-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RYNcAFFPRHyDR5n+JK1zIgztu6f7m3gndJQ5pKVf5jUPCyDiIc4ZrnJc+klo+8Pu ZK0Y/TtMCwnL98/8BBnISw== 0000804188-98-000012.txt : 19980724 0000804188-98-000012.hdr.sgml : 19980724 ACCESSION NUMBER: 0000804188-98-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980723 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL ASSOCIATES INC CENTRAL INDEX KEY: 0000804188 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 841055327 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15525 FILM NUMBER: 98670179 BUSINESS ADDRESS: STREET 1: 7175 W JEFFERSON AVE STE 3000 CITY: LAKEWOOD STATE: CO ZIP: 80235 BUSINESS PHONE: 3039801000 10-K 1 4Q98CAI.001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended May 31, 1998 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. Commission file number 0-15525 CAPITAL ASSOCIATES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 84-1055327 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 7175 WEST JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 980-1000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.008 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The approximate market value of stock held by non-affiliates was $7,450,000 based upon 1,510,000 shares held by such persons and the closing price on July 17, 1998 of $4 15/16. The number of shares outstanding of the Registrant's $.008 par value common stock at July 17, 1998 was 5,121,767. Documents incorporated by reference Certain portions of Registrant's definitive proxy statement to be filed within 120 days after the end of the Registrant's fiscal year pursuant to Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12 and 13 of this report. Page 1 of 21 Pages Exhibit Index Begins on Page 19 PART I Item 1. Business -------- Capital Associates, Inc. ("the Company") is a commercial finance company engaged in the leasing of a variety of equipment. The Company is principally engaged in (i) the origination of equipment leases with equipment users, including the acquisition of leases initially originated by other lessors (ii) the sale of equipment leases to third parties, (iii) the management and servicing of equipment leases retained by the Company or sold to private investors or other lessors, (iv) the sale and remarketing of equipment as it comes off lease and (v) the sale and servicing of new information technology equipment. During fiscal years 1998 and 1997, the Company originated over $540 million of equipment leases covering over 53,000 items of equipment. The principal market for the Company's activities is the United States. Leasing Activities - ------------------ The Company attempts to diversify its lease origination and funding sources in order to enhance its competitiveness regardless of changes in technology or regulations. Lease originations are diversified by (i) locating the retail originations sales force in regional branch offices throughout the United States, (ii) targeting a variety of specific industries and equipment types for lease originations, (iii) originating leases on a wholesale basis (i.e., acquiring leases from other lessors), and (iv) originating leases through relationships with equipment vendors. Funding sources are diversified by (x) matching individual equipment originations with the investment needs of private investors, (y) originating leases on a recurring basis on behalf of private lease investment programs it manages on behalf of other lessors (lease investment programs) and (z) funding lease transactions for its own portfolio through securitization or permanent non-recourse financing. The Company diversifies its own equipment lease portfolio (as well as the equipment portfolio it manages for private investors) to include a variety of equipment types that meet the Company's underwriting standards with emphasis on (i) material handling equipment, (ii) office furniture and store fixtures, (iii) circuit board and semiconductor manufacturing, production and testing equipment, (iv) machine tool and factory automation equipment and (v) information technology equipment. The Company seeks to maintain a diversified lease portfolio in order to minimize its credit and residual exposure to any single lessee, industry or equipment category. As of May 31, 1998, no single industry or lessee accounted for more than 10% of the Company's portfolio of leases. During fiscal 1998, the Company acquired DBL, Inc. d/b/a Connecting Point (subsequently renamed Capital Associates Technology Group or "CATG"). CATG provides a wide range of information technology ("IT") services, including procurement of software, PC's and networking equipment, and IT equipment maintenance. CATG was acquired to obtain specific IT equipment expertise which the Company hopes will provide (i) access to new markets which will allow the Company to realize higher residual values and to support lease originations, (ii) greater confidence in pricing and estimating residual values and (iii) the ability to provide enhanced equipment expertise and evaluation services to our customers. The Company's principal sources of funding for its leasing transactions include (i) a $51 million warehouse facility ("Warehouse Facility"), (ii) a $4 million term loan ("Term Loan"), (iii) a $5 million working capital facility ("Working Capital Facility"), (iv) permanent non-recourse financing, including securitization of receivables, (v) sales of equipment leases to third parties or lease investment programs it manages and (vi) the Company's internally generated revenues. Historically, the Company sold a significant portion of its lease originations to public limited partnership income funds ("PIF") in which it was the general partner or co-general partner. During fiscal 1998, the Company completed the offering of units in its most recent PIF, Capital Preferred Yield Fund-IV, L.P. (CPYF-IV). The Company has elected not to organize additional PIFs. As a result, future equipment sales to PIFs will reflect only the reinvestment needs of the existing PIFs, and are expected to represent a smaller amount of equipment sales. 2 of 21 Item 1. Business, continued -------- Leasing Activities, continued - ------------------ In the case of leases held for the Company's account, a typical lease transaction requires a cash investment by the Company of 5% to 30% of the original equipment cost, commonly known in the leasing industry as an "equity investment". The balance of original equipment cost is financed with permanent non-recourse borrowings, also referred to as discounted lease rentals or securitization funding. Such borrowings are secured by a first lien on the equipment and the related lease rental payments. The Company's equity investment is typically financed with proceeds from its Working Capital Facility, Term Loan, or internally generated funds. The Company recovers its equity investment from renewal rents received and/or sales proceeds realized from the equipment after repayment in full of the related permanent non-recourse debt or securitization funding. The Company is pursuing additional lease investment programs and is developing an expanded securitization program to finance its leases. The Company hopes to complete the first funding under the securitization program during the first quarter of fiscal 1999; however, such programs are expensive to implement and are subject to significant delays and there can be no assurance that it will ever be completed. Of the equipment leases originated or acquired by the Company in fiscal years 1998 and 1997, the Company retained approximately 28% and 18%, sold 29% and 9% to private leasing investment programs, sold 15% and 27% to the PIFs, and syndicated 28% and 46% to unaffiliated third parties, respectively. Equipment leases retained or serviced by the Company increased 22% to $828 million as of May 31, 1998 from $680 million in June 1997. The Company serviced $118 million and $22 million in assets (based on original equipment cost) for private leasing investment programs in fiscal years 1998 and 1997, respectively. As of May 31, 1998, the Company had awards for future business amounting to approximately $24.9 million, as compared to $14.2 million at May 31, 1997. On average approximately 97% of the Company's awarded business was closed for fiscal year 1998. The Company's lease origination strategy is transaction driven. With each lease origination opportunity, the Company evaluates both the prospective lessee and the equipment to be leased. With respect to each lessee, the Company evaluates the lessee's creditworthiness as well as the importance of the equipment to the lessee's business. With respect to the equipment, the Company evaluates the equipment's remarketability, upgrade potential and the probability that the equipment will remain in place at the end of the initial lease term. Typically, equipment which remains in place produces better residual returns than equipment sold or leased to a third party. The Company generally purchases equipment that is subject to relatively short-term leases (generally seven years or less). All of the Company's lease transactions are net leases with a specified noncancelable lease term. These noncancelable leases have a "hell-or-high-water" provision which requires the lessee to make all lease payments under all circumstances. In addition, the lessee is required to insure the equipment against casualty loss, pay all related maintenance expenses and pay property, sales and other taxes. The Company has master leases in place with more than 500 customers. Master leases are contracts that establish general terms and conditions under which the Company conducts its leasing business and are frequently a prerequisite in competing for new financing. Master leases simplify the approval process for lessees and enable the Company to compete for new business at all levels of an enterprise. Underwriting Standards - ---------------------- All leases are subject to review under the Company's underwriting standards. To minimize credit risk, the Company has established credit underwriting standards which specify that the Company's lessees have a credit rating of not less than Baa as determined by Moody's Investor Services, Inc., or comparable credit ratings as determined by other recognized credit rating services (an "investment grade credit"), or although not rated by a recognized credit rating 3 of 21 Item 1. Business, continued -------- Underwriting Standards, continued - ---------------------- service or rated below Baa, are believed by the Company to be sufficiently creditworthy to satisfy the financial obligations under the lease (a "non investment grade credit"). As of May 31, 1998, approximately 99% of the equipment owned by the Company was leased to companies that meet the above criteria. As of May 31, 1998, the dollar-weighted average credit rating of the Company's lessees was the equivalent of Baa. The Company originates leases for the PIFs and for private investment programs in accordance with each program's own lease underwriting standards. In the case of the PIF's, the underwriting standards are similar to those of the Company. The Company's historical losses associated with leases originated since 1991, including leases originated on behalf of the PIFs and for private investment programs, are less than 1% of the amount originated. Residual values are established at lease inception equal to the estimated value to be received from the equipment at the termination of the lease. In estimating such values, the Company considers relevant facts regarding the equipment and the lessee, including, for example, the equipment's remarketability, upgrade potential and probability that the equipment will continue to be installed in place at the end of the initial lease term. The nature of the Company's leasing activities is that it has credit exposure and residual value exposure and, accordingly, in the ordinary course of business it will incur losses arising from these exposures. The Company performs quarterly assessments of its assets to identify other-than-temporary losses in value. The Company records allowances for losses as soon as any other-than-temporary declines in asset values are known. Chargeoffs are recorded upon the termination or remarketing of the underlying assets. As such, chargeoffs will primarily occur subsequent to the recording of the allowances for losses. The Company has established a Transaction Review Committee ("TRC"), which is comprised of members of senior management. The TRC (1) reviews and approves all aspects of material lease transactions, including credit ratings assigned to lessees and certain pricing and residual value assumptions; (2) specifies lease documentation requirements and deal structuring guidelines; (3) monitors asset quality in order to estimate and assess the net realizable values at the end of a lease terms for the Company's equipment; and (4) revises and updates the underwriting standards, when and as necessary. All transactions over $3,000,000 with a less than investment grade credit and over $5,000,000 with an investment grade credit must be approved by the Executive Committee. Equipment Remarketing Activities - -------------------------------- Remarketing activities consist of lease portfolio management (i.e., managing equipment under lease) and asset management (i.e., managing off-lease equipment). One of the Company's principal goals is to minimize off-lease equipment by proactively managing such equipment while it is under lease (e.g., renewing or extending the lease, or re-leasing, upgrading or adding to the equipment before the end of the initial lease term). In general, remarketing equipment in place produces better residual returns than equipment sold or re-leased to third-parties. However, if the Company is unsuccessful in keeping the equipment in place, it will attempt to sell or re-lease the off-lease equipment to a different lessee, or sell the off-lease equipment to equipment brokers or dealers. Revenue from remarketing activities was approximately $6.3 million, $6.0 million, and $3.0 million during fiscal years 1998, 1997 and 1996, respectively. The Company attempts to maximize the remarketing proceeds from, and to minimize the warehousing costs for, off-lease equipment by (1) employing qualified and experienced remarketing personnel, (2) developing and acquiring equipment remarketing expertise in order to maximize the profit from sales of off-lease equipment, (3) minimizing the amount of off-lease equipment stored at independently operated equipment warehouses, (4) operating its own general equipment warehouse to further reduce warehousing costs, (5) eliminating scrap inventory, and (6) conducting on-site equipment inspections. The Company further supports these activities by carefully monitoring the residual values of its equipment portfolio and maintaining adequate reserves on its books, when and as needed, to reflect anticipated future reductions in such values due to obsolescence and other factors. 4 of 21 Item 1. Business, continued -------- Private Investor Lease Investment Programs and PIFs - --------------------------------------------------- The majority of leases originated by the Company are sold to private investors or to lease investment programs, collectively referred to as "Private Investors". The Company records sales revenue equal to the sales price of the equipment and equipment sales cost is equal to the carrying value of the equipment. In the event the Company warehouses a transaction prior to sale, the Company records leasing revenue and expenses during the warehouse period. Revenue from the sale of equipment under lease to private investors or to lease investment programs was $179.4 million, $131.6 million and $91.0 million during fiscal years 1998, 1997 and 1996, respectively. The Company currently sponsors or co-sponsors five PIFs. The Company sells certain equipment leases it originates to these PIFs. Revenue from the sale of leased equipment to the PIFs was $48.6 million, $67.0 million and $72.2 million during fiscal years 1998, 1997 and 1996, respectively. As discussed under Leasing Activities, sales to PIF's are expected to decline significantly in the future. Various subsidiaries and affiliates of the Company are the general partners or co-general partners of the PIFs. In addition, the Company contributed cash and/or equipment to each PIF in exchange for a Class B limited partner interest ("Class B interest") in each PIF. Public investors purchase Class A limited partnership units ("Class A Units") for cash, which the PIFs used to purchase leased equipment. The Company receives fees for performing various services for the PIFs (subject to certain dollar limits) including acquisition fees and management fees, and is reimbursed for organizational and offering expenses incurred in selling the Class A Units (subject to certain dollar limits). The Company receives a Class B cash distribution from each PIF (subordinated to the cash returns on the Class A Units). The general partner receives cash distributions and reimbursement of certain operating expenses incurred in connection with each PIFs operations. Competition - ----------- The business of equipment leasing is highly competitive. The Company competes for customers with a number of international, national and regional finance and leasing companies and banks. In addition, the Company's competitors include equipment manufacturers that finance the sale or lease of their products themselves. Many of the Company's competitors and potential competitors have greater financial, marketing and operational resources than the Company and may have a lower cost of funds than the Company and access to capital markets and to other funding sources that may not be available to the Company. Employees - --------- The Company had approximately 170 employees as of May 31, 1998 versus approximately 110 employees as of May 31, 1997, none of whom were represented by a labor union. The Company believes that its employee relations are good. Item 2. Properties ---------- The Company leases office facilities (approximately 23,000 square feet) in Lakewood, Colorado (a suburb of Denver). These facilities house the Company's administrative, financing and marketing operations. The Lakewood, Colorado facility adequately provides for present and future needs, as currently planned. In addition, the Company leases a warehouse facility and has seven regional or satellite marketing offices. The Company also leases facilities in Ogden and Salt Lake City, Utah where it markets and services information technology equipment. 