SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 1994
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1055327
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7175 West Jefferson Avenue, 80235
Lakewood, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.008 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate market value of stock held by non-affiliates was $2,570,000
based upon 3,287,800 shares held by such persons and the close price on July
7, 1994 was $.78125. The number of shares outstanding of the Registrant's
$.008 par value common stock at July 7, 1994 was 10,028,647.
Documents incorporated by reference
Certain portions of Registrant's definitive proxy statement to be filed
within 120 days after the end of the Registrant's fiscal year pursuant to
Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12
and 13 of this report.
Page One of 29 Pages Exhibit Index Begins on Page 23
PART I
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.
DEVELOPMENT OF BUSINESS
The Company reported net income of $710,000 for fiscal year 1994, net income
of $1.4 million for fiscal year 1993 and net losses of ($6.2) million for
fiscal year 1992, ($13.6) million for fiscal year 1991 and ($16.1) million
for fiscal year 1990. See the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992 (the "1992 Form 10-K") for a discussion of the
factors which contributed to the losses in fiscal years 1992, 1991 and 1990.
Through the first quarter of fiscal year 1991, the Company financed the
acquisition of long-term assets principally with funds drawn on its recourse
debt facility (the "Debt Facility"). At that time, the Debt Facility was a
short-term facility, and the Company had to renew it annually. The Debt
Facility reached a maximum principal balance of approximately $100 million
during August 1990.
During the second quarter of fiscal year 1991, the Company agreed with its
Lenders to begin repaying the Debt Facility. In March 1991, the Company and
its Lenders agreed to divide the Debt Facility into two components--a
revolving credit facility (the "Revolving Credit Facility") and a term loan
facility (the "Term Loan") and extended the term of the Debt Facility through
November 30, 1991. In December 1991, the Company and its Lenders extended
the Debt Facility for twelve months through November 30, 1992. In December
1992, the Company and its Lenders extended the Debt Facility for
thirty-months through May 31, 1995.
During the last four months of fiscal year 1991 and fiscal years 1992, 1993,
and 1994 the Company used substantially all of its cash flow after payment of
operating expenses to pay down the Debt Facility. As of May 31, 1994, the
outstanding principal balance under the Debt Facility was less than $19
million. However, as discussed in more detail in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below, these
circumstances have resulted in a decline in the Company's leasing portfolio
and related revenue (referred to in this discussion as "portfolio run-off").
On September 3, 1991, the Board of Directors appointed a new Chief Executive
Officer ("CEO"). The new CEO restructured management responsibilities and
hired e xperienced marketing and remarketing personnel. Because of the Debt
Facility repayment schedule and the related portfolio run-off resulting
therefrom the Company restructured operations (as described more fully in the
1992 Form 10-K) and implemented a business plan intended to return the
Company to profitability.
During fiscal years 1993 and 1994, the Company implemented its business plan
and reported eight consecutive profitable quarters. The primary strategy
underlying the business plan was to reduce back office costs (by
approximately 51%) and add revenue producing sales personnel. In this
connection, the Company:
* Opened ten new field sales offices since September 1, 1991.
* Raised $34 million through the offering of units of Class A limited
partner interest ("Class A Units") in the Company's fifth sponsored public
income fund ("PIF"), Capital Preferred Yield Fund II, L.P. ("CPYF II").
* Began offering Class A units in the Company's sixth sponsored PIF, Capital
Preferred Yield Fund III ("CPYF III").
* Reemphasized private equity syndications selling $43 million and $14
million of equipment to private investors during fiscal year 1994 and
1993, respectively, compared to $7 million during fiscal year 1992.
* Added remarketing personnel and increased remarketing sales margins to
$5.0, $8.3 million and $4.9 million in fiscal years 1994, 1993 and 1992,
respectively, compared to $4.7 million in fiscal year 1991.
* Maintained strict cost controls and enhanced productivity, including
significant reductions of the Company's workforce. General and
administrative expenses declined from $17 million in fiscal year 1992 to
$12.3 million in fiscal year 1994. The number of employees declined from
162 on May 31, 1992 to 114 on May 31, 1994.
* Favorably resolved several legal proceedings in which the Company was a
defendant.
* Renewed the Company's Debt Facility for thirty months through May 31,
1995, on terms favorable to the Company.
* Reduced the concentration of its investment in aircraft. The net
investment in aircraft declined from $12.4 million at May 31, 1993 to
$10.5 million at May 31, 1994. The Company has a commitment to sell
another aircraft which is expected to close in September 1994. After that
sale, the net equity in aircraft will be less than $8 million.
* Improved its recourse debt/stockholders equity ratio to .9 to 1 at May 31,
1994 compared to 3.3 to 1 at May 31, 1991.
The amount of future profits, if any, will be largely dependent on the amount
of new capital available to the Company. The Company has been pursuing
financing possibilities to obtain new capital. Such capital may be in a
variety of forms including new recourse debt, additional equity (which could
include a sale of the Company, possibly coupled with an infusion of new funds
into the Company from the purchaser), securitized financing vehicles, equity
from private purchases of equipment originated by the Company and/or
strategic alliances/combinations with other leasing companies. The Company
has not yet been successful in its efforts to raise new capital. However, as
a result of the Company's efforts to identify new investors, on June 2, 1994,
Richard Kazan (who at the time was the Company's largest single shareholder
owning approximately 23% of the Company's outstanding shares) sold of all his
shares to MCC Financial Corporation ("MCC"), a regional/commuter aircraft
leasing company headquartered in McLean, Virginia, and resigned as a director
of the Company. James Walker, the President of MCC, was appointed to fill
the vacancy on the Board of Directors created by Kazan's resignation.
The Company is continuing to actively pursue financing possibilities to
obtain new capital. Without obtaining new capital, profitability is
dependent principally upon (1) equipment sales margins from new lease
originations, (2) development of new sources of revenue related to the
Company's core business and (3) reductions in operating costs. The Company's
current business plan is designed to maintain profitable operations, focusing
on these activities listed above. No assurance can be given, however, that
the Company will be successful in operating profitably or in obtaining access
to new capital during fiscal year 1995.
DESCRIPTION OF BUSINESS
Leasing Activities
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, 1994, the Company's net investment in DFLs was
approximately $18 million and its net investment in OLs was approximately $16
million. See Note 1 to Notes to Consolidated Financial Statements for a
detailed discussion of the Company's lease accounting policies.
The Company's lease origination marketing strategy is transaction driven.
Leases are originated for the Company's account, its sponsored and
co-sponsored PIFs and private third party purchasers of equipment arranged by
the Company. 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,
as well as the probability that the lessee will renew the lease, upgrade or
add to the equipment on lease, or return the equipment at the end of the
lease. With respect to the equipment, the Company evaluates the remarketing,
upgrade and renewal potential of the equipment 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. In recent years, 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 its sponsored and co-sponsored 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
and other equipment that meet the Company's underwriting standards. It is
not the Company's intention to withdraw from the computer lease market. The
Company will continue to originate new computer equipment leases that meet
all of its underwriting standards and fit with its overall lease portfolio
strategy. However, the Company expects to originate a lower percentage of
leases of computer equipment in the future.
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, 1994, approximately
93% of the equipment owned by the Company was leased to companies that meet
the above criteria.
The Company finances a significant portion of its equipment purchases with
permanent fixed-rate, non-recourse borrowings secured by a first lien on the
equipment and the related lease rental payments. As an interim step, the
Company finances equipment purchases with the proceeds of borrowings under
its Revolving Credit Facility, pending the sale of the equipment to a private
investor or PIF, or placement of permanent non-recourse debt on equipment
obtained for its own account. On newly originated leases, it is the
Company's policy to recover its entire investment in the leases that it sells
to private equity investors and the PIFs at the time of sale. In the case of
equipment financed with permanent non-recourse debt for the Company's own
account, it is the Company's policy to recover all but its equity investment
in the equipment at the time it closes the financing. The Company finances
its equity investment with borrowings under its Revolving Credit Facility and
recovers the investment, in whole or in part, from renewal rents received
and/or sales proceeds realized from the equipment after repayment in full of
the related permanent non-recourse debt.
Due to low prevailing interest rates, the adverse effect of tax reform on the
availability of private equity markets, downsizing of the sales force during
1991, more stringent lease underwriting standards and the limited funds
available to the Company under its Revolving Credit Facility for new lease
originations, the volume of new lease originations by the Company during
fiscal years 1994, 1993 and 1992 was below that of preceding years. The cost
of all equipment purchased for lease by the Company totalled $95 million, $87
million and $56 million during fiscal years 1994, 1993, and 1992,
respectively. Of these amounts $82 million, $60 million and $53 million,
respectively, were sold to the Company's PIFs.
No payments from any single lessee during fiscal year 1994 accounted for more
than ten percent (10%) of the Company's consolidated revenues. For fiscal
years ended 1994, 1993 and 1992, leasing revenues accounted for 9%, 18%, and
30%, respectively, of the Company's consolidated revenues during such years.
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.
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. All transactions over $500,000 and certain extraordinary
transactions must be approved by the TRC. The TRC has delegated approval
authority for smaller dollar transactions to certain senior officers of the
Company. Generally, all transactions over $5,000,000 must also be approved
by the Board of Directors.
Remarketing Activities
Remarketing activities consist of two components that complement lease
origination activities: (1) lease portfolio management (i.e., managing
equipment under lease) and (2) asset management (i.e., managing off-lease
equipment). One of the Company's principal goals is to minimize off-lease
equipment by proactively managing such equipment while it is under lease
(e.g., renewing or extending the lease, or re-leasing, upgrading or adding to
the equipment before the end of the initial lease term), and by selling such
equipment after termination of the lease if it cannot be profitably
re-leased.
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 has sponsored or co-sponsored numerous private investment
programs in which third-party investors purchased, directly or indirectly,
ownership interests in leased equipment. Such transactions were generally
tax advantaged sale-leaseback transactions. The Company sold its private
programs directly, and through broker-dealers, to corporate, institutional
and individual investors. The Company has not entered into any such
transactions since fiscal year 1989. The Company generally administers all
aspects of its private investor programs and typically receives fees for its
services, as well as participation interests in the rental income and
residual value of the equipment.
During fiscal year 1993, the Company re-opened its equity syndications
department. This department sells equipment leases, including title to the
underlying equipment, to third party investors. The Company sold
approximately $43 million, $14 million and $7 million of equipment to private
investors during fiscal years 1994, 1993 and 1992, respectively.
A significant portion of the equipment acquired for lease is sold to the
Company's PIFs. 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 and (4) general
partner cash distributions. CAII's cash return on its Class B interest is
subordinated to the cash returns on the Class A Units.
The Company currently sponsors or co-sponsors six PIFs -- (1) Capital
Preferred Yield Fund, L.P. ("CPYF"), (2) Capital Preferred Yield Fund II,
L.P. ("CPYF II") and (3) Capital Preferred Yield Fund III, L.P. ("CPYF III"),
all three of which are sponsored solely by the Company; (4) PaineWebber
Preferred Yield Fund L.P. ("PWPYF"), co-sponsored by the Company and
PaineWebber Incorporated; (5) NorthStar Income Fund I, L.P. ("NorthStar"),
co-sponsored by the Company and Lehman Brothers Inc.; and (6) Leastec Income
Fund V ("Leastec V"), which the Company acquired from Leastec Corporation at
the time of sale by the Company of its interest in Leastec Corporation back
to its original owners. Only CPYF III is currently offering units for sale
to the public. However, due to the reinvestment feature of each PIF, all of
the PIFs, except Northstar and Leastec V, will acquire additional equipment
from CAII during fiscal year 1995.
