SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended November 30, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1055327
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7175 WEST JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----.
The number of shares outstanding of the Registrant's $.008 par value common
stock at January 12, 1999, was 5,211,757.
Exhibit Index - Page 18
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets - November 30, 1998 (Unaudited)
and May 31, 1998 3
Consolidated Statements of Income - Three and Six Months
Ended November 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows - Six Months Ended
November 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Exhibit Index 18
Signature 19
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
(Unaudited)
November 30, May 31,
1998 1998
------------ ---------
Cash and cash equivalents $ 3,955 $ 17,684
Receivables from affiliated limited partnerships 308 352
Accounts receivable, net 5,898 5,835
Inventory 1,997 1,141
Residual values and other receivables arising from
equipment under lease sold to private investors, net 7,507 4,277
Net investment in direct finance leases 28,329 31,181
Leased equipment, net 129,896 104,825
Investments in affiliated limited partnerships 2,582 3,589
Deferred income taxes 3,699 3,600
Other assets 4,477 4,883
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 23,825 37,626
--------- ---------
$ 212,473 $ 214,993
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse debt $ 53,029 $ 49,088
Accounts payable - equipment purchases 34,050 25,029
Accounts payable and other liabilities 14,607 11,379
Discounted lease rentals 85,309 104,311
--------- ---------
186,995 189,807
--------- ---------
Stockholders' equity:
Common stock 32 32
Additional paid-in capital 16,866 16,863
Retained earnings 8,663 8,374
Treasury stock (83) (83)
--------- ---------
Total stockholders' equity 25,478 25,186
--------- ---------
$ 212,473 $ 214,993
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue:
Equipment sales to PIFs $ 3,316 $ 12,321 $ 11,344 $ 23,703
Other equipment sales 38,897 54,458 87,512 78,933
Leasing 8,534 4,132 17,649 8,549
Interest 746 937 1,624 1,892
Other 1,065 1,391 2,388 2,200
--------- --------- --------- ---------
Total revenue 52,558 73,239 120,517 115,277
--------- --------- --------- ---------
Costs and expenses:
Equipment sales to PIFs 3,230 12,057 11,095 23,173
Other equipment sales 37,183 52,747 84,347 76,168
Leasing 5,679 2,849 11,584 5,653
Operating and other expenses 3,404 2,603 7,072 5,093
Provision for losses 25 230 50 400
Interest:
Non-recourse debt 2,053 1,318 4,200 2,667
Recourse debt 823 455 1,851 955
--------- --------- --------- ---------
Total costs and expenses 52,397 72,259 120,199 114,109
--------- --------- --------- ---------
Net income before income taxes 161 980 318 1,168
Income tax expense 15 245 29 292
--------- --------- --------- ---------
Net income $ 146 $ 735 $ 289 $ 876
========= ========= ========= =========
Earnings per common share:
Basic $ 0.03 $ 0.15 $ 0.06 $ 0.17
========= ========= ========= =========
Diluted $ 0.03 $ 0.14 $ 0.05 $ 0.16
========= ========= ========= =========
Weighted average number of
common shares outstanding:
Basic 5,149,000 5,036,000 5,129,000 5,031,000
========= ========= ========= =========
Diluted 5,419,000 5,383,000 5,398,000 5,374,000
========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
---------------------
November 30,
1998 1997
--------- ---------
Net cash provided by operating activities $ 42,442 $ 27,007
--------- ---------
Cash flows from investing activities:
Equipment purchased for leasing, net (41,740) (23,084)
Investment in leased office facility and
capital expenditures (377) (371)
Net receipts from affiliated public income funds 1,007 544
--------- ---------
Net cash used for investing activities (41,110) (22,911)
--------- ---------
Cash flows from financing activities:
Proceeds from securitization 10,527 -
Principal payments on securitization (735) -
Proceeds from discounting of lease rentals - 5,334
Principal payments on discounted lease rentals (27,133) (5,456)
Proceeds from sales of common stock 3 25
Net borrowings (payments) on revolving credit
facilities 1,609 (965)
Net borrowings on Term Loan 668 633
--------- ---------
Net cash used for financing activities (15,061) (429)
--------- ---------
Net increase (decrease) in cash and cash equivalents (13,729) 3,667
Cash and cash equivalents at beginning of period 17,684 6,194
--------- ---------
Cash and cash equivalents at end of period $ 3,955 $ 9,861
========= =========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,851 $ 955
Non-recourse interest paid 2,375 776
Income taxes paid 57 225
Income tax refunds received 260 70
Supplemental schedule of non-cash investing and
financing activities:
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 6,973 942
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. For
further information, please refer to the financial statements of Capital
Associates, Inc. (the "Company"), and the related notes, included within
the Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1998 (the "1998 Form 10-K"), previously filed with the Securities and
Exchange Commission.
The balance sheet at May 31, 1998 was derived from the audited financial
statements included in the Company's 1998 Form 10-K.
2. Securitization Facility
-----------------------
The Company established a securitization facility (the "Securitization
Facility") in August 1998 through a wholly-owned special purpose subsidiary
("SPS") which purchased from the Company equipment leases and related lease
rental payments. The SPS in turn borrowed 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").
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.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securitization Facility, continued
-----------------------
The Company will service 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 $7.9 million outstanding under the Senior and
Junior Loans and approximately $1.7 million under the Residual Loan on
November 30, 1998. Interest on the Senior Loan is equal to the LIBO rate
(5.55% at November 30, 1998) 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.
On December 14, 1998, the Company increased the amounts outstanding under
the Senior and Junior Loans by approximately $5.7 million and by
approximately $.9 million under the Residual Loan.
3. Senior Facility
---------------
The Senior Facility, as amended, was amended December 23, 1998. Under the
terms of the amendment, the term of the Senior Facility was extended from
December 24, 1998 to November 26, 2000 and the maximum amount allowable
under the Warehouse Credit Facility and the Working Capital Facility was
increased to $61,250,000 and $6,900,000, respectively.
4. Stock Options
-------------
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 November 30, 1998 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.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations
---------------------
GENERAL COMMENTS
Several factors cause operating results to fluctuate, including (i) the
seasonality of lease originations, (ii) variations in the relative
percentages of the Company's leases originated and held which are
classified as DFLs or OLs, and (iii) the level of fee income obtained from
the sale of leases in excess of lease equipment cost. 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 profit opportunities, portfolio
concentration, residual risk and its fiduciary duty to originate leases for
its PIFs.