5 of 21 Item 3. Legal Proceedings ----------------- The Company is involved in the following legal proceedings: a. The Company was involved in certain arbitration proceedings pursuant to the requirements of the National Association of Securities Dealers ("NASD"), representing three claims against CAI Securities Corporation, a wholly owned subsidiary of the Company. All three claims alleged breach of fiduciary duty, breach of contract, negligence and misrepresentation with regard to the sale of limited partnership units in Leastec Income Fund V ("LIFV"), a limited partnership whose general partner is a wholly owned subsidiary of the Company. The three claims involved investments in LIFV of approximately $625,000 and sought damages of $838,000 and special punitive and exemplary damages (one claim specified $1,500,000 in such damages while the other two claims did not specify an amount). All three claims were brought by the same company on behalf of three investors. Management believed that it had good and substantial defenses against these claims and that the Company's subsidiary would prevail. In July 1997, one of the cases, seeking $500,000 in damages and $1,500,000 in punitive damages, was heard by an NASD arbitration panel and that arbitration panel has now determined that there was no breach of fiduciary duty, no breach of contract, no negligence and no misrepresentation with regard to the sale of limited partnership units of LIFV and the subsequent financial reporting thereof and that no award is due the claimant under any of his claims. The claimant was assessed $7,300 in forum fees by the NASD for the arbitration proceeding. In June 1998, the second of these claims, which alleged the same claims and sought $176,000 in compensatory damages and an unspecified amount in punitive damages, was heard and the arbitration panel again found for the Company's subsidiary, so that no award was due to the claimants under any of their claims. The claimants were assessed $8,100 in forum fees by the NASD for the arbitration proceeding. Also in June 1998, shortly after the decision in the second case, the Company's subsidiary obtained a settlement of the third case by payment to the claimant's representative of a de minimus settlement amount which the Company believes was less than the travel costs which would have been incurred related to the arbitration hearing. b. The Company is involved in other routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- There were no matters submitted to a vote of security holders during the three months ended May 31, 1998. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder ---------------------------------------------------------------------- Matters ------- The Company's common stock trades on the Nasdaq National Market under the symbol: CAII. The Nasdaq Stock Market, which began operation in 1971, is the world's first electronic securities market and the fastest growing stock market in the U.S. Nasdaq utilizes today's information technologies-computers and telecommunications-to unite its participants in a screen-based, floorless market. It enables market participants to compete with each other for investor orders in each Nasdaq security and, through the use of Nasdaq Workstation II and other automated systems, facilitates the trading and surveillance of thousands of securities. This competitive marketplace, along with the many products and services available to issuers and their shareholders, attracts today's largest 6 of 21 Item 5. Market for the Registrant's Common Stock and Related Stockholder ---------------------------------------------------------------------- Matters, continued ------- and fastest growing companies to Nasdaq. These include industry leaders in computers, pharmaceuticals, telecommunications, biotechnology, and financial services. More domestic and foreign companies list on Nasdaq than on all other U.S. stock markets combined. The following table sets forth the high and low sales prices of the Company's common stock for the periods indicated, according to published sources. High and low sales prices shown reflect inter-dealer quotations without retail markups, markdowns or commissions and do not necessarily represent actual transactions. 1998 HIGH LOW ---- ---- --- First Quarter 4 2 1/4 Second Quarter 4 1/4 2 13/16 Third Quarter 3 1/2 2 1/8 Fourth Quarter 5 3/8 2 15/16 1997 HIGH LOW ---- ---- --- First Quarter 4 3/8 2 1/8 Second Quarter 4 1/4 2 1/8 Third Quarter 4 1/4 2 7/8 Fourth Quarter 3 13/16 2 1/2 On July 17, 1998, the date on which trading activity last occurred, the closing sales price of the Company's common stock was $4 15/16. On July 17, 1998, there were approximately 170 shareholders of record and at least 490 beneficial shareholders of the Company's outstanding common stock. No dividends were paid during the periods indicated. The Company does not anticipate that it will pay cash dividends on its common stock in the foreseeable future. See Note 8 to Notes to Consolidated Financial Statements for a discussion of restrictions on CAII's ability to transfer funds to the Company which, in turn, limits the Company's ability to pay dividends on its outstanding common stock. Item 6. Selected Financial Data ----------------------- The table on the following page sets forth selected consolidated financial data for the periods indicated derived from the Company's consolidated financial statements. The data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Company's consolidated financial statements and notes thereto appearing elsewhere herein. 7 of 21 Income Statement Data - --------------------- (in thousands, except per share and number of shares data)
Years Ended May 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Revenue: Equipment sales $ 248,258 $ 204,545 $ 166,242 $ 81,370 $ 122,469 Leasing 25,101 14,420 10,212 7,672 13,368 Interest 3,487 4,828 6,943 11,386 15,027 Other 4,228 3,741 3,284 4,516 4,101 --------- --------- --------- --------- --------- 281,074 227,534 186,681 104,944 154,965 --------- --------- --------- --------- --------- Costs and expenses: Equipment sales 240,702 200,018 161,797 70,866 114,440 Leasing 17,337 8,928 5,466 3,893 5,511 Operating and other expenses 11,830 9,568 8,332 11,603 12,307 Provision for losses 705 365 430 2,940 1,315 Interest - non-recourse debt 6,123 6,012 7,705 12,548 18,370 Interest - recourse debt 2,857 1,900 2,145 1,618 1,839 --------- --------- --------- --------- --------- 279,554 226,791 185,875 103,468 153,782 --------- --------- --------- --------- --------- Income before income taxes 1,520 743 806 1,476 1,183 Income tax expense - 10 202 360 473 --------- --------- --------- --------- --------- Net income $ 1,520 $ 733 $ 604 $ 1,116 $ 710 ========= ========= ========= ========= ========= Earnings per common share: BASIC $ .30 $ .15 $ .12 $ .22 $ .15 DILUTED $ .28 $ .14 $ .12 $ .21 $ .13 Weighted average number of common shares outstanding: BASIC 5,117,000 5,004,000 4,987,000 5,052,000 4,856,000 DILUTED 5,449,000 5,403,000 5,186,000 5,325,000 5,451,000 Balance Sheet Data - ------------------ (in thousands) May 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Total assets $ 214,993 $ 146,517 $ 127,511 $ 158,956 $ 209,725 Recourse debt 49,088 20,712 17,538 24,520 18,767 Discounted lease rentals 104,311 61,466 63,749 98,216 160,842 Stockholders' equity 25,186 23,501 22,881 22,490 21,099
8 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations --------------------- I. Results of Operations --------------------- During fiscal years 1998, 1997, 1996, 1995, and 1994, the Company reported net income of $1,520,000, $733,000, $604,000, $1,116,000, and $710,000, respectively. The Company's profits during these five years were achieved primarily as a result of (1) expanding and improving its lease originations, asset management, remarketing and leased equipment sales activities, (2) the sale of other corporate assets and the settlement of litigation and (3) a substantial reduction of operating expenses (as a percentage of revenue) in part due to improved back office efficiency. During fiscal year 1998, as a result of continuing emphasis on improving lease originations, operating efficiencies and competitive costs of capital, the Company: * generated profits for the sixth consecutive year and twenty-fourth consecutive quarter * continued to invest in its sales force through an extensive training program and personnel expansion * originated leases exceeding $300 million, the highest level during the last five years * closed a new $60 million bank facility * expanded its financing capabilities by adding a new private investment program * acquired a full service computer marketing company, and a wholesale forklift marketing company to enhance its expertise in regards to these two equipment types Significant factors which may impact the Company's profitability in the future include the ability to develop and to retain the field sales force, the amount of new capital available to the Company, the cost of that capital and the ability to increase lease origination levels while achieving profitability targets. Operating results are also subject to fluctuations resulting from several factors, including (i) seasonality of lease originations, (ii) variations in the relative percentages of the Company's leases entered into during the period which are classified as DFLs or OLs, or are sold for fee income, and (iii) the level of income obtained from the sale of leases in excess of lease equipment cost. The Company will adjust its mix of OLs and DFLs and volume of leases sold to private investors from time to time, when and as the Company determines that it would be in its best interests, taking into account profit opportunities, portfolio concentration and residual risk. Presented below is a schedule showing new lease originations volume and placement of new lease originations by fiscal year (in thousands). Years Ended May 31, -------------------------------- 1998 1997 1996 --------- --------- --------- Placement: Equipment under lease sold to PIFs $ 47,000 $ 63,000 $ 67,000 Equipment under lease sold to private investors 176,000 101,000 82,000 Leases added to the Company's lease portfolio (a significant portion of which will be/were sold during the subsequent fiscal years) 87,000 67,000 43,000 --------- --------- --------- Total lease origination volume $ 310,000 $ 231,000 $ 192,000 ========= ========= ========= 9 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- Leasing is an alternative to financing equipment with debt. Therefore, the ultimate profitability of the Company's leasing transactions is dependent, in part, on the general level of interest rates. Lease rates tend to rise and to fall with interest rates, although lease rate movements generally lag interest rate movements. The Company is able to originate a certain amount of leases with higher lease rates. Such leases have generally been sold to the PIF's because, as PIF sponsor, the Company has a fiduciary responsibility to maximize investor returns and does so by blending higher yielding transactions with investment grade credit quality leases having lower lease rates. In the present market environment, the number of higher yielding transactions having adequate credit quality is limited, and consequently, the volume of leases available for sale to the PIF's is limited. The Company's response to these factors has been to limit the amount of funds it raises from PIF investors. During fiscal year 1998, the Company completed the offering of units in its most recent PIF, Capital Preferred Yield Fund-IV, L.P. (CPYF-IV). The Company has elected not to organize additional PIFs and future equipment sales to PIF's are expected to comprise a significantly smaller percentage of total placements of new lease originations. The Company continues to evaluate additional sources of capital (including securitization, private debt placement and/or public debt or stock) which will provide the liquidity necessary to add leases to its own portfolio. The goal of such financing will be to lower the Company's cost of capital and expand the availability of capital. The Company believes this will enable it to originate leases for its own portfolio which have competitive market lease rates and good credit quality. The Company believes that in the present market there are significant opportunities to originate leases having these characteristics. However, the Company's present capital structure (i.e., both cost of capital and amount available) precludes taking full advantage of market opportunities for such leases. Should the Company be successful in identifying and in closing new sources of capital (for which no assurance can be given), it intends to grow its own lease portfolio. Presented below are schedules showing condensed income statement categories and analyses of changes in those condensed categories derived from the Consolidated Statements of Income appearing on page F-4 of this report on Form 10-K, prepared solely to facilitate the discussion of results of operations that follows (in thousands):
Condensed Condensed Consolidated Consolidated Statements of Income The Effect on Statements of Income The Effect on for the Years Net Income for the Years Net Income Ended May 31, of Changes Ended May 31, of Changes --------------------- Between --------------------- Between 1998 1997 Years 1998 1997 Years -------- -------- ------------- -------- --------- ------------- Equipment sales margin $ 7,556 $ 4,527 $ 3,029 $ 4,527 $ 4,445 $ 82 Leasing margin 7,764 5,492 2,272 5,492 4,746 746 Other income 4,228 3,741 487 3,741 3,284 457 Operating and other expenses (11,830) (9,568) (2,262) (9,568) (8,332) (1,236) Provision for losses (705) (365) (340) (365) (430) 65 Interest expense, net (5,493) (3,084) (2,409) (3,084) (2,907) (177) Income taxes - (10) 10 (10) (202) 192 --------- -------- --------- -------- -------- -------- Net income $ 1,520 $ 733 $ 787 $ 733 $ 604 $ 129 ========= ======== ========= ======== ======== ========
10 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- Equipment Sales Equipment sales revenue and the related margin (including retail sales of new information technology equipment by the Company's CATG subsidiary) consist of the following (in thousands):
Years Ended May 31, ---------------------------------------------- Increase 1998 1997 (Decrease) --------------------- --------------------- ----------------------- Revenue Margin Revenue Margin Revenue Margin --------- --------- ---------- --------- --------- ---------- Transactions during initial lease term: Equipment under lease sold to PIFs $ 48,648 $ 1,090 $ 66,987 $ 1,442 $ (18,339) $ (352) Equipment under lease sold to private investors 179,408 2,204 131,600 1,768 47,808 436 --------- --------- --------- --------- --------- --------- 228,056 3,294 198,587 3,210 29,469 84 --------- --------- --------- --------- --------- --------- Transactions subsequent to initial lease term (remarketing revenue): Sales of off-lease equipment 4,372 1,080 5,359 720 (987) 360 Sales-type leases 323 157 71 69 252 88 Excess collections (cash collections in excess of the associated residual value from equipment under lease sold to private investors) 1,622 1,622 528 528 1,094 1,094 --------- --------- --------- --------- --------- --------- 6,317 2,859 5,958 1,317 359 1,542 Deduct related provision for losses - (705) - (365) - (340) --------- --------- --------- --------- --------- --------- Realizations of value in excess of provision for losses 6,317 2,154 5,958 952 359 1,202 Add back related provision for losses - 705 - 365 - 340 --------- --------- --------- --------- --------- --------- 6,317 2,859 5,958 1,317 359 1,542 CATG sales 13,885 1,403 - - 13,885 1,403 --------- --------- --------- --------- --------- --------- Total equipment sales $ 248,258 $ 7,556 $ 204,545 $ 4,527 $ 43,713 $ 3,029 ========= ========= ========= ========= ========= ========= Years Ended May 31, --------------------------------------------- Increase 1997 1996 (Decrease) --------------------- -------------------- ----------------------- Revenue Margin Revenue Margin Revenue Margin --------- -------- --------- -------- --------- -------- Transactions during initial lease term: Equipment under lease sold to PIFs $ 66,987 $ 1,442 $ 72,202 $ 1,539 $ (5,215) $ (97) Equipment under lease sold to private investors 131,600 1,768 91,007 1,303 40,593 465 --------- ------- --------- ------- -------- ------ 198,587 3,210 163,209 2,842 35,378 368 --------- ------- --------- ------- -------- ------ Transactions subsequent to initial lease term (remarketing revenue): Sales of off-lease equipment 5,359 720 2,121 859 3,238 (139) Sales-type leases 71 69 359 191 (288) (122) Excess collections (cash collections in excess of the associated residual value from equipment under lease sold to private investors) 528 528 553 553 (25) (25) --------- ------- --------- ------- -------- ------ 5,958 1,317 3,033 1,603 2,925 (286) Deduct related provision for losses - (365) - (430) - 65 --------- -------- --------- ------- -------- ------ Realizations of value in excess of provision for losses 5,958 952 3,033 1,173 2,925 (221) Add back related provision for losses - 365 - 430 - (65) --------- ------- --------- ------- -------- ------ 5,958 1,317 3,033 1,603 2,925 (286) --------- ------- --------- ------- -------- ------ Total equipment sales $ 204,545 $ 4,527 $ 166,242 $ 4,445 $ 38,303 $ 82 ========= ======= ========= ======= ======== ======
11 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- Equipment Sales to PIFs ----------------------- Equipment sales to the PIFs decreased during fiscal year 1998 as compared to fiscal year 1997 and are expected to decrease further in fiscal year 1999 because three of the PIFs are in their planned liquidation stage and two of the PIFs were recently liquidated. Once a PIF enters the liquidation stage, it no longer acquires equipment under lease. Two PIFs are actively acquiring leases compared to four PIFs which were actively acquiring leases in 1997. The Company has elected not to organize future PIFs. Equipment sales to PIFs decreased during fiscal year 1997 as compared to fiscal year 1996 because three of the PIFs entered their planned liquidation stage during 1997. By the end of 1997, only two PIFs were actively acquiring leases compared to five PIFs at the end of 1996. Equipment Sales to Private Investors ------------------------------------ Equipment sales to private investors increased in fiscal year 1998 compared to fiscal year 1997, and in fiscal year 1997 compared to fiscal year 1996 principally because of the increased volume of lease originations. The Company has, in recent years, invested in its lease origination sales force through extensive training and personnel expansion, adopted a strategy of vertical integration (i.e., the development of specialized equipment and remarketing expertise) and established strategic alliances with investors having a lower cost of capital enabling the Company to originate and to sell leases at competitive prices. The Company defers income related to its servicing obligation on certain leases it sells. This income is amortized over the life of the lease and is included in other income. CATG Sales ---------- CATG sales consist primarily of new information technology hardware. In conjunction with the sale of hardware, CATG also sells software and services. Revenue from such sources is not material to total CATG sales. CATG's revenue and margin have been included since November 1, 1997, the date of acquisition. Remarketing of the Portfolio and Related Provision for Losses ------------------------------------------------------------- The Company has successfully realized gains on the remarketing of its portfolio of equipment after the initial lease term for the past twenty-four consecutive quarters. The remarketing of equipment for an amount greater than its book value is reported as equipment sales margin (if the equipment is sold) or as leasing margin (if the equipment is re-leased). The realization of less than the carrying value of equipment is recorded as provision for losses (which is typically not known until remarketing after the expiration of the initial lease term). As shown in the tables above, the realizations from sales exceeded the provision for losses for fiscal years 1998, 1997 and 1996, even without considering realizations from remarketing activities recorded as leasing margin. Revenue and margins from remarketing sales (i.e., sales occurring after the initial lease term) are affected by the number and the dollar amount of equipment leases that mature in a particular year. Revenue from remarketing sales increased during 1997, compared to 1996 primarily due to the sale of approximately $1.5 million of earth moving equipment and the early termination sale of approximately $2.5 million of manufacturing equipment. The Company's ability to remarket additional amounts of equipment and realize a greater amount of remarketing revenue in future periods is dependent on adding leases to its portfolio. However, adding leases to the Company's portfolio will not immediately increase the pool of maturing leases because leased equipment is typically not remarketed until after its initial lease term (which averages approximately four years). 