the equipment acquired by the SPS and is expected to be repaid
from the proceeds related to any remarketing of the equipment. As the SPS
borrows money under the Residual Loan, the SPS lends those funds to the
Company. The loan to the Company is evidenced by a demand promissory note
which can be called only in the event of certain bankruptcy or insolvency
events relating to the Company, or if the remarketing proceeds from the
equipment, together with any other funds that the SPS has available to it
after payment of amounts owed to the Senior and Junior Lenders are
inadequate to pay the amounts then due on the Residual Loan. The Residual
Loan is included with "Recourse debt" in the accompanying Consolidated
Balance Sheets.
The Company services the leases subject to the Securitization Facility and
has been appointed the remarketer of the equipment that secures the
Residual Loan. The Securitization Facility terminates, and the right of the
Company to continue as servicer and remarketer terminates, upon the
occurrence of various events, including the Company's failure to maintain
certain financial ratios and defaults under other indebtedness of the
Company.
The Company had approximately $20 million outstanding under the Senior and
Junior Loans and approximately $3.4 million under the Residual Loan on May
31, 1999. Interest on the Senior Loan is equal to the LIBO rate (4.90% at
May 31, 1999) per annum. Interest on the Junior Loan is equal to the LIBO
rate plus 2.8% per annum. Interest on the Residual Loan is equal to the
LIBO rate plus 3.25% per annum.
10. Recourse Bank Debt
------------------
The Company's senior, secured debt facility (the "Senior Facility")
consists of a term loan, a working capital revolving credit loan ("Working
Capital Facility") and a warehouse revolving credit loan ("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"). The Senior Facility was renewed on December 23, 1998, expires
November 30, 2000, 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 LIBO rate (8.5% and 5.7%, respectively at May 31, 1999)
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 $ 61,250,000 $ 6,900,000
Borrowings at May 31, 1999 33,942,024 6,900,000
Potential availability at May 31, 1999 27,307,976 -
Applicable Prime Rate Margin - .25%
Applicable LIBO Rate Margin 2.5% 2.75%
F-15
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Recourse Bank Debt, continued
------------------
The Term Loan commitment amount is $4 million with a four-year amortization
schedule to a balloon payment of $2 million due on November 30, 1999. As of
May 31, 1999, the Term Loan balance was $2,550,000 as a result of scheduled
quarterly principal repayments. The Term Loan bears interest at Prime plus
.75%, and principal and interest are payable quarterly in arrears.
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.
As of May 31, 1999, the Company was in compliance with the terms of the
Senior Facility, except for one financial ratio covenant, for which it
received a waiver from the Lenders on August 11, 1999.
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, 1999 was approximately $1,919,110, 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 obligation is subordinate to the Company's obligations under the
Senior Facility. The Deutsche 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, 1999, both the Company and its CATG subsidiary were in
compliance with the terms of the Deutsche facility, except for one
financial ratio covenant. The Company believes it will be able to obtain a
waiver from Deutsche. However, should it not be able to obtain a waiver, it
does not believe that there would be a material adverse effect on the
financial contition or operations of the Company.
11. Related Parties
---------------
PIFs
The Company sponsors or co-sponsors three PIFs (two of which purchased
equipment under lease from the Company during fiscal year 1999). 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 no obligation to make further cash
contributions. Amounts related to the PIFs for the years ended May 31,
1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997
------- ------- -------
Equipment sales margin $ 437 $ 1,090 $ 1,442
Fees and distributions
(included in other income) 2,757 3,114 2,453
Investment contributions in
subordinated limited partnership interests - 220 280
F-16
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Related Parties, continued
---------------
OTHER RELATED PARTIES
MCC Financial Corporation ("MCC") acquired voting control of the Company
during fiscal year 1996. Two executive officers of that company, Mr. Walker
and Mr. Buckland, are directors of the Company. In addition, Mr. Walker
became President and CEO of the Company in April 1998. The Company has
entered into a consulting agreement with Mr. Buckland and an employment
agreement with Mr. Walker. During fiscal years 1999, 1998 and 1997, the
Company paid approximately $555,000, $650,000 and $810,000, respectively,
under these agreements including $150,000 for expenses of Mr. Walker in
connection with his relocation to the Company's headquarters in 1997.
On August 11, 1999, the Company borrowed $350,000 from Messrs. Buckland and
Walker and issued a subordinated note to each in the face amount of
$175,000. The notes bear interest at 7% per year plus additional contingent
interest at 9% per year based on the performance of certain residual
interests owned by the Company. Principal and interest (which accrues
quarterly) are due on August 11, 2002, subject to certain prepayment
obligations. The notes are subordinated to all existing recourse bank debt.
