ITEM 1. BUSINESS
Capital Associates, Inc. ("CAI"), was incorporated as a holding company in October 1986. Its principal operating subsidiary, Capital Associates International, Inc. ("CAII"), was incorporated in December 1976. Capital Associates, Inc., is principally engaged in (1) buying, selling, leasing and remarketing new and used equipment, (2) managing equipment on and off-lease, (3) sponsoring, co-sponsoring, managing and co-managing publicly-registered income funds and (4) arranging equipment-related financing.
HISTORICAL BUSINESS AND FISCAL YEAR 1995 SIGNIFICANT ACCOMPLISHMENTS
Prior to fiscal year 1987, the Company's principal business was (1) brokering tax-advantaged, high-technology equipment lease transactions to, and for the benefit of, third party investors and (2) remarketing high technology equipment. The Tax Reform Act of 1986 effectively eliminated substantially all of the tax benefits associated with that business for individual investors. For the period fiscal year 1987 through the end of fiscal year 1991, the Company shifted its principal business to originating leases for its own account while at the same time continuing to (a) broker tax-advantaged equipment lease transactions to, and for the benefit, of corporate investors and (b) remarketing equipment. The Company financed its equity investment in new lease originations during this period with funds drawn on its short-term recourse debt facility.
The Company reported net losses of $6,177,000, $13,630,000 and $16,066,000 during fiscal years 1992, 1991 and 1990, respectively, in part due to the change in its business and the changes in the tax laws described above. Beginning in the first quarter of fiscal year 1991, the Company agreed with its lenders to begin repaying its short-term recourse debt facility. Thereafter, through the end of the second quarter of fiscal year 1995 (the "Restructuring Period") , the Company used substantially all of its cash flow after payment of operating expenses to repay its short-term recourse debt facility. As a result of making these payments, the Company did not have the funds during the Restructuring Period to add new leases to its own lease portfolio and the Company's lease portfolio and related revenue declined significantly during this period.
During fiscal years 1995, 1994 and 1993, the Company reported net income of $1,116,000, $710,000, and $1,396,000, respectively, and twelve consecutive profitable quarters. During fiscal year 1995, the Company:
* refinanced its short-term recourse debt facility with a new recourse debt facility with a new senior bank lending group in December 1994; the new recourse debt facility (the "Debt Facility") consists of a $32 million warehousing facility (the "Warehouse Facility"), a $5 million working capital facility (the "Working Capital Facility") and a $13 million, three-year term loan (the "Term Loan")
* favorably resolved several legal proceedings in which it was involved, including the MBank litigation which had been ongoing since early 1992; the Company received approximately $8.4 million in settlement of its claims in the MBank litigation;
* raised $24 million through the offering of Class A Limited Partner Units in Capital Preferred Yield Fund III, the Company's sixth public income fund
* sold one jet aircraft and placed a previously non-earning $5 million aircraft under lease
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ITEM 1. BUSINESS, continued
HISTORICAL BUSINESS AND FISCAL YEAR 1995 SIGNIFICANT ACCOMPLISHMENTS, continued
The ability of the Company to operate profitably in the future will depend largely on the amount of new capital available to the Company and the cost of that capital. The Company continues to explore possible sources of new capital including, for example, obtaining new or additional recourse debt, obtaining new equity capital (which could include a sale of the Company, possibly coupled with an infusions of new funds from the purchaser into the Company), securitizing lease transactions, obtaining equity capital from private investor purchases of equipment leases originated by the Company and/or entering into strategic alliances/combinations with other leasing or financial services companies. The Company intends to invest any new capital that it obtains in leases for its own portfolio. If the Company is unsuccessful in obtaining new capital, the ability of the Company to continue to operate profitably will depend on (1) equipment sales margins from new lease originations, (2) originating leases for its own account with a substantial rate spread, (3) remarketing of equipment at a profit and (4) further reducing its operating costs.
LEASING ACTIVITIES
All of the Company's leases are noncancelable "net" leases which contain provisions under which the customer must make all lease payments regardless of any defects in the equipment and which require the customer to insure the equipment against casualty loss, and pay all related property, sales and other taxes. The Company originates two basic types of leases, direct financing leases ("DFLs") and operating leases ("OLs"). Under generally accepted accounting principles ("GAAP"), the primary distinguishing factor between these two types of leases is the present value of the rents in relation to the cost of the leased equipment. In the case of a DFL, the Company is contractually entitled to recover at least 90% of its original investment in the equipment from the present value of the initial lease rentals. In the case of an OL, the Company is contractually entitled to recover less than 90% of its original investment in the equipment from the present value of the initial lease rentals. As of May 31, 1995, the Company's net investment in DFLs was approximately $14 million and its net investment in OLs was approximately $20 million. See Note 1 to Notes to Consolidated Financial Statements for a detailed discussion of the Company's lease accounting policies.
Leases are originated for the Company's own account, its public income funds (the "PIFs") and private third party purchasers of equipment. The Company's lease origination marketing strategy is transaction driven. With each lease origination opportunity, the Company evaluates both the prospective lessee and the equipment to be leased. With respect to each potential lessee, the Company evaluates the lessee's credit worthiness. With respect to the equipment, the Company evaluates the remarketing, upgrade potential and the probability that the lessee will renew the lease or return the equipment at the end of the lease, as well as its importance to the lessee's business.
Prior to fiscal year 1991, more than 50% of the equipment leases originated by the Company consisted of office technology equipment, including data processing and communications equipment. Since then, the Company has de-emphasized computer equipment and diversified its own equipment lease portfolio (as well as, the equipment portfolio it manages for private investors and the PIFs) to include a wide variety of high technology equipment as well as transportation equipment, materials handling equipment, manufacturing equipment, office automation equipment, retail equipment, medical equipment, mining equipment, industrial equipment, construction equipment, furniture, fixtures and equipment and other equipment that meets the Company's underwriting standards.
The Company leases equipment to lessees in diverse industries throughout the United States. To minimize credit risk, the Company generally leases equipment to (1) lessees that have a credit rating of not less than Baa as determined by Moody's Investor Services, Inc., or comparable credit ratings as determined by other recognized credit rating services, or (2) companies, which although not rated by a recognized credit rating service or rated below Baa, are believed by the Company to be sufficiently creditworthy to satisfy the financial obligations under the lease. As of May 31, 1995, approximately 79% of the equipment owned by the Company was leased to companies that meet the above criteria.
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ITEM 1. BUSINESS, continued
LEASING ACTIVITIES, continued
The Company finances equipment purchases with the proceeds of borrowings under its Warehouse Facility, pending the sale of the equipment to a private investor or PIF, the permanent non-recourse financing of the equipment or the securitization of the equipment/lease for its own account. In the case of equipment financed with permanent non-recourse debt or securitized equipment/leases, it is the Company's policy to recover all but its equity investment in the equipment at the time it closes the financing, and all such borrowings are secured by a first lien on the equipment and the related lease rental payments. The Company recovers its equity investment in equipment for its own account from renewal rents received and/or sales proceeds realized from the equipment after repayment in full of the related permanent non-recourse debt or securitization funding.
The Company's level of lease originations declined significantly during the Restructuring Period. During that period, the Company sold substantially all new lease originations to its PIFs and retained very few lease originations for its own account. Since the closing of the Company's new Debt Facility, the Company has resumed originating more leases for its own account. Lease originations of approximately $96 million for fiscal 1995 were financed through $44 million of sales to the PIFs, $25 million of sales to private investors, discounting $8 million of noncancelable lease rentals to various financial institutions at fixed rates on a nonrecourse basis, and the remainder for the Company's account of approximately $19 million through the use of the Company's Debt Facility.
No payments from any single lessee during fiscal year 1995 accounted for more than ten percent (10%) of the Company's consolidated revenues. During fiscal years 1995, 1994 and 1993, revenue from leasing activities was approximately $8 million $13 million and $26 million, respectively.
UNDERWRITING STANDARDS
All initial leases are subject to review under the Company's underwriting standards. Each potential lessee is assigned a credit risk rating of 1 (the highest rating) through 6 (the lowest rating), based on the application of specific criteria during the credit review process. The Company originates leases for its own account that have a credit rating of 1, 2 or 3. The Company originates leases for its PIFs consistent with each PIF's own lease origination standards, which are similar to those of the Company.