12 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- Remarketing of the Portfolio and Related Provision for Losses, continued ------------------------------------------------------------- The provision for losses recorded during fiscal year 1998 included the following significant items: * Other-than-temporary declines in the value of equipment which occurred primarily because lessees returned equipment to the Company at the end of leases. The Company had previously expected to realize the carrying value of such equipment through lease renewals and proceeds from sales of the equipment to the original lessees. The fair market value of the equipment re-leased or sold to third parties is considerably less than was anticipated. * Approximately $185,000 for two off-lease commuter aircraft. The Company engaged MCC Financial Corporation ("MCC"), the Company's majority stockholder and a commuter aircraft remarketer, to remarket the aircraft. That agent determined that the aircraft could be released within a reasonable remarketing period for an amount that would recover the Company's full carrying value over time, or sold for cash immediately but at a book loss. The Company elected to sell the aircraft immediately after determining that the proceeds could be more effectively redeployed in its vertical integration activities and for the equity portion of a potential financing program for leases. The provision for losses recorded during fiscal year 1997 included the following significant items: * Approximately $275,000 for other-than-temporary declines in the value of equipment which occurred primarily because lessees returned equipment to the Company at the end of the lease. The Company had previously expected to realize the carrying value of that equipment through lease renewals and proceeds from sale of the equipment to the original lessee. The fair market value of the equipment re-leased or sold to a third party was considerably less than was anticipated. * Approximately $90,000 as a result of a lease having a net book value of $245,000 at February 28, 1997 with a lessee that filed for bankruptcy protection under Chapter 11 of the Bankruptcy code during the third quarter fiscal 1997. The provision for losses recorded during fiscal year 1996 included the following significant items: * Approximately $539,000 related to the sale of a note receivable on a jet aircraft. * Approximately $525,000 to write down the carrying value of certain retained residuals. * A reversal of approximately $750,000 recorded during fiscal year 1995 for estimated loss exposure related to a bankrupt lessee. During 1996, the lease was restructured and the reserve was no longer needed. LEASING MARGIN Leasing margin consists of the following (in thousands): Fiscal Years Ended May 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- Leasing revenue $ 25,101 $ 14,420 $ 10,212 Leasing costs and expenses (17,337) (8,928) (5,466) -------- -------- -------- Leasing margin $ 7,764 $ 5,492 $ 4,746 ======== ======== ======== Leasing margin ratio 31% 38% 46% ======== ======== ======== 13 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- LEASING MARGIN, continued The increase in leasing revenue, leasing costs and expenses and leasing margin was due to the increase in the volume of lease originations warehoused pending sale to private investors and planned growth in the Company's lease portfolio. These revenue and expense amounts are expected to increase further as the Company continues to grow its lease portfolio, and increase the amount of leases warehoused pending sale. Leasing margin ratio fluctuates based upon (i) the mix of direct finance leases and operating leases, (ii) remarketing activities, (iii) the relative age and types of leases in the portfolio (operating leases have a lower leasing margin early in the lease term, increasing as the term passes. Leasing margin also includes leasing revenue and leasing cost related to equipment remarketed (re-leased) after the expiration of the initial lease term. The leasing margin ratio has decreased as the number of new lease originations has increased compared to the number of remarketed leases. OTHER INCOME Other income consists of the following (in thousands): Fiscal Years Ended May 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Fees and distributions from PIFs $ 3,114 $ 2,453 $ 2,958 Fees from private leasing programs 451 38 - Interest on installment sale of equipment 443 769 - Other 220 481 326 ------- ------- -------- $ 4,228 $ 3,741 $ 3,284 ======= ======= ======= Fees and distributions from PIFs includes a net gain of $790,000 related to the sale of substantially all the leases owned by two PIFs. For the reasons discussed under EQUIPMENT SALES TO PIFS, the amount of fees and distributions from PIF's is expected to decline in future years. The Company recorded an installment sale contract in connection with the settlement agreement reached with respect to the Hemmeter Litigation (which is discussed in Footnote 15 to Notes to Consolidated Financial Statements to the 1996 Form 10-K). During fiscal year 1998, the Company received $650,000 of cash payments related to the installment sale. Expected future cash payments and interest income under the installment sale are $1.4 million and $.9 million, respectively. OPERATING AND OTHER EXPENSES Operating and other expenses increased approximately $2.3 million (24%) for fiscal year 1998 compared to fiscal year 1997. Approximately $1.5 million of the increase was due to CATG expenses which have been included in the consolidating financial statements since the acquisition date. The remaining increase was due primarily to costs associated with the Company's investment in its retail marketing infrastructure. Operating and other expenses increased $1.2 million (15%) for fiscal year 1997 as compared to fiscal year 1996. The increase included (i) $400,000 for commissions related to the increase in business volume, (ii) $400,000 for costs associated with the Company's investment in its retail marketing infrastructure, and (iii) $400,000 for consulting fees and expenses of the Company's majority shareholder. 14 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- INTEREST EXPENSE, NET Interest expense, net consists of the following: 1998 1997 1996 ------- ------- ------- Interest income $(3,487) $(4,828) $(6,943) Non-recourse interest expense 6,123 6,012 7,705 ------- ------- ------- Net non-recourse interest expense 2,636 1,184 762 Recourse interest expense 2,857 1,900 2,145 ------- ------- ------- Interest expense, net $ 5,493 $ 3,084 $ 2,907 ======= ======= ======= The Company finances leases for its own portfolio primarily with non-recourse debt. Interest income arises when equipment financed with non-recourse debt is sold to investors. As a result, interest income reported in the accompanying Consolidated Statements of Income reflect an amount equal to non-recourse interest expense. Therefore, net non-recourse interest expense on related discounted lease rentals pertains to the Company's owned lease portfolio. Such amount increased due to an increase in the average outstanding balance of related discounted lease rentals related to growth in the Company's owned portfolio. It is anticipated that net non-recourse interest expense on related discounted lease rentals will continue to increase in the future as the Company adds additional leases financed with non-recourse debt to its portfolio. Recourse interest expense increased during fiscal year 1998 compared to fiscal year 1997 primarily due to increased borrowings under the Company's Warehouse Facility used to fund the growth in the number of leases the Company holds for sale to private investors. Recourse interest expense decreased during fiscal year 1997, as compared to fiscal year 1996, due to the reductions in the outstanding balance of the Term Loan portion of the Company's Debt Facility. INCOME TAXES As shown in the table in Note 11 to Notes to the Consolidated Financial Statements, the Company's significant deferred tax assets consist of an ITC carryforward of approximately $1.0 million (which expires from 1999 through 2001) and alternative minimum tax ("AMT") credits of $3.3 million (which are not subject to expiration). These tax assets are available to offset federal income tax liability. However, the amount of ITC and AMT credit carryforward that may be utilized to reduce tax liability is significantly limited due to the computation of AMT liability. As a result of the future expiration of the ITC carryforward, the Company has established a valuation allowance for deferred tax assets to reflect the uncertainty that the ITC carryforward will be fully utilized prior to expiration. Income tax expense is provided on income at the appropriate statutory rates applicable to such earnings. The appropriate statutory federal and state income tax rate for fiscal years 1998, 1997 and 1996 was approximately 40%. Adjustments to the valuation allowance are recognized as a separate component of the provision for income tax expense. Consequently, the actual income tax rate for fiscal years 1998, 1997 and 1996 was less than the effective rate of 40% primarily due to the reduction in the valuation allowance. The decrease in the valuation allowance recorded in fiscal 1998 represents the utilization of an ITC carryforward for which a valuation allowance had been provided, and reduction in the uncertainty about future utilization of ITC carryforwards prior to expiration. The reduction in the valuation allowance was recorded during the quarter ended May 31, 1998 and resulted in an income tax benefit of $464,000. The reduction of the valuation allowance recorded in fiscal 1997 represents the utilization of an ITC carryforward and the receipt of a state income tax refund for which a valuation allowance had been provided. 15 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- I. Results of Operations, continued --------------------- INCOME TAXES, continued During fiscal year 1996, a transaction was completed in which the Company's largest shareholder obtained more than fifty percent of the ownership and voting rights of the Company within a three year period ("a change in control"). Upon a change in control, provisions of the Internal Revenue Code limit the amount of ITC carryforwards and AMT carryforwards that could be utilized to reduce income tax liability in any year. However, the Company had previously established a valuation allowance for deferred taxes due to uncertainty that the full amount of the ITC carryforward would be utilized prior to expiration and therefore, the change in control and resulting limitation on the ITC and AMT carryforward is not expected to reduce the recoverability of the amount of the net deferred income tax assets, net of the valuation allowance. II. Liquidity and Capital Resources ------------------------------- The Company's activities are principally funded by proceeds from sales of on-lease equipment (to its PIFs or Private Investors), non-recourse debt, recourse bank debt (see Note 9 to Notes to Consolidated Financial Statements), rents, fees and distributions from its PIFs, and sales or re-leases of equipment after the expiration of the initial lease terms. In addition, the Company finances receivables of its CATG subsidiary under an agreement with a specialized finance company. Management believes the Company's ability to generate cash from operations is sufficient to fund operations, as shown in the accompanying Consolidated Statements of Cash Flows. The Company's Bank Facility was expanded during fiscal 1998 to a total of $60 million. The term of the Bank Facility is one year. See Note 9 to Notes to Consolidated Financial Statements for a description of the Company's Bank Facility. Historically, the Company sold a significant portion of its lease originations to the PIFs. During fiscal 1998, the Company completed the offering of units in the most recent PIF, Capital Preferred Yield Fund-IV. The Company has elected not to organize additional PIFs. Consequently, future equipment sales to PIFs will reflect only the reinvestment needs of the existing PIFs, and therefore are expected to represent smaller amounts of equipment sales margin and cash flow. However, leases that in the past would have been originated for sale to the PIF's are expected to be retained by the Company. This strategy is expected to increase the Company owned leased portfolio. An increase in the size of the Company's lease portfolio is expected to result in an increase in (a) the Company's revenue and ultimate profitability and (b) the amount of capital needed to fund leasing activities. Permanent non-recourse debt generally provides financing for 80-95% of the cost of leased equipment. Consequently, the Company continues to evaluate additional sources of capital (including securitization, private debt placement and/or public debt or stock) which will provide the liquidity necessary to add leases to its own portfolio. The goal of such financing will be to lower the Company's cost of capital and expand the availability of capital. Additional lease warehouse financing consisting of both recourse and non-recourse facilities provides the Company with the funding necessary to originate and to hold leases on a temporary basis in anticipation of sale to Private Investors or until permanent funding is arranged for leases it holds in its own portfolio. 16 of 21 Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued --------------------- II. Liquidity and Capital Resources, continued ------------------------------- The Company intends to securitize leases it adds to its portfolio. In a securitization transaction, the Company sells and transfers a pool of leases to a wholly-owned special purpose subsidiary ("SPS") of the Company. The SPS simultaneously sells and transfers an interest in the leases to multiple financing conduits, in return for cash advances against the leases. The Company retains the right to receive any cash flows in excess of those necessary to service repayment of the cash advances. The Company is negotiating a new $50 million securitization program to increase the availability of permanent funding for lease originations. The Company hopes to complete the first funding under the securitization program during the first quarter of fiscal 1999; however, such programs are expensive to implement and are subject to significant delays and there can be no assurance that it will ever be completed. The Company finances receivables and inventory for its CATG subsidiary under an agreement with Deutsche Financial Services. At May 31, 1998, accounts receivable, net included $3,192,000 of receivables related to the Company's CATG subsidiary which were eligible collateral under the financing agreement. Inflation has not had a significant impact upon the operations of the Company. YEAR 2000 ISSUES The Company has conducted a comprehensive review of its computer systems to identify systems that could be affected by the Year 2000 issue. The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. Certain computer programs which have time-sensitive software could recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failures or miscalculations. Certain of the Company's software have already been updated to software which correctly accounts for the Year 2000. In addition, the Company is engaged in a system conversion, whereby the Company's main lease tracking and accounting software is being replaced with new systems which will account for the Year 2000 correctly. The Company does not expect any other changes required for the Year 2000 to have a material effect on its financial position or results of operations. In addition, the Company does not expect any Year 2000 issues relating to its customers and vendors will have a material effect on its financial position or results of operations. The Company expensed all amounts related to its review of the Year 2000 issue. Amounts expended to date to address the Year 2000 issue have been immaterial. III. New Accounting Pronouncements ----------------------------- See Recently Issued Financial Accounting Standards under Note 1 to Notes to the Consolidated Financial Statements for a discussion about the impact of new accounting pronouncements on the Company's financial position or results of operations. IV. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act --------------------------------------------------------------------------- of 1995 ------- The statements contained in this report which are not historical facts may be deemed to contain forward-looking statements with respect to events, the occurrence of which involve risks and uncertainties, and are subject to factors that could cause actual future results to differ both adversely and materially from currently anticipated results, including, without limitation, the level of lease originations, realization of residual values, customer credit risk, competition from other lessors, speciality finance lenders or banks and the availability and cost of financing sources. Certain specific risks associated with particular aspects of the Company's business are discussed in detail throughout Parts I and II of this report when and where applicable. 17 of 21 Item 8. Financial Statements and Supplementary Data ------------------------------------------- See the Index to Financial Statements and Schedule appearing at Page F-1 of this Report. Item 9. Disagreements on Accounting and Financial Disclosure ---------------------------------------------------- None. PART III Item 10. Directors and Executive Officers -------------------------------- The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end. Item 11. Executive Compensation ---------------------- The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed within 120 days after the Company's fiscal year end. PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K -------------------------------------------------------------- (a) and (d) Financial Statements and Schedule --------------------------------- The financial statements and schedule listed on the accompanying Index of Financial Statements and Schedule (page F-1) are filed as part of this Annual Report. (b) Reports on Form 8-K ------------------- None (c) Exhibits -------- Included as exhibits are the items listed in the Exhibit Index. The Company will furnish to its shareholders of record as of the record date for its 1997 Annual Meeting of Stockholders, a copy of any of the exhibits listed below upon payment of $.25 per page to cover the costs to the Company of furnishing the exhibits. 