12. Income Taxes
------------
The components of income tax expense (benefit) charged to continuing
operations were (in thousands):
1999 1998 1997
------ ------ ------
Current:
Federal $ 765 $ -0- $ 240
State and local 135 200 170
------ ------ ------
900 200 410
------ ------ ------
Deferred:
Federal (765) -0- (100)
State and local (135) (200) (300)
------ ------ ------
(900) (200) (400)
------ ------ ------
Total tax provision $ 0 $ 0 $ 10
====== ====== ======
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:
1999 1998 1997
------ ------ ------
Computed "expected" tax expense $ 135 $ 515 $ 250
State tax provisions, net of
federal benefits 65 85 40
Reduction in valuation allowance
for deferred income tax assets (200) (600) (280)
------ ------ ------
$ 0 $ 0 $ 10
====== ====== ======
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
12. Income Taxes, continued
------------
Components of income tax expense (benefit) attributable to net income
before income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Taxes on net income before carryforwards $ 1,200 $ 200 $ 710
Benefit of investment tax credit ("ITC") carryforward utilized (300) - (300)
------- ------- -------
900 200 410
------- ------- -------
Deferred:
Tax effect of net change in temporary differences 100 1,300 (420)
Net operating loss ("NOL") carryforwards (200) (500) -
ITC carryforward utilized 300 - 300
ITC carryforward expired 100 300 -
Alternative Minimum Tax ("AMT") (900) (400) -
Decrease in valuation allowance for deferred income tax assets (300) (900) (280)
------- ------- -------
(900) (200) (400)
------- ------- -------
Provision for income taxes $ 0 $ 0 $ 10
======= ======= =======
Significant components of the Company's deferred tax liabilities and assets
as of May 31, 1999 and 1998, were as follows (in thousands):
1999 1998
------- -------
Deferred income tax liabilities:
Direct finance leases accounted for as operating leases
for income tax purposes, and equipment depreciation
for tax purposes in excess of financial reporting depreciation $ 2,000 $ 200
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 1,600 1,300
Other assets and liabilities, net - 900
------- -------
Total deferred income tax liabilities 3,600 2,400
------- -------
Deferred income tax assets:
Other assets and liabilities, net 1,100 -
NOL carryforwards 700 500
ITC carryforwards 600 1,000
AMT credit carryforwards 4,600 3,700
------- -------
Total deferred income tax assets 7,000 5,200
Valuation allowance for deferred income tax assets - (300)
------- -------
Net deferred income tax assets 7,000 4,900
------- -------
Net deferred income tax asset $ 3,400 $ 2,500
======= =======
</TABLE>
At May 31, 1999, the Company has ITC carryforwards of approximately
$600,000, which expire from 2000 through 2001, NOL carryforwards of
approximately $700,000, which expire from 2013 through 2014, and AMT
credits of approximately $4.6 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
12. Income Taxes, continued
------------
The Company had established a valuation allowance for deferred taxes due to
the uncertainty that the full amount of the ITC carryforwards will be
utilized prior to expiration. The valuation allowance was reduced in fiscal
1999 and 1998 to reflect the utilization and expiration of ITC
carryforwards for which the valuation allowance had previously been
provided (approximately $400,000 and $300,000, respectively). In addition,
the valuation allowance was reduced by an additional $600,000 and $300,000
in fiscal 1998 and 1997, respectively, to reflect a reduction in
uncertainty about the utilization of ITC carryforwards in future years. The
reductions in the valuation allowance for fiscal years 1999, 1998 and 1997
were recorded in the respective fiscal fourth quarter and resulted in
income tax benefits of $100,000, $464,000 and $227,000. 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.
13. 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, 1999, 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:
1999 1998 1997
--------- --------- ---------
Weighted average number of
common shares - basic 5,173,000 5,117,000 5,004,000
Common stock options
(utilizing treasury stock method) 226,000 332,000 399,000
--------- --------- ---------
Weighted average number of common
shares-assuming dilution 5,399,000 5,449,000 5,403,000
========= ========= =========
Common stock options totaling 296,000 were not included in the diluted
earnings per share calculation for the year ended May 31, 1999 because
their effect would have been anti-dilutive.
14. 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.
In November 1998, a director of the Company exercised stock options for
86,250 shares of common stock with an average exercise price of $1.53 by
paying the par value in cash of $690.00 and issuing a note payable to the
Company equal to approximately $131,000, the remainder of the exercise
price. The outstanding balance at May 31, 1999 was approximately $131,000
and was included in the equity section of the balance sheet. The note bears
interest at the rate of 4.5% compounded semi-annually and is due November
3, 2002.
F-19
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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>
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C> <C>
Net income As Reported $ 397,000 $ 1,520,000 $ 733,000
Pro forma $ 288,000 $ 1,349,000 $ 585,000
Basic earnings per share As Reported $ .08 $ 0.30 $ 0.15
Pro forma $ .06 $ 0.25 $ 0.13
Earnings per share assuming dilution As Reported $ .07 $ 0.28 $ 0.14
Pro forma $ .05 $ 0.25 $ 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 1999, 1998 and 1997,
respectively: no dividend yield; expected volatility of 110%, 104% and
110%; risk free interest rates of 5.61%, 5.62% and 6.58%; and expected
lives of five years.
Additional information on shares subject to options is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------- ------------------------
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 881,000 $ 2.50 649,000 $ 1.47 693,000 $ 1.23
Granted 56,000 3.69 349,000 3.99 90,000 2.88
Exercised (113,000) 1.41 (112,000) 1.18 (19,000) .81
Purchased - - - (104,000) 1.13
Forfeited (57,000) 3.74 (5,000) 2.97 (11,000) 2.10
--------- ------- ---------- ----------
Outstanding at the end of the year 767,000 2.65 881,000 2.50 649,000 1.47
========= ======= ========== ==========
Options exercisable at year-end 582,000 542,000 606,000
Weighted-average fair value of
options granted during the year $ 2.98 $ 3.60 $ 2.35
</TABLE>
F-20
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Stock Options, continued
-------------
The following table summarizes information about stock options outstanding
at May 31, 1999:
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 63,000 2.45 years $ 0.73 63,000 $ 0.73
$ 1.01 - $ 2.00 250,000 8.75 years 1.29 250,000 1.29
$ 2.01 - $ 3.00 122,000 9.05 years 2.72 85,000 2.60
$ 3.01 - $ 4.00 40,000 9.57 years 3.25 32,000 3.25
$ 4.01 - $ 5.00 292,000 9.32 years 4.13 152,000 -
------- -------
767,000 8.54 years 2.65 582,000 2.27
======= =======
15. 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 an
aggregate of $162,000 for the years ended May 31, 1999, 1998 and 1997.
16. Quarterly Financial Data (unaudited)
------------------------------------
Summarized quarterly financial data for the years ended May 31, 1999 and
1998 are (in thousands, except per share data):
Fiscal Year 1999: Total Revenue Net Income Basic Income Per Share
----------------- ------------- ---------- ----------------------
First quarter $ 67,960 $ 143 $ .03
Second quarter 52,558 146 .03
Third quarter 58,645 375 .07
Fourth quarter 64,259 (267) (.05)
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
In the fourth quarter fiscal 1999, the Company recorded a $500,000 charge
to reflect adjustments to equipment purchases payable at its CATG
subsidiary.
F-21
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Legal Proceedings
-----------------
The Company is involved in the following legal proceedings:
a. BANK ONE TEXAS, N.A. V. CAPITAL ASSOCIATES INTERNATIONAL, INC. AND
CAPITAL ASSOCIATES, INC., UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, CIVIL ACTION NO. 3-
99CV0697-G
On March 2, 1999, Bank One Texas, N.A. ("Bank One") filed a complaint
against the Company seeking recovery from the Company of $1,324,715.02
together with interest at the lesser of 18% per annum or the maximum
amount permitted by law from December 30, 1991. To date, Bank One has
not served the complaint on the Company. Bank One is alleging in the
lawsuit that the Company breached the terms of its Purchase Agreement,
dated December 30, 1991, with Bank One pursuant to which Bank One
agreed to purchase from the Company, for an initial payment of
$1,324,715.02 (the "Bank One Payment"), certain furniture, fixtures
and equipment (the "FF&E") previously leased to MBank Dallas, N.A.