Because the Company finances certain of its lease transactions with
recourse and non-recourse debt, the ultimate profitability of its leasing
transactions is dependent, in part, on the difference between the interest
rate inherent in the lease and the underlying debt rate. The ultimate
profitability of the Company's leasing transactions is dependent, in part,
on the general level of interest rates. Lease rates tend to rise and fall
with interest rates, although lease rate movements generally lag interest
rate movements.
Certain of the Company's competitors have access to lower cost funds.
However, the Company has developed relationships with various private
investors and formed various strategic alliances with investors that have a
lower cost of capital enabling the Company to originate and sell leases at
competitive prices. As a result of the low interest rate environment and
resulting low lease rates, the Company sells the majority of leases it
originates to private investors having a lower cost of capital than the
Company.
The Company believes that in the present market there are significant
opportunities to originate leases having competitive market rates and good
credit quality. 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.
The Company continues to evaluate additional sources of capital (including
sources such as a private debt placement or a public debt offering) which
would provide the liquidity necessary to significantly add leases to its
own portfolio. The goal of adding leases to its own portfolio would be to
increase leasing margin. Should the Company be successful in identifying
and closing on new sources of capital (for which no assurance can be
given), it intends to grow its own lease portfolio.
In fiscal year 1998, the Company made significant investments in its sales
force through an extensive training program and personnel expansion. In
addition, the Company invested significant amounts to enhance its expertise
in regards to computer marketing and wholesale forklift marketing. The
Company believes that its return on these investments will be realized in
the future through greater lease originations and increased residual
realizations from computers and forklifts. However, costs associated with
these activities are reflected as "Operating and Other Expenses".
During the six months ended November 30, 1998, the Company has continued to
invest in these areas and has incurred additional costs to enhance its
expertise in the area of semi-conductor test
8 of 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
GENERAL COMMENTS, continued
equipment and to expand its used personal computer retail capabilities. The
Company believes that lease originations and residual realizations will, in
the future, benefit from the significant costs being incurred in these
areas. Should the Company be successful in achieving the expected benefits
(for which no assurance can be given), it is anticipated that leasing
margin and/or remarketing profits would be positively impacted in the
future. However, realization of the benefits is dependent, in part, upon
adding leases to its own portfolio, and the benefits of a lease portfolio
are realized over the lease term as leasing margin, or upon lease maturity
as remarketing income. Therefore, because the costs associated with these
investments must be expensed in the period incurred in accordance with
Generally Accepted Accounting Principals, such costs are expected to
continue to exceed the revenue generated from these initiatives for at
least the next few quarters.
INTERIM FINANCIAL RESULTS
Presented below are schedules showing condensed income statement categories
and analyses of changes in those condensed categories for the Company and
its CATG division derived from the Consolidated Statements of Income
prepared solely to facilitate the discussion of results of operations that
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------- --------------------
CAI Consolidated 1998 1997 Change 1998 1997 Change
---------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 1,800 $ 1,975 $ (175) $ 3,414 $ 3,295 $ 119
Leasing margin 2,855 1,283 1,572 6,065 2,896 3,169
Other income 1,065 1,391 (326) 2,388 2,200 188
Operating and other expenses (3,404) (2,603) (801) (7,072) (5,093) (1,979)
Provision for losses (25) (230) 205 (50) (400) 350
Interest expense, net (2,130) (836) (1,294) (4,427) (1,730) (2,697)
Income taxes (15) (245) 230 (29) (292) 263
------- ------- ------- ------- ------- -------
Net income $ 146 $ 735 $ (589) $ 289 $ 876 $ (587)
======= ======= ======= ======= ======= =======
Three Months Ended Six Months Ended
November 30, November 30,
------------------- --------------------
CAI without CATG 1998 1997 Change 1998 1997 Change
---------------- ------- ------- ------- ------- ------- -------
Equipment sales margin $ 1,089 $ 1,800 $ (711) $ 1,928 $ 3,120 $(1,192)
Leasing margin 2,855 1,283 1,572 6,065 2,896 3,169
Other income 1,065 1,391 (326) 2,388 2,200 188
Operating and other expenses (2,726) (2,440) (286) (5,827) (4,930) (897)
Provision for losses (25) (230) (205) (50) (400) 350
Interest expense, net (2,109) (836) (1,273) (4,381) (1,730) (2,651)
Income taxes (15) (245) 230 (29) (292) 263
------- ------- ------- ------- ------- -------
Net income $ 134 $ 723 $ (589) $ 94 $ 864 $ (770)
======= ======= ======= ======= ======= =======
Three Months Ended Six Months Ended
November 30, November 30,
------------------- --------------------
CATG 1998 1997 Change 1998 1997 Change
---- ------- ------- ------- ------- ------- -------
Equipment sales margin $ 711 $ 175 $ 536 $ 1,486 $ 175 $ 1,311
Operating and other expenses (678) (163) (515) (1,245) (163) (1,082)
Interest expense, net (21) - (21) (46) - (46)
------- ------- ------- ------- ------- -------
Net income $ 12 $ 12 $ - $ 195 $ 12 $ 183
======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
LEASE ORIGINATIONS
For the three and six months ended November 30, 1998 and 1997, the Company
originated leases having an aggregate equipment acquisition cost of $85
million and $137 million and $87 million and $120 million, respectively.
Lease originations for the three months ended November 30, 1997 include a
one time acquisition from a PIF of a portfolio of $15.3 million, which was
sold to a private investor immediately after acquisition. Lease
originations increased to $85 million from $72 million for the three months
ended November 30, 1998 compared to the three months ended November 30,
1997 without the one-time acquisition.
Generally, originated leases are initially financed utilizing the Company's
Warehouse Credit Facility and then sold to private investors or to PIF's.
Income from the sale of leases is reported in the table above as "equipment
sales margin". In addition, the Company realizes rental or finance income
from leases held prior to sale (reported as "leasing margin" in the table
above) and incurs interest expense on the Warehouse Credit Facility during
the period the leases are held.
As a result of increased lease originations, and because the Company is
holding more leases for sale to private investors, the equipment sales
margin arising from equipment under lease sold to private investors,
leasing margin, and interest expense, net have each increased for the three
and six months ended November 30, 1998 compared to the three and six months
ended November 30, 1997.