18 of 21 Item No. Exhibit Index - -------- ------------- 3.1 Certificate of Incorporation of Capital Associates, Inc. (the "Company"), incorporated by reference to Exhibit 3.1 of the Company's registration statement on Form S-1 (No. 33-9503). 3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-K for the fiscal year ended May 31, 1991 (the "1991 10-K"). 4.2(a) Certificate of Incorporation as filed on October 17, 1986, incorporated by reference to 4.2(a) of the December 15, 1995 Form S-3. 4.2(b) Certificate of Amendment to Certificate of Incorporation, as filed on March 3, 1987, incorporated by reference to 4.2(a) of the December 15, 1995 Form S-3. 4.2(c) Certificate of Amendment of Certificate of Incorporation, as filed on November 2, 1995, incorporated by reference to 4.2(a) of the December 15, 1995 Form S-3. 10.8(f) Extension and Amendment of Second Amended and Restated Dennis J. Lacey Executive Employment Agreement executed on July 1, 1997 and effective as of October 1, 1997, by and between Dennis J. Lacey, the Company and Capital Associates International, Inc. ("CAII") (the "Lacey Employment Agreement"), incorporated by reference to exhibit 10.8(f) of the May 31, 1997 Form 10-K. 10.40 Purchase Agreement, dated as of December 30, 1991 by and among CAII, the Company and Bank One, Texas, N.A., incorporated by reference to Exhibit 19.11 of the November 1991 10-Q. 10.55 Consulting Agreement, effective as of June 1, 1996 by and among the Company, CAII and William H. Buckland, incorporated by reference to Exhibit 10.55 of the August 31, 1997 Form 10-Q. 10.56 Consulting Agreement, effective as of June 1, 1996 by and among the Company, CAII and James D. Walker, incorporated by reference to Exhibit 10.56 of the August 31, 1997 Form 10-Q. 10.57 Residual Sharing Note, dated as of June 1, 1997 by and among the Company, CAII and William H. Buckland, incorporated by reference to Exhibit 10.57 of the August 31, 1997 Form 10-Q. 10.58 Residual Sharing Note, dated as of June 1, 1997 by and among the Company, CAII and James D. Walker, incorporated by reference to Exhibit 10.58 of the August 31, 1997 Form 10-Q. 10.59 Loan and Security Agreement, dated as of November 26, 1997 by and among the Company and CAII as Borrowers and CoreStates Bank, N.A., as Agent and Issuing Bank and each of the Financial Institutions now or hereafter shown on the Signature pages of this Agreement, incorporated by reference to Exhibit 10.59 of the November 30, 1997 Form 10-Q. 10.60 First Amendment to Loan and Security Agreement, dated as of April 7, 1998 by and between Capital Associates, Inc., and Capital Associates International, Inc. as Borrowers and CoreStates Bank, N. A. as Agent and Issuing Bank and the four participating financial institutions. 10.61 Employment Agreement, dated as of April 7, 1998, by and among the Company, CAII and James D. Walker. 19 of 21 Item No. Exhibit Index - -------- ------------- 10.62 Business Financing Agreement, Addendum to Business Financing Agreement and Agreement for Wholesale Financing, Corporate Guaranty and Addendum to Guaranty, dated as of April 21, 1998 by and between Capital Associates Technology Group, Inc. and Deutsche Financial Services Corporation. 10.63 Second Amendment to Loan and Security Agreement, dated as of May 29, 1998 by and between Capital Associates, Inc., and Capital Associates International, Inc. as Borrowers and CoreStates Bank, N. A. as Agent and Issuing Bank and the four participating financial institutions. 21 List of Subsidiaries 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule 20 of 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL ASSOCIATES, INC. Dated: July 23, 1998 By: /s/Anthony M. DiPaolo ----------------------------------------- Anthony M. DiPaolo Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated and on the dates listed. Signature Title --------- ----- /s/James D. Walker President, CEO and Chairman of the Board - ---------------------- James D. Walker /s/William H. Buckland Director - ---------------------- William H. Buckland /s/James D. Edwards Director - ---------------------- James D. Edwards /s/Gary M. Jacobs Director - ---------------------- Gary M. Jacobs /s/Robert A. Sharpe Director - ---------------------- Robert A. Sharpe /s/John Gordon - ---------------------- Assistant Vice President and Controller John Gordon (Principal Accounting Officer) Each of the above signatures is affixed as of July 21, 1998 21 of 21 INDEX OF FINANCIAL STATEMENTS AND SCHEDULE Page Financial Statements ------ - -------------------- Independent Auditors' Report F-2 Consolidated Balance Sheets as of May 31, 1998 and 1997 F-3 Consolidated Statements of Income for the Years Ended May 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended May 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended May 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 to F-23 Schedule - -------- Independent Auditors' Report F-24 Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended May 31, 1998, 1997 and 1996 F-25 F - 1 INDEPENDENT AUDITORS' REPORT The Stockholders and Directors Capital Associates, Inc.: We have audited the accompanying consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of May 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended May 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Associates, Inc. and subsidiaries as of May 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP /s/ KPMG Peat Marwick LLP ------------------------- Denver, Colorado July 14, 1998 F - 2 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except shares and par value) ASSETS May 31, ------------------- 1998 1997 -------- -------- Cash and cash equivalents $ 17,684 $ 6,194 Receivable from affiliated limited partnerships 352 726 Accounts receivable, net 5,835 417 Inventory 1,141 1,331 Residual values, net, arising from equipment under lease sold to private investors 4,277 4,334 Net investment in direct finance leases 31,181 7,700 Leased equipment, net 104,825 71,443 Investment in affiliated limited partnerships 3,589 6,642 Other 4,883 3,585 Deferred income taxes 3,600 2,300 Discounted lease rentals assigned to lenders arising from equipment sale transactions 37,626 41,845 --------- --------- $ 214,993 $ 146,517 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Recourse debt $ 49,088 $ 20,712 Accounts payable - equipment purchases 25,029 30,231 Accounts payable and other liabilities 11,379 10,607 Discounted lease rentals 104,311 61,466 --------- --------- 189,807 123,016 --------- --------- Commitments and contingencies (Notes 9, 11, 16 and 17) Stockholders' equity: Common stock, $.008 par value, 15,000,000 shares authorized, 5,165,000 and 5,157,000 shares issued 32 32 Additional paid-in capital 16,863 16,897 Retained earnings 8,374 6,854 Treasury stock, at cost (83) (282) --------- --------- Total stockholders' equity 25,186 23,501 --------- --------- $ 214,993 $ 146,517 ========= ========= See accompanying notes to consolidated financial statements. F - 3 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except shares and per share data) Years Ended May 31, ------------------------------------- 1998 1997 1996 --------- ---------- --------- Revenue: Equipment sales to PIFs $ 48,648 $ 66,987 $ 72,202 Other equipment sales 199,610 137,558 94,040 Leasing 25,101 14,420 10,212 Interest 3,487 4,828 6,943 Other 4,228 3,741 3,284 --------- --------- --------- Total revenue 281,074 227,534 186,681 --------- --------- --------- Costs and expenses: Equipment sales to PIFs 47,558 65,545 70,663 Other equipment sales 193,144 134,473 91,134 Leasing 17,337 8,928 5,466 Operating and other expenses 11,830 9,568 8,332 Provision for losses 705 365 430 Interest: Non-recourse debt 6,123 6,012 7,705 Recourse debt 2,857 1,900 2,145 --------- --------- --------- Total costs and expenses 279,554 226,791 185,875 --------- --------- --------- Income before income taxes 1,520 743 806 Income tax expense - 10 202 --------- --------- --------- Net income $ 1,520 $ 733 $ 604 ========= ========= ========= Earnings per common share: Basic $ .30 $ .15 $ .12 ========= ========= ========= Diluted $ .28 $ .14 $ .12 ========= ========= ========= Weighted average number of common shares outstanding: Basic 5,117,000 5,004,000 4,987,000 ========= ========= ========= Diluted 5,449,000 5,403,000 5,186,000 ========= ========= ========= See accompanying notes to consolidated financial statements. F - 4 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 June 1, 1995 5,107,000 $ 63 $ 16,961 $ 5,517 16,000 $ (51) $ 22,490 Issuance of common stock under: - incentive stock option plan 27,000 - 19 - - - 19 - non-qualified stock option plan 5,000 - 6 - - - 6 Income tax benefit from stock compensation - - 9 - - - 9 One-for-two reverse stock split - (31) 31 - - - - Purchase of treasury shares - - - - 129,000 (247) (247) Net income - - - 604 - - 604 ---------- ----- -------- ------- ------- ------ -------- Balance at May 31, 1996 5,139,000 32 17,026 6,121 145,000 (298) 22,881 Issuance of common stock under: - incentive stock option plan 6,000 - 4 - - - 4 - non-qualified stock option plan 12,000 - 10 - - - 10 Issuance of treasury shares upon exercise of incentive stock options - - (16) - (5,000) 16 - Income tax benefit from stock compensation - - 11 - - - 11 Non-employee stock option buyout - - (138) - - - (138) Net income - - - 733 - - 733 ---------- ----- -------- ------- ------- ------ -------- Balance at May 31, 1997 5,157,000 32 16,897 6,854 140,000 (282) 23,501 Issuance of common stock under incentive stock option plan 8,000 - 14 - - 9 14 Issuance of treasury shares upon exercise of incentive stock options - - (82) - (98,000) 199 117 Income tax benefit from stock compensation - - 34 - - - 34 Net income - - - 1,520 - - 1,520 ---------- ----- -------- ------- ------- ------ -------- Balance at May 31, 1998 5,165,000 $ 32 $ 16,863 $ 8,374 42,000 $ (83) $ 25,186 ========== ===== ======== ======= ======= ====== ========
See accompanying notes to consolidated financial statements. F - 5 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years Ended May 31, ----------------------------------------------- 1998 1997 1996 --------- --------- ----------- Cash flows from operating activities: Net income $ 1,520 $ 733 $ 604 --------- --------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,172 9,634 6,182 Recovery of investment in direct financing leases 5,200 3,786 6,362 Proceeds from the sales of leases, net 23,536 15,693 8,995 Provision for losses 705 365 430 Deferred income taxes (1,300) (400) (100) Deferred financing costs (262) (100) (118) MBank sale proceeds - - 10,800 Sales-type lease margin (157) (69) (191) Decrease (increase) in accounts receivable (3,450) 1,651 (1,947) Other 2,936 1,879 (1,427) --------- --------- ---------- Total adjustments 45,380 32,439 28,986 --------- --------- ---------- Net cash provided by operating activities 46,900 33,172 29,590 --------- --------- ---------- Cash flows from investing activities: Equipment purchased for leasing (71,495) (35,798) (23,979) Investment in leased office facility and in capital expenditures (1,236) (452) (393) Net receipts from affiliated public income funds 3,427 1,810 1,222 Acquisition, net of cash acquired (767) - - --------- --------- ---------- Net cash used for investing activities (70,071) (34,440) (23,150) --------- --------- ---------- Cash flows from financing activities: Proceeds from discounting of lease rentals 23,127 13,686 8,513 Principal payments on discounted lease rentals (14,716) (12,125) (5,821) Proceeds from sales of common stock 14 14 25 Purchase of treasury shares - - (247) Purchase of non-employee stock options - (138) - Net borrowings (payments) on revolving credit facilities 25,953 7,507 (2,649) Net borrowings (payments) on Term Loan 283 (4,333) (4,333) --------- --------- ---------- Net cash provided by (used for) financing activities 34,661 4,611 (4,512) --------- --------- ---------- Net increase in cash and cash equivalents 11,490 3,343 1,928 Cash and cash equivalents at beginning of year 6,194 2,851 923 --------- --------- ---------- Cash and cash equivalents at end of year $ 17,684 $ 6,194 $ 2,851 ========= ========= ========== Supplemental schedule of cash flow information: Recourse interest paid $ 2,857 $ 1,900 $ 2,145 Non-recourse interest paid 2,892 1,514 983 Income taxes paid 928 183 2,264 Income tax refunds received 91 602 83 Supplemental schedule of non-cash investing and financing activities: Discounted lease rentals assigned to lenders arising from equipment sales transactions 7,583 24,266 14,095 Assumption of discounted lease rentals in lease acquisitions 46,236 22,499 19,324 Fair value of assets acquired, including cash 5,284 - - Liabilities assumed and incurred in acquisition 4,017 - -
See accompanying notes to consolidated financial statements. F - 6 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ NATURE OF OPERATIONS Capital Associates, Inc. ("the Company") is a commercial finance company engaged in the leasing of a variety of equipment. The Company is principally engaged in (i) the origination of equipment leases with equipment users, including the acquisition of leases initially originated by other lessors (ii) the sale of equipment leases to third parties, (iii) the management and servicing of equipment leases retained by the Company or sold to private investors or other lessors, (iv) the sale and remarketing of equipment as it comes off lease and (v) the sale and servicing of new information technology equipment. During fiscal years 1998 and 1997, the Company originated over $540 million of equipment leases covering over 53,000 items of equipment. The principal market for the Company's activities is the United States. During fiscal 1998, the Company acquired DBL, Inc. d/b/a Connecting Point (subsequently renamed Capital Associates Technology Group or "CATG"). CATG provides a wide range of information technology ("IT") services, including procurement of software and PC's and networking equipment, and IT equipment maintenance. CATG was acquired to obtain specific IT equipment expertise which the Company hopes will provide (i) access to new markets which will allow the Company to realize higher residual values and to support lease originations, (ii) greater confidence in pricing and estimating residual values and (iii) the ability to provide enhanced equipment expertise and evaluation services to our customers. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. For the Company, these are principally the estimates of residual values, collectibility of accounts receivable and valuation of inventory. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CAI and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. The Company has investments in public income funds (the "PIFs", consisting of both general partnership and subordinated limited partnership interests) and other 50%-or-less owned entities. Such investments are primarily accounted for using the equity method. The parent company's assets consist solely of its investments in subsidiaries, and it has no liabilities separate from its subsidiaries. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. F - 7 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, continued ------------------------------------------ INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. INVENTORY Inventory consists of the following: 1998 1997 ------ ------ Retail inventory $ 985 $ 89 Equipment held for sale or re-lease 156 1,242 ------ ------ $1,141 $1,331 ====== ====== Retail inventory consists primarily of information technology hardware and is stated at the lower of cost (first-in, first-out method) or market. Equipment held for sale or re-lease, recorded at the lower of cost or market value less cost to sell, consists of equipment previously leased to end users which has been returned to the Company following lease expiration. EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by all dilutive potential common shares outstanding during the period. STOCK OPTION PLAN The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB Opinion No. 25"), and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On June 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to apply the provisions of APB Opinion No. 25, as the Company has elected to do, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in fiscal year 1996 and future fiscal years as if the fair-value-based method defined in SFAS No. 123 had been applied. F - 8 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, continued ------------------------------------------ RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"), which became effective for periods ending after December 15, 1997. Statement 128 changes the computation and presentation requirements for earnings per share for entities with publicly held common stock or potential common stock. Under such requirements the Company is required to present both basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by all dilutive potential common shares outstanding during the period. The adoption of Statement 128 by the Company as of December 31, 1997, did not have a material effect on previously presented earnings per share amounts for previous years. In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"), which requires comprehensive income to be displayed prominently within the financial statements. Comprehensive income is defined as all recognized changes in equity during a period from transactions and other events and circumstances except those resulting from investments by owners and distributions to owners. Net income and items that previously have been recorded directly in equity are included in comprehensive income. Statement 130 affects only the reporting and disclosure of comprehensive income but does not affect recognition or measurement of income. Statement 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company adopted Statement 130 in the fourth quarter of fiscal year 1998. The adoption did not have an impact on its financial reporting. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 provides guidance for reporting information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports of public companies. An operating segment is defined as a component of a business that engages in business activities from which it may earn revenue and incur expenses, a component whose operating results are regularly reviewed by the company's chief operating decision maker, and a component for which discrete financial information is available. Statement 131 establishes quantitative thresholds for determining operating segments of a company. Statement 131 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company plans to adopt Statement 131 in the first quarter of 1999 by reporting operating segment information on Form 10-Q for its leasing and equipment retailing segments. EQUIPMENT LEASING AND SALES LEASE ACCOUNTING - Statement of Financial Accounting Standards No. 13, Accounting for Leases, requires that a lessor account for each lease by either the direct financing, sales-type or operating lease method. Direct financing and sales-type leases are defined as those leases which transfer substantially all of the benefits and risks of ownership of the equipment to the lessee. The Company currently utilizes (i) the direct financing or the operating lease method for substantially all of the Company's lease originations and (ii) the sales-type or the operating lease method for substantially all lease activity for an item of equipment subsequent to the expiration of the initial lease term. For all types of leases, the determination of profit considers the estimated value of the equipment at lease termination, referred to as the residual value. After the origination of a lease, the Company may engage in financing of lease receivables on a non-recourse basis (i.e., "non-recourse debt" or "discounted lease rentals") and/or equipment sale transactions to reduce or recover its investment in the equipment. F - 9 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, continued ------------------------------------------ EQUIPMENT LEASING AND SALES, continued The Company's accounting methods and their financial reporting effects are described below: LEASE INCEPTION DIRECT FINANCING LEASES ("DFLS") - The cost of equipment is recorded as net investment in DFLs. Leasing revenue, which is recognized over the term of the lease, consists of the excess of lease payments plus the estimated residual value over the equipment's cost. Earned income is recognized monthly to provide a constant yield and is recorded in leasing revenue in the accompanying consolidated statements of income. Initial direct costs ("IDC") are capitalized and amortized over the lease term in proportion to the recognition of earned income. Amortization of IDC is recorded as leasing costs in the accompanying consolidated statements of income. Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the initial lease (which in certain circumstances includes anticipated re-lease proceeds) as determined by the Company. In estimating such values, the Company considers all relevant information and circumstances regarding the equipment and the lessee. OPERATING LEASES ("OLS") - The cost of equipment is recorded as leased equipment and is depreciated on a straight-line basis over the lease term to an amount equal to the estimated residual value at the lease termination date. Leasing revenue consists principally of monthly rentals. IDC are capitalized and amortized over the lease term in proportion to the recognition of rental income. Depreciation expense and amortization of IDC are recorded as leasing costs in the accompanying consolidated statements of income. Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the initial lease (which in certain circumstances includes anticipated re-lease proceeds) as determined by the Company. In estimating such values, the Company considers all relevant information and circumstances regarding the equipment and the lessee. Because revenue, depreciation expense and the resultant profit margin before interest expense are recorded on a straight-line basis, and interest expense on discounted lease rentals is incurred on the interest method, profit is skewed toward lower returns in the early years of the term of an OL and higher returns in later years. TRANSACTIONS SUBSEQUENT TO LEASE INCEPTION NON-RECOURSE DISCOUNTING OF RENTALS - The Company may assign the future rentals from leases to financial institutions at fixed interest rates on a non-recourse basis. In return for such assigned future rentals, the Company receives the discounted value of the rentals in cash. In the event of default by a lessee, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Company. Cash proceeds from such financings are recorded on the balance sheet as discounted lease rentals. As lessees make payments to financial institutions, leasing revenue and interest expense are recorded. SALES TO PRIVATE INVESTORS OF EQUIPMENT UNDER LEASE - The Company may sell title to leased equipment that in some cases is subject to existing discounted lease rentals in equipment sale transactions with third-party investors. In such transactions, the investors obtain ownership of the equipment as well as rights to equipment rentals. Upon sale, the Company records equipment sales revenue equal to the sales price of the equipment which may include a residual interest retained by the Company (recorded as an asset at present value using an appropriate interest rate) and records equipment sales cost equal to the carrying value of the related assets (including remaining unamortized IDC). Income is recorded on residual interests retained by the Company after cumulative cash collections on such residuals exceed the recorded asset amount. Fees for remarketing equipment associated with such transactions are reflected in operations as realized. F - 10 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, continued ------------------------------------------ EQUIPMENT LEASING AND SALES, continued Other accounts arising from private equity sales include: DISCOUNTED LEASE RENTALS, ETC. - Pursuant to FASB Technical Bulletin No. 86-2, although private investors and PIFs may acquire the equipment sold to them by the Company subject to the associated non-recourse debt (i.e., discounted lease rentals), the debt is not removed from the balance sheet unless such debt has been legally assumed by the third-party investors. If not legally assumed, a corresponding asset ("discounted lease rentals assigned to lenders arising from equipment sale transactions") is recorded representing the present value of the end user rentals receivable relating to such transactions. Interest income is recorded on the discounted lease rentals and an equal amount of interest expense on the related liability is recorded in the accompanying statements of income. INTEREST INCOME - Interest income, as shown in the accompanying consolidated statements of income, includes interest on discounted lease rentals assigned to lenders arising from equipment sale transactions. SALES TO PIFS - Upon the sale of equipment to its PIFs, the Company records equipment sales revenue equal to the sales price of the equipment (including any acquisition fees earned) and costs of sales equal to the carrying value of the related assets (including remaining unamortized IDC). Fees for services the Company performs for the PIFs are recognized at the time the services are performed. SERVICING FEES - The Company defers income related to its servicing obligation on certain leases it sells. This income is amortized over the life of the lease and is included in other income. TRANSACTIONS SUBSEQUENT TO INITIAL LEASE TERMINATION After the initial term of equipment under lease expires, the equipment is either sold or re-leased. When the equipment is sold, the remaining net book value of equipment sold is removed and gain or loss recorded. When the equipment is re-leased, the Company utilizes the sales-type method (described below) or the OL method (described above). SALES-TYPE LEASES The excess of the present value of (i) future rentals and (ii) the estimated residual value (collectively, "the net investment") over the carrying value of the equipment subject to the sales-type lease is reflected in operations at the inception of the lease. Thereafter, the net investment is accounted for as a DFL, as described above. REVENUE RECOGNITION FOR SALES OF INFORMATION TECHNOLOGY HARDWARE AND SOFTWARE Revenue is recognized upon shipment to the customer, if the Company has no significant obligations to the customer after delivery. F - 11 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, continued ------------------------------------------ ALLOWANCE FOR LOSSES An allowance for losses is maintained at levels determined by management to adequately provide for any other- than-temporary declines in asset values. In determining losses, economic conditions, the activity in used equipment markets, the effect of actions by equipment manufacturers, the financial condition of customers, the expected courses of action by lessees with regard to leased equipment at termination of the initial lease term, changes in technology and other factors which management believes are relevant, are considered. Recoverability of an asset value is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If a loss is indicated, the loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Asset chargeoffs are recorded upon the termination or remarketing of the underlying assets. Assets are reviewed quarterly to determine the adequacy of the allowance for losses. The Company evaluates the realizability of the carrying value of its investment in its PIFs based upon all estimated future cash flows from the PIFs. As a result of such analyses, certain distributions have been accounted for as a recovery of cost instead of income. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. 2. Acquisition ----------- Effective November 1, 1997, CAII acquired all of the outstanding shares of DBL, Inc. d/b/a Connecting Point. DBL, Inc. has been renamed (and is doing business as) Capital Associates Technology Group ("CATG"). The purchase price consisted of $1,200,000 in cash (paid in December 1997) and a $2,140,000 four year note. The Company may be required to make additional payments of up to $221,750 per year ending October 31, 2001, contingent upon the results of CATG's operations over the course of that period. The $2,140,000 note payable to the sellers earns interest at the rate of 10% per annum and is payable in monthly installments of $58,000 beginning December 12, 1997 through November 12, 2000, and $42,057 beginning December 12, 2000 and continuing through November 12, 2001. The outstanding balance at May 31, 1998 was $1,902,000. Interest expense for fiscal 1998 was approximately $119,000. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based on their fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired of approximately $1.7 million (which will increase for any future contingent cash payment), has been recorded as goodwill (included in other assets), and is being amortized on a straight-line basis over 15 years. The amount of goodwill amortized during the fiscal 1998 was approximately $67,000. The following unaudited pro-forma information combines the consolidated results of operations of the Company and CATG as if the acquisition had occurred at the beginning of fiscal 1998 and 1997 after giving effect to certain pro-forma adjustments, including adjustments to reflect the amortization of the excess of the purchase price over the fair values of the net assets acquired and increased interest expense. The pro-forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations as they would have been had the acquisition been effected on the assumed dates. F - 12 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Acquisition, continued ----------- Years Ended May 31, ------------------------- 1998 1997 --------- --------- In thousands, except per share data (unaudited) Revenue $ 292,000 $ 250,000 Net income 1,400 500 Earnings per common share: Basic .27 .10 Diluted .26 .09 3. Residual Values and Other Receivables Arising from Equipment Under Lease --------------------------------------------------------------------------- Sold to Private Investors ------------------------- As of May 31, 1998 and 1997, the equipment types for which the Company recorded the present value of the estimated residual values and other receivables arising from sales of equipment under lease to private investors were (in thousands): Description 1998 1997 ----------- ------- ------- Material handling $ 2,134 $ 1,869 Furniture and fixtures 605 1,220 Mining and manufacturing 10 881 Aircraft 71 160 Other miscellaneous equipment 360 204 ------- ------- Total equipment residuals 3,180 4,334 Notes receivable due directly from investors 1,097 - ------- ------- $ 4,277 $ 4,334 ======= ======= Residual values arising from equipment under lease sold to private investors were net of an allowance for losses of $64,000 and $157,000 as of May 31, 1998 and 1997, respectively. 4. Net Investment in DFLs ---------------------- The components of the Company's net investment in DFLs as of May 31, 1998 and 1997 were (in thousands): 1998 1997 -------- -------- Minimum lease payments receivable $ 32,264 $ 8,133 Estimated residual values 4,217 692 IDC 336 72 Less unearned income (5,636) (1,197) -------- ------- $ 31,181 $ 7,700 ======== ======= F - 13 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Leased Equipment, net --------------------- The Company's investment in equipment under OLs, by major classes, as of May 31, 1998 and 1997 were (in thousands): 1998 1997 -------- -------- Material handling equipment $ 36,312 $ 25,083 Computers and peripheral computer equipment 45,861 21,776 Other technology and communication equipment 19,349 21,701 Furniture and fixtures 11,213 7,227 Other 8,017 4,885 Aircraft 343 1,327 IDC 1,128 831 --------- --------- 122,223 82,830 Less accumulated depreciation (16,811) (10,680) Less allowance for losses (587) (707) --------- --------- $ 104,825 $ 71,443 ========= ========= Depreciation expense related to leased equipment was $16,907,000, $8,662,000, and $5,205,000 for fiscal years 1998, 1997 and 1996, respectively. 6. Future Minimum Lease Payments ----------------------------- Future minimum lease payments receivable from noncancelable leases on equipment owned by the Company as of May 31, 1998, are as follows (in thousands): Years Ending May 31, DFLs OLs -------------------- -------- --------- 1999 $ 13,610 $ 40,003 2000 10,736 33,127 2001 4,752 20,426 2002 1,726 10,167 2003 703 2,801 Thereafter 737 1,870 -------- --------- $ 32,264 $ 108,394 ======== ========= 7. Significant Customer and Concentration of Credit Risk ----------------------------------------------------- During 1998, no lessee accounted for more than 10% of leasing revenue. During fiscal year 1997 and 1996, leasing revenue from one lessee accounted for 13% and 11%, respectively, of total leasing revenue. In addition, other equipment sales revenue related to equipment leased to that lessee accounted for 30%, 77% and 88% of total other equipment sales revenue during fiscal years 1998, 1997 and 1996, respectively. The Company leases various types of equipment to companies in diverse industries throughout the United States. To minimize credit risk, the Company generally leases equipment to (i) companies that have a credit rating of not less than Baa as determined by Moody's Investor Services, Inc., or comparable credit ratings as determined by other recognized credit rating services, or (ii) companies, which although not rated by a F - 14 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Significant Customer and Concentration of Credit Risk, continued ----------------------------------------------------- recognized credit rating service or rated below Baa, are believed by the Company to be sufficiently creditworthy to satisfy the financial obligations under the lease. At May 31, 1998, approximately 99% of equipment under OLs and DFLs owned by the Company was leased to companies meeting the above credit criteria. 8. Discounted Lease Rentals ------------------------ Discounted lease rentals outstanding at May 31, 1998 bear interest at rates between 6% and 16% with a weighted average rate of 8.5%. Aggregate maturities of such non-recourse obligations are (in thousands): Years Ending May 31: 1999 $ 48,801 2000 36,787 2001 14,322 2002 2,863 Thereafter 1,538 --------- $ 104,311 ========= 9. Recourse Bank Debt ------------------ On November 26, 1997, the Company obtained a new $60 million senior, secured debt facility (the "Senior Facility") in the form of a term loan, an acquisition term loan, working capital revolving credit loans ("Working Capital Facility") and warehouse revolving credit loans ("Warehouse Credit Facility"). The lender group consists of the agent bank, First Union National Bank, and participating lenders, BankBoston, N.A., US Bank, Norwest Bank Colorado, N.A., and European America Bank (the "Lender Group"). In April 1998, the Lender Group agreed to combine the Term Loan and Acquisition Term Loan into a single term loan ("Term Loan"). The term of the Senior Facility expires on November 25, 1998 and may be renewed annually at the Lender's sole discretion. Interest on the Senior Facility is tied to the Lender Group's prime rate or the LIBOR rate (8.5% and 5.7%, respectively at May 31, 1998) plus the Applicable Margin. The principal terms of the Warehouse Credit Facility and Working Capital Facility are as follows: Warehouse Working (Dollars in thousands) Credit Facility Capital Facility --------------- ---------------- Maximum Amount $ 51,000 $ 5,000 Borrowings at May 31, 1998 38,027 5,000 Potential availability at May 31, 1998 12,973 0 Applicable Prime Rate Margin 0.0% .25% Applicable LIBOR Rate Margin 2.5% 2.75% The Term Loan commitment amount is $4 million with a four-year amortization schedule to a balloon payment of $2 million after two years. The Term Loan was initially funded in the amount of $2.8 million. As of May 31, 1998, the Term Loan balance was $2,450,000 as a result of scheduled quarterly principal repayments. In July 1998, the Lender Group funded the remaining Term Loan commitment of $1.2 million. The Term Loan bears interest at Prime plus .75%, and principal and interest are payable quarterly in arrears. F - 15 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Recourse Bank Debt, continued ------------------ The Company is required to pay a quarterly commitment fee equal to .375% of the unused portion of the Working Capital Facility and the Warehouse Credit Facility. The Senior Facility is collateralized by all assets of the Company, except for the assets which collateralize the loan from Deutsche Financial Services ("Deutsche") described below. The Senior Facility contains certain provisions which limit the Company as to additional indebtedness, sale of assets, liens, guarantees, and distributions. Additionally, the Company must maintain certain specified financial ratios. The Senior Facility replaces the terminated Bank Facility, which expired under its terms as of November 30, 1997. As of May 31, 1998, the Company was in compliance with the terms of the Senior Facility. On May 29, 1998, the Company obtained $6 million in committed revolving credit financing from Deutsche for its CATG subsidiary. The loan is collateralized by specific accounts receivable and inventory generated or purchased by CATG. The facility is renewable annually at Deutsche's discretion. The outstanding balance related to this portion of the facility at May 31, 1998 was approximately $1,709,000, which is due on demand. The interest rate associated with this facility is Deutsche's Prime rate (8.5% at May 31, 1998) plus 0.5%. The Company is required to pay an annual facility fee of 0.125% of the total commitment. Balances outstanding under the facility are guaranteed by Capital Associates International, Inc. This guaranty obligations is subordinate to the Company's obligations to the Lender Group. The facility contains provisions which require CATG to maintain certain minimum levels of capitalization and liquidity. In addition, the agreement contains a minimum capitalization requirement for the Company. As of May 31, 1998, both the Company and its CATG subsidiary were in compliance with the terms of the Deutsche facility. 