The following table summarizes the amount of Class A units sold to the
public, the amount of cash and/or equipment contributed by CAI to each PIF in
exchange for its Class B interest and CAI's maximum future Class B
contributions/obligations for each PIF:
CAI's Class B
Class A Investment through Maximum additional
PIF Units Sold May 31, 1994 Class B Investment
CPYF $ 63.7 million $ 5.5 million None
CPYF II 33.9 million .3 million None
CPYF III .9 million 0.0 million $ 500,000
PWPYF 71.1 million 8.6 million None
Northstar 52.4 million 4.9 million None
Leastec V 50.4 million 2.5 million None
Competition
The Company competes in the leasing marketplace (1) as a lessor, (2) as a
broker of new and used equipment, (3) as a sponsor and co-sponsor of PIFs and
(4) with other leasing companies for permanent non-recourse financing of
lease rents. The Company, as an independent leasing company, competes with a
significant number of other firms in each of these activities. These firms
include (1) captive leasing companies that are subsidiaries, or otherwise
affiliated with, vendors or equipment manufacturers, (2) other independent
leasing companies that are publicly or privately owned, (3) leasing companies
that are subsidiaries of, or otherwise affiliated with, U.S. or foreign
banks, other financial institutions or insurance companies, (4) leasing
companies that are subsidiaries of, or otherwise affiliated with, industrial
or nonfinancial services companies, (5) equipment brokers, (6) investment
banking firms, and (7) other income fund sponsors. Each of these types of
companies operates differently in terms of its financial goals, its sources
of funding and its business strategies.
According to a study just recently concluded by The Monitor, a publication of
one of the leading recruiting firms in the financial services industry, the
Company ranks 65th out of the top 100 leasing companies in the U.S. (based on
1993 net assets). Looking solely at independent leasing companies, the
Company ranks 9th in the U.S. The Company's business represents less than 1%
of the U.S. leasing market.
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 terms of
such financing, 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 114 employees as of May 31, 1994 versus 116 employees as of
May 31, 1993, none of whom were represented by a labor union. On June 30,
1994 the Company reduced its workforce by 29 employees. The Company believes
that its employee relations are good.
Item 2. Properties
The Company leases office facilities (approximately 43,000 square feet) in
Lakewood, Colorado (a suburb of Denver). These facilities house the
Company's administrative, financing and marketing operations. The Lakewood,
Colorado lease is for a term of 7 years, with 2 years remaining in the term,
and with a base rent, as of May 31, 1994, of approximately $40,000 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 $170,000 per year.
Item 3. Legal Proceedings
The Company is involved in the following pending legal proceedings:
a. CIS Corporation ("CIS") voluntarily filed for protection under Chapter 11
of the bankruptcy laws in 1989. The CIS bankruptcy trustee (the
"Trustee") has asserted, in his First Amended Complaint, claims against
CAII seeking (1) return of $145,000 plus interest in connection with
certain alleged bankruptcy preference payments and (2) approximately $1.1
million for alleged breach of lease claims. CAII, in its Amended Answer
and Counterclaims, (A) denied CIS's allegations and (B) asserted
counterclaims of approximately $1.2 million against CIS for breaches of
leases between CAII, as lessor, and CIS, as lessee. On May 31, 1994,
CAII and CIS agreed to settle the litigation. Pursuant to the settlement
agreement, CAII agreed to pay $220,000 to CIS, the parties agreed to
dismiss their respective claims against each other in the bankruptcy
litigation and the parties agreed to enter into a mutual general release.
CIS agreed to draft the settlement agreement and deliver a copy thereof
to the Company as soon as reasonably possible. The Company has not
received a copy of the draft settlement agreement as of the date hereof.
b. In December 1987, CAII purchased certain equipment (the "Equipment") from
MBank Dallas, N.A.("MBank"), for approximately $30 million and
immediately leased (the "Lease") the Equipment back to MBank. In early
1988, as part of the same transaction, CAII financed approximately $25
million of the purchase price for the Equipment with the proceeds of a
nonrecourse loan (the "Prudential Loan") from The Prudential Insurance
Company ("Prudential"). MBank pledged the Equipment and certain
installment receivables (the "Receivables") as collateral for its Lease
obligations. CAII, in turn, pledged the Lease, the Equipment and the
Receivables as collateral for the Prudential Loan. Texas Commerce Bank,
N.A. ("TCB"), agreed to act as indenture trustee for the Prudential Loan.
In March 1989, the Federal Deposit Insurance Corporation ("FDIC") placed
MBank into receivership. This action and certain other actions of MBank
at or about the same time constituted events of default under the Lease.
In September 1989, FDIC purported to disaffirm the Lease, stopped making
rent payments under the Lease and demanded that TCB return all of the
Receivables to the FDIC. Thereafter, TCB continued to pay the proceeds
from the Receivables to Prudential until all amounts due under the
Prudential Loan (i.e., principal, interest and fees then due and owing)
were paid to Prudential in full in March 1990.
CAII requested that TCB distribute the amounts due and owing to CAII
under the Lease upon payment in full of the Prudential Loan. TCB refused
to do so, contrary to the terms of the Lease, and, as of the date hereof,
is still refusing to do so. Instead, TCB required CAII to enter into an
escrow agreement (the "Escrow Agreement"), whereby TCB continued to hold,
and still holds, the remaining Receivables and proceeds therefrom.
In December 1991, CAII, faced with TCB's continuing refusal to release
its security interest in the equipment, entered into an agreement (the
"Bank One Purchase Agreement") to sell (subject to CAII's obtaining a
release from TCB, as indenture trustee, of its security interest in the
Equipment) the Equipment to BankOne Texas, N.A. ("BankOne"), for $1
million in cash plus an additional $4.75 million payable in sixty monthly
installments, beginning on January 1, 1992. BankOne paid CAII the $1
million and three of the monthly installments.
In January 1992, BankOne filed a complaint in Texas state court against
TCB and Prudential. In March 1992, Prudential and TCB filed
counterclaims against Bank One and third-party claims against CAII and
FDIC. BankOne ceased making installment payments to CAII when it was
sued by Prudential and TCB. In April 1992, the state court case was
removed to the United States District Court for the Northern District of
Texas, Dallas Division (the "District Court"), where the case (the "MBank
Litigation") is currently ongoing.
The parties, CAII, FDIC, Prudential, TCB and BankOne, have filed multiple
claims, crossclaims, counterclaims and third-party claims against each
other in the MBank Litigation. The principle substantive issues in the
MBank Litigation relate to the ownership of the Equipment, the
Receivables and the proceeds therefrom. The claims asserted by CAII
against other parties, and against CAII by other parties, to the MBank
Litigation are summarized briefly below:
Claims Asserted by CAII. CAII is seeking to recover in excess of $10
million of proceeds from the Receivables in accordance with the terms of
the Lease which provided that CAII was entitled to such proceeds upon the
occurrence of an event of default under the Lease. MBank's insolvency
and FDIC's placement of MBank into receivership constituted events of
default under the Lease. In the alternative, CAII is seeking a
declaratory judgment, if CAII does not prevail on its claim to the
proceeds, that it is the owner of the Equipment free and clear of all
liens, which, if it prevailed on this claim, would permit CAII to
complete the sale of the Equipment to BankOne. CAII is also seeking
actual and punitive damages against (1) TCB for breach of its duty to pay
over the amounts due to CAII under the Lease, other breaches by TCB of
its duties to CAII under the indenture and Lease-related documents,
interference with the BankOne Purchase Agreement and other tortious acts
committed by TCB against CAII in connection with the Lease transaction
and (2) Prudential for interference with the BankOne Purchase Agreement
and other tortious acts committed by Prudential against CAII in
connection with the Lease transaction.
Claims Asserted Against CAII. FDIC is seeking to recover all of the
proceeds from the Receivables (in excess of $40 million, including
earnings thereon). CAII has never received any Receivables or any
proceeds from the Receivables. In the alternative, FDIC is seeking a
declaratory judgment, if FDIC does not prevail on its claim to such
proceeds, that it is the owner of the Equipment free and clear of all
liens. FDIC is also seeking actual damages for certain alleged breaches
of the Lease and other Lease-related documents.
Prudential is seeking a declaratory judgment that it is entitled to
retain all of the proceeds from the Receivables previously distributed to
it by TCB or, in the alternative, if it does not prevail on its claim to
the proceeds from the Receivables, that is the owner of the Equipment
free and clear of all liens. Prudential is also seeking actual damages
from CAII for certain alleged breaches of the Prudential Loan documents
and related Lease documents and actual and punitive for certain alleged
misrepresentations that CAII made to Prudential in connection with the
Prudential Loan.
TCB is seeking permission to interplead into the District Court the
proceeds from the Receivables (and accrued interest, thereon) still in
its possession. In addition, TCB is seeking indemnification from CAII
for the legal fees and other costs it has incurred in connection with the
MBank Litigation pursuant to the terms of the Escrow Agreement.
BankOne is seeking a declaratory judgment that TCB's lien against the
Equipment expired when TCB paid the Prudential Loan in full and that
BankOne is the owner of the Equipment free and clear of all liens.
The parties have filed cross summary judgment motions against each other
with respect to their claims to the Equipment, the Receivables and the
proceeds therefrom. The parties have completed discovery and are in the
process of filing their final briefs with the District Court. The
District Court has not ruled on any of these motions as of the date
hereof.
CAII (1) is defending vigorously the claims asserted against it by FDIC,
TCB and Prudential, (2) is asserting vigorously all available
counterclaims and third-party claims against FDIC, TCB and Prudential and
(3) is asserting vigorously all claims it has to the Equipment, the
Receivables and the proceeds therefrom. Although management believes,
based upon the advice of legal counsel, that the ultimate outcome of the
MBank Litigation should not have a material adverse impact on the
Company's financial position and that any amounts owed by CAII to any of
the other parties to the MBank Litigation should be completely, or at
least substantially, offset by amounts owed by those parties to CAII, it
is not possible to predict the ultimate outcome of the MBank Litigation
at this time.
The Company is involved in various legal proceedings ordinary, routine and
incidental to its business. In the opinion of management, none of these
proceedings will have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
three months ended May 31, 1994.
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock is traded on the over the counter market under the
symbol "CAII" and is quoted through the National Market System of the
National Association of Securities Dealers Automated Quotation System.
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.
1995 HIGH LOW
First Quarter
(through July 7, 1994) 15/16 25/32
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
1993 HIGH LOW
First Quarter 5/8 13/32
Second Quarter 3/4 9/32
Third Quarter 1 1/2
Fourth Quarter 1 13/16 13/16
On July 7, 1994, the date on which trading activity last occurred, the
closing sales price of the Company's stock was $.78125. On July 7, 1994,
there were approximately 270 holders of record 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. 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, which have been restated as noted for the adoption of
SFAS #109, "Accounting for Income Taxes". 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.
Income Statement Data
(in thousands, except per share and number of shares data)
Year Ended May 31,
--------------------------------------------------------------
1994 1993 1992 1991 1990
Revenue: (restated) (restated) (restated) (restated)
Equipment sales $122,469 $ 96,233 $ 78,752 $207,180 $279,084
Leasing 13,368 26,003 45,726 76,745 93,544
Interest 15,027 15,526 26,012 36,322 36,223
Other 4,101 3,638 4,386 2,699 4,902
-------- -------- -------- -------- --------
154,965 141,400 154,876 322,946 413,753
-------- -------- -------- -------- --------
Costs and expenses:
Equipment sales 114,440 85,423 72,737 194,245 262,350
Leasing 5,511 12,148 30,493 51,991 66,059
Operating and other
expenses 12,307 14,060 16,833 25,327 23,477
Provision for losses 1,315 2,070 2,150 10,632 22,069
Interest - non-recourse debt 18,370 22,091 36,820 53,796 55,209
Interest - recourse debt 1,839 3,282 6,140 9,672 11,365
-------- -------- -------- -------- --------
153,782 139,074 165,173 345,663 440,529
-------- -------- -------- -------- --------
Income (loss) before
income taxes 1,183 2,326 (10,297) (22,717) (26,776)
Income tax expense (benefit) 473 930 (4,120) (9,087) 10,710
-------- -------- -------- -------- --------
Net income (loss) $ 710 $ 1,396 $( 6,177) $(13,630) $ (16,066)
======== ======== ======== ======== =========
Earnings (loss) per common and dilutive common equivalent share:
Primary:
Net income (loss) per share $ .07 $ .14 $ ( .70) $ (1.54) $ (1.79)
Fully diluted:
Net income (loss) per share $ .07 $ .13 $ ( .70) $ (1.54) $ (1.79)
Weighted average number of common and dilutive
common equivalent shares outstanding used in
computing earnings per share:
Primary 10,901,000 10,306,000 8,886,000 8,850,000 8,981,000
Fully diluted 10,901,000 10,888,000 8,886,000 8,850,000 8,981,000
Balance Sheet Data
May 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990
Total assets $209,725 $280,635 $392,172 $611,142 $756,421
Revolving Credit Facility 49 21 - - -
Short-term recourse borrowings - - 58,984 80,320 94,900
Term Loan 18,718 37,836 - - -
Short-term non-recourse debt - - - - 20,287
Obligations under capital leases
and deferred gain arising from
sale-leaseback transactions 32,337 42,496 51,618 62,236 70,591
Discounted lease rentals 128,505 168,065 237,538 390,386 455,890
Stockholders' equity 21,099 20,303 18,539 24,651 38,341
I. Results of Operations
a. Business Restructuring and Impact on Total Assets and Total Revenue
As discussed in Item 1. Business, during fiscal year 1991, the Company
agreed with its Lenders to begin repaying its Debt Facility.