("MBank"). MBank defaulted on the lease in 1989 and was eventually
placed in receivership. Bank One filed a lawsuit over the ownership of
the FF&E and certain collateral for MBank's lease obligations (the
"MBank Collateral") in January 1992 (the "MBank Litigation"). See the
Company's Annual Reports on Form 10-K for the fiscal years ended May
31, 1994 and 1995, for the history of the MBank Litigation. In August
1995, all of the parties to the MBank Litigation, except Bank One,
settled their claims with respect to the MBank Collateral. The Company
received approximately $10.8 million as part of the settlement. Later
in August 1995, the Company, pursuant to the terms of the settlement
agreement, delivered $2.2 million to Bank One in repayment of the Bank
One Payment together with interest thereon. Bank One rejected the
tender and returned the $2.2 million to The Company while purporting
to reserve all rights to make a claim to such funds in the future. In
August 1998, the trial court held that Bank One was the owner of the
FF&E. Now, a year after the trial court's decision and more than four
years since it rejected The Company's tender, Bank One is seeking
recovery of the Bank One Payment plus interest thereon since December
30, 1991.
If Bank One pursues this lawsuit, the Company intends to (1) defend
vigorously the claims asserted against it by Bank One and (2) assert
vigorously all counterclaims it may have against Bank One. The Company
believes that, at very least, it has strong defenses to the running of
any additional interest on the Bank One Payment since Bank One
rejected the Company's tender in August 1995. The Company also
believes it may have credible defenses to the repayment of any portion
of the Bank One Payment or any of the interest thereon based on Bank
One's conduct over the past eight years.
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, or the matter noted above, will have a material
adverse effect on the financial condition or operations of the
Company.
18. 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 $821,000, $650,000, and $502,000 for fiscal years 1999, 1998
and 1997, respectively.
F-22
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Commitments, continued
-----------
Minimum future rental payments required by such leases are as follows (in
thousands):
Years Ending May 31,
2000 $ 805
2001 333
2002 284
-------
$ 1,422
=======
19. Business Units
--------------
The Company conducts business with external customers through the
operations of its Capital Associates ("Leasing") and Capital Associates
Technology Group ("Technology Group") business units. Certain legal,
accounting and finance, personnel and other administrative support services
are provided by employees of Leasing on behalf of Technology Group. Direct
costs of $150,000 in 1999 associated with these services have been
allocated from Leasing to Technology Group. During 1998, services performed
by Leasing on behalf of Technology Group were immaterial.
In evaluating the financial performance of each business unit, management
focuses on revenue and net income before taxes, on total assets and
recourse debt. In 1999, interest expense, net for Technology Group includes
interest associated with the term loan utilized to finance the acquisition
of CATG. Recourse debt for Technology Group includes amounts borrowed from
Deutsche only. Financial performance measurements for Leasing and
Technology Group are set forth below for each of the Company's business
units for fiscal years ending May 31, 1999 and 1998. The results for 1998
reflect information for Technology after its acquisition effective November
1, 1997.
1999 1998
--------- ---------
Revenue:
Leasing $ 216,222 $ 267,188
Technology Group 27,148 13,886
--------- ---------
$ 243,370 $ 281,074
========= =========
Interest expense, net:
Leasing $ 9,325 $ 5,361
Technology Group 368 132
--------- ---------
$ 9,693 $ 5,493
========= =========
Net income before taxes:
Leasing $ 1,439 $ 1,799
Technology Group (1,042) (279)
--------- ---------
$ 397 $ 1,520
========= =========
Total assets:
Leasing $ 240,536 $ 209,253
Technology Group 6,205 4,840
--------- ---------
$ 246,741 $ 214,093
========= =========
Recourse debt:
Leasing $ 48,141 $ 47,379
Technology Group 1,919 1,709
--------- ---------
$ 50,060 $ 49,088
========= =========
F-23
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. 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, 1999 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, 1999, discounted lease rentals and discounted lease rentals
assigned to lenders arising from equipment sale transactions of
$125,639,000 and $19,773,000, respectively, have fair values of
$120,107,000 and $18,627,000, respectively. The fair values were estimated
utilizing market rates of comparable debt having similar maturities and
credit quality as of May 31, 1999.
F-24
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Capital Associates, Inc.:
Under date of September 10, 1999, we reported on the consolidated balance sheets
of Capital Associates, Inc. and subsidiaries as of May 31, 1999 and 1998, 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,
1999, as contained in the Company's annual report on Form 10-K for the year
1999. 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.
/s/KPMG LLP
--------------------------
KPMG LLP
Denver, Colorado
September 10, 1999
F-25
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
for the Years Ended May 31, 1999, 1998 and 1997
(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(1) Period
----------- ---------- ---------- ------------- ---------
Year ended May 31, 1999:
- -----------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
- - accounts receivable $ 90 $ 76 $ (30) $ 136
Allowance for losses:
- - residual values arising from equipment
under lease sold to private investors 64 - (61) 3
- - leased equipment 587 479 (39) 1,027
------- ------ ------ -------
$ 741 $ 555 $ (130) $ 1,166
======= ====== ====== =======
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
======= ===== ====== =======
</TABLE>
(1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditors' report.
F-26
EXHIBIT 10.75
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This Fifth Amendment to Loan and Security Agreement ("Amendment")
entered into as of August 13, 1999, 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, 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, that certain
Second Amendment to Loan and Security Agreement dated as of May 29, 1998, that
certain Third Amendment to Loan and Security Agreement dated as of November 25,
1998 and that certain Fourth Amendment to Loan and Security Agreement dated as
of December 22, 1998 (collectively, the "Loan Agreement"), pursuant to which
Lenders agreed to make advances to Borrowers up to a maximum aggregate amount of
$71,250,000, evidenced by Borrowers' delivery of certain Notes to Lenders.
B. The Borrowers have requested the Loan Documents be modified in
certain respects. Agent, Lenders and Issuing Bank have consented to these
modifications subject to the terms and conditions set forth below.
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:
1. ACKNOWLEDGMENT AND WAIVER. Borrowers hereby acknowledge that they
have not met the Interest Coverage Ratio covenant contained in Section 6.9(d) of
the Loan Agreement for the Borrowers' third fiscal quarter of 1999. Upon the
effectiveness of this Amendment, Lender shall be deemed to have waived such
non-compliance, provided that Lender's waiver shall not be deemed to be a waiver
of any subsequent non-compliance of the Interest Coverage Ratio covenant, nor a
waiver of any Events of Default (other than such non-compliance) which may have
occurred.