10. Related Parties --------------- PIFs The Company sponsors or co-sponsors seven PIFs (five of which purchased equipment under lease from the Company during fiscal year 1998). The Company, through its PIF general partner subsidiaries, acts as either a general partner or co-general partner of each PIF for which it receives general partner distributions and management fees. The Company, through CAII, also acts as the Class B limited partner of each PIF for which it receives Class B limited partner distributions. The Class B limited partner is required to make subordinated limited partnership investments in the PIFs. The Class B limited partner has a maximum remaining obligation to make further cash contributions of approximately $0.2 million, relating solely to CPYF IV. Amounts related to the PIFs for the years ended May 31, were as follows (in thousands): 1998 1997 1996 -------- ------- ------- Equipment sales margin $ 1,090 $ 1,442 $ 1,539 Fees and distributions (included in other income) 3,114 2,453 2,958 Investment contributions in subordinated limited partnership interests 220 280 260 F - 16 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Related Parties, continued --------------- OTHER RELATED PARTIES MCC Financial Corporation acquired voting control of the Company during fiscal year 1996. Two executive officers of that company are directors of the Company and members of the Executive Committee of the Board of Directors of the Company. The Company has entered into various agreements with these directors for certain consulting fees and payments of other expenses. During fiscal years 1998 and 1997, the Company paid approximately $650,000 and $810,000, respectively, under these agreements including $150,000 for relocation expenses of one director (who is Chairman of the Board of Directors, President and CEO of the Company) in connection with his relocation to Company headquarters in 1997. 11. Income Taxes ------------ The components of the income tax expense (benefit) charged to continuing operations were (in thousands): 1998 1997 1996 --------- ------ ------- Current: Federal $ 1,100 $ 240 $ 653 State and local 200 170 (351) -------- ------ ------ 1,300 410 302 -------- ------ ------ Deferred: Federal (1,100) (100) (501) State and local (200) (300) 401 -------- ------ ------ (1,300) (400) (100) -------- ------ ------ Total tax provision $ 0 $ 10 $ 202 ======== ====== ====== Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 34% to pre-tax income from continuing operations as a result of the following: 1998 1997 1996 ------ ------ ------ Computed "expected" tax expense $ 515 $ 250 $ 272 State tax provisions, net of federal benefits 85 40 50 Reduction in valuation allowance for deferred income tax assets (600) (280) (120) ------ ------ ------ $ 0 $ 10 $ 202 ====== ====== ====== Income taxes are provided on income from continuing operations at the appropriate federal and state statutory rates applicable to such earnings. F - 17 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes, continued ------------ Components of income tax expense attributable to net income before income taxes is as follows (in thousands): 1998 1997 1996 -------- ------- -------- Current: Taxes on net income before carryforwards $ 1,600 $ 710 $ 832 Benefit of investment tax credit ("ITC") carryforward utilized (300) (300) (530) -------- ------ ------ 1,300 410 302 -------- ------ ------ Deferred: Tax effect of net change in temporary differences (1,000) (420) (510) ITC carryforward utilized 300 300 530 Decrease in valuation allowance for deferred income tax assets (600) (280) (120) -------- ------ ------ (1,300) (400) (100) -------- ------ ------ Provision for income taxes $ 0 $ 10 $ 202 ======== ====== ====== Significant components of the Company's deferred tax liabilities and assets as of May 31, 1998 and 1997, were as follows (in thousands): 1998 1997 -------- -------- Deferred income tax liabilities: Direct finance leases accounted for as operating leases for income tax purposes, and equipment depreciation for tax purposes in excess of financial reporting depreciation $ 1,000 $ - Residual values and other receivables arising from equipment under lease sold to private investors recognized for financial reporting purposes, but not for tax reporting purposes 1,100 1,700 -------- ------- Total deferred income tax liabilities 2,100 1,700 -------- ------- Deferred income tax assets: Other assets and liabilities, net 2,000 600 Investment tax credit carryforwards 1,000 1,300 AMT credit carryforwards 3,300 3,300 -------- ------- Total deferred income tax assets 6,300 5,200 Valuation allowance for deferred income tax assets (600) (1,200) -------- ------- Net deferred income tax assets 5,700 4,000 -------- ------- Net deferred income tax asset $ 3,600 $ 2,300 ======== ======= At May 31, 1998, the Company has an ITC carryforward of approximately $1.0 million, which expires from 1999 through 2001, and AMT credits of approximately $3.3 million. Under present federal tax law, AMT credits may be carried forward indefinitely and may be utilized to reduce regular tax liability to an amount equal to AMT liability. Due to a change in control, provisions of the Internal Revenue Code limit the annual future ITC carryforward and AMT credit carryforward utilization to approximately $300,000 per year. F - 18 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes, continued ------------ The Company has established a valuation allowance for deferred taxes due to the uncertainty that the full amount of the ITC carryforward will be utilized prior to expiration. The valuation allowance was reduced in fiscal 1998 and fiscal 1997 to reflect the utilization of ITC carryforward for which the valuation allowance had previously been provided (approximately $300,000 in each fiscal year). In addition, the valuation allowance was reduced by an additional $300,000 in fiscal 1998 to reflect a reduction in uncertainty about the utilization of ITC carryforward in future years. The reductions in the valuation allowance for fiscal years 1998 and 1997 were recorded in the respective fiscal fourth quarter and resulted in income tax benefits of $464,000 and $227,000, respectively. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining net deferred tax assets. 12. Preferred Stock and Earnings Per Common Share --------------------------------------------- PREFERRED STOCK The Company has authority to issue 2,500,000 shares of preferred stock at $0.008 par value. At May 31, 1998, no shares of preferred stock had been issued. EARNINGS PER COMMON SHARE The following is a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share for the years ended May 31: 1998 1997 1996 --------- --------- --------- Weighted average number of common shares - basic 5,117,000 5,004,000 4,987,000 Common stock options (utilizing treasury stock method) 332,000 399,000 199,000 --------- --------- --------- Weighted average number of common shares-assuming dilution 5,449,000 5,403,000 5,186,000 ========= ========= ========= Common stock options totaling 293,500 were not included in the diluted earnings per share calculation for the year ended May 31, 1998 because their effect would have been anti-dilutive. 13. Stock Options ------------- The Company has a qualified incentive stock option plan whereby stock options may be granted to employees to purchase shares of the Company's common stock at prices equal to the market price of the Company's stock on date of grant. The Company has a non-qualified plan covering all directors except the CEO. Common stock received through the exercise of qualified incentive stock options which are sold by the optionee within eighteen months of grant or one year of exercise result in a tax deduction for the Company equivalent to the taxable gain recognized by the optionee. Effective on May 31, 1996, the Company purchased 401,000 outstanding options issued to current employees at a cost to the Company of $557,000, which was equal to the difference of $2.45 and the exercise price of each option purchased. The cost was included in operating and other expenses in the accompanying consolidated statements of income for the fiscal year ended May 31, 1996. F - 19 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Stock Options, continued ------------- During July 1996, the Company purchased 104,000 outstanding options issued to non-employees at a cost to the Company of $138,000, which was equal to the difference of $2.45 and the exercise price of each option purchased. The cost was reflected as a charge to additional paid-in capital in the accompanying May 31, 1997 consolidated balance sheets. Options generally become exercisable over a four-year period and have a term of ten years. The Company applies APB Opinion No. 25 in accounting for its stock option plans. Accordingly, and since the Company awards stock options at fair market value, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value of options at the grant date under SFAS No. 123, the Company's net income and earnings per common and dilutive common equivalent share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------------ --------- --------- Net income As Reported $ 1,520,000 $ 733,000 $ 604,000 Pro forma $ 1,261,000 $ 667,000 $ 576,000 Basic earnings per share As Reported $ 0.30 $ 0.15 $ 0.12 Pro forma $ 0.25 $ 0.13 $ 0.12 Earnings per share assuming dilution As Reported $ 0.28 $ 0.14 $ 0.12 Pro forma $ 0.23 $ 0.12 $ 0.11
For purposes of calculating the compensation cost in accordance with SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996, respectively: no dividend yield; expected volatility of 142%, 111% and 164%; risk free interest rates of 5.62%, 6.58% and 6.40%; and expected lives of five years. Additional information on shares subject to options is as follows:
1998 1997 1996 ---------------------- ------------------------ -------------------------- Weighted- Weighted- Weighted- Number average Number average Number average of Exercise of Exercise of Exercise Options Price Options Price Options Price -------- ----------- ---------- ----------- ---------- ----------- Outstanding at beginning of year 649,000 $ 1.47 693,000 $ 1.23 1,047,000 $ 1.10 Granted 349,000 3.99 90,000 2.88 130,000 1.62 Exercised (112,000) 1.18 (19,000) .81 (32,000) .94 Purchased - - (104,000) 1.13 (401,000) .94 Forfeited (5,000) 2.97 (11,000) 2.10 (51,000) 1.24 --------- --------- ----------- Outstanding at the end of the year 881,000 2.50 649,000 1.47 693,000 1.23 ========= ========= =========== Options exercisable at year-end 542,000 606,000 641,000 Weighted-average fair value of options granted during the year $ 3.60 $ 2.35 $ 1.53
F - 20 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Stock Options, continued ------------- The following table summarizes information about stock options outstanding at May 31, 1998: Options Outstanding Options Exercisable --------------------------------- -------------------- Weighted- average Weighted- Weighted- Number Remaining average Number average Range of of Contractual Exercise of Exercise Exercise Prices Options Life Price Options Price --------------- ------- ----------- --------- ------- --------- $ 0.01 - $ 1.00 71,000 3.5 years $ 0.73 71,000 $ 0.73 $ 1.01 - $ 2.00 334,000 3.8 years 1.26 334,000 1.26 $ 2.01 - $ 3.00 127,000 7.1 years 2.65 97,000 2.54 $ 3.01 - $ 4.00 55,000 9.0 years 3.25 40,000 3.25 $ 4.01 - $ 5.00 294,000 9.9 years 4.13 - - ------- ------- 881,000 6.6 years 2.50 542,000 1.57 ======= ======= 14. Employee Benefit Plan --------------------- The Company has a defined contribution retirement plan whereby employees who have completed six months of service may contribute up to 15% of their annual salaries. The Company will match 50% of non-highly compensated employees contributions subject to a maximum of the lesser of (i) 4% of the employee's eligible compensation or (ii) $1,000. The Company contributed approximately $45,000 for the years ended May 31, 1998, 1997 and 1996, respectively. 15. Quarterly Financial Data (unaudited) ------------------------------------ The following information has not been reviewed by the Company's independent auditors. Summarized quarterly financial data for the years ended May 31, 1998 and 1997 are (in thousands, except per share data): Fiscal Year 1998: Total Revenue Net Income Basic Income Per Share ----------------- ------------- ---------- ---------------------- First quarter $ 42,038 $ 141 $ .03 Second quarter 73,239 735 .15 Third quarter 82,309 515 .10 Fourth quarter 83,488 129 .03 Fiscal Year 1997: Total Revenue Net Income Basic Income Per Share ----------------- ------------- ---------- ---------------------- First quarter $ 36,967 $ 138 $ .03 Second quarter 69,611 246 .05 Third quarter 74,002 298 .06 Fourth quarter 46,954 51 .01 F - 21 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Legal Proceedings ----------------- The Company is involved in the following legal proceedings: a. The Company was involved in certain arbitration proceedings pursuant to the requirements of the National Association of Securities Dealers ("NASD"), representing three claims against CAI Securities Corporation, a wholly owned subsidiary of the Company. All three claims alleged breach of fiduciary duty, breach of contract, negligence and misrepresentation with regard to the sale of limited partnership units in Leastec Income Fund V ("LIFV"), a limited partnership whose general partner is a wholly owned subsidiary of the Company. The three claims involved investments in LIFV of approximately $625,000 and sought damages of $838,000 and special punitive and exemplary damages (one claim specified $1,500,000 in such damages while the other two claims did not specify an amount). All three claims were brought by the same company on behalf of three investors. Management believed that it had good and substantial defenses against these claims and that the Company's subsidiary would prevail. In July 1997, one of the cases, seeking $500,000 in damages and $1,500,000 in punitive damages, was heard by an NASD arbitration panel and that arbitration panel has now determined that there was no breach of fiduciary duty, no breach of contract, no negligence and no misrepresentation with regard to the sale of limited partnership units of LIFV and the subsequent financial reporting thereof and that no award is due the claimant under any of his claims. The claimant was assessed $7,300 in forum fees by the NASD for the arbitration proceeding. In June 1998, the second of these claims, which alleged the same claims and sought $176,000 in compensatory damages and an unspecified amount in punitive damages, was heard and the arbitration panel again found for the Company's subsidiary, so that no award was due to the Claimants under any of their claims. The claimants were assessed $8,100 in forum fees by the NASD for the arbitration proceeding. Also in June 1998, shortly after the decision in the second case, the Company's subsidiary obtained a settlement of the third case by payment to the claimant's representative of a de minimus settlement amount which the Company believes was less than travel costs which would have been incurred related to the arbitration hearing. b. The Company is involved in other routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Company. 17. Commitments ----------- The Company leases office space under long-term and short-term non-cancelable operating leases. The leases contain renewal options and provide for annual escalation for utilities, taxes and service costs. Rent expense was $650,000, $502,000, and $425,000 for fiscal years 1998, 1997 and 1996, respectively. Minimum future rental payments required by such leases are as follows (in thousands): Years Ending May 31, 1999 $ 592 2000 445 2001 447 ------- $ 1,484 ======= F - 22 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Disclosures about Fair Value of Financial Instruments ----------------------------------------------------- The following disclosure of the estimated fair value of financial instruments was made in accordance with Statements of Financial Standards No. 107 ("SFAS No. 107"), Disclosures about Fair Value of Financial Instruments. SFAS No. 107 specifically excludes certain items from its disclosure requirements such as the Company's investment in leased assets. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the net assets of the Company. The carrying amounts at May 31, 1998 for cash and cash equivalents, accounts receivable, recourse bank debt, accounts payable-equipment purchases and accounts payable and other liabilities approximate their fair values due to the short maturity of these instruments, or because the related interest rates approximate current market rates. As of May 31, 1998, discounted lease rentals and discounted lease rentals assigned to lenders arising from equipment sale transactions of $104,311,000 and $37,626,000, respectively, have fair values of $109,240,000 and $42,555,000, respectively. The fair values were estimated utilizing market rates of comparable debt having similar maturities and credit quality as of May 31, 1998. 19. Year 2000 Issues ---------------- The Company has conducted a comprehensive review of its computer systems to identify systems that could be affected by the Year 2000 issue. The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. Certain computer programs which have time-sensitive software could recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failures or miscalculations. Certain of the Company's software have already been updated to software which correctly accounts for the Year 2000. In addition, the Company is engaged in a system conversion, whereby the Company's main lease tracking and accounting software is being replaced with new systems which will account for the Year 2000 correctly. The Company does not expect any other changes required for the Year 2000 to have a material effect on its financial position or results of operations. In addition, the Company does not expect any Year 2000 issues relating to its customers and vendors will have a material effect on its financial position or results of operations. The Company expensed all amounts related to its review of the Year 2000 issue. Amounts expended to date to address the Year 2000 issue have been immaterial. F - 23 INDEPENDENT AUDITORS' REPORT The Stockholders and Directors Capital Associates, Inc.: Under date of July 14, 1998, we reported on the consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of May 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended May 31, 1998, as contained in the Company's annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP /s/KPMG Peat Marwick LLP ------------------------ Denver, Colorado July 14, 1998 F - 24 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES for the Years Ended May 31, 1998, 1997 and 1996 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- ---------- ------------- ---------- Balance at Charged to Balance Beginning Costs and at End of Description of Period Expenses Deductions Period ----------- ---------- ---------- ------------- ---------- Year ended May 31, 1998: Allowance for doubtful accounts: - - accounts receivable $ 30 $ 60 $ - $ 90 Allowance for losses: - - residual values arising from equipment under lease sold to private investors 157 - (93) 64 - - leased equipment 707 645 (765) 587 ------- ----- -------- ------- $ 894 $ 705 $ (858) $ 741 ======= ===== ======== ======= Year ended May 31, 1997: Allowance for doubtful accounts: - - accounts receivable $ 44 $ - $ (14) $ 30 Allowance for losses: - - residual values arising from equipment under lease sold to private investors 258 - (101) 157 - - leased equipment 1,120 365 (778) 707 ------- ----- -------- -------- $ 1,422 $ 365 $ (893) $ 894 ======= ===== ======== ======== Year ended May 31, 1996: Allowance for doubtful accounts: - - accounts receivable $ 48 $ - $ (4) $ 44 Allowance for losses: - - residual values arising from equipment under lease sold to private investors 1,654 524 (1,920) 258 - - leased equipment 2,416 (94) (1,202) 1,120 ------- ----- -------- ------- $ 4,118 $ 430 $ (3,126) $ 1,422 ======= ===== ======== ======= Principally charge-offs of assets against the established allowances. Includes $750,000 recovery from litigation settlement.