Accordingly, during the last four months of fiscal year 1991 and fiscal
years 1992, 1993 and 1994, the Company used substantially all of its
cash flow after payment of operating expenses to pay down its Debt
Facility. As a result of making these repayments, the Company has not
had the funds necessary to significantly add to its leasing portfolio.
Because a leasing portfolio declines in size as it matures, these
circumstances have resulted in a decline in the Company's leasing
portfolio and related revenue (referred to in this discussion as
"portfolio run-off").
To reverse the effects of portfolio run-off, the Company needs to
obtain additional capital or other sources of lease financing to
finance the equity component of leases until such leases mature. The
ompany is pursuing possibilities to obtain new capital. Without
obtaining new capital, profitability will depend principally upon (1)
equipment sales margins from new lease originations, (2) development of
new sources of revenue related to the Company's core business, and (3)
reductions in operating costs. The Company's current business plan is
focused on these three activities. No assurance can be given, however,
that the Company will be successful in operating profitably or in
obtaining access to new capital during fiscal year 1995.
b. Results of Operations
The Company originates leases for its own account and on behalf of
private investors and its PIFs. The ultimate profitability of the
Company's leasing transactions is dependent, in part, on the general
level of interest rates because leasing is an alternative to financing
equipment purchases with debt. Rental rates tend to rise and fall with
interest rates, although rental rate movements generally lag interest
rate movements. Because of the presently low (by historical standards)
interest rate environment, the number of available transactions which
meet the Company's profitability and credit quality standards has
declined.
Because the Company utilizes non-recourse debt (discounted lease
rentals) to finance its lease transactions, the ultimate profitability
of leasing transactions is also dependent, in part, on the difference
between the interest rate inherent in the lease and the underlying
interest rate paid to the non-recourse lender ("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.
During fiscal years 1993 and 1994, the Company's business plan provided
for originating mostly DFLs financed with permanent non-recourse debt
for its own account because such leases report profits (after interest
expense on related non-recourse debt) during the early term of the
leases (as opposed to OLs, which report losses during the early
term of the leases). The presently low interest rate environment has
reduced the availability of high quality DFLs because lessees prefer to
purchase equipment with debt at the currently low interest rates.
Presented below are schedules showing condensed income statement
categories and analyses of changes in those condensed categories
derived from the Consolidated Statements of Operations appearing on
page F-5 of this report on Form 10-K prepared solely to facilitate the
discussion of results of operations (in thousands).
Condensed Consolidated
Statements of Operations The effect on Statements of Operations The effect on
for the Years net income of for the Years net income of
Ended May 31, changes between Ended May 31, changes between
---------------------------- periods ------------------------- periods
1994 1993 1993 1992
--------------------------------------------------------------------------------------------
(in thousands)
Equipment sales margin $ 8,029 $ 10,810 $ (2,781) $ 10,810 $ 6,015 $ 4,795
Leasing margin (net of
interest expense on
discounted lease rentals) 4,514 7,290 (2,776) 7,290 4,425 2,865
Other income 4,101 3,638 463 3,638 4,386 (748)
Operating and other expenses (12,307) (14,060) 1,753 (14,060) (16,833) 2,773
Provision for losses (1,315) (2,070) 755 (2,070) (2,150) 80
Interest expense on
recourse debt (1,839) (3,282) 1,443 (3,282) (6,140) 2,858
Income taxes<F1> (473) (930) 457 (930) 4,120 (5,050)
--------- -------- --------- -------- -------- ---------
Net income $ 710 $ 1,396 $ (686) $ 1,396 $ (6,177) $ 7,573
========= ======== ========= ======== ======== =========
<F1> Income taxes for the years ended May 31, 1993 and 1992 have been
restated to reflect the adoption of SFAS #109. See Note 11 to Notes
to Consolidated Financial Statements.
Equipment Sales
Equipment sales revenue (and the related equipment sales margin) consists
of the following (in thousands):
Year Ended May 31, Increase
-------------------------------------------- (Decrease)
1994 1993 ----------------------
--------------------------------------------
Revenue Margin Revenue Margin Revenue Margin
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 70,085 $ 1,774 $ 62,252 $ 1,773
Equipment under lease sold to
private investors 43,037 1,257 13,945 777
-------- ------- -------- -------
113,122 3,031 76,197 2,550 $ 36,925 $ 481
-------- ------- -------- -------
Transactions subsequent to initial lease
termination:
Sales of off-lease equipment 4,759 2,021 11,682 3,098
Sales-type leases 2,672 1,061 4,530 1,338
Excess collections (cash collections
in excess of the associated residual
value from equipment under
lease sold to private investors) 1,916 1,916 3,824 3,824
-------- ------- -------- -------
9,347 4,998 20,036 8,260 (10,689) (3,262)
-------- ------- -------- ------- --------- ---------
$122,469 8,029 $ 96,233 10,810 $ 26,236 $ (2,781)
Provision for losses ======== (1,315) ======== (2,070)
Realizations of value in excess of ------- -------
provision for losses $ 6,714 $ 8,740
======= =======
Year Ended May 31, Increase
-------------------------------------------- (Decrease)
1993 1992 ----------------------
--------------------------------------------
Revenue Margin Revenue Margin Revenue Margin
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 62,252 $ 1,773 $ 53,776 $ 1,224
Equipment under lease sold to
private investors 13,945 777 6,747 (102)
-------- ------- -------- -------
76,197 2,550 60,523 1,122 $ 15,674 $ 1,428
-------- ------- -------- -------
Transactions subsequent to initial lease
termination:
Sales of off-lease equipment 11,682 3,098 12,425 1,073
Sales-type leases 4,530 1,338 2,093 109
Excess collections (cash collections
in excess of the associated residual
value from equipment under
lease sold to private investors) 3,824 3,824 3,711 3,711
-------- ------- -------- -------
20,036 8,260 18,229 4,893 1,807 3,367
-------- ------- -------- ------- -------- ---------
$ 96,233 10,810 $ 78,752 6,015 $ 17,481 $ 4,795
Provision for losses ======== (2,070) ======== (2,150)
Realizations of value in excess of ------- -------
provision for losses $ 8,740 $ 3,865
======= =======
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 when the profit is desirable
or to reduce perceived residual exposure. This strategy resulted in
increases in sales margin from transactions during the initial lease
term of $481,000 for fiscal year 1994 and $1,428,000 for fiscal year
1993. The Company expects to continue to sell leased equipment during
the initial lease term during fiscal year 1995. To the extent such
sales involve seasoned lease transactions, portfolio run-off will
accelerate.
The table below demonstrates that the decline in the Company's lease
portfolio during the fiscal year ended May 31, 1994 is attributable
primarily to equipment sales (in thousands):
Discounted lease
Direct finance rentals, net of
leases, operating discounted lease
leases, net and rentals assigned Net
equipment to lenders investment
held for sale arising from in leased
or re-lease equipment sales equipment
As of May 31, 1993 $ 91,284 $ (54,538) $ 36,746
Net change arising
from equity
syndications and
PIF sales (25,479) 16,532 (8,947)
Sale of lease rentals<F1> (5,167) 3,003 (2,164)
Provision for losses (1,315) - (1,315)
Non-recourse debt balloon
pay-off (see page 12) - 2,300 2,300
Change as a result of
portfolio run-off (20,360) 15,791 (4,569)
--------- --------- --------
As of May 31, 1994 $ 38,963 $ (16,912) $ 22,051
========= ========= ========
<F1> The Company recorded a gain of $319,000 on the sale of the
underlying lease rentals.
A significant portion of the Company's net assets consists of aircraft.
To reduce the concentration of aircraft in its portfolio, the Company
sold several aircraft under lease. The following table summarizes the
Company's investment in aircraft as of May 31, 1994 and May 31, 1993
(in thousands):
May 31, May 31,
1994 1993
Leased equipment, net of accumulated
depreciation $ 8,017 $ 23,836
Associated non-recourse debt (3,077) (12,425)
Equipment held for sale or re-lease 5,000 -
-------- --------
9,940 11,411
Residual values and other receivables
arising from equipment under lease
sold to private investors 518 1,008
-------- --------
Net investment in aircraft $ 10,458 $ 12,419
======== ========
Approximately $2.7 million (net of non-recourse debt of $2.3 million)
of the Company's current $10.5 million of net investment in aircraft is
represented by one jet aircraft. The lease on the aircraft expires
December 31, 1996. The Company has a commitment to sell the aircraft
for $5 million which is approximately equal to it's carrying value.
The sale is scheduled to close in September 1994.
Another jet aircraft having a net book value of $5 million was subject
to a lease which expired during fiscal year 1994. The aircraft was
returned to the Company and is included in the balance sheet under the
caption Equipment Held for Sale or Re-Lease. The Company's investment
in such aircraft was subject to non-recourse "balloon" debt of
approximately $2.3 million which was payable in full upon expiration of
the lease. The Company funded such payment with amounts drawn on its
Revolving Credit Facility. The aircraft is presently undergoing
maintenance and refurbishment. Upon completion, the Company intends to
remarket the aircraft through re-lease or sale.
Equipment Sales to PIFs
Equipment sales to PIFs increased during fiscal year 1994 as compared
to fiscal year 1993 and fiscal year 1993 as compared to fiscal year
1992, 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.
Under applicable regulatory guidelines, the Company is entitled to
receive various fees and distributions in connection with its
activities related to its sponsored PIFs. Acquisition fees payable
upon sale of equipment under lease to a PIF are subject to a
regulatory maximum amount over the term of a PIF. Acquisition fees
earned by the Company from equipment sales to one of its PIFs reached
this maximum during fiscal year 1992 and, during fiscal year 1994, the
maximum was reached for another PIF. These circumstances will have an
impact on reported equipment sales margins in future periods, but are
not expected to impact total PIF-related income (after costs of
equipment sales) in future periods as compared to the related
investment because other allowable fees and distributions are expected
to increase during such periods.
Equipment Sales to Private Investors
The Company re-opened its private investor sales department during
fiscal year 1993 and has hired two experienced private equity
salespersons. As a result, equipment sales to private investors
increased between fiscal years 1992 and 1994. The development of a
customer base of private investors is a principal operating goal for
the Company.
Remarketing Sales
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 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. Accordingly,
the Company is pursuing financing opportunities to obtain funds to add
leases to its own portfolio.
Revenue and margin from remarketing sales increased in fiscal year
1993, as compared to fiscal year 1992, because of the addition of
remarketing personnel.
Provision for Losses
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 Company
performs ongoing quarterly assessments of its assets to identify other
than temporary losses in value.
Provision for losses result from 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).
The remarketing of equipment for an amount greater than its book value
is reported as equipment sales margin or as leasing margin. As shown
above, realizations from sales exceeded the provision for losses, even
without considering realizations from remarketing activities recorded
as leasing margin (see discussion below).
Leasing Margin
Leasing margin consists of the following (in thousands):
Fiscal Years Ended May 31,
--------------------------------------
1994 1993 1992
Leasing revenue $ 13,368 $ 26,003 $ 45,726
Leasing costs and expenses (5,511) (12,148) (30,493)
Interest expense on related
discounted lease rentals (3,343) (6,565) (10,808)
-------- -------- --------
Leasing margin $ 4,514 $ 7,290 $ 4,425
======== ======== ========
Leasing margin ratio 34% 28% 10%
== == ==
Pro-forma leasing margin
ratio without the impact
of "excess depreciation" 34% 28% 18%
== == ==
The components of leasing margin (i.e., leasing revenue and leasing
costs and expenses) have declined for each of the last two fiscal years
and are expected to decline further, due to portfolio run-off and the
sales of seasoned leases. The leasing margin ratio increased for the
last two fiscal years primarily as a result of remarketing activities,
which include the rental proceeds from renewing, extending or
re-leasing equipment before and after the end of the initial lease
term.