EQUIPMENT SALES (for CAI without CATG)
Equipment sales revenue and the related equipment sales margin consists of
the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------ Increase
November 30, 1998 November 30, 1997 (Decrease)
------------------- -------------------- -----------------
Revenue Margin Revenue Margin Revenue Margin
-------- ------ -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 3,316 $ 86 $ 12,321 $ 264 $ (9,005) $ (178)
Equipment under lease sold to private
investors 32,430 713 51,215 471 (18,785) 242
-------- ------- -------- -------- -------- ------
35,746 799 63,536 735 (27,790) 64
-------- ------- -------- -------- -------- ------
Transactions subsequent to initial
lease term (remarketing revenue):
Sales of off-lease equipment 260 152 1,254 415 (994) (263)
Sales-type leases - - 56 56 (56) (56)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 138 138 594 594 (456) (456)
-------- ------- -------- -------- -------- ------
398 290 1,904 1,065 (1,506) (775)
Deduct related provision for losses - (25) - (230) - 205
-------- ------- -------- -------- -------- ------
Realization of value in excess of
provision for losses 398 265 1,904 835 (1,506) (570)
Add back related provision for losses - 25 - 230 - (205)
-------- ------- -------- -------- -------- ------
398 290 1,904 1,065 (1,506) (775)
-------- ------- -------- -------- -------- ------
Total equipment sales $ 36,144 $ 1,089 $ 65,440 $ 1,800 $(29,296) $ (711)
======== ======= ======== ======== ======== ======
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
EQUIPMENT SALES (for CAI without CATG), continued
Six Months Ended
------------------------------------------ Increase
November 30, 1998 November 30, 1997 (Decrease)
------------------- -------------------- -----------------
Revenue Margin Revenue Margin Revenue Margin
-------- ------ -------- -------- ------- ------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 11,344 $ 250 $ 23,703 $ 530 $(12,359) $ (280)
Equipment under lease sold to private
investors 72,178 ,181 74,983 903 (2,805) 278
-------- ------- -------- -------- -------- -------
83,522 1,431 98,686 1,433 (15,164) (2)
-------- ------- -------- -------- -------- -------
Transactions subsequent to initial
lease term (remarketing revenue):
Sales of off-lease equipment 2,148 262 1,382 458 766 (196)
Sales-type leases - - 56 56 (56) (56)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 235 235 1,173 1,173 (938) (938)
-------- ------- -------- -------- -------- -------
2,383 497 2,611 1,687 (228) (1,190)
Deduct related provision for losses - (50) - (400) - 350
-------- ------- -------- -------- -------- -------
Realization of value in excess of
provision for losses 2,383 447 2,611 1,287 (228) (840)
Add back related provision for losses - 50 - 400 - (350)
-------- ------- -------- -------- -------- -------
2,383 497 2,611 1,687 (228) (1,190)
-------- ------- -------- -------- -------- -------
Total equipment sales $ 85,905 $ 1,928 $101,297 $ 3,120 $(15,392) $(1,192)
======== ======= ======== ======== ======== =======
</TABLE>
Equipment Sales to PIF's
------------------------
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. As such, equipment sales to the PIFs have
declined and will continue to decline. Currently, 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. In addition, fees and distributions from the PIF's (reported as
"Other Income") has also declined.
Equipment Sales to Private Investors
------------------------------------
Equipment sales to private investors decreased for the three months ended
November 30, 1998 compared to the three months ended November 30, 1997 by
$18.8 million. The decline reflects the sale in the three months ended
November 30, 1998 of a portfolio totaling $15.3 million which was acquired
from a PIF. No similar acquisition and sale occurred during the three
months ended November 30, 1998. Residual values and other receivables
arising from equipment under lease sold to private investors, net increased
primarily due to approximately $4.0 million of receivables arising from
equipment under lease sold to private investors. These amounts have been
collected.
During the three and six months ended November 30, 1998, other equipment
sales revenue related to equipment leased to two lessees accounted for 35%
and 32%, respectively, of total other equipment sales revenue. During the
six months ended November 30, 1997, other equipment sales revenue related
to one lessee accounted for 27% and 28%, respectively of total other
equipment sales revenue.
11 of 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Related Provision for Losses
-------------------------------------------------------------
The Company has successfully realized gains on the remarketing of its
portfolio of equipment after the initial lease term for the past six years.
The remarketing of equipment for an amount greater than its book value is
reported as part of equipment sales margin (if the equipment is sold) or
leasing margin (if the equipment is re-leased). The realization of less
than the carrying value of equipment is recorded as provision for losses
(which is typically not known until remarketing after the expiration of the
initial lease term). As shown in the table above, the realizations from
sales exceeded the provision for losses during the three and six months
ended November 30, 1998 even without considering realizations from
remarketing activities recorded as leasing margin.
Remarketing revenue and the related margin sales (i.e., sales occurring
after the initial lease term) are affected by the number and dollar amount
of equipment leases that mature in a particular quarter. Because the
Company sold substantially all new lease originations to its PIFs or
private investors and retained very few lease originations for its own
account during the fiscal years preceding fiscal year 1995, and in
accordance with GAAP, the Company does not consolidate the results of its
PIFs, generally, each quarter, fewer leases mature and less equipment is
available for remarketing. In general, remarketing revenue and margin are
expected to remain at levels which are lower than fiscal 1997 and prior
years. The Company's ability to remarket additional amounts of equipment
and realize a greater amount of remarketing revenue in future periods is
dependent on adding additional leases to its portfolio. However, adding
leases to the Company's portfolio will not immediately increase the pool of
maturing leases because new leases typically are not remarketed until after
their initial term (which averages approximately four years).
Because the amount of leases added to the Company's portfolio in the past
which is now maturing has not been significant, the amount of leased
equipment available for remarketing is not consistent between quarters and
therefore the amount of remarketing revenue varies significantly between
quarters. It is expected that the quarterly variations will continue until
the Company's held portfolio is increased to a significant level.