The Company's Transaction Review Committee (the "TRC"), which is composed of members of senior management, (1) reviews and approves all material aspects of lease transactions, the credit ratings assigned to lessees and certain pricing and residual value assumptions, (2) advises on lease documentation requirements and deal structuring guidelines, (3) is responsible for monitoring asset quality on an on-going basis in order to estimate and assess the net realizable value at the end of the lease term for the Company's equipment and for reviewing and approving the quarterly Asset Quality Report and (4) revises and updates the underwriting standards, when and as necessary. Generally, all transactions over $3,000,000 must also be approved by a sub-committee of the Board of Directors.
REMARKETING ACTIVITIES
Remarketing activities consist of (1) lease portfolio management (i.e., managing equipment under lease) and (2) asset management (i.e., managing off-lease equipment). Revenue from remarketing activities was approximately $5 million, $9 million and $20 million during fiscal years 1995, 1994 and 1993, respectively. One of the Company's principal goals is to minimize off-lease equipment by proactively managing such equipment while it is under lease (e.g., renewing or extending the lease, or re-leasing, upgrading or adding to the equipment before the end of the initial lease term), and by selling such equipment after termination of the lease if it cannot be profitably re-leased.
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ITEM 1. BUSINESS, continued
REMARKETING ACTIVITIES, continued
The Company attempts to maximize the remarketing proceeds from, and minimize the warehousing costs for, off-lease equipment by (1) employing qualified and experienced remarketing personnel, (2) developing equipment remarketing expertise in order to maximize the profit from sales of off-lease equipment, (3) minimizing the amount of off-lease equipment stored at independently operated equipment warehouses and thereby reducing warehousing costs, (4) leasing and operating its own general equipment warehouse to further reduce warehousing costs, (5) eliminating scrap inventory from the warehouses and (6) conducting on-site equipment inspections. The Company further supports these activities by carefully monitoring the residual values of its equipment portfolio and maintaining adequate reserves on its books, when and as needed, to reflect anticipated future reductions in such values due to obsolescence and other factors.
PRIVATE INVESTOR PROGRAMS, EQUITY SYNDICATIONS AND PIFS
The Company sells ownership interests in leased equipment to third-party investors. The Company sold approximately $25 million, $43 million, and $14 million of equipment to private investors during fiscal years 1995, 1994 and 1993, respectively. The Company receives fees upon sale of its ownership interests in its leased equipment. In addition, the Company may retain participation interests in the residual value of such sold leased equipment.
The Company currently sponsors or co-sponsors six PIFs. The Company sells a significant portion of the equipment it acquires for lease to its PIFs. The Company sold approximately $44 million, $70 million and $62 million of equipment to its PIFs during fiscal years 1995, 1994 and 1993, respectively. Various subsidiaries and affiliates of the Company act as the general partners or co-general partners of the PIFs. In addition, CAII contributes cash and/or equipment to each PIF in exchange for a Class B limited partner interest ("Class B interest"). Public investors purchase units of Class A limited partnership interest ("Class A units") for cash, which the PIFs use to purchase equipment on-lease to lessees. The Company receives (1) fees for performing various services for the PIFs (subject to certain dollar limits), (2) reimbursement for organizational and offering expenses incurred in selling the Class A Units (subject to certain dollar limits), (3) Class B partner cash distributions from each PIF (subordinated to the cash returns on the Class A Units) and (4) general partner cash distributions.
Capital Preferred Yield Fund-III is the only PIF currently offering Class A units for sale to the public. In the aggregate, the six PIFs have sold $295 million of Class A units to the public through May 31, 1995. Up to $26 million of Class A units will be offered for sale to the public during fiscal year 1996. CAII's maximum remaining obligation to make Class B partner cash contributions is $0.3 million.
COMPETITION
The Company competes mainly on the basis of its remarketing capability, terms offered in its leasing transactions, reliability in meeting its commitments and customer service. The Company's continued ability to compete effectively may be materially affected by the availability of financing, the costs of such financing, and the marketplace for public income fund investments. 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 92 employees as of May 31, 1995 versus 114 employees as of May 31, 1994, none of whom were represented by a labor union. The Company believes that its employee relations are good.
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ITEM 2.
ITEM 2. PROPERTIES
The Company leases office facilities (approximately 20,000 square feet) in Lakewood, Colorado (a suburb of Denver). These facilities house the Company's administrative, financing and marketing operations and were consolidated from approximately 43,000 square feet as of June 1, 1995. The Lakewood, Colorado lease is for a term of 5 years, with 5 years remaining in the term, and with a base rent, as of May 31, 1995, of approximately $27,000 per month, plus a pro-rata share of building costs and expenses. The Lakewood, Colorado facility adequately provides for present and future needs, as currently planned. In addition, the Company leases a warehouse facility and regional marketing offices at an aggregate rental of approximately $110,000 per year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
a. THE MBANK LITIGATION. See Footnote 15 to Notes to Consolidated Financial Statements appearing elsewhere herein for a description of the MBank Litigation.
b. THE PAINEWEBBER CLASS ACTION. A series of class actions have been filed in the United States District Court for the Southern District of New York against PaineWebber Incorporated ("PaineWebber") and certain of its affiliates in connection with its sale and sponsorship of limited partnership units in various limited partnerships, one of which is PaineWebber Preferred Yield Fund L.P., one of the Company's PIFs. The Company and its subsidiary, CAI Equipment Leasing II Corporation ("CAIEL II"), are not named defendants in these class actions. On July 27, 1995 PaineWebber announced that it (1) was taking a one-time charge of $200 million during its second quarter of 1995 to cover the financial cost of resolving these actions and other related claims and (2) hoped to resolve these actions within ninety (90) days of the date of its announcement. Management believes that the PaineWebber Class Action Lawsuit will not have a material adverse effect on the financial condition or operations of the Company or CAIEL II.
c. The Company is also involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Company.
Item 4.
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, 1995.
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's common stock trades on the Nasdaq National Market under the symbol: CAII.
On June 2, 1995, the Nasdaq Stock Market, Inc. ("Nasdaq"), informed the Company that it was not in compliance with the minimum $1.00 bid price requirement (or the alternative $3 million value of public float requirement) for continued listing of its Common Stock on the Nasdaq National Market (both tests are collectively referred to herein as the "Stock Price Requirement"). At a hearing in front of Nasdaq on July 13, 1995, the Company requested an extension of time to comply with the Stock Price Requirement. By letter, dated August 2, 1995, Nasdaq (1) agreed to extend the period of time for the Company to comply with the Stock Price Requirement through August 31, 1995, and (2) advised the Company that if the Company is unable to comply with the Stock Price requirement by that date, the Company will no longer be listed on the Nasdaq National Market. The Company intends to seek a further extension of time beyond August 31, 1995 to comply with the Stock Price Requirement if it is not in compliance with such requirements as of August 31, 1995. No assurance can be given that the Company will be able to obtain such further extension of time. If the Company does not satisfy the Stock Price Requirement as of August 31, 1995, and cannot obtain a further extension of time to comply with such requirement, the Company's Common Stock will be delisted from the Nasdaq National Market and will most likely thereafter be traded on the OTC Bulletin Board.
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PART II
The following table sets forth the high and low sales prices of the Company's common stock for the periods indicated, according to published sources. High and low sales prices shown reflect inter-dealer quotations without retail markups, markdowns or commissions and do not necessarily represent actual transactions.
1996 HIGH LOW
First Quarter (through August 18, 1995) 29/32 5/8
1995 HIGH LOW
First Quarter 15/16 5/8 Second Quarter 15/16 5/8 Third Quarter 13/16 15/32 Fourth Quarter 13/16 7/16
1994 HIGH LOW
First Quarter 1 5/8 15/16 Second Quarter 1 1/2 11/16 Third Quarter 1 3/8 27/32 Fourth Quarter 15/16 13/16
On August 18, 1995, the date on which trading activity last occurred, the closing sales price of the Company's stock was $.78125. On August 18, 1995, there were approximately 230 shareholders of record and at least 800 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 to Notes to Consolidated Financial Statements for a discussion of restrictions upon CAII's ability to transfer funds to the Company in the form of cash dividends, loans or advances that limit the Company's ability to pay dividends on its outstanding Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table on the following page sets forth selected consolidated financial data for the periods indicated derived from the Company's consolidated financial statements. The data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Company's consolidated financial statements and notes thereto appearing elsewhere herein.