In the first quarter of fiscal year 1991, the Company began recording
depreciation on OLs in excess of the amount of depreciation scheduled
when the leases were originated. Such "excess depreciation" was
recorded due to the anticipated decline in future residual values of
such equipment. Based on the Company's on-going quarterly review
of its lease portfolio, it was determined that "excess depreciation"
charges were no longer needed after May 31, 1992. The Company recorded
"excess depreciation" of $3.8 million during fiscal year 1992.
The decrease in both the net investment in DFLs and leased equipment,
net, reflects portfolio run-off and the sale of seasoned leases. The
Company has made minimal additions to its lease portfolio during fiscal
years 1994, 1993 and 1992, as it has preferred to sell new lease
originations for fee income as discussed above.
Other Income
Except for fiscal year 1992, which included a gain of $1.7 million on
the sale of an investment in Corporate Express, Inc., Other Income
consists primarily of fees and distributions from the PIFs. Such fees
have been increased as PIF assets under management have increased.
Operating and Other Expenses
Operating and other expenses decreased approximately $1.8 million (12%)
for fiscal year 1994, compared to fiscal year 1993. The decrease is
principally due to (1) approximately $0.4 million from reductions in
restructuring costs, related to the Company's Debt Facility, (2)
approximately $0.8 million from compensation expense reductions and (3)
a reduction of approximately $0.6 million in legal fees. The Company
expects to achieve additional reductions in operating and other
expenses during fiscal year 1995. On June 30, 1994, the Company
reduced its workforce by 29 employees.
Operating and other expenses decreased approximately $2.8 million (16%)
for fiscal year 1993, compared to fiscal year 1992. The decrease is
primarily due to personnel reductions, operating efficiencies
attributable to a smaller workforce and reductions in professional fees
and other costs (principally related to the restructuring of the Debt
Facility).
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 Operations reflect 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 and Restatement
In 1994 the Company adopted Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), Accounting for Income Taxes and has applied
the provisions of SFAS No. 109 retroactively to June 1, 1988. 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. The Company previously accounted for
income taxes under Accounting Principle Board Opinion No. 11,
whereby deferred taxes were provided for revenue and expense items
recognized in different years for financial statement and income tax
purposes.
Income tax expense is provided on income at the appropriate statutory
rates applicable to such earnings. The effective tax rate for fiscal
years 1994, 1993 and 1992 was 40%. This rate does not reflect actual
tax payments by the Company because of net operating loss carryforwards
available to offset taxable income.
II. Liquidity and Capital Resources
The Company's activities are principally funded by non-recourse debt,
its Revolving Credit Facility, rents, proceeds from sales of on-lease
equipment, fees and distributions from its PIFs, and sales or re-leases
of equipment after the expiration of the initial lease terms. As shown
below, the change in the line item, "Net increase (decrease) in cash"
on the Consolidated Statement of Cash Flows should be viewed in the
context of the Company's history of principally funding its operations
from its Debt Facility (in thousands):
1994 1993 1992 1991 1990
Net increase
(decrease) in
cash and cash
equivalents $ (1,138) $ (3,816) $ 3,854 $ (5,528) $(7,842)
Net payments on
recourse
borrowings (19,090) (21,127) (21,336) (14,580) (4,000)
-------- -------- -------- -------- -------
Net increase
(decrease) in
cash and cash
equivalents after
elimination of
recourse debt
activity $ 17,952 $ 17,311 $ 25,190 $ 9,052 $(3,842)
======== ========= ======== ======== =======
The table above demonstrates that the Company has operated on a
positive cash flow basis during fiscal years 1994, 1993, 1992 and 1991.
Substantially all of the net positive cash flow has been used to reduce
recourse debt, and not reinvested in new lease originations, resulting
in a decrease in the Company's leasing portfolio.
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.
In this context, it should be noted that the Company reduced the
principal balance of its Debt Facility by $19.1 million since May 31,
1993 and improved its recourse debt-to-equity ratio as follows:
As of May 31,
-----------------------
1994 1993
Recourse debt outstanding under
the Debt Facility $ 18,767 $ 37,857
Stockholder's equity $ 21,099 $ 20,303
Recourse debt/stockholder's equity .89 to 1 1.86 to 1
The Company currently utilizes approximately 35 institutional lenders
to permanently finance lease rentals on a non-recourse basis. These
financings are collateralized solely by the leased equipment and
related rentals, and the Company has no recourse liability to these
lenders for repayment of the debt. This complement of lenders meets
the Company's current non-recourse financing needs for leases
originated with investment grade lessees. However, due to external
factors, obtaining permanent non-recourse financing for non-investment
grade lessees is more difficult and expensive.
The offering period for CPYF II ended in April 1994. A total of $34
million of Class A units were sold to the public. In April 1994, the
Company commenced offering units of CPYF III for sale to the public.
Through June 30, 1994, the Company sold a total of $2.9 million of
Class A units of CPYF III. During fiscal year 1995, the Company
anticipates selling up to $30 million of Class A units in CPYF III,
which will represent a principal source of liquidity and acquisition
fee income for the Company. No assurance can be given that the Company
will achieve its target of Class A unit sales of CPYF III in fiscal
year 1995.
As shown in the Consolidated Statements of Cash Flows, the Company
reported cash receipts from the PIFs (net of the Company's funding
obligations with respect to its Class B interests) of approximately
$2.4 million, $3.2 million and $0.5 million during fiscal years 1994,
1993 and 1992. Currently, the Company has substantially funded these
obligations and is receiving cash distributions from the PIFs with
respect to the Class B interests, management fees and other
distributions from the PIFs and, accordingly, the Company is receiving
a net cash inflow from its investment in its PIF's. The Company
currently expects to sell approximately $80 million of equipment to the
PIFs over the next twelve months, approximately $ 30 million of which
will be sold to CPYF III.
Inflation has not had a significant impact upon the operations of the
Company.
III. Business Plan
As previously discussed, during fiscal year 1991, the Company agreed
with its Lenders to begin repaying its Debt Facility. Accordingly,
during the last four months of fiscal year 1991, fiscal years 1992,
1993 and 1994, the Company used substantially all of its cash flow
after payment of operating expenses to pay down its Debt Facility. As
a result of making these repayments, 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, the Company's leasing
portfolio and related revenue have declined since 1991. The Debt
Facility provides a limited amount of funds to the Company to invest in
new leases. However, this level of funds is not sufficient to maintain
the current portfolio and, accordingly, the current level of
remarketing profits may not be achievable in the future. Therefore,
maintaining profitability is dependent principally upon (1) equipment
sales margins from new lease originations, (2) development of new
sources of revenue related to the Company's core business, and (3)
reductions in operating costs.
The Company's business plan is designed to maintain profitable
operations, focusing on the activities listed in the above paragraph.
The amount of longer-term future profits, if any, will largely depend
on the amount of new capital available to the Company. Such capital
may be in a variety of forms including new recourse debt, additional
equity (which) could include a sale of the Company, possibly coupled
with an infusion of new funds into the Company from the purchaser),
securitized financing vehicles or equity provided from private
purchases of equipment originated by the Company or strategic
alliances/combinations with other leasing companies. The Company is
pursuing financing possibilities. No assurance can be given, however,
that the Company will be successful in operating profitably, developing
new sources of revenue or in obtaining access to new financing during
the fiscal year ended May 31, 1994.
Item 8. Financial Statements and Supplementary Data
See the Index to Financial Statements and Schedules appearing at Page F-1 of
this Report.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
PART IV
Item 14. Exhibits, Financial Statement 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 F-1) are filed as part of this
Annual Report.
(b) Reports on Form 8-K
None.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The Company
will furnish to its shareholders of record as of the record date for its 1994
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.
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(b) Amended and Restated Exhibit A to the Option Agreement between the
Company and Richard Kazan, incorporated by reference to Exhibit
19.1 of 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.
10.7 Form of Indemnification Agreement by and between the Company and
its in-house legal counsel, incorporated by reference to Exhibit
10.14 of the 1991 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").
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.
10.9 Letter Agreement regarding employment of Richard H. Robinson, dated
October 9, 1991, by and between Richard H. Robinson and the
Company, as extended by Letter Agreement dated November 23, 1992,
incorporated by reference to Exhibit 19.2 of the November 1992
10-Q.
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.
10.11 Agreement dated as of February 2, 1993 by and between the Company
and Stephen P. Kregstein, incorporated by reference to Exhibit 19.1
of the Quarterly Report on Form 10-Q for the Quarter ended February
28, 1993 (the "February 1993 10-Q").
10.12 Form of Amended and Restated Revolving Credit and Term Loan
Agreement dated as of November 30, 1991, effective as of December
16, 1991, by and among CAII, Mellon National Bank, N.A. ("Mellon"),
The Chase Manhattan Bank, N.A., First Bank National Association
(collectively, the "Banks"), Horace Mann Life Insurance Company and
CIG & Co. as nominee for Connecticut General Life Insurance Company
(collectively, the "Noteholders"), as Lenders (the Banks and the
Noteholders are collectively referred to as the "Lenders"), and
Mellon Bank, N.A. (the "Agent"), incorporated by reference to
Exhibit 19.3 of the November 1991 10-Q.
10.13 Form of Restated Revolving Credit Notes dated as of December 16,
1991, by CAII in favor of each of the Banks, incorporated by
reference to Exhibit 19.4 of the November 1991 10-Q.
10.14 Form of Restated Term Loan Notes dated as of December 16, 1991 by
CAII in favor of each of the Lenders, incorporated by reference to
Exhibit 19.5 of the November 1991 10-Q.
10.15 Form of Reaffirmation of Amended Guaranty, Pledge, Security and
Subordination Agreement, dated as of November 30, 1991, by and
among the Lenders, CAII and the Company, incorporated by reference
to Exhibit 19.7 of the November 1991 10-Q.
10.16 Form of Omnibus Amendment to Amended Loan Documents, dated as of
November 30, 1991, by and among the Lenders, CAII and the Company,
incorporated by reference to Exhibit 19.8 of the November 1991
10-Q.
10.17 Form of Continuing Guaranty, Security and Subordination Agreement,
executed in January 1992, effective as of November 30, 1991, by and
among the Lenders, the Agent and each of the following affiliates
of the Company as guarantor, incorporated by reference to Exhibit
19.1 of the February 1992 10-Q:
(a) CAI Equipment Leasing I Corporation;
(b) CAI Equipment Leasing III Corporation;
(c) CAI Leasing Canada, Ltd.;
(d) CAI Partners Management Company;
(e) Capital Equipment Corporation; and
(f) Whitewood Credit Corporation.
10.18 Omnibus Amendment No. 2 to Amended Loan Documents, dated as of
April 15, 1992, by and among CAII, the Company, the Lenders and the
Agent, incorporated by reference to Exhibit 10.40 of the 1992 10-K.
10.19 Waiver Agreement by and among CAII, the Company, the Lenders and
the Agent, incorporated by reference to Exhibit 10.41 to the 1992
10-K.
10.20 Amendment No. 3 to Amended Loan Agreement by and among CAII, the
Company, the Lenders and the Agent, incorporated by reference to
Exhibit 10.42 of the August 1992 10-K.
10.21 Forbearance Agreement dated as of December 1, 1992, by and among
CAII as Borrower, the Company as Guarantor, and CAI Equipment
Leasing I Corp. ("CEL I"), CAI Equipment Leasing III Corp. ("CEL
II"), CAI Leasing Canada, Ltd. ("CAI Canada"), CAI Partners
Management Company ("CPMC"), Capital Equipment Corporation ("CEC")
and Whitewood Credit Corporation ("Whitewood") as subsidiary
Guarantors (the "Subsidiary Guarantors"), and Agent, incorporated
by reference to Exhibit 19.5 of the November 1992 10-Q.
10.22(a) Second Amended and Restated Revolving Credit and Term Loan
Agreement dated as of December 21, 1992, by and among CAII, Agent
and the Lenders, incorporated by reference to Exhibit 19.6 of the
November 1992 10-Q.
10.22(b) Amendment No. 1 to the Second Amended and Restated Revolving Credit
and Term Loan Agreement dated as of April 30, 1993, incorporated by
reference to exhibit 10.22 (b) to the 1993 10-K.