Residual values are established equal to the estimated values to be
received from equipment following termination of the leases. In estimating
such values, the Company considers all relevant facts regarding the
equipment and the lessees, including, for example, the equipment's
remarketability, upgrade potential and the probability that the equipment
will remain in place at the end of an initial lease term. The nature of the
Company's leasing activities is that it has credit 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's policy is to record allowances for losses as soon as any
other-than-temporary declines in asset values are known. However,
chargeoffs are recorded upon the termination or remarketing of the
underlying assets. As such, chargeoffs will primarily occur subsequent to
the recording of the allowances for losses. The provision for losses
recorded during the three and six months ended November 30, 1998 reflects
the Company's best estimate of the amount necessary to maintain the
allowance for losses at a level which adequately provides for
other-than-temporary declines in the value of equipment.
12 of 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- --------- ---------
Leasing revenue $ 8,534 $ 4,132 $ 17,649 $ 8,549
Leasing costs and expenses (5,679) (2,849) (11,584) (5,653)
-------- -------- -------- --------
Leasing margin $ 2,855 $ 1,283 $ 6,065 $ 2,896
======== ======== ======== ========
Leasing margin ratio 33% 31% 34% 34%
======== ======== ======== ========
The increase in leasing revenue and leasing costs during the three and six
months ended November 30, 1998 compared to the three and six months ended
November 30, 1997 is primarily due to growth in the Company's lease
portfolio, a significant portion of which will subsequently be sold. During
the three and six months ended November 30, 1998, no lessee accounted for
more than 10% of total leasing revenue. During the three and six months
ended November 30, 1997, payments from one lessee accounted for 11% and 11%
of total leasing revenue.
Leasing margin ratio may fluctuate based upon (i) the mix of direct finance
leases and operating leases, (ii) remarketing activities, (iii) the method
used to finance leases added to the Company's lease portfolio, and (iv) 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).
OTHER INCOME
Other Income consists of the following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------
1998 1997 1998 1997
------ ------- ------ ------
Fees and distributions from the PIFs $ 683 $ 1,298 $ 1,224 $ 1,978
Management fees from private programs 294 77 612 113
Other 88 16 552 109
------- ------- ------- -------
$ 1,065 $ 1,391 $ 2,388 $ 2,200
======= ======= ======= =======
OPERATING AND OTHER EXPENSES (for CAI without CATG)
The aggregate amount of operating and other expenses increased
approximately $286,000 and $897,000 for the three and six months ended
November 30, 1998, compared to the three and six months ended November 30,
1997, respectively. The increase is primarily due to the on-going
investment in the Company's marketing and administrative infrastructure
including costs associated with the increase in marketing personnel and
costs associated with the conversion of the Company's leasing software.
13 of 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
INTEREST EXPENSE, NET (for CAI without CATG)
Interest expense, net consists of the following:
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------
1998 1997 1998 1997
------ -------- ------ ------
Interest income $ (746) $ (937) $ (1,624) $ (1,892)
Non-recourse interest expense 2,053 1,318 4,200 2,667
------- ------- -------- --------
Net non-recourse interest expense 1,307 381 2,576 775
Recourse interest expense 802 455 1,805 955
------- ------- -------- --------
Interest expense, net $ 2,109 $ 836 $ 4,401 $ 1,730
======= ======= ======== ========
The Company finances leases for its own portfolio primarily with
non-recourse debt. Interest income arises when equipment financed with
non-recourse debt is sold to investors. As a result, interest income
reported in the accompanying Consolidated Statements of Income reflect an
amount equal to non-recourse interest expense. Therefore, net non-recourse
interest expense on related discounted lease rentals pertains to the
Company's owned lease portfolio. Such amount increased due to an increase
in the average outstanding balance of related discounted lease rentals
related to growth in the Company's owned portfolio. It is anticipated that
net non-recourse interest expense on related discounted lease rentals will
continue to increase in the future as the Company adds additional leases
financed with non-recourse debt to its portfolio through its securitization
facility.
Recourse interest expense increased during the three months ended November
30, 1998 compared to the three months ended November 30, 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
Income tax expense is provided on income at the appropriate federal and
state statutory rates applicable to such earnings. The aggregate statutory
tax rate is 40%, adjusted for a reduction in the valuation allowance for
deferred income tax assets to reflect a reduction in uncertainty about the
utilization of the AMT credit carryforward in future years as a result of
the Company's recurring profitable results of operations (see Note 10 to
Notes to Consolidated Financial Statements in the 1998 Form 10-K). 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.
CATG
The Company acquired its CATG division in November of 1997. The increase in
its equipment sales margin and operating and other expenses is due
primarily to having three and six months of activity for the three and six
months ended November 30, 1998 compared to one and four months of activity
for the three and six month periods ended November 30, 1997.
14 of 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
II. Liquidity and Capital Resources
-------------------------------
The Company's activities are principally funded by proceeds from sales of
on-lease equipment (to PIFs or Private Investors), non-recourse debt,
recourse bank debt rents, fees and distributions from PIFs, sales or
re-leases of equipment after the expiration of the initial lease terms and
the Securitization Facility. 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.
The Senior Facility, as amended, was amended December 23, 1998. Under the
terms of the amendment, the term of the Senior Facility was extended from
December 24, 1998 to November 26, 2000 and the maximum amount allowable
under the Warehouse Credit Facility and the Working Capital Facility was
increased to $61,250,000 and $6,900,000, respectively.
The Company finances leases for its own portfolio utilizing the
Securitization Facility described in Note 2 to Notes to Consolidated
Financial Statements. The Company's ability to finance leases under the
Securitization Facility will depend upon a number of factors, including
general conditions in the credit markets and the ability of the Company to
originate equipment leases which satisfy eligibility requirements set forth
in the Securitization Facility documents. There can be no assurance that
the Company will continue to originate eligible equipment leases.
On December 14, 1998, the Company increased the amounts outstanding under
the Senior and Junior Loans by approximately $5.7 million and by
approximately $.9 million under the Residual Loan.
III. Year 2000 Issue
---------------
The Company has conducted a comprehensive review of its computer systems to
identify systems that could be affected by the Year 2000 issue. The Year
2000 issue results from computer programs being written using two digits
rather than four to define the applicable year. Certain computer programs
which have time-sensitive software could recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in major system
failures or miscalculations. Certain of the Company's software has already
been updated to correctly account for the Year 2000 issue. In addition, the
Company is engaged in a system conversion, whereby the Company's primary
lease tracking and accounting software is being replaced with new systems
which will account for the Year 2000 correctly. The Company expects that
the new system 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 conversion to a new system by December 31, 1999. In addition,
the Company does not expect any Year 2000 issues relating to its customers
and vendors to have a material effect on its financial position or results
of operations. The Company expensed all amounts related to its review of
the Year 2000 issue. Amounts expended to date to address the Year 2000
issue have been immaterial.