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Income Statement Data (in thousands, except per share and number of shares data)
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULTS OF OPERATIONS
During the preceding five fiscal years, revenue and assets have declined. The reason for this is that, during the Restructuring Period, the Company used substantially all of its cash flow after payment of operating expenses to repay its prior short-term recourse debt facility. As a result of making these payments, and until the Company closed its new Debt Facility in December 1994, the Company did not have the funds necessary to significantly add to its leasing portfolio. Because a leasing portfolio declines in size as it matures, these circumstances resulted in a substantial decline in the Company's own leasing portfolio and related revenue (referred to in this discussion as "portfolio run-off").
The Company originates leases for its own account and for sale to private investors and 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 fall with interest rates, although lease rate movements generally lag interest rate movements.
Because the Company finances its lease transactions with recourse and non-recourse debt, the ultimate profitability of leasing transactions is dependent, in part, on the difference between the interest rate inherent in the lease and the underlying debt rate ("rate spread"). Certain of the Company's competitors have access to lower cost funds than the Company. As a result, the Company is at a competitive disadvantage in pricing new leasing transactions because the Company cannot achieve rate spreads as great as some of its competitors, or cannot drop rates to win new lease transactions and remain profitable.
During fiscal years 1994 and 1995, the Company's business plan provided for originating mostly DFLs financed with permanent non-recourse debt for its own account because such leases report constant returns (after interest expense on related non-recourse debt) over the term of the DFLs (as opposed to OLs, which report lower returns during the early term of the leases). The presently low interest rate environment and the expansion by commercial banks of their leasing activities have reduced the availability of high quality DFLs. Accordingly, the Company's 1996 business plan provides for originating mostly OLs for its account.
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 of this report on Form 10-K, prepared solely to facilitate the discussion of results of operations (in thousands).
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULTS OF OPERATIONS, continued
EQUIPMENT SALES
Equipment sales revenue (and the related equipment sales margin) consists of the following (in thousands):
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULTS OF OPERATIONS, continued
EQUIPMENT SALES, continued
To partially offset the effect on income of portfolio run-off while the Company is growing its lease portfolio, one of the Company's strategies is to increase sales margins from equipment sold during its initial lease term to offset the decrease in sales margins from transactions subsequent to initial lease termination. In the ordinary course of business, the Company will (1) sell new lease originations to its PIFs (to the extent the PIFs have funds available for such purpose) or private investors and (2) sell seasoned lease transactions (previously originated leases held in the Company's portfolio) to private investors. To the extent sales of seasoned leases exceed new lease originations, growth in the Company's portfolio will be slower.
EQUIPMENT SALES TO PIFS
Equipment sales to the PIFs were lower during fiscal year 1995, as compared to fiscal year 1994, primarily because (1) the PIFs were more fully leveraged during fiscal year 1995 and, therefore, had less available borrowing capacity to acquire additional equipment and (2) only one PIF, CPYF-III, was offering Class A units for sale. Continuing to offer Class A units in CPYF-III for sale is a principal operating goal of the Company and to accomplish that goal, the Company almost doubled its PIF marketing staff of wholesalers by the end of fiscal year 1995.
Equipment sales to PIFs increased during fiscal year 1994 as compared to fiscal year 1993, principally because more leases that satisfied the Company's underwriting standards were identified, in part as a result of the opening of new sales offices.
EQUIPMENT SALES TO PRIVATE INVESTORS
Equipment sales to private investors for fiscal year 1994 included sales of approximately $14 million of "seasoned" leases (i.e., previously originated leases held in the Company's portfolio) and approximately $29 million of new lease originations. This compares to fiscal year 1995 amounts of approximately $5 million and $20 million for "seasoned" leases and new lease originations, respectively. Equipment sales to private investors during fiscal year 1995 were less than in the prior year primarily because lease originations identified for sale to private investors were less than the prior year. The continued development of a customer base of private investors and growth in new lease originations suitable for private equipment sales are principal operating goals of the Company.
MBANK SALE PROCEEDS
The increase in equipment sales margin during fiscal year 1995 as compared to fiscal year 1994 is due to the MBank sale. The parties settled their claims to the cash collateral for the original MBank lease and the Company received approximately $8.4 million from the cash collateral for the original MBank lease (net of amounts the Company has agreed to refund to BankOne, Texas N.A.). The Company recorded $6.1 million in equipment sales margin from the MBank sale (i.e., proceeds of approximately $8.4 million less a carrying value of approximately $2.3 million).
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULTS OF OPERATIONS, continued
REMARKETING OF THE PORTFOLIO AND RELATED PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value is reported as equipment sales margin (if the equipment is sold) or as leasing margin (if the equipment is re-leased). The realization of less than the carrying value of equipment (which is typically not known until remarketing subsequent to the initial lease termination has occurred) is recorded as provision for losses. As shown in the tables above, the realizations from sales exceeded the provision for losses for fiscal years 1995, 1994 and 1993, even without considering realizations from remarketing activities recorded as leasing margin as discussed below. This circumstance of realizing in excess of the aggregate carrying value on the Company's portfolio has occurred in each of the last twelve quarters.
Margins from remarketing sales (i.e., sales occurring after the initial lease term) are affected by the amount of equipment leases that matures in a particular quarter. In general, as the size of the Company's lease portfolio declines, fewer leases mature and less equipment is available for remarketing each quarter. As a result, remarketing revenue and the related margin declined during both fiscal year 1995 as compared to fiscal year 1994, and fiscal year 1994 as compared to fiscal year 1993. Remarketing revenue and margin are expected to decline further as portfolio runoff continues. 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 offset the effect of portfolio runoff because new leases typically are not remarketed until after their initial term (which averages three to four years).
Residual values are established equal to the estimated value to be received from the equipment following termination of the lease. In estimating such values, the Company considers all relevant facts regarding the equipment and the lessee, including, for example, the likelihood that the lessee will re-lease the equipment. The nature of the Company's leasing activities is that it has credit exposure and residual value exposure and, accordingly, in the ordinary course of business it will incur losses arising from these exposures. The Company performs ongoing quarterly assessments of its assets to identify other than temporary losses in value.
The provision for losses of $2.9 million recorded during fiscal year 1995 included $2.3 million recorded during the fourth fiscal quarter 1995. The provision for losses for the fiscal year included the following more significant items:
* approximately $750,000 to record the Company's loss exposure related to approximately $3 million of net book value of equipment leased to a lessee who filed Chapter 11 bankruptcy during July 1995
* approximately $550,000 recorded to write-down the carrying value of IBM equipment retained residuals to fair market values based upon current third-party quotes
* approximately $500,000 for equipment originally expected to remain with the lessee upon lease termination which the Company now believes will be returned
* approximately $400,000 recorded to write-down the carrying value of one of the Company's aircraft to fair market value because of the deteriorating financial condition of the lessee at May 31, 1995
* approximately $250,000 to record the Company's loss exposure related to approximately $350,000 of net book value of equipment leased to another lessee that filed Chapter 11 bankruptcy during December 1994.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULT OF OPERATIONS, continued
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Fiscal Years Ended May 31, --------------------------------------- 1995 1994 1993 -------- -------- --------
Leasing revenue $ 7,672 $ 13,368 $ 26,003 Leasing costs and expenses (3,893) (5,511) (12,148) Net interest expense on related discounted lease rentals (1,162) (3,343) (6,565) -------- -------- --------
Leasing margin $ 2,617 $ 4,514 $ 7,290 ======== ======== ========
Leasing margin ratio 34% 34% 28% == == ==
Leasing margin has declined as a result of portfolio run-off and is expected to decline further until the Company has significantly added to its lease portfolio. See the discussion under "Business Plan" below.
As discussed under "Business Plan" below, the Company intends to continue to grow its lease portfolio in the future, subject to profitability considerations from immediate sale of leases as discussed above. The Company's equipment under lease increased for the first time since fiscal year 1991. The changes in the Company's equipment under lease during the fiscal year ended May 31, 1995 consisted of the following (in thousands):
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULT OF OPERATIONS, continued
OTHER INCOME
Other Income consists of the following (in thousands):
Other than fees and distributions from the company-sponsored PIFs, most of the transactions above are "one-time" transactions and, accordingly, the Company does not expect to realize material amounts in the future with respect to the Other Income items listed above.