10.23 Second Amendment to Amended Joint Security Agreement dated as of
December 21, 1992 by and among CAII, Agent and the Lenders,
incorporated by reference to Exhibit 19.7 of the November 1992
10-Q.
10.24 First Amendment to Amended Continuing Guaranty, Pledge, Security
and Subordination Agreement and Second Reaffirmation of Guaranty
dated as of December 21, 1992, by and among the Company, Agent and
the Lenders, incorporated by reference to Exhibit 19.8 of the
November 1992 10-Q.
10.25 Form of First Amendment to Continuing Guaranty, Security and
Subordination Agreement and Reaffirmation of Guaranty ("First
Amendment to Subsidiary Guaranty") dated as of December 21, 1992,
by and among Agent, the Lenders and each of CEL I, CEL II and CPMC,
incorporated by reference to Exhibit 19.9 of the November 1992
10-Q.
10.26 Form of First Amendment to Subsidiary Guaranty dated as of December
21, 1992 by and among Agent, the Lenders and each of CAI Canada,
CEC and Whitewood, incorporated by reference to Exhibit 19.10 of
the November 1992 10-Q.
10.27 Second Omnibus Amendment to Amended Loan Documents dated as of
December 21, 1992, by and among CAII, the Company, Agent and the
Lenders, incorporated by reference to Exhibit 19.11 of the November
1992 10-Q.
10.28 Form of Revolving Credit Note dated as of December 21, 1992, by
CAII in favor of each of the Banks, incorporated by reference to
Exhibit 19.12 of the November 1992 10-Q.
10.29 Form of Term Loan Note dated as of December 21, 1992, by CAII in
favor of each of the Lenders, incorporated by reference to Exhibit
19.13 of the November 1992 10-Q.
10.30 Letter Agreement dated as of December 11, 1992 by and between the
Company and Hanifen, Imhoff Inc., incorporated by reference to
Exhibit 19.14 of the November 1992 10-Q.
10.31 Limited Partnership Agreement of Leastec Income Fund V dated as of
October 1, 1987, by and among, CAI Partners Management Company,
Leastec Corporation and the limited partners, (the "Leastec Limited
Partnership Agreement"), incorporated by reference to Exhibit 10.36
of the 1991 10-K.
10.32 Form of Amendment to No. 1 to Leastec Limited Partnership Agreement
dated as of October 21, 1988, incorporated by reference to Exhibit
10.37 of the 1991 10-K.
10.33 Form of Amendment No. 2 to the Leastec Limited Partnership
Agreement dated as of March 31, 1992, incorporated by reference to
Exhibit 10.45 of the 1992 10-K.
10.34(a) Amended and Restated Limited Partnership Agreement of Northstar
Income Fund-I, L.P. dated as of January 6, 1989, by and among,
Capital Partners Management Company, CAI Equipment Leasing I Corp.,
SLH Equipment Leasing Income, Inc. and the Class A Limited Partners
(the "NorthStar Limited Partnership Agreement"), incorporated by
reference to Exhibit 10.38 of the 1991 10-K.
10.34(b) Amendment No. 1 to the NorthStar Limited Partnership Agreement
dated as of January 11, 1989, incorporated by reference to Exhibit
10.38(b) of the 1991 10-K.
10.34(c) Amendment No. 2 to the NorthStar Limited Partnership Agreement
dated as of February 10, 1989, incorporated by reference to Exhibit
10.38(c) of the 1991 10-K.
10.34(d) Amendment No. 3 to the NorthStar Limited Partnership Agreement
dated as of May 8, 1989, incorporated by reference to Exhibit
10.38(d) of the 1991 10-K.
10.34(e) Amendment No. 4 to the NorthStar Limited Partnership Agreement
dated as of May 25, 1989, incorporated by reference to Exhibit
10.38(e) of the 1991 10-K.
10.34(f) Amendment No. 5 to the NorthStar Limited Partnership Agreement
dated as of April 5, 1990, incorporated by reference to Exhibit
10.38(f) of the 1991 10-K.
10.35(a) Limited Partnership Agreement of Capital Preferred Yield Fund dated
as of July 13, 1989, by and among, CAI Partners Management Company,
CAII and the Class A Limited Partners (the "CPYF Limited
Partnership Agreement"), incorporated by reference to Exhibit 10.39
1991 10-K.
10.35(b) Amendment No. 1 to the CPYF Limited Partnership Agreement dated as
of December 31, 1991, incorporated by reference to Exhibit 10.48 of
the 1992 10-K.
10.35(c) Amendment No. 2 to the CPYF Limited Partnership Agreement dated as
of March 31, 1992, incorporated by reference to Exhibit 10.49 of
the 1992 10-K.
10.36(a) Amended and Restated Partnership Agreement of PaineWebber Preferred
Yield Fund L.P. dated as of June 22, 1990, by and among, CAI
Equipment Leasing II Corp., General Equipment Management, Inc.,
Capital Partners Management II Company and the Class A Limited
Partners (the "PWPYF Partnership Agreement"),incorporated by
reference to Exhibit 10.50 of the 1991 10-K.
10.36(b) Form of Amendment No. 7 to the PWPYF Partnership Agreement, dated
as of February 7, 1991 incorporated by reference to exhibit
10.36(h) to the 1993 10-K.
10.37(a) Form of Amended and Restated Agreement of Limited Partnership of
Capital Preferred Yield Fund II by and among CAI Equipment Leasing
III Corporation, CAII and the Class A Limited Partners (the "CPYF
II Partnership Agreement"), incorporated by reference to Exhibit
10.51 of the 1992 10-K.
10.37(b) Amendment No. 1 to the CPYF II Partnership Agreement dated as of
June 12, 1992.
10.38 Purchase Agreement, dated as of November 26, 1991, by and among the
Purchasers named therein, Corporate Express, Inc., the Company and
Whitewood Credit Corporation, incorporated by reference to Exhibit
19.9 of the November 1991 10-Q.
10.39 Form of Settlement Agreement, effective as of December 31, 1991, by
and between CAII and the City of Chicago, incorporated by reference
to Exhibit 19.10 of the November 1991 10-Q.
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 to 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.
10.43 Confidentiality and Standstill Agreement, dated as of June 1, 1994,
by and between the Company and Kazan.
10.44 Indemnification Agreement, dated as of January 14, 1994, by and
between the Company and Jacobs.
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).
10.46(a) Amendment No. 2 to the Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of December 23, 1993, by and
among CAII and the Lenders.
10.46(b) Continuing Guaranty, Security and Subordination Agreement, dated as
of December 23, 1993, by and among CAI Equipment Leasing IV Corp.
and the Lenders.
10.46(c) Second Amendment to Amended Continuing Guaranty, Pledge, Security
and Subordination Agreement and Third Reaffirmation of Guaranty,
dated as of December 23, 1993, by and among the Company and the
Lenders.
10.46(d) Second Amendment to Continuing Guaranty, Security and Subordination
Agreement and Reaffirmation of Guaranty, dated as of December 23,
1993, by and among CAI Partners Management Company and the Lenders.
10.46(e) Second Amendment to Continuing Guaranty, Security and Subordination
Agreement and Reaffirmation of Guaranty, dated as of December 23,
1993, by and among CAI Equipment Leasing I Corp. and the Lenders.
10.46(f) Second Amendment to Continuing Guaranty, Security and Subordination
Agreement and Reaffirmation of Guaranty, dated as of December 23,
1993, by and among CAI Equipment Leasing III Corp. and the Lenders.
10.46(g) Pledge Amendment, dated as of December 23, 1993, executed by CAII,
pledging shares of CAI Lease Securitization I Corp. to the Lenders.
10.47(a) Agreement of Limited Partnership of Capital Preferred Yield Fund -
III, L.P. ("CPYF-III"), dated as of November 2, 1993, by and
between CAI Equipment Leasing IV Corp. as General Partner, and John
F. Olmstead as the original Limited Partner.
10.47(b) Amended and Restated Agreement of Limited Partnership of CPYF III,
dated as of June 14, 1994, by and among CAI Equipment Leasing IV
Corp. as General Partner, CAII as the Class B Limited Partner, John
F. Olmstead as the original Limited Partner, and the Class A
Limited Partners.
11 Statement regarding Computation of Per Share Earnings.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick.
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 July 14, 1994.
CAPITAL ASSOCIATES, INC.
By: /s/ Anthony M. DiPaolo
-------------------------------
Anthony M. DiPaolo
Senior Vice President and
Controller
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 July 14, 1994
- - --------------------------- and Director
William B. Patton, Jr.
/s/Dennis J. Lacey President, Chief Executive July 14, 1994
- - --------------------------- Officer and Director
Dennis J. Lacey
/s/James D. Walker Director July 14, 1994
- - ---------------------------
James D. Walker
/s/James D. Edwards Director July 14, 1994
- - ---------------------------
James D. Edwards
/s/Peter F. Schabarum Director July 14, 1994
- - ---------------------------
Peter F. Schabarum
/s/Gary M. Jacobs Director July 14, 1994
- - ---------------------------
Gary M. Jacobs
/s/Anthony M. DiPaolo Senior Vice President July 14, 1994
- - --------------------------- and Controller
Anthony M. DiPaolo (Principal Accounting Officer)
/s/John E. Christensen Senior Vice President July 14, 1994
- - --------------------------- Chief Financial Officer
John E. Christensen and Treasurer
(Principal Financial Officer)
INDEX OF FINANCIAL STATEMENTS
AND SCHEDULES
Financial Statements
Independent Auditor's Report F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of
May 31, 1994 and 1993 F-4
Consolidated Statements of Operations for
the Years Ended May 31, 1994, 1993 and 1992 F-5
Consolidated Statements of Changes in
Stockholders' Equity for the Years
Ended May 31, 1994, 1993 and 1992 F-6
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1994, 1993 and 1992 F-7
Notes to Consolidated Financial Statements F-8 to F-22
Schedules
Independent Auditor's Report F-23
Report of Independent Accountants F-24
Schedule V - Property, Plant and Equipment for the
Years Ended May 31, 1994, 1993 and 1992 F-25
Schedule VI - Accumulated Depreciation,
Depletion and Amortization of Property,
Plant and Equipment for the Years
Ended May 31, 1994, 1993 and 1992 F-26
Schedule VIII - Valuation and Qualifying
Accounts and Reserves for the Years
Ended May 31, 1994, 1993 and 1992 F-27
Schedule IX - Short-Term Borrowings for the Years
Ended May 31, 1994, 1993 and 1992 F-28
Schedule X - Supplementary Income
Statement Information for the Years
Ended May 31, 1994, 1993 and 1992 F-29
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors of
Capital Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Associates, Inc. and subsidiaries as of May 31, 1994 and 1993 and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the years then ended. 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, 1994 and 1993 and the results
of their operations and their cash flows for the years then ended May 31,
1994 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 11 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109), as of June 1, 1993 and
retroactively restated its consolidated financial statements for the years
ended may 31, 1993 and 1992.
We also audited the adjustments described in Note 11 relating to the
Company's adoption of SFAS 109 that were applied to restate the 1992
financial statements. In our opinion, such adjustments are appropriate and
have been properly applied.