15 of 19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
IV. New Accounting Pronouncements
-----------------------------
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. Statement 133 is effective for fiscal years beginning after June 15,
1999, with earlier application permitted. The Company plans to adopt
Statement 133 in the first fiscal quarter of fiscal year 2001 by
redesignating and documenting all hedging relationships pursuant to the
provision of Statement 133.
The Company's hedging activities are limited to the floating-to-fixed
interest rate swap acquired in connection with the Securitization Facility.
That hedge is designed to effectively hedge the exposure to interest rate
changes. As such, the impact of adoption of SFAS 133 is not expected to be
material.
V. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
---------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may
be deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to
factors that could cause actual future results to differ both adversely and
materially from currently anticipated results, including, without
limitation, the level of lease originations, realization of residual
values, the availability and cost of financing sources and the ultimate
outcome of any contract disputes. Certain specific risks associated with
particular aspects of the Company's business are discussed in detail
throughout Item 2 of this report and Parts I and II of the 1997 Form 10-K
when and where applicable.
16 of 19
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) Other. The Company is involved in other routine legal proceedings
incidental to the conduct of its business. Management believes
that none of these legal proceedings will have a material adverse
effect on the financial condition or operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
b. Reports on Form 8-K
-------------------
None
17 of 19
<PAGE>
Item No. Exhibit Index
- -------- -------------
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.
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.
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.
27 Financial Data Schedule
18 of 19
<PAGE>
CAPITAL ASSOCIATES INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL ASSOCIATES, INC.
Registrant
Date: January 14, 1999 By: /s/Anthony M. DiPaolo
------------------------------------------
Anthony M. DiPaolo,
Senior Vice-President and
Chief Financial Officer
19 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 3,955
<SECURITIES> 0
<RECEIVABLES> 6,236
<ALLOWANCES> 30
<INVENTORY> 1,997
<CURRENT-ASSETS> 0
<PP&E> 129,896
<DEPRECIATION> 0
<TOTAL-ASSETS> 212,473
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 25,446
<TOTAL-LIABILITY-AND-EQUITY> 212,473
<SALES> 42,213
<TOTAL-REVENUES> 52,558
<CGS> 40,413
<TOTAL-COSTS> 46,092
<OTHER-EXPENSES> 3,404
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 2,876
<INCOME-PRETAX> 161
<INCOME-TAX> 15
<INCOME-CONTINUING> 146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
EXHIBIT 10.70
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This Third Amendment to Loan and Security Agreement ("Amendment") entered
into as of November 25, 1998, by and among CAPITAL ASSOCIATES, INC. and CAPITAL
ASSOCIATES INTERNATIONAL, INC. (each a Borrower and collectively "Borrowers"),
FIRST UNION NATIONAL BANK, SUCCESSOR BY MERGER TO CORESTATES BANK, N.A., a
national banking corporation, in its capacity as agent ("Agent") and as lender
and Issuing Bank and each of the lenders listed on the signature pages hereof
and Schedule A attached to the Loan Agreement, in their capacity as lenders
(singly, each is a "Lender" and collectively, all are "Lenders").
BACKGROUND
----------
A. On or about November 26, 1997, Borrowers, Agent and Lenders entered into
a certain Loan and Security Agreement, as amended by that certain First
Amendment to Loan and Security Agreement dated as of April 7, 1998 and that
certain Second Amendment to Loan and Security Agreement dated as of May 29, 1998
(collectively, the "Loan Agreement"), pursuant to which Lenders agreed to make
advances to Borrowers up to a maximum aggregate amount of $60,000,000, evidenced
by Borrowers' delivery of certain Notes to Lenders.
B. The Current Term is set to expire on November 25, 1998. Borrowers have
requested that the Current Term be extended through December 24, 1998, and Agent
and Lenders have agreed to do so subject to the terms hereof.
C. All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Loan Agreement.
NOW, THEREFORE, with the foregoing background incorporated by reference,
the parties hereto, intending to be legally bound, hereby agree as follows:
1. EXTENSION OF TERM: The Current Term of the Credit Facility is hereby
extended from November 25, 1998 through December 24, 1998, after which date no
further Loans will be made unless the Current Term is further extended, in the
Lenders' sole discretion.
2. BORROWER'S RATIFICATION: 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
Loan Agreement or related instruments, agreements or documents, all of which,
except as expressly modified herein, remain in full force and effect. Borrowers
hereby ratify and confirm their Obligations under the Revolving Credit Notes,
the Loan Agreement and related instruments, agreements and documents and agree
that the execution and delivery of this Amendment does not in any way diminish
or invalidate any of their Obligations thereunder.
3. REAFFIRMATION OF SURETIES: Each Surety, parties to a certain Surety
Agreement dated as of November 26, 1997 in favor of Agent for the benefit of the
Lenders, by execution hereof in their capacity as Sureties, hereby consent to
the amendments set forth in this Amendment, and acknowledge that the Surety
Agreement remains in full force and effect and that each remain, jointly and
severally liable for Obligations of Borrowers to Lenders.
4. REPRESENTATIONS AND WARRANTIES:
a. Borrowers represent and warrant that as of the date hereof no Event
-1-
<PAGE>
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.
5. 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.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered as of the day and year first above written.
BORROWERS:
CAPITAL ASSOCIATES, INC.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
AGENT:
FIRST UNION NATIONAL BANK, Successor by
Merger to CoreStates Bank, N.A.
By: /s/Joseph A. Romano
----------------------------------------
Title: Commercial Officer
LENDERS:
FIRST UNION NATIONAL BANK, Successor by
Merger to CoreStates Bank, N.A., as Lender
and Issuing Bank
By: /s/Joseph A. Romano
----------------------------------------
Title: Commercial Officer
NORWEST BANK COLORADO, N.A.
By: /s/Carol A. Ward
----------------------------------------
Title: Vice President
-3-
<PAGE>
BANKBOSTON, N.A.