OPERATING AND OTHER EXPENSES
Operating and other expenses decreased approximately $0.7 million (6%) for fiscal year 1995, compared to fiscal year 1994 due to on-going efforts to minimize costs.
Operating and other expenses decreased approximately $1.8 million (12%) for fiscal year 1994, compared to fiscal year 1993. The decrease was principally due to (1) approximately $0.4 million from reductions in restructuring costs, related to the Company's prior debt facility, (2) approximately $0.8 million from compensation expense reductions and (3) a reduction of approximately $0.6 million in legal fees.
INTEREST INCOME AND EXPENSE
Interest income on discounted lease rentals arises when equipment financed with non-recourse debt is sold to investors. The Consolidated Statements of Income include an equal amount of interest expense. The decline in interest income and non-recourse debt interest expense is due to portfolio run-off.
Over the last three fiscal years, the decrease in recourse debt interest expense reflects the decline in interest rates and the continuing reduction in the outstanding balance of the Company's Debt Facility.
INCOME TAXES
Income tax expense is provided on income at the appropriate statutory rates applicable to such earnings. The appropriate statutory tax rate for fiscal years 1995, 1994 and 1993 was 40%. Adjustments to the valuation allowance are recognized as a separate component of the provision for income tax expense. Consequently, the actual income tax rate for 1995 was less than the effective rate of 40% due to the reduction in the valuation allowance of $230,000.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
I. RESULT OF OPERATIONS, continued
INCOME TAXES, continued
Income tax expense does not reflect actual tax payments by the Company because net operating loss ("NOL") carryforwards and investment tax credit ("ITC") carryforwards were utilized to offset taxable income. At May 31, 1995, the Company had fully utilized all remaining NOL carryforwards. During 1995, the Company paid alternative minimum tax ("AMT") of $1.6 million. The deferred tax asset balance at May 31, 1995 primarily reflects the payment of, and anticipated future recovery of, such amount.
As shown in the table in Note 11 to Notes to the Consolidated Financial Statements, the Company's significant deferred tax assets consist of an ITC carryforward of $7.4 million (which expire from 1996 through 2001) and alternative minimum tax ("AMT") credits of $3.3 million (which are not subject to expiration). These tax assets are available to offset federal income tax liability. However, the amount of ITC carryforward and AMT credits that may be utilized to reduce tax liability is significantly limited in computing AMT liability. As a result of this limitation on 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. During 1995, the valuation allowance was reduced by $230,000 to reflect utilization of ITC carryforward for which a valuation allowance had previously been provided.
II. LIQUIDITY AND CAPITAL RESOURCES
The Company's activities are principally funded by its Working Capital Facility and Warehouse Facility (see Note 9 to Notes to Consolidated Financial Statements), rents, proceeds from sales of on-lease equipment (to its PIFs and third party investors), non-recourse debt, fees and distributions from its PIFs, sales or re-leases of equipment after the expiration of the initial lease terms and other cash receipts. Management believes the Company's ability to generate cash from operations is sufficient to fund operations, particularly when operations are viewed as including investing and financing activities.
To reverse the effects of portfolio run-off, the Company needs to significantly grow its lease portfolio. To the extent possible, the Company intends to use proceeds from its Debt Facility, the MBank sale proceeds and the possible financing proceeds from its jet aircraft to finance the equity component of leases until such leases mature. While these sources of capital will be sufficient for the Company's short-term needs, the Company will pursue opportunities to obtain other sources of new capital.
During July 1995, the Company and certain of its sponsored PIFs entered into an agreement to debt finance up to $40 million of lease receivables with a lender as part of a lease securitization program. As with nonrecourse debt financings of lease rentals, securitized financings are also collateralized by the leased equipment and related rentals, and the Company has no recourse liability to the lender for repayment of the debt. The Company selected this securitized debt vehicle because of attractive interest rates and anticipates that certain unleveraged leases will be debt financed using this facility.
Currently the Company is offering units of CPYF III for sale to the public. During fiscal year 1995, the Company sold a total of $22.7 million of Class A units of CPYF III and sold $21.8 million during fiscal year 1994. During fiscal year 1996, the Company has up to $26 million of Class A units in CPYF III available for sale, which will represent a source of liquidity and acquisition fee income for the Company. Four of the Company's PIFs, including CPYF-III, are in their reinvestment stage and are using a portion of their available cash to purchase additional equipment from the Company. The Company expects to sell approximately $64 million of equipment to these PIFs during fiscal year 1996. Two of the Company's PIFs are in their liquidation stage and are no longer purchasing equipment.
Inflation has not had a significant impact upon the operations of the Company.
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III. BUSINESS PLAN
Management has identified the following trends in results of operations:
* although the Company has reported a profit of $.10 per share for fiscal year 1995 (its ninth, tenth, eleventh and twelfth consecutive profitable quarters), the profit resulted largely from "other income" items;
* although the Company had been continually enhancing its lease origination capabilities by adding lease originators, the level of lease originations were substantially below their 1995 expectations;
The Company has identified several factors which could adversely impact profitability in the future:
* because of the flattening of the yield curve for debt securities during calendar year 1994 and into calendar year 1995, lease rates are not rising in line with the Company's cost of funds which makes it difficult to maintain a substantial spread between lease rates and the Company's cost of funds;
* even if lease originations increase significantly, growth in the Company's profits will be slow because as a portfolio grows, under generally accepted accounting principles, operating leases produce lower leasing margin after interest expense during the early term of such leases;
* the cost of funds for many of the Company's competitors is lower than the Company's cost of funds; and
* certain of the Company's competitors also price transactions with tax benefits not available to the Company.
During the Restructuring Period, the Company could not originate a significant amount of leases for its own account because it did not have the financing to fund and hold such originations. The Company believes that it has the necessary funding capability for fiscal year 1996 to (1) continue to increase the size of its own lease portfolio, and (2) originate/acquire additional leases for sales to PIFs and private equity investors. The Company has recently hired a new complement of field lease originators to originate new leases for the Company's own portfolio and for sale to third parties.
However, while growing the Company's lease origination function and adding new leases to the Company's portfolio will positively affect the Company's results of operations over time, such actions will not positively affect the Company's results of operations in the near term because (a) it will take a period of time before new lease transactions can be closed, (b) new operating lease transactions "throw off" lower returns (for financial reporting purposes) during their early term and (c) the Company will incur additional operating expenses in increasing the size of its marketing force. During this period of growth, the Company may realize small operating losses or reduced operating profits as a result of these circumstances. In addition to factors discussed above, operating results are subject to fluctuations resulting from several of other factors, including variations in the relative percentages of the Company's leases entered into during the period which are classified as DFLs, OLs, or sold for fee income.
The ability of the Company to operate profitably in the future will depend largely on the amount of new capital available to the Company and the cost of that capital. The Company continues to explore possible sources of new capital including, for example, obtaining new or additional recourse debt, obtaining new equity capital (which could include a sale of the Company, possibly coupled with an infusions of new funds from the purchaser into the Company), securitizing lease transactions, obtaining equity capital from private investor purchases of equipment leases originated by the Company and/or entering into strategic alliances/combinations with other leasing or financial services companies. The Company intends to invest any new capital that it obtains in leases for its own portfolio. If the Company is unsuccessful in obtaining new capital, the ability of the Company to continue to operate profitably will depend on (1) equipment sales margins from new lease originations, (2) origination leases for its own portfolio with a substantial rate spread, and (3) remarketing of equipment at a profit and (3) further reducing its operating costs.
16 of 20
Item 8.
Item 8. Financial Statements and Supplementary Data
See the Index to Financial Statements and Schedules appearing at Page of this Report.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers
The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end.
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d) Financial Statements and Schedules
The financial statements and schedules listed on the accompanying Index of Financial Statements and Schedules (page) are filed as part of this Annual Report.
(b) Reports on Form 8-K
On March 22, 1995, a Form 8-K was filed disclosing developments related to the MBank litigation discussed under Item 3 above.
(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 1995 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.
17 of 20
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").
10.1 Amended and Restated Stock Option Plan of the Company incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K for the fiscal year ended May 31, 1992 (the "1992 10-K").