2. AMENDMENTS TO LOAN AGREEMENT:
a. The Loan Agreement is hereby amended by adding the following to
Section 1.1:
DOCUMENTATION AGENT - European American Bank, or any
successor thereto.
-1-
<PAGE>
b. The Loan Agreement is hereby amended by adding the following to
Section 1.1:
FIFTH AMENDMENT WAIVER FEE - That certain fee in the amount of
$89,062.50 paid by Borrowers to Agent for the ratable benefit of the Lenders in
connection with the execution of the Fifth Amendment to the Loan and Security
Agreement dated August 13, 1999.
c. The Loan Agreement is hereby amended by deleting the
definition of "Interest Coverage Ratio" in its entirety and replacing it with
the following to Section 1.1:
INTEREST COVERAGE RATIO - The ratio of EBIT to
interest expense (excluding any interest expense which is
otherwise characterized as Nonrecourse Debt), determined
in accordance with GAAP on a consolidated, rolling four
quarter basis; provided however that for purposes of
calculating and determining the Interest Coverage Ratio
for the fourth fiscal quarter of 1999, the first fiscal
quarter of 2000 and the second fiscal quarter of 2000
only, the Interest Coverage Ratio shall be the ratio of
the sum of EBIT (calculated, in the fourth fiscal quarter
of 1999 only, to exclude any reduction for the payment of
the Fifth Amendment Waiver Fee (as defined in the Fifth
Amendment to Loan and Security Agreement dated August 13,
1999) plus the amount by which the total principal amount
of the Officer Subordinated Debt (as defined in the Fifth
Amendment to the Loan and Security Agreement dated August
13, 1999) exceeds $350,000, to interest expense
(excluding any interest expense which is attributable to
the Officer Subordinated Debt and any interest expense
which is otherwise characterized as Nonrecourse Debt),
determined in accordance with GAAP on a consolidated,
rolling four quarter basis.
d. The Loan Agreement is hereby amended by adding the following to
Section 1.1:
OFFICER SUBORDINATED DEBT - Any indebtedness of
Borrowers, or either of them, made by MCC Financial
Corporation Executive Deferred Compensation Plan, the
James D. Walker account or MCC Financial Corporation
Executive Deferred Compensation Plan, the William
Buckland account, which is expressly subordinated to the
Obligations of the Borrowers to the Agent and/or Lenders,
on terms and conditions are satisfactory to Agent and
Lenders in their sole discretion. Officer Subordinated
Debt shall be deemed not to constitute a transaction with
an Affiliate within the meaning of Section 7.4.
-2-
<PAGE>
e. The Loan Agreement is hereby amended by adding the following to
Section 1.1:
SUBORDINATED DEBT - any indebtedness of the
Borrowers, or either of them, including without
limitation the Officer Subordinated Debt (as defined in
the Fifth Amendment to Loan and Security Agreement dated
August 13, 1999), which is subordinated to the
Obligations of the Borrowers to Agent and/or Lenders on
terms and conditions satisfactory to Agent and Lender in
their sole discretion.
f. The Loan Agreement is hereby amended by deleting Section 6.9(d)
in its entirety and replacing it with the following:
(d) Interest Coverage Ratio:
-----------------------
(i) For the Borrower's fourth fiscal quarter of 1999, first fiscal
quarter of 2000 and second fiscal quarter of 2000, the Borrowers
shall have and maintain an Interest Coverage Ratio on a
consolidated basis, measured as of the last day of each fiscal
quarter, of not less than 1.10:1; provided that the Interest
Coverage Ratio on a stand alone basis calculated for, and based on
the financial results of, the second fiscal quarter of 2000, shall
be at least 1.20:1;
(ii) Beginning with the third fiscal quarter of 2000, and at all
times thereafter, Borrowers shall have and maintain at all times an
Interest Coverage Ratio on a consolidated basis, measured as of the
last day of each fiscal quarter, of not less than 1.20:1.
g. The Loan Agreement is hereby amended by deleting Section 6.9(b)
in its entirety and replacing it with the following:
(b) NET INCOME/LOSS: Borrowers shall not suffer an operating
loss and/or incur negative net income on a consolidated basis in
excess of $250,000 during any two consecutive fiscal quarters. For
the fourth fiscal quarter of 1999 only, Borrower's net income, for
the purposes of this covenant, shall be determined by adding the
principal amount of the Officer Subordinated Debt to Borrowers' net
income and excluding any reduction for the payment of the Fifth
Amendment Waiver Fee.
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<PAGE>
h. The Loan Agreement is hereby amended by deleting Section 7.6(b)
in its entirety and replacing it with the following:
(b) Neither Borrower shall borrow money from, or
incur indebtedness to, any Person other than (i) in the
form of Nonrecourse Debt; (ii) pursuant to a
Securitization Residual Financing, or (iii) in the form
of any Subordinated Debt (as defined in the Fifth
Amendment to Loan and Security Agreement dated August13,
1999).
i. The Loan Agreement is hereby amended by deleting Section
9.15(c) in its entirety and replacing it with the following:
(c) Notwithstanding anything to the contrary contained in
subparagraph (a) above, Agent shall not, without the prior
written consent of the SuperMajority Lenders: (i) enter into
any written amendment to any of the Loan Documents; (ii) except
as set forth in the last sentence of this subsection (c), waive
Borrower's compliance with the terms and conditions of the Loan
Document or any Event of Default hereunder or thereunder; or
(iii) consent to Borrower taking any action which, if taken,
would constitute an Event of Default under this Agreement or
under any of the Loan Documents. Notwithstanding anything to
the contrary contained in clause (ii) above, Agent shall not,
without the prior written consent of the SuperMajority Lenders
and the Documentation Agent, waive Borrower's compliance with
the financial covenants set forth in Section 6.9 above.
3. WAIVER FEE: In consideration for Lenders agreeing to the waiver of
the Existing Default and the other modifications to the Loan Agreement contained
in this Amendment, Borrowers shall pay to Agent, for the ratable benefit of the
Lenders, contemporaneously with the execution hereof, a Fifth Amendment Waiver
Fee in the amount of $89,062.50. This Fifth Amendment Waiver Fee is fully earned
and non-refundable.