KPMG PEAT MARWICK
/s/ KPMG Peat Marwick
- - --------------------------
Denver, Colorado
June 30, 1994
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Capital Associates, Inc.:
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows, before the adjustment
discussed in Note 11, of Capital Associates, Inc. and subsidiaries for the
year ended May 31, 1992. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and their cash
flows of Capital Associates, Inc. and subsidiaries, before the adjustment
discussed in Note 11, for the year ended May 31, 1992 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND
/s/ Coopers & Lybrand
- - --------------------------
Denver, Colorado
September 14, 1992
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
ASSETS
May 31,
-------------------------
1994 1993
(as restated
see Note 11)
Cash, including restricted funds of $1,567
in 1994 and $2,206 in 1993 $ 2,072 $ 3,210
Accounts receivable, net of allowance for
doubtful accounts of $343 in 1994 and
$593 in 1993 1,375 1,715
Income tax refunds receivable 250 1,870
Equipment held for sale or re-lease 5,242 461
Residual values and other receivables arising
from equipment under lease sold to private
investors 5,098 5,071
Net investment in direct finance leases 18,106 51,649
Leased equipment, net 15,615 39,174
Investment in affiliated limited partnerships 12,178 15,200
Other 5,779 6,084
Notes receivable arising from sale-leaseback
transactions 32,417 42,674
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 111,593 113,527
-------- --------
$209,725 $280,635
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Facility $ 49 $ 21
Accounts payable and other liabilities 8,187 10,414
Term Loan 18,718 37,836
Deferred income taxes 830 1,500
Obligations under capital leases arising
from sale-leaseback transactions 32,337 42,496
Discounted lease rentals 128,505 168,065
-------- --------
188,626 260,332
-------- --------
Commitments and contingencies (Notes 9, 10, 12, 15, and 16)
Stockholders' equity:
Common stock, $.008 par value, 15,000,000
shares authorized, 9,759,000 and 9,686,000
shares issued 60 59
Additional paid-in capital 16,689 16,604
Retained earnings 4,401 3,691
Treasury stock, at cost (51) (51)
-------- --------
Total stockholders' equity 21,099 20,303
-------- --------
$209,725 $280,635
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended May 31,
----------------------------------------------
1994 1993 1992
(as restated (as restated
see Note 11) see Note 11)
Revenue:
Equipment sales to
affiliated limited
partnerships $ 70,085 $ 62,252 $ 53,776
Other equipment sales 52,384 33,981 24,976
Leasing 13,368 26,003 45,726
Interest 15,027 15,526 26,012
Other 4,101 3,638 4,386
-------- -------- --------
Total revenue 154,965 141,400 154,876
-------- -------- --------
Costs and expenses:
Equipment sales 114,440 85,423 72,737
Leasing 5,511 12,148 30,493
Operating and other expenses 12,307 14,060 16,833
Provision for losses 1,315 2,070 2,150
Interest:
Non-recourse debt 18,370 22,091 36,820
Recourse debt 1,839 3,282 6,140
-------- -------- --------
Total costs and expenses 153,782 139,074 165,173
-------- -------- --------
Net income (loss) before
income taxes 1,183 2,326 (10,297)
Income tax expense (benefit) 473 930 (4,120)
-------- -------- --------
Net income (loss) $ 710 $ 1,396 $ (6,177)
======== ======== ========
Earnings (loss) per common
and dilutive common
equivalent share:
Primary:
Net income (loss) per share $ .07 $ .14 $ ( .70)
======== ======== ========
Fully diluted:
Net income (loss) per share $ .07 $ .13 $ ( .70)
======== ======== ========
Weighted average number of
common and dilutive
common equivalent shares
outstanding used in
computing earnings per share:
Primary 10,901,000 10,306,000 8,886,000
========== ========== =========
Fully diluted 10,901,000 10,888,000 8,886,000
========== ========== =========
The accompanying notes are an integral part
of these consolidated financial statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Stock Additional Treasury Stock
-------------------- Paid-in Retained --------------------
Shares Amount Capital Earnings Shares Cost Total
Balance at May 31, 1991 (as restated, 9,080,000 $ 54 $ 16,573 $ 8,472 272,500 $(448) $ 24,651
see Note 11)
Sale of common stock under
incentive stock option plan 16,000 - 6 - - - 6
Issuance of shares to
officers - - (147) - (125,000) 206 59
Net loss - - - (6,177) - - (6,177)
--------- ---- -------- -------- -------- ----- --------
Balance at May 31, 1992 (as restated, 9,096,000 54 16,432 2,295 147,500 (242) 18,539
see Note 11)
Sale of common stock under
incentive stock option plan 56,000 1 23 - - - 24
Issuance of shares to
officers 534,000 4 149 - (115,500) 191 344
Net income - - - 1,396 - - 1,396
--------- ---- -------- -------- -------- ----- --------
Balance at May 31, 1993 (as restated, 9,686,000 59 16,604 3,691 32,000 (51) 20,303
see Note 11)
Sale of common stock under
incentive stock option plan 23,000 - 10 - - - 10
Issuance of shares to
officer 50,000 1 56 - - - 57
Income tax benefit from
stock compensation - - 19 - - - 19
Net income - - - 710 - - 710
--------- ---- -------- -------- -------- ----- --------
Balance at May 31, 1994 9,759,000 $ 60 $ 16,689 $ 4,401 32,000 $ (51) $ 21,099
========= ==== ======== ======== ======== ===== ========
The accompanying notes are an integral
part of these consolidated financial statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended May 31,
-------------------------------------------
1994 1993 1992
(as restated (as restated
see Note 11) see Note 11)
Cash flows from operating
activities:
Net income (loss) $ 710 $ 1,396 $ (6,177)
------- ------- --------
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization 6,613 12,998 31,694
Provision for losses 1,315 2,070 2,150
Deferred income taxes (670) (200) (4,900)
Gain on sale of
equipment held for
investment (3,190) (3,789) (877)
Sales-type lease margin (1,062) (1,338) (109)
Decrease in accounts
receivables 2,131 4,311 7,053
Other (1,709) (70) 497
------- ------- --------
Total adjustments 3,428 13,982 35,508
------- ------- --------
Net cash provided by operating
activities 4,138 15,378 29,331
------- ------- --------
Cash flows from investing
activities:
Recovery of investment in
direct financing leases 13,840 20,129 22,664
Equipment purchased for
leasing (3,446) (19,518) (16,131)
Net receipts from affiliated
public income funds 2,395 3,164 527
Sale of investment in
Corporate Express, Inc. - - 1,770
Proceeds from sales of
equipment 17,824 18,563 23,998
------- ------- --------
Net cash provided by investing
activities 30,613 22,338 32,828
------- ------- --------
Cash flows from financing
activities:
Proceeds from discounting
of lease rentals 4,916 13,697 15,069
Principal payments on
discounted lease rentals (21,725) (34,126) (52,044)
Proceeds from sales of
common stock 10 24 6
Net payments on Revolving
Credit Facility, short-term
recourse borrowings and
Term Loan (19,090) (21,127) (21,336)
------- ------- --------
Net cash used by financing
activities (35,889) (41,532) (58,305)
------- ------- --------
Net increase (decrease) in cash (1,138) (3,816) 3,854
Cash at beginning of year 3,210 7,026 3,172
------- ------- --------
Cash at end of year $ 2,072 $ 3,210 $ 7,026
======== ======= ========
Supplemental schedule of cash
flow information:
Recourse interest paid $ 1,867 $ 3,631 $6,508
Non-recourse interest paid 3,055 6,042 10,408
Income taxes paid 809 1,805 1,193
Income tax refunds received 1,623 70 3,421
Supplemental schedule of non-cash
investing and financing
activities:
Discounted lease rentals
associated with equipment
sold to third-party
investors 36,612 18,007 23,985
Assumption of discounted
lease rentals in lease
acquisitions 15,795 23,171 -
Other receivables relating
to equipment sale
transactions 1,876 49 -
The accompanying notes are an integral part
of these consolidated financial statements.
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 and Restatement
In 1994 the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes and
has applied the provisions of SFAS No. 109 retroactively to June 1,
1988. 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. The Company
previously accounted for income taxes under Accounting Principle Board
Opinion No. 11, whereby deferred taxes were provided for revenue and
expense items recognized in different years for financial statement
and income tax purposes.
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. The May 31, 1994 carrying value consists primarily
of one jet aircraft.
Income (Loss) 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.
Loss per common and common equivalent share is computed by dividing
net loss by the weighted average number of shares of common stock
outstanding, as outstanding common options were anti-dilutive.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
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 leases
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 inception 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 operations. 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
as determined by the Company. In estimating such values, the Company
considers all relevant information and circumstances regarding the
equipment and the lessee.
Operating Leases ("OLs") - 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 operations. 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 to such
transactions. Interest income is recorded on the discounted lease
rentals and an equal amount of interest expense on the related
liability is recorded in the accompanying statements of operations.
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 operations 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 on the accompanying
statements of operations, 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 recorded) 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 or the OL method.
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 the 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. The lease portfolio
is reviewed quarterly to determine the adequacy of the allowance for
losses.
The Company evaluates the realizability of the carrying value of its
investment in its PIFs based upon all estimated future cash flows from
the PIFs. As a result of such analyses, certain distributions may be
accounted for as a recovery of cost instead of income.
2. Residual Values and Other Receivables Arising from Equipment Under Lease
Sold to PrivateInvestors
As of May 31, 1994 and 1993, 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 are (in
thousands):
Description 1994 1993
IBM, primarily peripheral computer equipment $ 461 $ 345
Aircraft 518 1,008
Mining and manufacturing 725 648
Grocery store fixtures 1,118 0
Other miscellaneous equipment 812 1,287
-------- -------
Total equipment residuals 3,634 3,288
Notes receivable due directly from investors 1,289 1,440
End user rentals under existing
leases assigned to the Company by investors 175 343
-------- -------
$ 5,098 $ 5,071
======== =======
Residual values and other receivables arising from equipment under lease
sold to private investors are net of an allowance for doubtful accounts
of $6,934,000 and $8,719,000 as of May 31, 1994 and 1993, respectively.
3. Net Investment in DFLs
The components of the net investment in DFLs as of May 31, 1994 and 1993
are (in thousands):
1994 1993
Minimum lease payments receivable $ 18,214 $ 53,325
Estimated residual values 2,256 7,972
IDC 136 390
Less unearned income (2,500) (10,038)
-------- -------
$18,106 $51,649
======== =======
4. Leased Equipment
The Company's investments in equipment on OLs by major classes as of May
31, 1994 and 1993 are (in thousands):
1994 1993
IBM peripheral computer equipment $ 3,427 $ 10,635
IBM processors 3,237 1,840
DEC computer equipment 309 5,353
Other technology and communication equipment 4,168 12,036
Aircraft 9,040 29,835
Other 8,284 10,883
IDC 103 296
-------- --------
28,568 70,878
Less accumulated depreciation (11,212) (27,551)
Less allowance for losses (1,741) (4,153)
-------- --------
$ 15,615 $ 39,174
======== ========
Depreciation on leased equipment was $5,209,000, $11,425,000 and
$28,409,000 for fiscal years 1994, 1993 and 1992, respectively.
The investment in aircraft includes one aircraft for which the Company
has a commitment to sell for $5 million, which is approximately equal to
its carrying value. The sale is scheduled to close in September 1994.
5. Future Minimum Lease Payments
Future minimum lease payments receivable from noncancelable leases on
equipment owned by the Company as of May 31, 1994, are as follows (in
thousands):
Years Ending May 31 DFLs OLs
1995 $ 9,530 $ 3,938
1996 5,520 2,098
1997 2,368 1,255
1998 623 87
1999 143 0
Thereafter 30 0
-------- -------
$ 18,214 $ 7,378
======== =======
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. 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.
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
1995 $ 11,380 $ 11,314
1996 12,628 12,603
1997 7,666 7,673
1998 743 747
-------- --------
$ 32,417 $ 32,337
======== ========
Notes receivable and obligations arising from sale-leaseback
transactions bear interest at rates ranging from 10.0% to 11.63%.
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 (1) 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 (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.
At May 31, 1994, equipment on 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 on lease
Baa (or equivalent) or above 82%
Below Baa (or equivalent) 11
In bankruptcy 7
8. Discounted Lease Rentals
Discounted lease rentals outstanding at May 31, 1994 bear interest at
rates primarily ranging between 7% to 12%. Aggregate maturities of such
non-recourse obligations are (in thousands):
Years Ending May 31:
1995 $ 64,619
1996 32,380
1997 21,745
1998 7,869
1999 1,462
Thereafter 430
--------
$128,505
========
9. Credit Facility
The Company's recourse operating credit facility ("Debt Facility")
consists of two facilities, a revolving credit facility (the "Revolving
Credit Facility") and a term facility (the "Term Loan"). The
availability under the Revolving Credit Facility is equal to the lesser
of (1) $10.75 million or (2) the Borrowing Base Amount (as defined),
reduced by the outstanding indebtedness under the Revolving Credit
Facility at any time and from time to time. As of May 31, 1994, the
Borrowing Base Amount was $4.1 million, and the outstanding
indebtedness under the Revolving Credit Facility was $49,109, leaving
approximately $4.0 million of availability under the Revolving Credit
Facility at May 31, 1994 to fund the Company's working capital needs.