10.2 Form of Stock Option Agreement between the Company and the directors of the Company (the "Option Agreement"), incorporated by reference to Exhibit 19.12 of the Quarterly Report on Form 10-Q for the quarter ended February 28, 1991 (the "February 1991 10-Q").
10.3(a) Amended and Restated Exhibit A to the Option Agreement between the Company and James D. Edwards, incorporated by reference to Exhibit 19.1 of the Quarterly Report on Form 10-Q for the quarter ended August 31, 1991 (the "August 1991 10-Q").
10.3(c) Amended and Restated Exhibit A to the Option Agreement between the Company and William B. Patton, Jr., incorporated by reference to Exhibit 19.1 of the August 1991 10-Q.
10.3(d) Amended and Restated Exhibit A to the Option Agreement between the Company and Peter F. Schabarum, incorporated by reference to Exhibit 19.1 of the August 1991 10-Q.
10.4 Defined Contribution Plan and Trust, incorporated by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the fiscal year ended May 31, 1990 (the "1990 10-K").
10.5(a) Stockholder's Agreement dated October 27, 1982 among the Company, Richard Kazan, Jack M. Durliat, and Gary M. Jacobs, as amended, incorporated by reference to exhibit 10.3 to the Company's registration statement on Form S-1 (No. 33-9503).
10.5(b) Amendment to Stockholder's Agreement dated August 1, 1990, incorporated by reference to Exhibit 10.3(b) of the 1990 10-K.
10.6 Form of Indemnification Agreement by and between the Company and its directors, incorporated by reference to Exhibit 10.16 of the 1990 10-K.
10.8(a) Executive Employment Agreement, executed October 25, 1991 and effective as of September 7, 1991, by and between Dennis J. Lacey, the Company and Capital Associates International, Inc. ("CAII") (the "Lacey Employment Agreement"), incorporated by reference to Exhibit 19.1 of the Quarterly Report on Form 10-Q for the quarter ended November 30, 1991 (the "November 1991 10-Q").
10.8(b) Amendment No. 1 to the Lacey Employment Agreement dated as of September 7, 1992, incorporated by reference to Exhibit 19.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1992 (the "November 1992 10-Q").
10.8(c) Amendment No. 2 to the Lacey Employment Agreement dated as of April 9, 1993, incorporated by reference to exhibit 10.8(c) to the Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (the "1993 10-K").
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ITEM NO. EXHIBIT INDEX
10.8(d) Form of Amendment No. 3 to the Lacey Employment Agreement dated as of April 20, 1993, incorporated by reference to exhibit 10.8(d) to the 1993 10-K.
10.8(e) First Amended and Restated Lacey Employment Agreement dated as of June 15, 1993, incorporated by reference to exhibit 10.8(c) to the 1993 10-K.
10.10(a) Crisis Recovery Employee Incentive Bonus plan dated as of December 2, 1991, incorporated by reference to Exhibit 19.3 of the November 1992 10-Q.
10.10(b) Capital Associates, Inc. Incentive Program to Enhance Earnings Growth dated June 27, 1993, incorporated by reference to exhibit 10.10(b) to the 1993 10-K.
10.40 Purchase Agreement, dated as of December 30, 1991 by and among CAII, the Company and Bank One, Texas, N.A., incorporated by reference to Exhibit 19.11 of the November 1991 10-Q.
10.41 Form of Consulting Agreement, dated as of April 30, 1993 by and among the Company CAII and William B. Patton, Jr., incorporated by reference to Exhibit 10.41 of the 1993 10-K.
10.42 Amendment to Stockholders' Agreement, dated as of June 1, 1994, by and between the Company, Durliat, Jacobs and Kazan, incorporated by reference to Exhibit 10.42 of the 1994 10-K.
10.43 Confidentiality and Standstill Agreement, dated as of June 1, 1994, by and between the Company and Kazan, incorporated by reference to Exhibit 10.43 of the 1994 10-K.
10.44 Indemnification Agreement, dated as of January 14, 1994, by and between the Company and Jacobs, incorporated by reference to Exhibit 10.44 of the 1994 10-K.
10.45 Form of Stock Option Agreement between the Company and the directors of the Company (with a grant date of August 27, 1993 for Kazan, Patton, Edwards and Schabarum and a grant date of January 14, 1994 for Jacobs), incorporated by reference to Exhibit 10.45 of the 1994 10-K.
10.48 Form of Credit and Security Agreement, dated as of November 30, 1994, by and among CAII, Norwest Bank Colorado, National Association ("Norwest"), Norwest Equipment Finance, Inc., and First Interstate Bank of Denver, N.A. ("First Interstate") (the "New Lenders"), incorporated by reference to Exhibit 10.48 of the February 1995 10-Q.
10.49 Settlement Agreement and Release of Liens and Claims, dated as of December 2, 1994, by and among the Company, CAII, each of the Company's and CAII's wholly-owned subsidiaries, Mellon Bank, N.A., as Agent, and the Lenders, incorporated by reference to Exhibit 10.49 of the February 1995 10-Q.
11 Statement regarding Computation of Per Share Earnings.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick.
27 Financial Data Schedule
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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 on August 29, 1995.
CAPITAL ASSOCIATES, INC.
By /s/John E. Christensen ------------------------------- John E. Christensen 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 Date
/s/William B. Patton, Jr. Chairman of the Board August 29, 1995 - ------------------------- and Director William B. Patton, Jr.
/s/William H. Buckland Director August 29, 1995 - ------------------------- William H. Buckland
/s/James D. Edwards Director August 29, 1995 - ------------------------- James D. Edwards
/s/Gary M. Jacobs Director August 29, 1995 - ------------------------- Gary M. Jacobs
/s/Dennis J. Lacey President, Chief Executive August 29, 1995 - ------------------------- Officer and Director Dennis J. Lacey
/s/Peter F. Schabarum Director August 29, 1995 - ------------------------- Peter F. Schabarum
/s/James D. Walker Director August 29, 1995 - ------------------------- James D. Walker
/s/Joseph F. Bukofski Assistant Vice President August 29, 1995 - ------------------------- and Controller Joseph F. Bukofski (Principal Accounting Officer)
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INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements - --------------------
Independent Auditors' Report
Consolidated Balance Sheets as of May 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended May 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended May 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended May 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements to
Schedules - ---------
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended May 31, 1995, 1994 and 1993
F - 1
INDEPENDENT AUDITORS' REPORT
The Stockholders and Directors Capital Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of May 31, 1995, and 1994 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, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three year period ended May 31, 1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
/s/ KPMG Peat Marwick ---------------------
Denver, Colorado July 14, 1995, except for Note 15 which is as of August 23, 1995
F - 2
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value)
ASSETS
May 31, 1995 1994 -------- --------
Cash $ 923 $ 2,072 Accounts receivable, net of allowance for doubtful accounts of $308 and $343 563 1,625 MBank receivable (Note 15) 10,800 - Equipment held for sale or re-lease 66 5,242 Residual values and other receivables arising from equipment under lease sold to private investors 5,608 5,098 Net investment in direct finance leases 19,319 18,106 Leased equipment, net 19,987 15,615 Investment in affiliated limited partnerships 10,316 12,178 Other 2,970 5,779 Deferred income taxes 1,800 - Notes receivable arising from sale-leaseback transactions 21,037 32,417 Discounted lease rentals assigned to lenders arising from equipment sale transactions 65,283 111,593 --------- ---------
$ 158,672 $ 209,725 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ 1,531 $ 49 Warehouse Facility 12,156 - Accounts payable and other liabilities 13,446 8,187 Term Loan 10,833 18,718 Deferred income taxes - 830 Obligations under capital leases arising from sale-leaseback transactions 21,024 32,337 Discounted lease rentals 77,192 128,505 --------- ---------
136,182 188,626 --------- ---------
Commitments and contingencies (Notes 10, 12, 15, and 16)
Stockholders' equity: Common stock, $.008 par value, 15,000,000 shares authorized, 10,214,000 and 9,759,000 shares issued 63 60 Additional paid-in capital 16,961 16,689 Retained earnings 5,517 4,401 Treasury stock, at cost (51) (51) --------- --------- Total stockholders' equity 22,490 21,099 --------- ---------
$ 158,672 $ 209,725 ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
Year Ended May 31, 1995 1994 1993 ---------- ---------- ---------- Revenue: Equipment sales to affiliated limited partnerships $ 43,638 $ 70,085 $ 62,252 Other equipment sales (Note 15) 37,732 52,384 33,981 Leasing 7,672 13,368 26,003 Interest 11,386 15,027 15,526 Other 4,516 4,101 3,638 ---------- ---------- ---------
Total revenue 104,944 154,965 141,400 ---------- ---------- ---------
Costs and expenses: Equipment sales (Note 15) 70,866 114,440 85,423 Leasing 3,893 5,511 12,148 Operating and other expenses 11,603 12,307 14,060 Provision for losses 2,940 1,315 2,070 Interest: Non-recourse debt 12,548 18,370 22,091 Recourse debt 1,618 1,839 3,282 ---------- ---------- ---------
Total costs and expenses 103,468 153,782 139,074 ---------- ---------- ---------
Net income before income taxes 1,476 1,183 2,326
Income tax expense 360 473 930 ---------- ---------- ---------
Net income $ 1,116 $ 710 $ 1,396 ========== ========== =========
Earnings per common and dilutive common equivalent share:
Primary $ .10 $ .07 $ .14 ========== ========== =========
Fully diluted $ .10 $ .07 $ .13 ========== ========== =========
Weighted average number of common and dilutive common equivalent shares outstanding used in computing earnings per share:
Primary 10,649,000 10,901,000 10,306,000 ========== ========== ==========
Fully diluted 10,672,000 10,901,000 10,888,000 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capital Associates, Inc. ("CAI") and its subsidiaries (collectively, the "Company"). Intercompany accounts and transactions are eliminated in consolidation.