By: /s/Deirdre M. Holland
----------------------------------------
Title: Vice President
EUROPEAN AMERICAN BANK
By: /s/Christopher M. Czaja
----------------------------------------
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION, f/k/a
COLORADO NATIONAL BANK
By: /s/Ralph P. Atkinson
----------------------------------------
Title: Vice President
SURETIES:
CAI EQUIPMENT LEASING II CORP.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: President
CAI EQUIPMENT LEASING III CORP.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAI EQUIPMENT LEASING IV CORP.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
-4-
<PAGE>
CAI EQUIPMENT LEASING V CORP.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAI PARTNERS MANAGEMENT COMPANY
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAPITAL EQUIPMENT CORPORATION
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAI EQUIPMENT LEASING VI CORP.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAI LEASE SECURITIZATION I CORP.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAI LEASING CANADA, LTD.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: President
CAPITAL ASSOCIATES INTERNATIONAL DE
MEXICO S. DE R.L. DE C.V.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
-5-
<PAGE>
WHITEWOOD EQUIPMENT CORPORATION,
f/k/a WHITEWOOD CREDIT CORPORATION
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: President
CAI SECURITIES CORPORATION
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
CAPITAL ASSOCIATES TECHNOLOGY GROUP,
INC.
By: /s/Anthony M. DiPaolo
----------------------------------------
Title: Senior Vice President
-6-
EXHIBIT 10.71
PROMISSORY NOTE
$ 131,069.25 Lakewood, Colorado
Date: As of November 4, 1998
FOR VALUE RECEIVED, the undersigned ("Maker(s)") unconditionally promises to pay
to the order of Capital Associates, Inc., a Delaware corporation, its successors
or assigns ("Holder") the sum of One Hundred Thirty One Thousand Sixty Nine &
25/100 DOLLARS ($ 131,069.25 ), and all subsequent advances made, if any, with
interest thereon from the date hereof at the rate of 4.5% per annum, on the
entire unpaid balance, compounded semi-annually, until paid in full. Principal
and interest shall be due and payable in lawful currency of the United States of
America on or before November 3, 2002, at the offices of Capital Associates
International, Inc., 7175 West Jefferson Avenue, Lakewood, Colorado 80235, or at
such other place as the Holder hereof may designate from time to time in
writing.
In the event of a default in any payment due hereunder, the entire unpaid
principal balance hereunder may be declared immediately due and payable, at the
option of Holder, and the entire principal balance, together with any additional
advances made by Holder, shall bear interest at the lesser of 12% per annum or
the highest rate then allowed by law from the date of default until paid in
full.
All payments received hereunder shall be first applied to the payment of
interest due hereunder, then to the payment of any other sums payable hereunder,
if any, and finally to the unpaid principal balance then remaining unpaid. The
principal balance and any other sums payable hereunder, may be prepaid in whole
or in part without premium or penalty.
Makers, endorsers and other persons liable hereunder expressly grant to Holder
the right to release or to agree not to sue any other person, or to suspend the
right to enforce this Note against any such person or to otherwise discharge
such person; and each such Maker, endorser or other person liable hereunder
agree that the exercise of such rights by the Holder will have no effect upon
the liability of any other person liable hereunder. Makers, endorsers or other
persons liable hereunder waive delinquency in collection, demand for payment,
presentment for payment, protest, notice of protest, notice of dishonor and all
duty or obligation of Holder to effect, protect, perfect, retain or enforce any
security for payment of this Note or to proceed against any collateral before
otherwise enforcing this Note. This Note shall be the joint and several
obligation of Makers, endorsers or other persons liable hereunder and shall be
binding upon them, their personal representatives, heirs, successors and
assigns. Furthermore, Makers, endorsers or other persons liable hereunder
expressly agree that this Note and any payment hereunder may be extended, by
Holder, from time to time without in any way affecting the liability of the
Makers, endorsers or other persons liable hereunder.
-1-
<PAGE>
Time is of the essence hereof. Makers, endorsers or other persons liable
hereunder, jointly, severally and unconditionally guarantee prompt satisfaction
when due, whether by acceleration or otherwise, of the entire outstanding
principal balance and all accrued and unpaid interest and amounts of any
additional advancements, if any, and further agree to immediately pay to Holder
upon demand, all losses, costs, expenses (including attorneys' fees) incurred by
Holder in the collection and enforcement of this Note in the event of default or
otherwise.
Each Maker executing this Note represents and warrants that this Note is binding
upon the undersigned Maker(s) in accordance with its terms, except to the extent
that enforcement of remedies may be limited by applicable bankruptcy,
insolvency, and other laws affecting the enforcement of creditors' rights
generally. Each undersigned Maker represents and warrants that the indebtedness
evidenced by this Note was incurred for business and commercial purposes, and
not for personal, family, household or agricultural purposes.
Payment and performance of all obligations under this Note are secured by the
pledge by Maker(s) of 86,250 shares of Capital Associates, Inc. common stock,
par value $.008 per share, under and pursuant to that Security Agreement and
Stock Pledge Agreement of even date herewith. It is agreed that all obligations
under this Note shall immediately become due and payable to Holder upon the sale
of such stock.
The terms and provisions of this Note shall be governed by the laws of the State
of Colorado.
Executed and delivered this 18 day of November, 1998.
MAKER(S):
/s/James D. Edwards
-------------------------------------
James D. Edwards
Address: 5415 Sunshine Canyon Road
-2-
EXHIBIT 10.72
SECURITY AGREEMENT AND STOCK PLEDGE AGREEMENT
Dated: As of November 4 , 1998
1. Borrower(s): James D. Edwards, and his successors and assigns.
---------- Address: 5415 Sunshine Canyon Road
Boulder Canyon, Colorado 80304
Telephone: (303) 449-6784
Facsimile: (303) 449-0424
Tax I.D.: ###-##-####
2. Pledgor(s): James D. Edwards
----------
3. Secured Party: Capital Associates, Inc., a Delaware corporation, and
------------- its successors and assigns
Address: 7175 West Jefferson Avenue - Suite 4000
Lakewood, Colorado 80235
Telephone: (303) 980-7585
Facsimile: (303) 980-7065
4. Collateral: The following property and all accessions thereto:
----------
4.1. Eighty Six Thousand Two Hundred Fifty ( 86,250 ) shares of $.008
par value common stock of Capital Associates, Inc., a Delaware
corporation, represented by stock certificate numbered D 0298, and
any substitutions and replacements thereof, held in the name of the
Pledgor(s), together with executed blank stock power assignment(s),
have been delivered to Secured Party by Pledgor(s) and Secured Party
hereby acknowledges receipt of said items.