The outstanding principal balance of the Term Loan, as of May 31, 1994,
was $18.7 million. Principal reductions under the Term Loan are
scheduled to occur as follows (in thousands):
Principal Balance on May 31, 1994 $18,718
Twelve Months Ended May 31, 1995 14,665
-------
Principal Balance Remaining on May 31, 1995 $ 4,053
=======
The entire unpaid balance of the Debt Facility will be due and owing on
May 31, 1995, unless the parties agree to renew and extend such
indebtedness. As of May 31, 1994, CAII had prepaid $2.0 million of the
scheduled Term Loan payments, representing approximately 1.4 months of
scheduled payments and no Defaults or Events of Default existed under
the Second Amended Loan Agreement which had not been waived by its
Lenders.
The Revolving Credit Facility bears interest at the Mellon Bank, N.A.'s
("Mellon") Prime Rate, plus 1%, payable monthly, in arrears. On May 31,
1994, Mellon's Prime was 7.25%. The Term Loan bears interest at a fixed
rate of 6.0%, payable monthly, in arrears.
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, other
than liens which are senior by operation of law, other liens to which
the Lenders have subordinated their position and non-recourse financing
liens on specific equipment and leases. The Company and certain of the
Company's and CAII's subsidiaries have guaranteed CAII's obligations
under the Second Amended Loan Agreement and have pledged all of their
assets, with limited exceptions, to collateralize their guarantees.
The Second Amended Loan Agreement requires CAII to maintain (1) a ratio
of Total Collateral Amount to Maximum Aggregate Commitment (as defined
in the Second Amended Loan Agreement) of not less than .70:1 through
August 29, 1994 and .80:1 thereafter, (2) consolidated stockholders'
equity of not less than $19 million and (3) a ratio of Eligible
Receivables to the Revolving Credit Loan (as defined in the Second
Amended Loan Agreement) of not less than 1.1:1.0.
As required under the Second Amended Loan Agreement, the Company has
directed lessees under all leases for which permanent non-recourse
financing has not been obtained to remit their rental payments directly
to a cash collateral account. The Company holds separate from the cash
collateral account (into which all Company owned receipts are deposited
and disbursements are made from) certain funds on behalf of certain
third parties. From time to time, the Company makes payments from these
funds to such third parties. In the aggregate, at May 31, 1994, cash
and cash equivalents totalling $1,567,000 were held by the Company on
behalf of third parties. All of these funds are classified as
restricted.
The Second Amended Loan Agreement restricts CAII's ability to pay
dividends, or loan or advance funds, to the Company. The Company has
submitted a business plan to the Lenders and material deviation from
that plan requires the Lenders' consent. The Company is also required
to obtain the Lenders' consent for the disposition of certain assets.
The Term Loan also provides for the payment of additional, contingent
interest at Mellon's Prime Rate, plus 3%, less any interest actually
paid on the Term Loan ("Additional Interest"), upon the earliest to
occur of any one of the following events: (1) a sale by CAII of
substantially all of its assets outside the ordinary course of business,
(2) a merger of the Company or CAII with any person other than the
Company, CAII or one of their subsidiaries, (3) a refinancing of all or
a portion of the indebtedness under the Second Amended Loan Agreement,
(4) a sale by the Company or CAII of 20% or more of its stock or (5) the
filing by or against the Company, CAII or one of their subsidiaries of a
petition for relief under the bankruptcy laws.
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 fees for managing the day-to-day
activities of each PIF and providing certain other services. As of May
31, 1994, approximately $0.5 million was receivable from the PIFs for
such fees. The Company recognized gain on sales of equipment to the
PIFs of approximately $1.8 million in fiscal year 1994, $1.8 million in
fiscal year 1993, and $1.2 million in fiscal year 1992, and earned fees
and other distributions totalling approximately $3.3 million, $2.9
million and $2.3 million in fiscal years 1994, 1993 and 1992,
respectively.
The Company is required to make subordinated limited partnership
investments in the PIFs. During fiscal years 1994, 1993 and 1992, the
Company made investments in subordinated limited partnership interests
in the PIFs by contributing cash of approximately $0.2 million and $0.1
million in fiscal years 1994 and 1993, respectively, and purchasing and
contributing equipment with a net book value of approximately $3.2
million in fiscal year 1992. The Company has a maximum remaining
obligation to make further cash or equipment contributions not to exceed
approximately $0.5 million for all of the existing PIFs (which relates
solely to CPYF III).
Other Related Party Transactions:
The Company had an approximate 44% interest in an office products and
computer supply company, Corporate Express, Inc. On November 27, 1991,
the Company sold substantially all of its investment in Corporate
Express, Inc. ("CE"), for an aggregate price of approximately $1.7
million. The investment in CE was previously fully reserved for, and
the sale resulted in a gain of $1,744,000, which is included in "Other
Revenue" in the accompanying Consolidated Statements of Operations for
fiscal year 1992.
The Company has entered into a vendor program agreement with a computer
equipment and software vendor. An executive officer of the vendor is a
director of the Company. During fiscal year 1994 the Company purchased
and leased to third parties $206,000 of equipment under this program.
During fiscal year 1994, the Company purchased computer equipment from a
manufacturer having a cost of $427,000. An executive officer of the
manufacturer is a director of the Company.
The Company has entered into a remarketing agreement for certain of its
aircraft with a regional/commuter aircraft leasing company. An
executive officer of that company is a director of the Company. During
fiscal year 1994, the Company paid $106,000 of commissions under this
remarketing agreement.
11. Income Taxes
As discussed in Note 1, the Company adopted SFAS No. 109 effective June
1, 1993, and has applied the provisions of SFAS 109 retroactively to
June 1, 1988. The financial statements for the years ended May 31, 1989
through 1993 have been restated to comply with the provisions of SFAS
No. 109.
The cumulative effect of the change in the method of accounting for
income taxes resulted in a $12,718,000 charge to operations as of June
1, 1988. The effects of the restatement on net income and related per
share amounts for fiscal years 1993 and 1992 are as follows:
1993 1992
As previously reported:
Net income (loss) $1,196,000 $(11,077,000)
Net income (loss) per primary
common share .12 (1.25)
As restated:
Net income (loss) $1,396,000 $ (6,177,000)
Net income (loss) per primary
common share .14 (.70)
Effect of SFAS No. 109:
Change in net income (loss) 200,000 4,900,000
Change in net income (loss)
per primary common share .02 .55
In addition, retained earnings, as of May 31, 1991, have been reduced by
$6,600,000, as a result of the restatement.
The components of the income tax provision (benefit) charged (credited)
to continuing operations were (in thousands):
1994 1993 1992
Current:
Federal $ 1,000 $ 730 $ 400
State and local 143 400 380
-------- ------- -------
1,143 1,130 780
-------- ------- -------
Deferred:
Federal (400) (150) (3,675)
State and local ( 270) (50) (1,225)
-------- ------- -------
(670) (200) (4,900)
-------- ------- -------
Total tax provision $ 473 $ 930 $(4,120)
======== ======= =======
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to pretax income from
continuing operations as a result of the following:
1994 1993 1992
Computed "expected" tax expense
(benefit) $ 402 $ 791 $(3,501)
State tax provisions, net of
federal benefits 71 139 (619)
-------- ------- -------
$ 473 $ 930 $(4,120)
======== ======= =======
Income taxes are provided 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,
1994 and 1993 was 40%.
Components of income tax expense (benefit) attributable to net income
(loss) before income taxes is as follows (in thousands):
1994 1993 1992
Current
Taxes on net income before
carryforwards $ 8,593 $ 5,190 $ 6,100
Less benefit of loss carryforward
utilized (7,050) (4,060) (5,320)
Less benefit of investment tax
credit carryforward utilized (400) - -
-------- -------- --------
1,143 1,130 780
-------- -------- --------
Deferred
Tax effect of net change in
temporary differences (9,100) (4,260) (10,220)
Utilization of tax net operating
loss carryforward 7,050 4,060 5,320
AMT liability, net of utilization
of investment tax credit
carryforward (1,000) - -
Increase in valuation allowance
for deferred income tax assets 2,380 - -
-------- -------- --------
( 670) (200) 4,900)
-------- -------- --------
Provision for income taxes $ 473 $ 930 $ (4,120)
======== ======== ========
Significant components of the Company's deferred tax liabilities and
assets as of May 31, 1994 and 1993, were as follows (in thousands):
1994 1993
Deferred income tax liabilities:
Direct finance leases accounted for as operating
leases for income tax purposes, and equipment
depreciation for tax purposes in excess of
book depreciation $ 9,300 $18,600
Residual values and other receivables arising
from equipment under lease sold to private
investors 1,400 1,300
-------- -------
Total deferred income tax liabilities 10,700 19,900
-------- -------
Deferred income tax assets:
Receivables realized for books, but not for
income tax reporting purposes 400 1,000
Other assets and liabilities, net 600 100
Net operating loss carryforwards 6,700 13,750
Capital loss carryforwards 350 350
Investment tax credit carryforwards 8,000 8,400
AMT credit carryforwards 2,000 600
-------- -------
Total deferred income tax assets 18,050 24,200
Valuation allowance for deferred income
tax assets (8,180) (5,800)
-------- -------
Net deferred income tax assets 9,870 18,400
-------- -------
Net deferred income tax liability $ 830 $ 1,500
======== =======
The valuation allowance for the Company's deferred tax assets represents
primarily managements estimate of the portion of investment tax credit
carryforwards which will expire prior to utilization.
As of May 31, 1994, the Company has the following income tax carryovers
(in thousands):
Alternative
Regular Minimum Tax
Income Tax (AMT) Years
Reporting Income Tax of
Purposes Reporting Purposes Expiration
Net operating loss $ 16,800 $ 0 2005-2006
Investment tax credit 8,000 8,000 1995-2001
AMT credit against
regular tax 2,000 N/A N/A
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, 1994, no shares of preferred stock had
been issued.
Two principal stockholders, who together own approximately 35.5% of the
outstanding shares of the Company 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 to purchase their
shares of common stock at current market value. Upon the death or
disability of one of them, the Company will be obligated to purchase an
amount of his shares at current market value 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 stock option plan whereby stock options may be granted
to directors and 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.
Common stock received through the exercise of 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 a tax
benefit to the Company of $19,000 in fiscal year 1994.
The following table summarizes the activity in this plan for the periods
indicated:
Options Exercise Price Options
Outstanding Per Share Exercisable
Outstanding at
May 31, 1991 3,634,000 0.4000 - 5.6250 1,191,000
Exercised (16,000) 0.4000 - 0.5625 =========
Granted 1,821,000 0.0625 - 0.7500
Canceled (2,746,000) 0.3400 - 5.6250
Outstanding at ----------
May 31, 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
========== =========
14. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for the years ended May 31, 1994 and
1993 are (in thousands, except per share data):
Income Per
Total Net Common and Common
Fiscal year 1994: Revenue Income 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 <F1> .01
Income Per
Total Net Common and Common
Fiscal year 1993: Revenue Income Equivalent Share
First quarter $31,018 $ 386 $ .04
Second quarter 44,102 380 .04
Third quarter 26,663 350 .03
Fourth quarter 39,617 280 .03
<F1> The fiscal fourth quarter results were impacted by a provision for
loss of approximately $180,000, recorded to reflect the impairment in
value of the Company's general partnership interest in Northstar, a
PIF established during fiscal 1988. Northstar is approaching
termination and the range of probable realized asset values has
narrowed, and an impairment in value is now expected.
15. M-Bank Lease and Litigation and CIS Litigation
MBank Lease and Litigation
In 1987, the Company leased equipment ("Equipment") to MBank Dallas,
N.A., an FDIC insured institution ("MBank"). FDIC placed MBank in
receivership in 1989. The Company's carrying value in the Equipment at
May 31, 1994 is $2.3 million. The Company agreed to sell the Equipment
during 1992 to Bank One, Texas, N.A., another financial institution,
that previously bought other MBank assets. The sales contract with Bank
One provided for installment payments of $5.75 million, of which the
Company has collected $1.3 million. Payments under the contract ceased
as a result of litigation related to the Equipment, the lease thereof
(the "Lease") and certain other collateral for the Lease. The
litigation is discussed in detail in the Company's Annual Report on
Form 10-K for fiscal 1994.