The Company has investments in affiliated public income funds (the "PIFs", consisting of both general partnership and subordinated limited partnership interests) and other 50%-or-less owned entities. Such investments are primarily accounted for using the equity method. The parent company's assets consist solely of its investments in subsidiaries and it has no liabilities separate from its subsidiaries.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
EQUIPMENT HELD FOR SALE OR RE-LEASE
Equipment held for sale or re-lease, recorded at the lower of cost or market value expected to be realized, consists of equipment previously leased to end users which has been returned to the Company following lease expiration.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (consisting solely of common stock options) outstanding during the period.
RECLASSIFICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOW - The principal portion of receipts of direct financing leases and proceeds from sales of equipment have been classified as "Cash flows from operating activities". Previously, such amounts were reported as "Cash flows from investing activities".
F - 7
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
RECLASSIFICATIONS, continued
The effect of the reclassification on previously issued financial statements is as follows (in thousands):
EQUIPMENT LEASING AND SALES
Lease Accounting - Statement of Financial Accounting Standards No. 13 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 the direct financing or the operating method for substantially all of the Company's lease originations. The Company currently utilizes the sales-type and operating lease methods for substantially all subsequent lease activity for an item of equipment after the expiration of the initial lease term. For all types of leases, the determination of profit considers the estimated value of the equipment at lease termination, referred to as the residual value. After the origination of a lease, the Company may engage in financing of lease receivables on a non-recourse basis 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 statements of income. Initial direct costs ("IDC") are capitalized and amortized over the lease term in proportion to the recognition of earned 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.
F - 8
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
EQUIPMENT LEASING AND SALES, continued
OPERATING LEASES ("OLs") - Leasing revenue consists principally of monthly rentals. 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. 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. 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 statements of income. 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 rentals from leases to financial institutions at fixed interest rates on a non-recourse basis. In return for such future lease payments, the Company receives the discounted value of the payments in cash. In the event of default by a lessee, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Company. Cash proceeds from such financings are recorded on the balance sheet as discounted lease rentals. As lessees make payments to financial institutions, leasing revenue and interest expense are recorded.
SALES TO PRIVATE INVESTORS OF EQUIPMENT UNDER LEASE - The Company sells title to leased equipment that in some cases is subject to existing non-recourse debt 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 and tax benefits. 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, 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 t o 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.
F - 9
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
EQUIPMENT LEASING AND SALES, continued
SALE-LEASEBACK TRANSACTIONS - In sale-leaseback transactions, the Company leases equipment, obtains non-recourse financing on the equipment, sells the equipment to a third party and leases the equipment back from the third party. Income in a sale-leaseback transaction is deferred and principally amortized over the leaseback term in proportion to the reduction in the leased asset. For financial reporting purposes, a note receivable from the third-party, a capital lease obligation equal to the present value of the leaseback payments and a deferred gain are recorded at the time of the transaction. Amortization of the deferred gain is generally recorded as a reduction of leasing costs and expenses in the accompanying statements of income unless the estimated residual value of the underlying equipment has experienced an other than temporary decline in value, in which case amortization ceases. The Company has not entered into a sale/leaseback transaction since fiscal year 1991.
INTEREST INCOME - Interest income, as shown in the accompanying statements of income, includes interest on discounted lease rentals and interest on notes receivable arising from sale-leaseback transactions.
SALES TO PIFS - Upon the sale of equipment to its PIFs, the Company records equipment sales revenue equal to the sales price of the equipment (including any acquisition fees earned) and costs of sales equal to the carrying value of the related assets (including remaining unamortized IDC). Fees for services the Company performs for the PIFs are recognized at the time the services are performed.
Transactions Subsequent to Initial Lease Termination ----------------------------------------------------
After the initial term of equipment under lease expires, the equipment is either sold or released. When the equipment is sold, the remaining net book value of equipment sold is removed and gain or loss recorded. When the equipment is released, 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 future rentals and the present value of the estimated residual value (collectively, "the net investment") over the carrying value of the equipment subject to the sales-type lease is reflected in operations at the inception of the lease. Thereafter, the net investment is accounted for as a DFL, as described above.
ALLOWANCE FOR LOSSES
An allowance for losses is maintained at levels determined by management to adequately provide for any other than temporary declines in asset values. In determining losses, economic conditions, the activity in used equipment markets, the effect of actions by equipment manufacturers, the financial condition of lessees, the expected courses of action by lessees with regard to leased equipment at termination of the initial lease term, and other factors which management believes are relevant, are considered. Assets are reviewed quarterly to determine the adequacy of the allowance for losses.
F - 10
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
GENERAL ACCOUNTING PRINCIPLES, continued
ALLOWANCE FOR LOSSES, continued
The Company evaluates the realizability of the carrying value of its investment in its PIFs based upon all estimated future cash flows from the PIFs. As a result of such analyses, certain distributions have been accounted for as a recovery of cost instead of income.
2. RESIDUAL VALUES AND OTHER RECEIVABLES ARISING FROM EQUIPMENT UNDER LEASE SOLD TO PRIVATE INVESTORS
As of May 31, 1995 and 1994, the equipment types for which the Company recorded the present value of the estimated residual values and other receivables arising from private sales of equipment under lease were (in thousands):
Description 1995 1994 ----------- ------ ------
Furniture and fixtures $1,284 $1,118 Mining, manufacturing and material handling 786 725 Aircraft 396 518 Other miscellaneous equipment 404 812 IBM, primarily peripheral computer equipment - 461 ------ ------
Total equipment residuals 2,870 3,634 Notes receivable due directly from investors 2,678* 1,289 End user rentals under existing leases assigned to the Company by investors 60 175 ------ ------
$5,608 $5,098 ====== ======
*Balance was collected during June 1995
Residual values and other receivables arising from equipment under lease sold to private investors were net of an allowance for doubtful accounts of $1,654,000 and $6,934,000 as of May 31, 1995 and 1994, respectively.
3. NET INVESTMENT IN DFLS
The components of the Company's net investment in DFLs as of May 31, 1995 and 1994 were (in thousands):
1995 1994 ------ ------
Minimum lease payments receivable $ 21,486 $ 18,214 Estimated residual values 1,161 2,256 IDC 159 136 Less unearned income (3,487) (2,500) -------- --------
$ 19,319 $ 18,106 ======== ========
F - 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LEASED EQUIPMENT, net
The Company's investment in equipment under OLs, by major classes, as of May 31, 1995 and 1994 were (in thousands):
1995 1994 -------- --------
Material handling $ 7,151 $ 2,074 Other technology and communication equipment 5,536 4,168 Other 4,274 5,361 Aircraft 4,125 9,040 Mining equipment 3,989 402 IBM processors and peripheral computer equipment 3,329 6,973 Furniture and fixtures 2,460 447 IDC 239 103 -------- -------- 31,103 28,568 Less accumulated depreciation (8,700) (11,212) Less allowance for losses (2,416) (1,741) -------- --------
$ 19,987 $ 15,615 ======== =========
Depreciation on leased equipment was $3,771,000, $5,209,000, and $11,425,000 for fiscal years 1995, 1994 and 1993, respectively.