4. BORROWER'S RATIFICATION AND RECONFIRMATION: Borrowers agree that
they have no defense or set-offs against the Agent or Lenders, their respective
officers, directors, employees, agents or attorneys with respect to the
Revolving Credit Notes, the Working Capital Notes, the Term Loan Notes, the Loan
Agreement or related instruments, agreements or documents, all of which, except
as expressly modified herein, remain in full force and effect. Borrowers hereby
-4-
<PAGE>
ratify and confirm their Obligations under the Revolving Credit Notes, the
Working Capital Notes, the Term Loan Notes, the Loan Agreement and related
instruments, agreements and documents (each as amended hereby or in accordance
herewith) and agree that the execution and delivery of this Amendment does not
in any way diminish or invalidate any of their Obligations thereunder. As
security for their Obligations thereunder, Borrowers reconfirm the prior
security interest and lien in and to all of their right, title and interest in
and to the Collateral. Borrowers confirm that all of the Collateral and security
interests continue to secure the Obligations and nothing contained herein shall
in any way limit, alter or impair the validity, priority, enforceability or
perfection of Agent's liens and security interests.
5. REAFFIRMATION OF SURETIES: Each Surety party to that certain
Amended and Restated Surety Agreement dated as of December 22, 1998 in favor of
Agent for the benefit of the Lenders, by execution hereof in their capacity as
Sureties, hereby consents to the amendments set forth in this Amendment, and
acknowledges that the Amended and Restated Surety Agreement is in full force and
effect and that each remains, jointly and severally liable for Obligations of
Borrowers to Agent and Lenders under the Loan Documents, as amended hereby.
6. REPRESENTATIONS AND WARRANTIES:
a. Borrowers represent and warrant that, except as explicitly
described in Section 1 above, 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 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.
d. All warranties and representations made to Lender under the
Loan Agreement and any related documents are true and correct as of the date
hereof.
7. CONDITIONS TO EFFECTIVENESS: This Amendment shall be effective
upon satisfaction of each of the following conditions (all documents to be in
form and substance satisfactory to Agent and Agent's counsel):
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<PAGE>
a. Execution and delivery by the Borrowers and the Sureties of
this Amendment to the Agent;
b. Execution and Delivery of the Subordination Agreements from MCC
Financial Corporation Executive Deferred Compensation Plan, the
James D. Walker account and MCC Financial Corporation Executive
Deferred Compensation Plan, the William Buckland account,
subordinating the Officer Subordinated Debt to the Obligations owed
to the Lenders under the Loan Agreement.
c. Delivery of an updated Exhibit 5.10 (relating to guarantees,
investments and borrowing).
d. True and correct copies of the promissory notes evidencing the
Officer Subordinated Debt.
e. Such other agreements, documents and instruments as Agent may
reasonably request; and
f. Payment of the Fifth Amendment Waiver Fee.
8. MISCELLANEOUS:
a. This Amendment shall be governed by, construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
b. 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.
c. 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.
d. Signatures by facsimiles shall bind the parties hereto.
-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/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
AGENT:
FIRST UNION NATIONAL BANK, Successor by
Merger to CoreStates Bank, N.A.
By: /s/Hugh Connelly
--------------------------------
Hugh Connelly
Title: Vice President
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<PAGE>
LENDERS:
FIRST UNION NATIONAL BANK, Successor by
Merger to CoreStates Bank, N.A., as Lender
and Issuing Bank
By: /s/Hugh Connelly
--------------------------------
Hugh Connelly
Title: Vice President
BANKBOSTON, N.A.
By: /s/Dierdre Holland
--------------------------------
Dierdre Holland
Title: Vice President
EUROPEAN AMERICAN BANK
By: /s/Chris Czaja
--------------------------------
Chris Czaja
Title: Vice President
NORWEST BANK COLORADO, N.A.
By: /s/Carol A. Ward
--------------------------------
Carol A. Ward
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION
By: /s/Ralph P. Atkinson
--------------------------------
Ralph P. Atkinson
Title: Vice President
SURETIES:
CAI EQUIPMENT LEASING III CORP.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
-8-
<PAGE>
CAI EQUIPMENT LEASING IV CORP.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAI EQUIPMENT LEASING V CORP.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAI EQUIPMENT LEASING VI CORP.
By: /s/Anthony M. DiPaolo
--------------------------------
Anthony M. DiPaolo
Title:
CAI LEASE SECURITIZATION I CORP.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAI LEASING CANADA, LTD.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAI SECURITIES CORPORATION
By: /s/Anthony M. DiPaolo
--------------------------------
Anthony M. DiPaolo
Title:
-9-
<PAGE>
CAPITAL ASSOCIATES INTERNATIONAL DE
MEXICO S. DE R.L. DE C.V.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAPITAL ASSOCIATES TECHNOLOGY GROUP, INC.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
CAPITAL EQUIPMENT CORPORATION
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
NAME BRAND COMPUTER OUTLET, INC.
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
WHITEWOOD EQUIPMENT CORPORATION,
f/k/a WHITEWOOD CREDIT CORPORATION
By: /s/David Sislowski
--------------------------------
David Sislowski
Title: Vice President
-10-
EXHIBIT 10.76
SUBORDINATION AGREEMENT
-----------------------
Dated: August 13, 1999
To: First Union National Bank, as Agent ("Agent") for
the Lenders and Issuing Bank named in the Loan
Agreement defined below (collectively "Lenders")
To induce the Lenders to establish and continue a credit facility for
making loans and extending credit from time to time for the joint and several
benefit of Capital Associates, Inc. and Capital Associates International, Inc.
(collectively, "Borrowers" and each a "Borrower") from time to time pursuant to
the terms of that certain Loan and Security Agreement among Borrowers, Lenders,
Sureties (as defined in the Loan Agreement) and Agent, dated as of November 26,
1997 (as has been and may hereafter be amended, supplemented or replaced from
time to time, the "Loan Agreement"), the undersigned intending to be legally
bound, hereby agrees as follows:
1. The payment of any and all Officer Subordinated Debt is expressly
subordinated to the Senior Debt to the extent and in the manner set forth in
this Subordination Agreement. The term "Officer Subordinated Debt" means the
principal of and interest on all indebtedness, liabilities, and obligations of
Borrowers, or either of them, now existing or hereafter arising, to the
undersigned pursuant to or in connection with the indebtedness of Borrowers, or
either of them, evidenced by that certain Senior Subordinated Unsecured Note
dated as of August 13, 1999 (as amended, replaced and/or substituted from time
to time, "Note"), payable to the order of the undersigned in the original
principal amount of $175,000.00. The term "Senior Debt" means any and all
Obligations (as defined in the Loan Agreement) of Borrowers to Agent and/or
Lenders under the Loan Agreement.