At this time, potential outcomes are (i) CAI collects $10 million under
the lease for a gain of $4.6 million (net of income tax), (ii) CAI
collects $4.4 million on the contract for a gain of $1.3 million (net of
income tax), (iii) CAI loses its equity investment in the Equipment and
returns payments received for a loss of $2.2 million (net of income tax)
or (iv) CAI participates in a settlement of the litigation. Certain
other defendants have filed breach of contract and related tort claims
against the Company. The results of these claims will depend on the
final resolution of the parties' respective claims related to the
Equipment, the Lease and the other collateral for the Lease. Based upon
the advice of legal counsel, management believes that the ultimate
outcome of the MBank Litigation will not have a material adverse impact
on the Company's financial position.
CIS Litigation
On May 31, 1994, CAI and CIS agreed to settle their respective claims
against each other in connection with CIS's bankruptcy. Pursuant to
such settlement, CAI has agreed to pay $220,000 to CIS, the parties have
agreed to dismiss their respective claims against each other and the
parties have agreed to enter into a mutual general release. CIS has
agreed to draft the settlement agreement and deliver a copy thereof
to the Company. The Company has not received that copy as of the date
of these financial statements. The Company has accrued the settlement
amount of $220,000 as of May 31, 1994.
16. Commitments
In November, 1989, the Company bought two options (the "Options") to
acquire certain mining equipment (the "Equipment") on lease (the
"Lease") to an end-user (the "End-User") for $760,000. The purchase
price for the Options consisted of two full recourse promissory notes,
one payable to the seller (the "Seller") in July 1996, and the other
payable to the Seller in July 1997 (the "Notes"). Interest on the Notes
accrues at 10% per year as follows (in thousands):
Note A Note B Total
Note payable balance
as of May 31, 1994 $ 598 $ 598 $1,196
Future interest expense
for the year ending
May 31, 1995 63 63 126
1996 69 69 138
1997 77 6 83
1998 7 - 7
------ ------ ------
Balance due at maturity $ 814 $ 736 $1,550
====== ====== ======
The Option purchase agreements provide that the Seller cannot agree to
certain amendments to the Lease without the Company's prior consent.
The Seller and the End-User have agreed to certain amendments to the
Lease. The Company believes that the Notes are no longer enforceable
because of such amendments. The Company has asked the Seller to cancel
the Notes and return them to the Company. The Seller has refused to do
so. The Company will not eliminate the Notes payable and carrying value
of the Equipment until it receives the cancelled Notes back from the
Seller.
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):
Year Ending May 31,
1995 $ 570
1996 486
1997 198
------
$1,254
======
In connection with the lease agreement for the Company's headquarters,
the Company has granted the landlord a lien on all furniture, fixtures,
improvements and personal property of the Company located at the
headquarters facility.
17. Disclosures about Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments was made in accordance with SFAS No. 107. 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, 1994 for cash, accounts receivable,
income tax refunds receivable, residual values and other receivables
arising from equipment under lease sold to private investors, the
Revolving Credit 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, 1994, discounted lease rentals and discounted lease
rentals assigned to lenders arising from equipment sale transactions of
$128,505,000 and $111,593,000, respectively, have fair values of
$131,653,000 and $114,327,000, respectively. The fair values were
estimated utilizing market rates of comparable debt having similar
maturities and credit quality as of May 31, 1994.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Capital Associates, Inc.:
Under date of June 30, 1994, we reported on the consolidated balance sheets
of Capital Associates, Inc. and subsidiaries as of May 31, 1994 and 1993, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended, as contained in the
Company's annual report on Form 10-K for the year 1994. In connection with
our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedules as listed in the
accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits.
In our opinion, the financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 11 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, ACCOUNTING FOR INCOME TAXES, as of June 1, 1993 and retroactively
restated its consolidated financial statements for the years ended May 31,
1993 and 1992.
We also audited the adjustments described in Note 11 relating to the
Company's adoption of SFAS 109 that were applied to restate the 1992
financial statements. In our opinion, such adjustments are appropriate and
have been properly applied.
KPMG PEAT MARWICK
/s/ KPMG Peat Marwick
- - ----------------------------
Denver, Colorado
June 30, 1994
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Capital Associates, Inc.:
Our report on the consolidated financial statements of Capital Associates,
Inc. and subsidiaries is included on page F-3 of the Form 10-K. In
connection with our audit of such financial statements, we have also audited
the related financial statement schedules listed in the index on page F-1 of
this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
before the adjustment discussed in Note 11, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND
/s/ Coopers & Lybrand
- - ----------------------------
Denver, Colorado
September 14, 1992
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
for the years ended May 31, 1994, 1993 and 1992
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Balance at Other Balance
Beginning Additions Changes at End of
Classification of Period at Cost Retirements <F2> Period
May 31, 1994:
Equipment under
operating
leases <F1> $ 70,878 $ 85,542 $(40,611) $(87,241) $ 28,568
Furniture and
fixtures 5,045 658 (835) - 4,868
-------- -------- -------- -------- --------
$ 75,923 $ 86,200 $(41,446) $(87,241) $ 33,436
======== ======== ======== ======== ========
May 31, 1993:
Equipment under
operating
leases <F1> $139,924 $ 59,473 $(62,389) $(66,130) $ 70,878
Furniture and
fixtures 4,727 333 (11) (4) 5,045
-------- -------- -------- -------- --------
$144,651 $ 59,806 $(62,400) $(66,134) $ 75,923
======== ======== ======== ======== ========
May 31, 1992:
Equipment under
operating
leases <F1> $257,870 $ 58,186 $(97,259) $(78,873) $139,924
Furniture and
fixtures 4,796 154 (223) - 4,727
-------- -------- -------- -------- --------
$262,666 $ 58,340 $(97,482) $(78,873) $144,651
======== ======== ======== ======== ========
<F1> Represents the net cost to the Company of equipment under operating
leases.
<F2> Primarily represents sales of equipment to third-party investors and
Company sponsored and co-sponsored PIFs.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
for the years ended May 31, 1994, 1993 and 1992
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Additions
Balance at Charged to Other Balance
Beginning Costs and Changes at End of
Classification of Period Expenses Retirements <F1> Period
May 31, 1994:
Equipment under
operating
leases $ 27,551 $ 5,209 $(17,611) $ (3,937) $ 11,212
Furniture and
fixtures 3,151 783 (604) - 3,330
-------- -------- -------- -------- --------
$ 30,702 $ 5,992 $(18,215) $ (3,937) $ 14,542
======== ======== ======== ======== ========
May 31, 1993:
Equipment under
operating
leases $ 67,928 $ 11,425 $(49,681) $ (2,121) $ 27,551
Furniture and
fixtures 2,298 866 (11) (2) 3,151
-------- -------- -------- -------- --------
$ 70,226 $ 12,291 $(49,692) $ (2,123) $ 30,702
======== ======== ======== ======== ========
May 31, 1992:
Equipment under
operating
leases $118,851 $ 28,409 $(73,559) $ (5,773) $ 67,928
Furniture and
fixtures 1,589 811 (102) - 2,298
-------- -------- -------- -------- --------
$120,440 $29,220 $(73,661) $ (5,773) $ 70,226
======== ======== ======== ======== ========
<F1> Primarily represents sales of equipment to third-party investors and
Company sponsored and co-sponsored PIFs.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
for the years ended May 31, 1994, 1993 and 1992
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions<F1> of Period
Year ended May 31, 1994:
Allowance for doubtful accounts -
- residual values and other receivables arising
from equipment under lease sold to private investors $ 8,719 $ 82 $ - $ (1,867) $ 6,934
- accounts receivable 593 - - (250) 343
- net investment in direct financing leases - - - - -
Allowance for losses
- investment in affiliated public income funds - 130 - (130) -
- leased equipment 4,153 1,103 - (3,515) 1,741
-------- ------- ------ --------- --------
$ 13,465 $ 1,315 $ - $ (5,762) $ 9,018
======== ======= ====== ========= ========
Year ended May 31, 1993:
Allowance for doubtful accounts -
- residual values and other receivables arising
from equipment under lease sold to private investors $ 10,826 $ - $ 13 $ (2,120) $ 8,719
- accounts receivable 1,448 - - (855) 593
- net investment in direct financing leases 2,715 - - (2,715) -
Allowance for losses
- leased equipment 5,846 2,070 - (3,763) 4,153
-------- ------- ------ --------- --------
$ 20,835 $ 2,070 $ 13 $ (9,453) $ 13,465
======== ======= ====== ========= ========
Year ended May 31, 1992:
Allowance for doubtful accounts -
- residual values and other receivables arising
from equipment under lease sold to private investors $ 8,984 $ 2,000 $ - $ (158) $ 10,826
- accounts receivable 3,603 150 - (2,305) 1,448
- net investment in direct financing leases 2,725 - - (10) 2,715
- other assets 1,779 - - (1,779) -
Allowance for losses
- leased equipment 6,793 - 1,923 (2,870) 5,846
-------- ------- ------ --------- --------
$23,884 $ 2,150 $1,923<F2> $ (7,122) $ 20,835
======== ======= ====== ========= ========
<F1> Principally charge-offs of assets against the established allowances.
<F2> Consists of deferred gain arising from sales-leaseback transactions
transferred to allowance for losses as a result of the impairment of
the related leased equipment.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
for the years ended May 31, 1994, 1993 and 1992
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Weighted
Maximum Average Average
Category of Weighted Amount Amount Interest
Aggregate Balance at Average Outstanding Outstanding Rate
Short-Term End of Interest During the During the During the
Borrowings Period<F3> Rate Period Period <F1> Period <F2>
Year ended
May 31, 1994:
Revolving
Credit
Facility $ 49 7.13% $ 5,641 $ 1,690 7.16%
Year ended
May 31, 1993:
Revolving
Credit
Facility $ 21 7.00% $ 5,461 $ 2,088 7.01%
Short-term
borrowings
from
Lenders <F3> $ - - $ 54,884 $ 51,396 7.13%
Year ended
May 31, 1992:
Short-term
borrowings
from Lenders $ 58,984 7.50% $ 80,662 $ 69,697 8.52%
<F1> The average amount outstanding during the period was computed by
dividing the total daily outstanding principal balances by the number
of days.
<F2> The weighted average interest rate during the period was computed by
dividing actual interest expense by the average short-term borrowings
outstanding during the period.
<F3> See also Note 9 to Notes To Consolidated Financial Statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
for the years ended May 31, 1994, 1993 and 1992
(in thousands)
COLUMN A COLUMN B
Charged to Costs
Item and Expenses
Year Ended May 31, 1994:
Depreciation and amortization of intangible assets,
pre-operating costs and similar deferrals $ 621
=======
Year Ended May 31, 1993:
Depreciation and amortization of intangible assets,
pre-operating costs and similar deferrals $ 706
=======
Year Ended May 31, 1992:
Depreciation and amortization of intangible assets,
pre-operating costs and similar deferrals $ 2,474
=======
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Year Ended May 31,
------------------------------------------
1994 1993 1992
Shares outstanding at
beginning of period 9,654,000 8,948,000 8,807,000
Shares issued during the
period (weighted average) 58,000 642,000 79,000
Dilutive shares contingently
issuable upon exercise of
options (weighted average) 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) (1,062,000) (992,000) -
----------- ----------- -----------
Total shares, primary 10,901,000 10,306,000 8,886,000
=========== =========== ===========
Net Income (loss) $ 710,000 $ 1,396,000 $(6,177,000)
=========== =========== ===========
Income (loss) per common and
common equivalent share,
primary $ .07 $ .14 $ ( .70)
=========== =========== ===========
Exhibit 11
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Year Ended May 31,
------------------------------------------
1994 1993 1992
Shares outstanding at
beginning of period 9,654,000 8,948,000 8,807,000
Shares issued during the
period (weighted average) 58,000 642,000 79,000
Dilutive shares contingently
issuable upon exercise of
options (weighted average) 2,251,000 1,708,000 -
Less shares assumed to have
been purchased for treasury
with assumed proceeds from
exercise of stock options (1,062,000) (410,000) -
(weighted average) ----------- ----------- -----------
Total shares, fully diluted 10,901,000 10,888,000 8,886,000
=========== =========== ===========
Net Income (loss) $ 710,000 $1,396,000 $(6,177,000)
=========== =========== ===========
Income (loss) per common
and common equivalent
share, fully diluted $ .07 $ .13 $ ( .70)
=========== =========== ===========