5. FUTURE MINIMUM LEASE PAYMENTS
Future minimum lease payments receivable from noncancelable leases on equipment owned by the Company as of May 31, 1995, were as follows (in thousands):
Years Ending May 31 DFLs OLs ---- ---
1996 $ 9,607 $ 7,099 1997 3,802 5,619 1998 2,035 2,847 1999 1,288 1,680 2000 4,754 1,017 Thereafter 0 708 ------- -------
$21,486 $18,970 ======= =======
6. NOTES RECEIVABLE AND OBLIGATIONS UNDER CAPITAL LEASES ARISING FROM SALE- LEASEBACK TRANSACTIONS
In sale-leaseback transactions, the leaseback payments are generally equal in amount to the principal and interest payments due under the note receivable and, accordingly, the notes receivable and obligations under capital leases arising from sale-leaseback transactions do not represent future net cash inflows or outflows of the Company.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES RECEIVABLE AND OBLIGATIONS UNDER CAPITAL LEASES ARISING FROM SALE- LEASEBACK TRANSACTIONS, continued
Aggregate maturities of notes receivable and obligations under capital leases arising from sale-leaseback transactions are as follows (in thousands): Notes Years Ending May 31 Receivable Obligations ---------- -----------
1996 $ 12,628 $ 12,603 1997 7,666 7,673 1998 743 748 --------- ---------
$ 21,037 $ 21,024 ======== ========
Notes receivable and obligations arising from sale-leaseback transactions bear interest at rates ranging from 10% to 12%.
7. CONCENTRATION OF CREDIT RISK
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, 1995, equipment under OLs and DFLs owned by the Company was leased to companies with the following credit ratings:
Percentage of the net book value of Credit Rating equipment under lease ------------- ---------------------
Baa (or equivalent) or above 79% Below Baa (or equivalent) 18 In bankruptcy 3
8. DISCOUNTED LEASE RENTALS
Discounted lease rentals outstanding at May 31, 1995 bear interest at rates between 6% to 12%. Aggregate maturities of such non-recourse obligations are (in thousands):
Years Ending May 31:
1996 $ 37,485 1997 26,147 1998 10,516 1999 2,377 2000 667 --------
$ 77,192 ========
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DEBT FACILITIES
The Company closed a new recourse debt facility (the "Debt Facility") on December 2, 1994. The lender group currently consists of Norwest Bank Colorado, National Association (the "Agent"), Norwest Equipment Finance, Inc. (the "Collateral Agent"), First Interstate Bank of Denver, N.A., The Daiwa Bank, Ltd. and The First National Bank of Boston (the "Lenders"). The Borrower under the Debt Facility is Capital Associates International, Inc., a wholly-owned subsidiary of the Company ("CAII").
The Debt Facility consists of three components, a term loan facility (the "Term Loan"), a revolving working capital facility (the "Working Capital Facility") and a revolving warehousing facility (the "Warehouse Facility"). The principal terms of the three facilities are as follows (in thousands):
Principal reductions under the Term Loan are scheduled to occur as follows (in thousands):
Fiscal year ending May 31, 1996 $ 4,333 Fiscal year ending May 31, 1997 4,333 Fiscal year 1998 through November 30, 1997 2,167 --------
$ 10,833 ========
The Debt Facility (1) is collateralized by all of CAII's assets and (2) is senior, in order of priority, to all of CAII's indebtedness, subject to certain limited exceptions. The Company and certain of the Company's and CAII's subsidiaries have pledged all of their assets, with limited exceptions, to collateralize their guarantees. The Debt Facility restricts CAII's ability to pay dividends or loan or advance funds to the Company.
As of May 31, 1995, there were no defaults existing under the Debt Facility.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTIES
PIFs:
The Company sponsors or co-sponsors six PIFs that purchase equipment under lease from the Company. The Company acts as either a general partner or co-general partner of each PIF for which it receives general partner distributions as well as management fees. As of May 31, 1995, approximately $0.4 million was receivable from the PIFs for such fees. In addition, the Company is required to make subordinated limited partnership investments in the PIFs. The Company has a maximum remaining obligation to make further cash contributions of approximately $0.3 million for all of the existing PIFs (which relates solely to CPYF III). Amounts related to the PIFs are as follows (in thousands):
1995 1994 1993 ------ ------ ------
Equipment sales margin $ 1,047 $ 1,774 $ 1,773 Fees and distributions 2,908 3,293 2,925 Investment contributions in subordinated limited partnership interests 230 200 130
OTHER RELATED PARTY TRANSACTIONS:
A director and principal shareholder of the Company is a shareholder and executive officer of Corporate Express, Inc. ("CE"). During fiscal year 1995, the Company sold all of its investment in CE resulting in a gain of $671,000, which is included in "Other Revenue" in the accompanying Consolidated Statements of Income.
11. INCOME TAXES
The components of the income tax expense (benefit) charged to continuing operations were (in thousands):
1995 1994 1993 ------ ------ ------ Current: Federal $ 1,990 $ 1,000 $ 730 State and local 1,000 143 400 ------- ------- ------ 2,990 1,143 1,130 ------- ------- ------ Deferred: Federal (1,800) (400) (150) State and local (830) (270) (50) ------- ------- ------ (2,630) (670) (200) ------- ------- ------ Total tax provision $ 360 $ 473 $ 930 ======= ======= ======
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:
1995 1994 1993 ------ ------ ------
Computed "expected" tax expense $ 502 $ 402 $ 791 State tax provisions, net of federal benefits 88 71 139 Reduction in valuation allowance for deferred income tax assets (230) - - ------ ------ ------ $ 360 $ 473 $ 930 ====== ====== ======
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES, continued
Income taxes are provided on income from continuing operations at the appropriate federal and state statutory rates applicable to such earnings. The effective tax rate for the fiscal years ended May 31, 1995 and 1994 was 40%.
Components of income tax expense attributable to net income before income taxes is as follows (in thousands):
Significant components of the Company's deferred tax liabilities and assets as of May 31, 1995 and 1994, were as follows (in thousands):
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES, continued
At May 31, 1995, the Company had an investment tax credit carryforward of $7.4 million, which expires from 1996 through 2001, and AMT credits of $3.3 million. Under present United States 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.
The Company has established a valuation allowance for deferred taxes due to the uncertainty that the full amount of the ITC carryforward will be utilized prior to expiration. The reduction in the valuation allowance recorded in fiscal 1995 of $230,000 represents the utilization of an ITC carryforward for which a valuation allowance had previously been provided.
12. COMMON AND PREFERRED STOCK
The Company has authority to issue 2,500,000 shares of preferred stock at $0.008 par value. At May 31, 1995, no shares of preferred stock had been issued.
Two principal stockholders, who together own approximately 32% of the outstanding shares of the Company's stock are parties to an agreement with the Company pursuant to which each of them has granted the Company and, secondarily, the other, a right of first refusal under certain circumstances to purchase their shares of common stock at current market value. Upon the death or disability of one of them, the Company is obligated to purchase his shares at an amount equal to the greater of $1 million or the amount of insurance proceeds to be received by the Company in the event of death. The Company is the owner of life insurance policies providing approximately $3 million of coverage with respect to each of the principal stockholders.
13. STOCK OPTIONS
The Company has a qualified incentive stock option plan whereby stock options may be granted to employees to purchase shares of the Company's common stock at prices equal to 100% of the estimated fair value at the date of grant. The Company has a non-qualified plan covering all directors except the CEO.