2. Until the Senior Debt is paid in full, Borrowers shall not pay, and
undersigned shall not accept, any payments of principal and interest (including
prepayments) associated with Officer Subordinated Debt, except that payments may
be made on the Officer Subordinated Debt before the Senior Debt is paid in full
(i) if the payments are made out of the proceeds of any new Subordinated Debt
(as defined in the Loan Agreement) incurred by the Borrowers, or either of them,
in accordance with the provisions of the Loan Agreement or (ii) on a scheduled
payment date which is a date three years after the date hereof.
3. Any payments on the Officer Subordinated Debt received by the
undersigned, other than as permitted in paragraph 2 above, shall be held in
trust for Lenders and the undersigned will forthwith turn over any such payments
in the form received, properly endorsed, to Agent to be applied to the Senior
Debt as determined by Agent.
4. No Borrower shall grant to the undersigned and the undersigned
shall not take any lien on or security interest in any of such Borrower's
property, now owned or hereafter acquired or created, without Agent's prior
written consent.
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<PAGE>
5. The undersigned agrees that it will not make any assertion or claim
in any action, suit or proceeding of any nature whatsoever in any way
challenging the priority, validity or effectiveness of the liens and security
interests granted to Agent and/or Lenders under and in connection with the Loan
Agreement, or any amendment, extension, replacement thereof or related
agreement, instrument or document among Lenders and/or Agent and Borrowers or
either of them.
6. The undersigned will not commence any action or proceeding against
Borrowers, or any of them, to recover all or any part of the Officer
Subordinated Debt not paid when due and shall at no time join with any creditor,
in bringing any proceeding against any Borrower under any liquidation,
conservatorship, bankruptcy, reorganization, rearrangement, or other insolvency
law now or hereafter existing, unless and until the Senior Debt shall be paid in
full. Subject to the foregoing, the undersigned may accelerate the amount of the
Officer Subordinated Debt upon the occurrence of (i) the acceleration of the
Senior Debt; and (ii) the filing of a petition under the Bankruptcy Code by any
Borrower.
7. In the event of any liquidation, conservatorship, bankruptcy,
reorganization, rearrangement, or other insolvency proceeding of Borrowers, or
any of them, the undersigned will at Agent's request file any claims, proofs of
claim, or other instruments of similar character necessary to enforce the
obligations of such Borrower(s) in respect of the Officer Subordinated Debt and
will hold in trust for Lenders and pay over to Agent in the same form received,
to be applied on the Senior Debt as determined by Agent, any and all money,
dividends or other assets received in any such proceedings on account of the
Officer Subordinated Debt, unless and until the Senior Debt shall be paid in
full, including without limitation interest owing to Lenders after the
commencement of a bankruptcy proceeding at the rate specified in the Loan
Agreement, whether or not such interest is an allowable claim in any such
proceeding. Agent may, as attorney-in-fact for the undersigned, take such action
on behalf of the undersigned and the undersigned hereby appoints Agent (for the
benefit of Lenders) as attorney-in-fact for the undersigned to demand, sue for,
collect, and receive any and all such money, dividends or other assets and give
acquittance therefore and to file any claim, proof of claim or other instrument
of similar character and to take such other proceedings in Agent's name or in
the name of the undersigned, as Agent or Lenders may deem necessary or advisable
for the enforcement of this Agreement. The undersigned will execute and deliver
to Agent or Lenders such other and further powers of attorney or other
instruments as either reasonably may request in order to accomplish the
foregoing.
8. Lenders and/or Agent may at any time and from time to time, without
the consent of or notice to the undersigned, without incurring responsibility to
the undersigned and without impairing or releasing any of Agent's or Lenders'
rights, or any of the obligations of the undersigned hereunder:
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<PAGE>
(a) Change the amount, manner, place or terms of payment or change
or extend the time of payment of or renew or alter the Senior Debt, or any part
thereof, or amend, supplement or replace the Loan Agreement and/or any notes
executed in connection therewith in any manner or enter into or amend,
supplement or replace in any manner any other agreement relating to the Senior
Debt;
(b) Sell, exchange, release or otherwise deal with all or any part
of any property at any time pledged or mortgaged by any party to secure or
securing the Senior Debt or any part thereof;
(c) Release anyone liable in any manner for the payment or
collection of the Senior Debt;
(d) Exercise or refrain from exercising any rights against
Borrowers or others (including the undersigned); and
(e) Apply sums paid by any party to the Senior Debt in any order
or manner as determined by Agent and Lender.
9. The undersigned will advise each future holder of all or any part
of the Officer Subordinated Debt that the Officer Subordinated Debt is
subordinated to the Senior Debt in the manner and to the extent provided herein.
The undersigned represents that no part of the Officer Subordinated Debt or any
instrument evidencing the same has been transferred or assigned and the
undersigned will not transfer or assign, except to Agent for the benefit of
Lenders, any part of the Officer Subordinated Debt while any Senior Debt remains
outstanding, unless such transfer or assignment is made expressly subject to
this Agreement. Upon Agent's request, the undersigned will in the case of any
Officer Subordinated Debt which is not evidenced by any instrument cause the
same to be evidenced by an appropriate instrument or instruments, and place
thereon and on any and all instruments evidencing the Officer Subordinated Debt
a legend in such form as Agent may determine to the effect that the indebtedness
evidenced thereby is subordinated and subject to the prior payment in full of
all Senior Debt pursuant to this Subordination Agreement, as well as deliver all
such instruments to Agent.
10. This Subordination Agreement contains the entire agreement between
the parties regarding the subject matter hereof and may be amended, supplemented
or modified only by written instrument executed by Agent, on behalf of Lenders,
and the undersigned. This Subordination Agreement, and the rights shall
terminate upon indefeasible payment in full of all liabilities and obligations
owing from Borrowers to Agent and Lenders and termination of the Revolving
Credit under the Loan Agreement.
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<PAGE>
11. The undersigned represents and warrants that neither the execution
or delivery of this Subordination Agreement nor fulfillment of nor compliance
with the terms and provisions hereof will conflict with, or result in a breach
of the terms, conditions, or provisions of or constitute a default under any
agreement or instrument to which the undersigned or any of the undersigned's
assets is now subject.