5. Obligations:
-----------
5.1. Any and all obligations of Borrower(s) to Secured Party under
that certain promissory note, dated as of November 4, 1998, in the
original principal amount of $ $131,069.25 ("Loan Note") and all
other agreements and instruments executed by Borrower(s) and
delivered to Secured Party in consummating the loan represented by
the Loan Note and any other transactions contemplated in said loan.
5.2. Future advances, if any, made and/or credit granted by Secured
Party to Borrower(s) under the Loan Note, plus interest thereon;
5.3. All expenditures of any kind or nature made by Secured Party to
preserve the Collateral, including, but not limited to, all amounts
paid to discharge taxes, liens, security interests and any other
encumbrances against the Collateral, and to repair any damage to the
Collateral or otherwise preserve or maintain the Collateral and all
insurance thereon.
-1-
<PAGE>
6. SECURITY INTEREST: To secure payment and performance of the Obligations,
Pledgor(s) hereby pledge(s) and grant(s) to Secured Party a security
interest in the Collateral and in all attachments, replacements and
accessions thereto and the proceeds therefrom. Pledgor(s) hereby warrant(s)
and represent(s) that Pledgor(s) has/have, or forthwith will acquire, title
to the Collateral free and clear of all liens, security interests and
encumbrances. Contemporaneously with the execution and delivery hereof,
Pledgor(s) is/are delivering the certificates representing the Collateral
to the Secured Party. The Secured Party's security interest in the
Collateral is being granted as security only and shall not affect or modify
any obligation or liability of Borrower(s) and/or Pledgor.
7. WARRANTIES AND REPRESENTATIONS: Pledgor(s) warrant(s) and represent(s) to
Secured Party the following:
7.1. Except for the security interests created by this Agreement,
Pledgor(s) is/are the owner(s) of all of the Collateral, or will
be at the time such Collateral is created or acquired, free and
clear of all liens, security interest and encumbrances and any
rights to subscribe for or rights or options to purchase or
acquire the same (including without limitation, through any
securities convertible into or exchangeable for any such pledged
securities).
7.2. The Collateral has been duly authorized and validly issued and is
fully paid and non-assessable, and is subject to no option to
purchase for similar rights of any person. Pledgor(s) is/are not
and shall not become a party to or otherwise bound by any
agreement, document or other instrument (other than this
Agreement) that restricts in any manner the rights of any present
or future holder of any part of the Collateral with respect
thereto.
7.3. The Assignment and granting of the security interest hereunder
represents a legally binding obligation of Pledgor(s), and, upon
delivery of the stock certificates representing the Collateral,
shall constitute a valid, effective, enforceable and perfected
security interest in the Collateral in favor of Secured Party.
Furthermore, upon delivery of the stock certificates no
registration, recordation or filing with any governmental
authority is required in connection with the execution, delivery
or performance of this Agreement or necessary to establish the
validity, effectiveness or enforceability hereof or of the
security interest or for the perfection of the security interest.
Pledgor(s) has/have not performed and shall not perform any act
that might prevent the secured party from enforcing any of the
terms and conditions of this Agreement or that would limit the
secured party in any such enforcement.
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7.4. Pledgor(s) agree(s) to warrant and defend Secured Party's right,
title, security interest in and assignment of Collateral and/or
any cash or property distributed thereunder.
7.5. Pledgor(s) has/have no undisclosed knowledge of any circumstances
or conditions with respect to the Collateral that could reasonably
be expected to adversely affect the value or marketability of such
Collateral.
7.6. The execution and delivery of this Agreement will not violate any
agreement to which Pledgor(s) is/are a party or, to the best of
Pledgor's(s') knowledge, will not violate any law governing
Pledgor(s).
7.7. All information and statements with respect to Pledgor(s) on the
front of this Agreement are true and correct.
8. EVENTS OF DEFAULT: The occurrence of any of the following events shall
constitute an event of default under this Agreement:
8.1. Default in the payment or performance of any of the Obligations
when due, after written notice of such default is provided to
Borrower(s) by Secured Party and the applicable grace period had
expired;
8.2. Failure of Borrower(s) to perform or observe other covenants
contained in this Agreement, any other agreements or any other
documents or instruments evidencing an obligation of Borrower(s)
to Secured Party, whether now or hereafter in existence, and
Borrower(s) fail(s) to cure such default(s) within the allotted
time period after receipt of written notice of such default(s) by
Secured Party;
8.3. Any warranty, representation or statement of Pledgor(s) in this
Agreement, or by the Borrower(s) in any other agreement, document
or instrument, or otherwise made or furnished to Secured Party by
or on behalf of Borrower(s), proves to have been false in any
material respect when made or furnished; and
8.4. The sale or transfer of Pledgor's interest in the Collateral or
any part thereof, or interest therein, without the prior written
consent of Secured Party.
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9. REMEDIES:
9.1. Upon the occurrence of any Event of Default and at any time
thereafter, Secured Party shall have, in addition to all other
rights and remedies, the remedies of a secured party under the
Uniform Commercial Code as then in effect in the State of Colorado
("UCC"), regardless of whether the UCC applies to the security
transactions covered by this Agreement.
9.2. Upon the occurrence of any Event of Default and at any time
thereafter, the Secured Party, in its sole discretion, may assign
or transfer the whole or any part of the Obligations and may
transfer and deliver the whole or any part of the Collateral into
the name of any transferee and the transferee shall be vested with
all the rights and powers of Secured Party hereunder with respect
to the Collateral so transferred.
9.3. Upon the occurrence of any Event of Default and at any time
thereafter, the Secured Party shall have the right to receive and
retain as Collateral hereunder all dividends and other payments
and distributions made upon or with respect to the Collateral and
the Pledgor(s) shall take all such actions and execute and deliver
all such instruments as the Secured Party may deem necessary or
desirable to give effect to such right.