Common stock received through the exercise of qualified incentive stock options which are sold by the optionee within two years of grant or one year of exercise result in a tax deduction for the Company equivalent to the taxable gain recognized by the optionee. For financial reporting purposes, the tax effect of this deduction is accounted for as additional paid-in capital. Such optionee sales resulted in tax benefits to the Company of $58,000 and $19,000 in fiscal years 1995 and 1994, respectively.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS, continued
The following table summarizes the activity in this plan for the periods indicated:
Options Exercise Price Options Outstanding Per Share Exercisable ----------- -------------- -----------
Outstanding at June 1, 1992 2,693,000 0.0625 - 2.7500 1,112,000 ========== Exercised (56,000) 0.3400 - 0.5625 Granted 160,000 0.4065 - 1.1250 Canceled (446,000) 0.3400 - 2.7500 --------- Outstanding at May 31, 1993 2,351,000 0.0625 - 1.1250 1,336,000 ========== Exercised (23,000) 0.3400 - 0.5625 Granted 55,000 0.8125 - 1.2188 Canceled (119,000) 0.3400 - 1.1250 --------- Outstanding at May 31, 1994 2,264,000 0.0625 - 1.2188 1,682,000 ========== Exercised (454,000) 0.0625 - 1.0625 Granted 491,000 0.6250 - 0.6600 Canceled (208,000) 0.3400 - 1.1875 --------- Outstanding at May 31, 1995 2,093,000 0.3400 - 1.2188 1,670,000 ========= ==========
14. QUARTERLY FINANCIAL DATA (unaudited)
Summarized quarterly financial data for the years ended May 31, 1995 and 1994 are (in thousands, except per share data):
Total Net Income Per Common and Fiscal year 1995: Revenue Income Common Equivalent Share ---------------- ------- ------ -----------------------
First quarter $ 18,769 $ 163 $ .02 Second quarter 24,396 71 .01 Third quarter 29,471 54 .01 Fourth quarter 32,308 828 .08
Total Net Income Per Common and Fiscal year 1994: Revenue Income Common Equivalent Share ---------------- ------- ------ -----------------------
First quarter $ 52,342 $ 281 $ .03 Second quarter 39,900 174 .02 Third quarter 22,297 187 .02 Fourth quarter 40,426 68 .01
15. LEGAL PROCEEDINGS
MBank Litigation - Capital Associates International, Inc. ("CAII") had been a third party defendant in certain litigation involving Bank One Texa s, N.A. ("Bank One"), The Prudential Insurance Company ("Prudential"), Texas Commerce Bank, N.A. ("TCB") and the Federal deposit Insurance Corporation ("FDIC") since January 1992 (the "MBank Litigation"). The MBank Litigation involved multiple disputes among the parties concerning the ownership of certain equipment (the "Equipment") that the Company leased (the "Lease") to MBank Dallas, N.A. ("MBank"), in 1987 and the rights to certain cash collateral for MBank's obligations under that Lease (the "Cash Collateral") following MBank's default under the Lease in 1989.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. LEGAL PROCEEDINGS, continued
MBANK LITIGATION, continued
On March 16, 1995, the United States District Court for the Northern District of Texas, Dallas Division (the "District Court") granted the motions for partial summary judgment of CAII, Prudential and TCB and denied the motion for partial summary judgment of the FDIC (the "District Court's Opinion").
On August 15, 1995, the FDIC (in its corporate capacity and in its capacity as receiver for MBank), Prudential, TCB and CAII agreed to settle their claims on the terms set forth in that Settlement Agreement, dated as of the same date and filed with the District Court a Joint Motion Regarding Settlement of Claims Among FDIC, CAI, TCB and Prudential (the "Joint Motion"), seeking to have the District Court (a) ratify and approve the dismissal of the arties claims against each other, (b) accept tender of the bill of sale for the equipment and (c) approve distribution of the remaining Cash Collateral as follows:
a. $7.0 million to the FDIC; and
b. $2.0 million to TCB and Prudential, jointly, to be divided between TCB and Prudential as they agree; and
c. the remaining proceeds (in the approximate amount of $10.8 million) to CAII (CAII agreed to pay approximately $2.4 million of the $10.8 million to Bank One, in repayment of the monies received from Bank One in 1992, with interest thereon at the rate of 18% per annum, as required by that certain Purchase Agreement, by and among CAII, the Company and Bank One (the "Bank One Purchase Agreement"));
On August 16, 1995, the District Court approved the Joint Motion. On August 23, 1995, TCB distributed approximately $10.8 million to CAII.
Bank One is not a party to the Settlement Agreement or the Joint Motion. In August 1995, the District Court approved Bank One's request to file its first amended complaint in the MBank Litigation ("Bank One's Amended Complaint"). Bank One's Amended Complaint seeks, with respect to CAII, (1) a declaratory judgment that CAII is obligated to convey title to the Equipment to Bank One and (2) a permanent injunction prohibiting CAII from transferring title to the equipment to the FDIC ("Bank One's Amended Claims"). Bank One's Amended Complaint does not assert any money damage claims against CAII. CAII delivered a confirmatory bill of sale for the Equipment to the District Court on August 15, 1995. The Company has filed a motion with the District Court asking it to dismiss Bank One's Amended Claims against CAII. CAII intends to defend vigorously Bank One's Amended Claims. Management believes, based upon the advice of counsel, that the ultimate outcome with respect to Bank One's Amended Claims will not have a material adverse effect on the Company's financial position.
The MBank sale proceeds of approximately $8.4 million and the MBank equipment carrying value of approximately $2.3 million were included in "Other equipment sales" and "Cost of equipment sales", respectively, in the accompanying Consolidated Statements of Income.
16. COMMITMENTS
The Company leases office space under long-term non-cancelable operating leases. The leases contain renewal options and provide for annual escalation for utilities, taxes and service costs. Minimum future rental payments required by such leases are as follows (in thousands):
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS, continued
Year Ending May 31, 1996 $ 400 1997 353 1998 353 1999 340 2000 321 -------
$ 1,767 =======
17. 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, 1995 for cash, accounts receivable, residual values and other receivables arising from equipment under lease sold to private investors, the Working Capital Facility, the Warehouse Facility, accounts payable and other liabilities and the Term Loan 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, 1995, discounted lease rentals and discounted lease rentals assigned to lenders arising from equipment sale transactions of $77,192,000 and $65,283,000, respectively, have fair values of $76,551,000 and $64,741,000, respectively. The fair values were estimated utilizing market rates of comparable debt having similar maturities and credit quality as of May 31, 1995.
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INDEPENDENT AUDITORS' REPORT
The Stockholders and Directors Capital Associates, Inc.:
Under date of July 14, 1995, except for note 15, which is as of August 23, 1995, we reported on the consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of May 31, 1995 and 1994, 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 3, 1995, as contained in the Company's annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK
/s/KPMG Peat Marwick ------------------------------
Denver, Colorado July, 14, 1995
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES for the years ended May 31, 1995, 1994 and 1993 (in thousands)
F - 22
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE
Year Ended May 31, ----------------------------------- 1995 1994 1993 -------- -------- --------
Shares outstanding at beginning of period 9,727,000 9,654,000 8,948,000
Shares issued during the period (weighted average) 377,000 58,000 642,000
Dilutive shares contingently issuable upon exercise of options (weighted average) 1,905,000 2,251,000 1,708,000
Less shares assumed to have been purchased for treasury with assumed proceeds from exercise of stock options (weighted average) (1,360,000) 1,062,000) (992,000) ----------- ---------- ----------
Total shares, primary 10,649,000 10,901,000 10,306,000 =========== ========== ==========
Net Income $ 1,116,000 $ 710,000 1,396,000 =========== ========== ==========
Income per common and common equivalent share, primary .10 $ .07 $ .14 =========== ========== ==========
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Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Year Ended May 31,
1995 1994 1993 -------- -------- --------
Shares outstanding at beginning of period 9,727,000 9,654,000 8,948,000
Shares issued during the period 377,000 58,000 642,000 (weighted average)
Dilutive shares contingently issuable upon exercise of options 1,905,000 2,251,000 1,708,000 (weighted average)
Less shares assumed to have been purchased for treasury with assumed proceeds from exercise of stock options (1,337,000) (1,062,000) (410,000) (weighted average) ----------- ---------- ---------
Total shares, fully diluted 10,672,000 10,901,000 10,888,000 =========== ========== ==========
Net Income $ 1,116,000 $ 710,000 $1,396,000 =========== ========== ==========
Income per common and common equivalent share, fully diluted $ .10 $ .07 $ .13 =========== ========== ==========
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