12. Any notice of acceptance of this Subordination Agreement is hereby
waived.
13. This Subordination Agreement may be assigned by Agent and/or
Lenders, or any of them, in whole or in part in connection with any assignment
or transfer of any portion of the Senior Debt.
14. This Subordination Agreement shall be binding upon the undersigned,
and the undersigned's successors, representatives and assigns.
15. Except as provided in paragraph 2 above, each Borrower agrees that
it will not make any payment on any of the Officer Subordinated Debt, or take
any other action in contravention of the provisions of this Subordination
Agreement.
16. This Subordination Agreement shall in all respects be interpreted,
construed and governed by the substantive laws of the Commonwealth of
Pennsylvania. The undersigned (i) submits to the jurisdiction of the Courts of
the Commonwealth of Pennsylvania or the United States District Court for the
Eastern District of Pennsylvania for the purposes of resolving any controversy
relating thereto and (ii) waives the right to a jury trial for the purpose of
resolving any controversy hereunder or enforcing or defending any rights or
claim hereunder or in connection herewith, whether sounding in contract, tort or
otherwise.
MCC FINANCIAL CORPORATION
EXECUTIVE DEFERRED COMPENSATION
PLAN, THE WILLIAM BUCKLAND ACCOUNT
By: /s/William Buckland
-----------------------------
William Buckland
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<PAGE>
Consented and agreed to as of the date first above written:
Capital Associates, Inc.
By: /s/David Sislowski
---------------------------------
David Sislowski
Title: Vice President
Capital Associates International, Inc.
By: /s/David Sislowski
---------------------------------
David Sislowski
Title: Vice President
First Union National Bank, as Agent
By: /s/Hugh Connelly
---------------------------------
Hugh Connelly, Vice President
-5-
EXHIBIT 10.77
SUBORDINATION AGREEMENT
Dated: August 13, 1999
To: First Union National Bank, as Agent ("Agent") for
the Lenders and Issuing Bank named in the Loan
Agreement defined below (collectively "Lenders")
To induce the Lenders to establish and continue a credit facility for
making loans and extending credit from time to time for the joint and several
benefit of Capital Associates, Inc. and Capital Associates International, Inc.
(collectively, "Borrowers" and each a "Borrower") from time to time pursuant to
the terms of that certain Loan and Security Agreement among Borrowers, Lenders,
Sureties (as defined in the Loan Agreement) and Agent, dated as of November 26,
1997 (as has been and may hereafter be amended, supplemented or replaced from
time to time, the "Loan Agreement"), the undersigned intending to be legally
bound, hereby agrees as follows:
1. The payment of any and all Officer Subordinated Debt is expressly
subordinated to the Senior Debt to the extent and in the manner set forth in
this Subordination Agreement. The term "Officer Subordinated Debt" means the
principal of and interest on all indebtedness, liabilities, and obligations of
Borrowers, or either of them, now existing or hereafter arising, to the
undersigned pursuant to or in connection with the indebtedness of Borrowers, or
either of them, evidenced by that certain Senior Subordinated Unsecured Note
dated as of August 13, 1999 (as amended, replaced and/or substituted from time
to time, "Note"), payable to the order of the undersigned in the original
principal amount of $175,000.00. The term "Senior Debt" means any and all
Obligations (as defined in the Loan Agreement) of Borrowers to Agent and/or
Lenders under the Loan Agreement.
2. Until the Senior Debt is paid in full, Borrowers shall not pay, and
undersigned shall not accept, any payments of principal and interest (including
prepayments) associated with Officer Subordinated Debt, except that payments may
be made on the Officer Subordinated Debt before the Senior Debt is paid in full
(i) if the payments are made out of the proceeds of any new Subordinated Debt
(as defined in the Loan Agreement) incurred by the Borrowers, or either of them,
in accordance with the provisions of the Loan Agreement or (ii) on a scheduled
payment date which is a date three years after the date hereof.
3. Any payments on the Officer Subordinated Debt received by the
undersigned, other than as permitted in paragraph 2 above, shall be held in
trust for Lenders and the undersigned will forthwith turn over any such payments
in the form received, properly endorsed, to Agent to be applied to the Senior
Debt as determined by Agent.
4. No Borrower shall grant to the undersigned and the undersigned
shall not take any lien on or security interest in any of such Borrower's
property, now owned or hereafter acquired or created, without Agent's prior
written consent.
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<PAGE>
5. The undersigned agrees that it will not make any assertion or claim
in any action, suit or proceeding of any nature whatsoever in any way
challenging the priority, validity or effectiveness of the liens and security
interests granted to Agent and/or Lenders under and in connection with the Loan
Agreement, or any amendment, extension, replacement thereof or related
agreement, instrument or document among Lenders and/or Agent and Borrowers or
either of them.
6. The undersigned will not commence any action or proceeding against
Borrowers, or any of them, to recover all or any part of the Officer
Subordinated Debt not paid when due and shall at no time join with any creditor,
in bringing any proceeding against any Borrower under any liquidation,
conservatorship, bankruptcy, reorganization, rearrangement, or other insolvency
law now or hereafter existing, unless and until the Senior Debt shall be paid in
full. Subject to the foregoing, the undersigned may accelerate the amount of the
Officer Subordinated Debt upon the occurrence of (i) the acceleration of the
Senior Debt; and (ii) the filing of a petition under the Bankruptcy Code by any
Borrower.
7. In the event of any liquidation, conservatorship, bankruptcy,
reorganization, rearrangement, or other insolvency proceeding of Borrowers, or
any of them, the undersigned will at Agent's request file any claims, proofs of
claim, or other instruments of similar character necessary to enforce the
obligations of such Borrower(s) in respect of the Officer Subordinated Debt and
will hold in trust for Lenders and pay over to Agent in the same form received,
to be applied on the Senior Debt as determined by Agent, any and all money,
dividends or other assets received in any such proceedings on account of the
Officer Subordinated Debt, unless and until the Senior Debt shall be paid in
full, including without limitation interest owing to Lenders after the
commencement of a bankruptcy proceeding at the rate specified in the Loan
Agreement, whether or not such interest is an allowable claim in any such
proceeding. Agent may, as attorney-in-fact for the undersigned, take such action
on behalf of the undersigned and the undersigned hereby appoints Agent (for the
benefit of Lenders) as attorney-in-fact for the undersigned to demand, sue for,
collect, and receive any and all such money, dividends or other assets and give
acquittance therefore and to file any claim, proof of claim or other instrument
of similar character and to take such other proceedings in Agent's name or in
the name of the undersigned, as Agent or Lenders may deem necessary or advisable
for the enforcement of this Agreement. The undersigned will execute and deliver
to Agent or Lenders such other and further powers of attorney or other
instruments as either reasonably may request in order to accomplish the
foregoing.