See accompanying independent auditors' report. F - 25 EX-10.60 2 4Q98CAI.001 EXHIBIT 10.60 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ---------------------------------------------- This First Amendment to Loan and Security Agreement ("Amendment") entered into as of April 7, 1998, by and among CAPITAL ASSOCIATES, INC. and CAPITAL ASSOCIATES INTERNATIONAL, INC. (each a Borrower and collectively "Borrowers"), CORESTATES BANK, N.A., a national banking corporation, in its capacity as agent ("Agent") and as lender and each of the lenders listed on the signature pages hereof and the First Amended Schedule A attached to the Loan Agreement, in their capacity as lenders (singly, each is a "Lender" and collectively, all are "Lenders"). BACKGROUND ---------- A. On or about November 26, 1997, Borrowers, Agent and Lenders entered into a certain Loan and Security Agreement ("Loan Agreement") pursuant to which Lenders agreed to make advances to Borrowers up to a maximum aggregate amount of $60,000,000, evidenced by Borrowers' delivery of certain Notes to Lenders. B. Borrowers have requested that Lenders and Agent amend the Loan Agreement pursuant to the terms hereof and Agent and Lenders have agreed to do so subject to the terms hereof. C. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. NOW, THEREFORE, with the foregoing background incorporated by reference, the parties hereto, intending to be legally bound, hereby agree as follows: 1. AMENDMENT TO LOAN AGREEMENT: a. Section 1.1 of the Loan Agreement is hereby amended by deleting the definition of "Senior Management Team" in its entirety and replacing it with the following: SENIOR MANAGEMENT TEAM - Richard Abernethy, Anthony DiPaolo and Jack Olmstead. b. Section 7.11 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: 7.11 CHANGE OF MANAGEMENT: Borrower shall not at any time permit two current members of Borrowers' Senior Management Team to cease to be involved in the day to day operations of the Borrowers. 2. Each Surety, parties to a certain Surety Agreement dated as of November 27, 1997 in favor of Agent for the benefit of the Lenders, by execution hereof in their capacity as Sureties, hereby consent to the amendments set forth in this Amendment, and acknowledge that the Surety Agreement remains in full force and effect and that each remain, jointly and severally liable for Obligations of Borrowers to Lenders. 3. a. Borrowers represent and warrant that as of the date hereof no Event of Default or Unmatured Event of Default has occurred or is existing under the Loan Documents. b. The execution and delivery by each Borrower of this Amendment and performance by it of the transactions herein contemplated (i) are and will be within its powers, (ii) have been authorized by all necessary corporate action, and (iii) are not and will not be in contravention of any 2 order of any court or other agency of government, of law or any other indenture, agreement or undertaking to which such Borrower is a party or by which the Property of such Borrower is bound, or be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or undertaking or result in the imposition of any lien, charge or encumbrance of any nature on any of the properties of such Borrower. c. This Amendment and each other agreement, instrument or document executed and/or delivered in connection herewith, shall be valid, binding and enforceable in accordance with its respective terms. 4. This Amendment shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 5. Except as expressly provided herein, all terms and conditions of the Loan Documents remain in full force and effect, unless such terms or conditions are no longer applicable by their terms. To the extent the provisions of this Amendment are expressly inconsistent with the provisions of the Loan Documents, the provisions of this Amendment shall control. 6. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute one and the same respective agreement. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the day and year first above written. BORROWERS: CAPITAL ASSOCIATES, INC. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No. 84-1055327 CAPITAL ASSOCIATES INTERNATIONAL, INC. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No. 84-0724694 AGENT: CORESTATES BANK, N.A. By: /s/Hugh W. Connelly ---------------------------------- Title: Vice President 4 LENDERS: CORESTATES BANK, N.A., as Lender and Issuing Bank By: /s/Hugh W. Connelly ---------------------------------- Title: Vice President NORWEST BANK COLORADO, N.A. By: /s/Carol A. Ward ---------------------------------- Title: Vice President BANKBOSTON, N.A. By: /s/Dierdre M. Holland ---------------------------------- Title: Vice President EUROPEAN AMERICAN BANK By: /s/Christopher M. Czaja ---------------------------------- Title: Vice President U.S. BANK NATIONAL ASSOCIATION, D/B/A COLORADO NATIONAL BANK By: /s/Ralph P. Atkinson ---------------------------------- Title: Vice President 5 SURETIES: CAI EQUIPMENT LEASING II CORP. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1133179 CAI EQUIPMENT LEASING III CORP. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1184608 CAI EQUIPMENT LEASING IV CORP. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1248788 CAI EQUIPMENT LEASING V CORP. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1348277 6 CAI PARTNERS MANAGEMENT COMPANY By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1066243 CAPITAL EQUIPMENT CORPORATION By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-0913965 CAI EQUIPMENT LEASING VI CORP. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1435874 CAI LEASE SECURITIZATION I CORP. By: /s/Anthony M. DiPaolo ---------------------------------- Title: President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1250490 CAI LEASING CANADA, LTD. By: /s/Anthony M. DiPaolo ---------------------------------- Title: President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1150068 7 CAPITAL ASSOCIATES INTERNATIONAL de MEXICO S. de R.L. de C.V. By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: N/A WHITEWOOD EQUIPMENT CORPORATION f/k/a WHITEWOOD CREDIT CORPORATION By: /s/Anthony M. DiPaolo ---------------------------------- Title: President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1032253 CAI SECURITIES CORPORATION By: /s/Anthony M. DiPaolo ---------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------ (Corporate Seal) Fed. Tax ID No.: 68-0002657 8 EX-10.61 3 4Q98CAI.001 EXHIBIT 10.61 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement") is made as of the 7th day of April, 1998, in Lakewood, Colorado, by and between CAPITAL ASSOCIATES, INC., a Delaware corporation and CAPITAL ASSOCIATES INTERNATIONAL, INC., a Colorado corporation (hereinafter collectively referred to as the "Corporations"), and James D. Walker (hereinafter referred to as "Mr. Walker"). 1. EMPLOYMENT. The Corporations hereby employ Mr. Walker and Mr. Walker hereby accepts employment with the Corporations upon the terms and conditions hereinafter set forth. 2. TERM. Subject to the provisions set forth in SECTION 6 of this Agreement, the original term of this Agreement shall commence on the 7th day of April, 1998 and continue to the end of the Corporations' fiscal year, May 31, 2001, Thereafter, the Term of this Agreement shall be automatically renewed for successive one (1) year periods unless prior written notice to the contrary is given by the Corporations or Mr. Walker to the other on or before sixty (60) days prior to the expiration of the original Term hereof or each such successive one (1) year renewed Term(s), as the case may be. 3. DUTIES. a. OFFICES. Mr. Walker is engaged as President and Chief Executive Officer of the Corporations, which is in addition to his existing offices as Director and Chairman of the Board of the Corporations, with the powers, authority, duties and responsibilities specified at any time and from time to time by a majority of the Board and as set forth in the Bylaws of the Corporations. Mr. Walker also agrees to perform such other executive services as shall from time to time be reasonably assigned to him by the Boards of Directors of the Corporations ("Boards"). b. EXTENT OF SERVICE. Mr. Walker shall diligently devote his business time, attention and energies to the performance of his duties under this Agreement and shall exert his best efforts in furtherance of the business of the Corporations; provided, however, that it is hereby acknowledged by the Corporations that Mr. Walker continues his employment with MCC Financial Corporation ("MCC"), which holds approximately 57% of the common stock of Capital Associates, Inc. Mr. Walker will continue to devote a portion of his business time toward his duties and obligations at MCC. In the event any issues or actions occur that present an apparent conflict of interest between the Corporations and MCC, Mr. Walker hereby agrees to remove himself so as to permit others with no such conflicting relationship to resolve such issues or actions or, in the alternative, represent only the Corporations in such matters. Mr. Walker also agrees to exert his best efforts to preserve for the benefit of the Corporations the good will of the Corporations' clients and those who may have business relations with it. 1 4. COMPENSATION. a. BASE SALARY DURING EMPLOYMENT. Commencing on the Effective Date, Mr. Walker's base salary shall be $ 325,000.00 per year on an annualized basis ("Base Salary"), subject to increase at any time during the Term of this Agreement by the Compensation Committee of the Boards (the "Compensation Committee"), in its sole and absolute discretion. In determining whether an increase in the Base Salary is appropriate at any time during the Term of this Agreement, the Compensation Committee shall consider, among other things, (a) profitability of the Corporations, (b) the market value of Capital Associates, Inc. common stock as reflected from time to time on the NASDAQ NMS, and (c) such other factors as the Compensation Committee deems appropriate, in its sole and absolute discretion. Base Salary shall be payable in accordance with the Corporations' prevailing payroll policies. b. INCENTIVE COMPENSATION. In addition, to compensate Mr. Walker for his contributions to the overall success of the Corporations as reflected in their earnings and in enhanced value to stockholders, and to the extent that the Corporations reach the goals in the Business Plan for each fiscal year, incentive compensation will be in such form and amount as the Compensation Committee of the Board shall determine, in its sole discretion. For each of the fiscal years covered by the Term of this Agreement, Mr. Walker will be entitled to receive a bonus payment of 4% (the "Base Incentive Payment Percentage") of the Corporations's pre-tax earnings for each such fiscal year (the "Base Incentive Payment"). The Base Incentive Payment will be adjusted either up or down by adjusting the Base Incentive Payment Percentage in an amount equal to the percentage change in the average closing price of the Corporations's stock for the last four months of the applicable fiscal year as compared to the same period in the prior fiscal year; provided, however, that in no event shall the Base Incentive Payment Percentage be adjusted lower than 3% or higher than 6%. The timing of the payment of the Base Incentive Payment shall be the same as similar payments made to other employees of the Corporations. For the Corporations' fiscal year ending May 31, 1998, the Base Incentive Payment shall be pro-rated to cover the portion of the fiscal year Mr. Walker serves as President and Chief Executive Officer, April 7, 1998 through May 31, 1998. c. STOCK OPTION. Pursuant to a stock option agreement in the form attached as EXHIBIT A to this Agreement and incorporated herein by this reference, Mr. Walker will be granted, on and as of the commencement of each of the Corporations fiscal years during the Term hereof, an option (the "Stock Option") under the Corporations 1996 Stock Option Plan, to purchase up to 10,000 shares of common stock of the Capital Associates, Inc. ("Stock"), the terms and conditions of which are set forth in the Stock Option Agreement attached as EXHIBIT A hereto. This Stock Option commitment on the part of the Corporations will not be in lieu or preclude any other grants the Corporations may decide to provide Mr. Walker. d. DIRECTORS FEES. Mr. Walker, as Chairman of the Board, will continue to receive Directors Fees under and pursuant to the current policies of the Corporations for Director's compensation. 2 e. OTHER BENEFITS DURING EMPLOYMENT. Mr. Walker will continue to look to and participate in MCC's SEP/IRA plans and employee benefit programs for insurance (life, medical, dental, prescriptions, disability , etc.) which are offered to the employees of MCC. All of the benefits described in the preceding sentence shall be in accordance with current personnel policy. f. EXPENSES. Mr. Walker is authorized to incur reasonable expenses for promoting the business of the Corporations, including expenses for meals, travel, and other similar items. The Corporations shall reimburse the Mr. Walker for all such expenses upon the presentation by the Mr. Walker, from time to time, of an itemized accounting for such expenditures. g. SEVERANCE. Upon termination of his employment with the Corporations, Mr. Walker may be entitled to the severance benefits in accordance with SECTION 6.c., below. h. PERSONAL TIME. Mr. Walker shall be entitled to take two hundred sixteen (216) hours of paid personal time per year; provided, however, that the Mr. Walker shall not take more than two (2) consecutive weeks of personal time, unless due to illness, in any single instance. 5. O&D INSURANCE AND INDEMNIFICATION. Mr. Walker will be entitled to the same officer and director liability insurance and indemnification as other officers and directors of the Corporations for any period during which Mr. Walker served or serves in such capacities. The Corporations hereby agree to indemnify, protect, defend and hold Mr. Walker harmless to the fullest extent permitted by the Delaware and Colorado General Corporation Laws, as the same now exist or may hereafter be amended, with regard to the performance of his duties to the Corporations as Director, Chairman of the Board, President and Chief Executive Officer. 6. TERMINATION. a. DISABILITY. In the event that during the term of this Agreement, Mr. Walker shall become disabled by accident or by illness so as to be unable to perform the duties required of him/her under this Agreement for a period of ninety (90) consecutive days, then the Corporations may, at the expiration of such ninety (90) day period, suspend the Mr. Walker's services and the Corporations' obligation and duties under this Agreement for the continuing period of his disability by notice to him in writing and, if the Mr. Walker does not resume the duties required of him/her within ninety (90) days of the date he first became so disabled, this Agreement and all of the rights, duties, and obligations hereunder shall terminate except that the restrictions imposed on Mr. Walker as set forth in SECTION 7 of this Agreement and the remedies available to the Corporations as set forth in such Sections shall remain in effect. b. "For Cause" Termination. Anything herein to the contrary notwithstanding, upon the happening of any one of the following events, the Corporations may terminate this Agreement by giving Mr. Walker written notice of 3 of such termination: (i) an act or omission of Mr. Walker constituting Cause (as defined below); or (ii) a violation by Mr. Walker of any of the provisions of SECTION 7. hereof. For the purpose of clause (i) of this SECTION 6.b., "Cause" shall mean (A) conviction in a court of law of any crime or offense involving money or other property of the Corporations or any of its affiliates, or (B) the determination by the Corporations, acting in good faith, that Mr. Walker has knowingly and willfully committed an offense described in clause (A) above or committed an act of fraud with respect to money or other property of the Corporations or an affiliate of the Corporations. Termination pursuant to this SECTION 6.b. shall be effective five (5) days after the date of such notice or as otherwise provided therein. The Corporations' right of termination pursuant to this SECTION 6.b. shall be in addition to the rights and remedies available to the Corporations at law or in equity and such rights and remedies shall survive termination of this Agreement. In the event of termination of this Agreement pursuant to this SECTION 6.b., Mr. Walker shall have no right to receive any compensation for any period subsequent to the date of such termination, except for any pro-rated or other amounts earned prior to such termination. c. TERMINATION OTHER THAN "FOR CAUSE." In the event of termination of this Agreement for any reason other than as set forth in SECTION 6.b., Mr. Walker shall be entitled to receive the greater of (i) three (3) times the annual Base Salary, or (ii) the Base Salary for the remainder of the Term, plus the pro-rated amount of the Incentive Compensation for the fiscal year in which such termination occurs. A "Change of Control" of the Corporations (as defined in the immediately following paragraph) shall be deemed a termination of Mr. Walker other than "for cause" for purposes of determining Mr. Walker's payment under SECTION 6.c., and Mr. Walker's Stock Options shall immediately vest upon such Change of Control. However, Mr. Walker may choose not to exercise his Stock Option in full in connection with the Change of Control, if the Surviving Corporation issues/grants replacement stock options to acquire shares of stock of the Surviving Corporation to Walker, having comparable value and substantially the same terms as Mr. Walker's Stock Option. A "Change of Control" shall be deemed to occur upon the happening of any of the following events: (i) the Board adopts a resolution to the effect that a change of control has occurred or is anticipated to occur and such change of control does in fact occur; (ii) any change of control of the Corporations of a nature that is required to be reported on Form 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (iii) individuals who then constitute the Board of the Capital Associates, Inc. cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of such directors on the Board prior to such election or nomination; (iv) the approval 4 by the