9.4. Upon the occurrence of an Event of Default and at any time
thereafter, the proceeds of any sale of, or other realization upon
all or any part of the Collateral and any cash held by the
Borrower(s) shall be applied by the Secured Party in the following
order of priorities: (i) to the payment of the reasonable expenses
of such sale or other realization including reasonable
compensation to the Secured Party and Counsel, and all expenses,
liabilities and advances incurred or made by the Secured Party in
connection therewith, and any other unreimbursed expenses or other
amounts for which the Secured Party is to be reimbursed hereunder,
(ii) to the ratable payment in respect of accrued but unpaid
interest, if any, on the Obligations; (iii) to the ratable payment
in respect of due but unpaid principal of the Loan Note and any
and all other unpaid Obligations; and (iv) to payment to the
Pledgor(s) or to his/her/its respective heirs, successors, or
assigns, as a court of competent jurisdiction may direct.
9.5. It is further agreed and understood that no delay on the part of
Secured Party in exercising any of the rights hereunder shall
operate as a waiver of said rights, nor shall Secured Party be
liable to the undersigned for any delay in collecting or realizing
upon the Collateral or substitutes therefor or additions thereto.
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9.6. Secured Party may delay exercising or may omit to exercise any
right or remedy under this Security Agreement without waiving that
or any other part, present or future right or remedy.
9.7. Upon payment in full of all Obligations of the Borrower(s) to the
Secured Party, the Secured Party shall deliver the Collateral to
the Pledgor(s) and this Agreement shall terminate.
9.8. Upon the occurrence of an Event of Default and at any time
thereafter (whether or not any or all of the pledged securities
have been transferred of record into the secured parties names),
the Secured Party shall have the right to the extent permitted by
law and the Pledgor(s) shall take all such action as may be
necessary or appropriate to give effect to such right, to vote and
to give consent, ratifications and waivers, and take any other
actions, with respect to any or all of the pledged securities with
the same force and effect as if the Secured Party were the
absolute and sole owner.
10. GENERAL:
10.1. The terms "Borrower(s)", "Pledgor(s)", "Secured Party",
"Collateral" and "Obligations" are defined in paragraphs 1,2,3,4
and 5;
10.2. No defaults shall be waived by Secured Party except in writing and
no waiver by Secured Party or other right under this Agreement
shall operate as a waiver of any other payment or right;
10.3. Secured Party may assign or transfer its rights under this
Agreement to any transferee. Pledgor(s) hereby agree(s) that on
such assignment or other transfer, all rights, powers and remedies
of Secured Party hereunder shall belong to and be exercisable by
the transferee.
10.4. If there is more than one Pledgor(s), all of the terms and
conditions of this Agreement shall apply to each and any of them
jointly and severally;
10.5. Without affecting any obligations of Pledgor(s) under this
Agreement, Secured Party without notice or demand may renew or
extend the terms and conditions of any of the Obligations; take or
release any other Collateral as security for any of the
Obligations, and add or release any guarantor, endorser, surety or
other party to any of the Obligations;
10.6. Beyond the exercise of reasonable care in the custody thereof, the
Secured Party shall have no duty as to any Collateral in its
possession or control or in the possession or control of any agent
or bailee or as to the preservation of rights against prior
parties or any other rights pertaining thereto. The Secured Party
shall be deemed to have exercised reasonable care in the custody
and preservation of the Collateral in their possession if the
Collateral is accorded treatment substantially equal to that
accorded by the Secured Party to their own property. The Secured
Parties shall not be liable or
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responsible for any loss or damage to any Collateral, or for any
diminution in the value thereof, by reason of the act or omission
of any agent or bailee selected by the Secured Party in good
faith.
10.7. Any consent, notice or other communication required or
contemplated by this Agreement shall be in writing. It shall be
deemed given when hand delivered or three (3) days after deposit
in U.S. mail, if mailed, certified or registered U.S. mail, return
receipt requested, postage prepaid, to the other party at the
address given on the first page hereof or at such other address
given by notice as herein provided; or one (1) business day after
being sent via air express carrier, fare prepaid; or on the
business day if received during business hours or the next
following business day such item is transmitted by facsimile;
provided such consent, notice or other communication is made to
the respective addressee at the address or facsimile number such
party set forth herein, or at such other address or facsimile
number given by notice as herein.
10.8. All of the rights of Secured Party under this Agreement shall be
cumulative and shall inure to the benefit of its successors and
assigns. All obligations of Pledgor(s) hereunder shall be binding
upon the heirs, legal representatives, successors or assigns of
Pledgor(s)
10.9. Any provision hereof contrary to, prohibited by, or invalid under
applicable laws or regulations shall be inapplicable and deemed
omitted herefrom, but shall not invalidate the remaining
provisions hereof. Pledgor(s) acknowledge(s) receipt of a true
copy of this Agreement and waive(s) acceptance hereof.
10.10. This Agreement may be signed in one or more counterparts, each of
which shall have the effect of an original, but all such
counterparts shall be deemed one and the same agreement;
10.11. The Pledgor(s) shall defend, indemnify and hold the Secured Party
harmless for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever that may be
imposed on, incurred by or asserted against the Secured Party in
any way relating to or arising out of this Agreement any other
related document or any other document contemplated by or referred
to herein or therein or the transactions contemplated by or
referred to herein or therein or the encroachment of any of the
terms hereof or thereof or otherwise arising or relating in any
manner to the pledges contemplated hereunder.
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10.12. This Agreement shall be construed under, governed by and enforced
under the laws of the State of Colorado.
10.13. This Agreement represents the entire agreement and understanding
between Secured Party and Pledgor(s) with regard to the subject
matter hereof and supersedes all prior agreements. Any
modification or amendments to this Agreement shall be in writing
and signed by the party to be charged.
10.14. Except as otherwise provided in this Agreement, the Pledgor(s)
hereby waive(s), to the extent permitted by applicable law, notice
of Judicial Hearing in connection with the Secured Party taking
possession or disposing of any of the Collateral including,
without limitation, any and all prior notices and hearings for any
prejudgment remedy or remedies and any such right that Pledgor(s)
otherwise would have under the Constitution or any statute of the
United States or any State, and, to the full extent permitted by
applicable law, Pledgor(s) hereby further waive(s) all the
requirements as to the time, place and terms of sale or other
requirements with respect to the enforcement of the Pledgor's(s')
rights and powers. Any sale or realization upon any Collateral
shall operate to divest all right, title and interest, at law or
in equity against the Pledgor(s) thereon and thereto, and shall be
a perpetual bar both at law and in equity against Pledgor(s) and
against any and all persons claiming or attempting to claim the
Collateral.
PLEDGOR(S):
/s/James. D. Edwards
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Name: James D. Edwards
Date: November 18, 199
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