8. Lenders and/or Agent may at any time and from time to time, without
the consent of or notice to the undersigned, without incurring responsibility to
the undersigned and without impairing or releasing any of Agent's or Lenders'
rights, or any of the obligations of the undersigned hereunder:
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<PAGE>
(a) Change the amount, manner, place or terms of payment or change
or extend the time of payment of or renew or alter the Senior Debt, or any part
thereof, or amend, supplement or replace the Loan Agreement and/or any notes
executed in connection therewith in any manner or enter into or amend,
supplement or replace in any manner any other agreement relating to the Senior
Debt;
(b) Sell, exchange, release or otherwise deal with all or any part
of any property at any time pledged or mortgaged by any party to secure or
securing the Senior Debt or any part thereof;
(c) Release anyone liable in any manner for the payment or
collection of the Senior Debt;
(d) Exercise or refrain from exercising any rights against
Borrowers or others (including the undersigned); and
(e) Apply sums paid by any party to the Senior Debt in any order
or manner as determined by Agent and Lender.
9. The undersigned will advise each future holder of all or any part
of the Officer Subordinated Debt that the Officer Subordinated Debt is
subordinated to the Senior Debt in the manner and to the extent provided herein.
The undersigned represents that no part of the Officer Subordinated Debt or any
instrument evidencing the same has been transferred or assigned and the
undersigned will not transfer or assign, except to Agent for the benefit of
Lenders, any part of the Officer Subordinated Debt while any Senior Debt remains
outstanding, unless such transfer or assignment is made expressly subject to
this Agreement. Upon Agent's request, the undersigned will in the case of any
Officer Subordinated Debt which is not evidenced by any instrument cause the
same to be evidenced by an appropriate instrument or instruments, and place
thereon and on any and all instruments evidencing the Officer Subordinated Debt
a legend in such form as Agent may determine to the effect that the indebtedness
evidenced thereby is subordinated and subject to the prior payment in full of
all Senior Debt pursuant to this Subordination Agreement, as well as deliver all
such instruments to Agent.
10. This Subordination Agreement contains the entire agreement between
the parties regarding the subject matter hereof and may be amended, supplemented
or modified only by written instrument executed by Agent, on behalf of Lenders,
and the undersigned. This Subordination Agreement, and the rights shall
terminate upon indefeasible payment in full of all liabilities and obligations
owing from Borrowers to Agent and Lenders and termination of the Revolving
Credit under the Loan Agreement.
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<PAGE>
11. The undersigned represents and warrants that neither the execution
or delivery of this Subordination Agreement nor fulfillment of nor compliance
with the terms and provisions hereof will conflict with, or result in a breach
of the terms, conditions, or provisions of or constitute a default under any
agreement or instrument to which the undersigned or any of the undersigned's
assets is now subject.
12. Any notice of acceptance of this Subordination Agreement is hereby
waived.
13. This Subordination Agreement may be assigned by Agent and/or
Lenders, or any of them, in whole or in part in connection with any assignment
or transfer of any portion of the Senior Debt.
14. This Subordination Agreement shall be binding upon the undersigned,
and the undersigned's successors, representatives and assigns.
15. Except as provided in paragraph 2 above, each Borrower agrees that
it will not make any payment on any of the Officer Subordinated Debt, or take
any other action in contravention of the provisions of this Subordination
Agreement.
16. This Subordination Agreement shall in all respects be interpreted,
construed and governed by the substantive laws of the Commonwealth of
Pennsylvania. The undersigned (i) submits to the jurisdiction of the Courts of
the Commonwealth of Pennsylvania or the United States District Court for the
Eastern District of Pennsylvania for the purposes of resolving any controversy
relating thereto and (ii) waives the right to a jury trial for the purpose of
resolving any controversy hereunder or enforcing or defending any rights or
claim hereunder or in connection herewith, whether sounding in contract, tort or
otherwise.
MCC FINANCIAL CORPORATION
EXECUTIVE DEFERRED COMPENSATION
PLAN, THE JAMES D. WALKER ACCOUNT
By: /s/James D. Walker
-----------------------------
James D. Walker
-4-
<PAGE>
Consented and agreed to as of the date first above written:
Capital Associates, Inc.
By: /s/David Sislowski
---------------------------------
David Sislowski
Title: Vice President
Capital Associates International, Inc.
By: /s/David Sislowski
---------------------------------
David Sislowski
Title: Vice President
First Union National Bank, as Agent
By: /s/Hugh Connelly
---------------------------------
Hugh Connelly, Vice President
-5-
Exhibit 21
LIST OF SUBSIDIARIES
OF
CAPITAL ASSOCIATES, INC.
Place of
Name 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
Name Brand Computer Outlet Colorado
CAI-ALJ 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 September 10, 1999, relating to the
consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of
May 31, 1999 and 1998, 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, 1999, and the related schedule, which reports
appear in the May 31, 1999 Annual Report on Form 10-K of Capital Associates,
Inc.
/s/KPMG LLP
-----------------------
KPMG LLP
Denver, Colorado
September 10, 1999
<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-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 7,926
<SECURITIES> 0
<RECEIVABLES> 8,600
<ALLOWANCES> 136
<INVENTORY> 2,578
<CURRENT-ASSETS> 0
<PP&E> 150,338
<DEPRECIATION> 0
<TOTAL-ASSETS> 246,741
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 25,573
<TOTAL-LIABILITY-AND-EQUITY> 246,741
<SALES> 193,914
<TOTAL-REVENUES> 243,370
<CGS> 187,733
<TOTAL-COSTS> 214,993
<OTHER-EXPENSES> 15,513
<LOSS-PROVISION> 555
<INTEREST-EXPENSE> 11,912
<INCOME-PRETAX> 397
<INCOME-TAX> 0
<INCOME-CONTINUING> 397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397
<EPS-BASIC> .08
<EPS-DILUTED> .07
</TABLE>