stockholders of the Capital Associates, Inc. of any merger or consolidation of Capital Associates, Inc. with any other corporation or entity or the sale or other disposition of all or substantially all the assets of the Corporations to any other person, corporation or entity (such other corporation or entity in the case of a merger, consolidation or sale of all or substantially all of the assets of the Corporations being referred to herein as the "Surviving Corporation"), and (v) any person (within the meaning of Section 13(d) of the Exchange Act), other than MCC, becomes the beneficial owner (directly or indirectly) of securities of the Corporations representing 50% or more of the combined voting power of the Corporations's then outstanding securities entitled to vote generally in the election of directors. d. VOLUNTARY TERMINATION BY MR. WALKER. In the event Mr. Walker voluntarily terminates his employment with the Corporations during the Term of this Agreement, Mr. Walker shall receive no severance payments. e. EXPENSE REIMBURSEMENT. In the event Mr. Walker's employment is terminated (without regard to the reason for such termination), Mr. Walker will be reimbursed for reasonable expenses, including travel and entertainment expenses, incurred by him on behalf of the Corporations while he was an employee of the Corporations and for which he submits to the Corporations properly completed expense report/reimbursement forms on or before the 15th business day following his termination date. f. OTHER PAYMENTS. In the event Mr. Walker is terminated by the Corporations other than "for cause" (or is treated as if terminated other than "for cause") during the Term of this Agreement, Mr. Walker shall receive the following termination benefits from the Corporations, in addition to the termination payments referenced in SECTION 2, above: (i) The Corporations agree to pay to MCC all costs necessary to maintain in full force and effect the SEP/IRA plans and all medical, health and other similar insurance on behalf of Mr. Walker and his immediate family, on the terms and conditions in effect for Mr. Walker on the Termination Date for the period for which Mr. Walker receives severance payments as set forth in SECTION 6. c., above and COBRA benefits thereafter commencing on the first anniversary date of his termination date. (ii) The Corporations will pay to Mr. Walker his share of any bonuses declared by the Compensation Committee, prorated based upon the aggregate dollar amounts of the bonus and Mr. Walker's employment for the portion of the year prior to his termination date; provided, however, that Mr. Walker acknowledges that nothing contained herein shall obligate the Compensation Committee to declare any such bonus or give Mr. Walker a legal right to enforce the declaration of such bonus. 7. NON-DISCLOSURE AND NON-USE OF CONFIDENTIAL INFORMATION. Except as set forth below, Mr. Walker agrees that all Confidential Information (as defined below) and all physical embodiments thereof are confidential to the Corporations. Mr. Walker agrees that he will not at any time, directly or indirectly, use, 5 disclose or make available to any person, concern or entity any Confidential Information, except with the prior written consent of the Corporations or as may be required by law. "Confidential Information" shall be broadly defined to include any and all data and information relating to the business of the Corporations, including without limitation: (i) information and material relating to lessee and investor relations; (ii) lease and financing documentation; (iii) financial and accounting affairs of the Corporations; (iv) business agreements with vendors and lenders; (v) pricing information; (vi) customer lists; (vii) business plans and strategies; (viii) any and all information relating to present or proposed Corporations' debt or equity products; (ix) marketing plans and data; (x) trade secrets; and (xi) any other information that Mr. Walker knows or should know is treated as confidential by the Corporations. "Confidential Information" shall not include any data or information that has been voluntarily disclosed to the public by the Corporations or that otherwise enters the public domain by lawful means. 8. AGREEMENT NOT TO SOLICIT EMPLOYEES OR OTHERS. Mr. Walker agrees that, through and including the third annual anniversary of his Termination Date, he will not, directly or indirectly, (i) solicit, induce, interfere with or hire away, or assist any third party in soliciting, diverting, interfering with or hiring away any part-time or full-time employee of the Corporations, whether or not such employment is pursuant to a written agreement, is for a specified term or is "at will," (ii) induce or attempt to induce any customer, to cease doing business with the Corporations, or in any way interfere with the relationship between any such party and the Corporations, and (iii) retain as an employee any former part-time or full-time employee of the Corporations within six months following such employee's termination of employment with the Corporations. 9. AGREEMENT INCLUSIVE. This Agreement supersedes any and all consulting, employment or other agreements, whether written or oral by and between the Mr. Walker and the Corporations and any and all such prior Agreements are hereby canceled effective as at the date of this Agreement. 10. BENEFIT. This Agreement shall inure to the benefit of and be binding upon the Corporations, its successors and assigns, including, but not limited to, (i) any corporation(s) which may acquire all or substantially all of Corporations' assets and business, (ii) any corporation(s) with or into which the Corporations may be consolidated or merged; (iii) any corporation(s) that is the successor corporation(s) in a share exchange, and Mr. Walker's heirs, guardians and personal and legal representatives. Mr. Walker may assign any of his financial or monetary rights under this Agreement to an immediate family member (i.e., wife or children). Mr. Walker may not assign any of his rights under this Agreement to anyone other than a family member or any of his obligations under this Agreement, without the prior written consent of the Board. The Corporations may not assign any of its rights or obligations under this Agreement without the prior written consent of Mr. Walker. 6 11. REMEDIES. The Corporations and Mr. Walker will be entitled to enforce their respective rights under this Agreement, specifically to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights to which they may be entitled. The Corporations and Mr. Walker agree that monetary damages may not be an adequate remedy for breach of the provisions of this Agreement and that either of them may, in their sole discretion, apply to any court for specific performance and/or injunctive relief in order to enforce or prevent violations of this Agreement. 12. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 13. GOVERNING LAW. This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of Colorado. 14. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties, and may be amended, waived, changed, modified, extended or rescinded only by a writing signed by the party against whom any such amendment, waiver, change, modification, extension or rescission is sought. 15. NOTICES. All notices and communications hereunder shall be in writing and shall be deemed given upon personal delivery or three (3) days after deposit with the U. S. Postal Service, postage prepaid, by registered or certified mail, return receipt requested, and, if intended for the Corporations, shall be addressed to the attention of the Legal Department, Capital Associates, Inc., at 7175 West Jefferson Avenue - Suite 4000, Lakewood, Colorado 80235, or at such other address of which the Corporations shall have given notice to the Mr. Walker in the manner herein provided, and if intended for the Mr. Walker, shall be addressed to him at 7175 West Jefferson Avenue Suite 4000, Lakewood, Colorado 80235 or at such other address of which the Mr. Walker shall have given notice to the Corporations in the manner herein provided. 16. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 7 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. IN WITNESS WHEREOF, the parties hereto have set their hands as of the date first above written. "CORPORATIONS" Capital Associates, Inc., a Delaware corporation By: /s/Anthony M. DiPaolo ---------------------------- Name: Anthony M. DiPaolo ---------------------------- Its: Senior Vice President ---------------------------- Capital Associates International, Inc., a Colorado corporation By: /s/Anthony M. DiPaolo ---------------------------- Name: Anthony M. DiPaolo ---------------------------- Its: Senior Vice President ---------------------------- "MR. WALKER" /s/James D. Walker ---------------------------- James D. Walker The foregoing agreement and been reviewed and approved by the Special Committee of Non-Employee Directors of the Corporations this 12th day of May, 1998 /s/James D. Edwards - --------------------------- James D. Edwards, Chairman 8 EXHIBIT A TO EMPLOYMENT AGREEMENT DATED AS OF APRIL 7, 1998 BY AND BETWEEN CAPITAL ASSOCIATES, INC. AND CAPITAL ASSOCIATES INTERNATIONAL, INC. (THE "CORPORATIONS") AND JAMES D. WALKER ("MR. WALKER") STOCK OPTIONS. During the term of this Agreement, Mr. walker shall be entitled to the following stock option grants under the 1996 Stock Option Plan of Capital Associates, Inc. or any replacements or substitutions thereof (the "Plan"). The Plan is for the benefit of the Employees of the Corporations and due to the special capacity of Mr. Walker in and to the Corporations and to make Mr. Walker's transition to an employee of the Corporations equitable, the following grants and vesting are hereby agreed to by the Corporations: 1. AUTOMATIC ANNUAL OPTION GRANTS. During the term of this Agreement, Mr. Walker, who is serving as a member of the Board of Directors of the Corporations (the "Board") shall automatically be granted on the first day of each of the Corporations' fiscal years (the "Grant Date"), an option to purchase 5,000 Shares of the common stock of Capital Associates, Inc., par value $.008 per share. 2. EXECUTIVE COMMITTEE ANNUAL OPTION GRANTS. In addition, Mr. Walker, who is serving as member of the Executive Committee shall automatically be granted on each Grant Date an additional option to purchase 5,000 Shares. 3. VESTING. No portion of any option granted under the Plan during any fiscal year of the Corporations shall be exercisable and vest, in whole or in part, prior to the close of business on the last day of such fiscal year. 4. INCORPORATION OF THE PLAN. All others terms, conditions and provisions of the Plan are hereby incorporated by this reference. EX-10.62 4 4Q98CAI.001 EXHIBIT 10.62 BUSINESS FINANCING AGREEMENT This Business Financing Agreement ("Agreement") is made as of April 21, 1998 between DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS") and CAPITAL ASSOCIATES TECHNOLOGY GROUP, INC., A Corporation ("Dealer"), having a principal place of business located at 2236 Washington Blvd., Ogden, UT 84401 - -------------------------------------------------------------------------------- 1. DEFINITIONS ----------- 1.1 SPECIAL DEFINITIONS. The following terms will have the following meanings in this Agreement, Agreement for Wholesale Financing and in the Other Agreements: "ACCOUNTS": all accounts, leases, contract rights, chattel paper, choses in action and instruments, including any lien or other security interest that secures or may secure any of the foregoing, plus all books, invoices, documents and other records in any form evidencing or relating to any of the foregoing, now owned or hereafter acquired by Dealer. "ACCOUNTS RECEIVABLE FACILITY": a credit facility extended pursuant to this Agreement. "AGREEMENT FOR WHOLESALE FINANCING": any Agreement for Wholesale Financing, as amended from time to time, which Dealer has executed in conjunction with inventory financing extended by DFS. "AVERAGE CONTRACT BALANCE": the amount determined by dividing: (a) the sum of the Daily Contract Balances (as defined in SECTION 2.1.1) for a billing period; by, (b) the actual number of days in such billing period. "DEFAULT": the events or occurrences enumerated in SECTION 6. "ENTITY": any individual, association, firm, corporation, partnership, limited liability company, trust, governmental body, agency or instrumentality whatsoever. "GUARANTOR": a guarantor of any of the Obligations. "INVENTORY": all of Dealer's presently owned and hereafter acquired goods which are held for sale or lease. "OBLIGATIONS": all liabilities and indebtedness now or hereafter arising, owing, due or payable from Dealer to DFS (and any of its subsidiaries and affiliates), including any third party claims against Dealer satisfied or acquired by DFS, whether primary or secondary, joint or several, direct, contingent, fixed or otherwise, and whether or not evidenced by instruments or evidences of indebtedness, and all covenants, agreements (including consent to binding arbitration), warranties, duties and representations, whether such Obligations arise under this Agreement, the Other Agreements or any other agreements previously, now or hereafter executed by Dealer and delivered to DFS or by operation of law. "OTHER AGREEMENTS": all security agreements (including the Agreement for Wholesale Financing), mortgages, leases, instruments, documents, guarantees, schedules, certificates, contracts and similar agreements heretofore, now or hereafter executed by Dealer and delivered to DFS or delivered by or on behalf of Dealer to a third party and assigned to DFS by operation of law or otherwise. "PRIME RATE": the rate of interest which Chase Manhattan Bank publicly announces from time to time as its prime rate or reference rate; provided, however, that for purposes of this Agreement, the interest rate charged to Dealer will at no time be computed on a Prime Rate of less than Six percent ( 6% per annum. The Prime Rate will change and take effect for purposes of this Agreement on the day that Chase Manhattan Bank announces any change in its Prime Rate or reference rate. AR000010 8/97 1 2. CREDIT FACILITY/INTEREST RATES/FEES ----------------------------------- 2.1 ACCOUNTS RECEIVABLE FACILITY. Subject to the terms of this Agreement, DFS agrees to provide to Dealer an Accounts Receivable Facility of Six Million DOLLARS ($ 6,000,000.00). DFS will not be obligated to advance funds if a Default has occurred hereunder. 2.1.1 INTEREST. Dealer agrees to pay interest to DFS on the Daily Contract Balance at a rate equal to the Prime Rate plus one half of one percent ( .50% %) per annum. Such interest will: (i) be computed based on a 360 day year; (ii) be calculated each day by multiplying the Daily Rate (as defined below) by the Daily Contract Balance (as defined below); and (iii) accrue from the date that DFS authorizes any Electronic Transfer (as defined in SECTION 3.10 herein) or otherwise makes an advance under the Accounts Receivable Facility until DFS receives the full and final payment of the principal debt which Dealer owes to DFS, subject to the terms of SECTION 3.8 herein. The "Daily Rate" is the quotient of the applicable annual rate provided herein divided by 360. The "Daily Contract Balance" is the amount of the outstanding principal debt which Dealer owes to DFS on the Accounts Receivable Facility at the end of each day (including the amount of all Electronic Transfers authorized) after DFS has credited the payments which it has received on the Accounts Receivable Facility, subject to the terms of SECTION 3.8 herein. 2.1.2 FEES. Dealer agrees to pay to DFS an advance fee equal to zero percent ( 0%) on each advance to Dealer under the Accounts Receivable Facility. 2.1.3 MAXIMUM INTEREST. Dealer acknowledges that DFS intends to strictly conform to the applicable usury laws governing this Agreement. Regardless of any provision contained herein or in any other document executed or delivered in connection herewith or therewith, DFS shall never be deemed to have contracted for, charged or be entitled to receive, collect or apply as interest on this Agreement (whether termed interest herein or deemed to be interest by judicial determination or operation of law), any amount in excess of the maximum amount allowed by applicable law, and, if DFS ever receives, collects or applies as interest any such excess, such amount which would be excessive interest will be applied first to the reduction of the unpaid principal balances of advances under this Agreement, and, second, any remaining excess will be paid to Dealer. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Dealer and DFS shall, to the maximum extent permitted under applicable law: (a) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest; (b) exclude voluntary pre-payments and the effect thereof; and (c) spread the total amount of interest throughout the entire term of this Agreement so that the interest rate is uniform throughout such term. 2.2 PAYMENTS. DFS will send Dealer a monthly billing statement(s) identifying all charges due on Dealer's account with DFS. The interest and fee charges specified on each billing statement will be: (a) due and payable in full immediately on receipt, and (b) an account stated, unless DFS receives Dealer's written objection thereto within fifteen (15) days after it is mailed to Dealer. If DFS does not receive, by the 25th day of any given month, payment of all charges accrued to Dealer's account with DFS during the immediately preceding month, Dealer will (to the extent allowed by law) pay DFS a late fee ("Late Fee") equal to the greater of $5 or 5% of the amount of such finance charges (payment of the Late Fee does not waive the default caused by the late payment). Dealer will also pay DFS $100 for each of Dealer's checks returned unpaid for insufficient funds (an "NSF check") (such $100 payment repays DFS' estimated administrative costs; it does not waive the default caused by the NSF check). DFS may adjust the billing statement at any time to conform to applicable law and this Agreement. Dealer waives the right to direct the application of any payments hereafter received by DFS on account of the Obligations. DFS will have the continuing exclusive right to apply and reapply any and all such payments in such manner as DFS may deem advisable notwithstanding any entry by DFS upon its books and records. AR000010 8/97 2 2.3 ONE LOAN. DFS may combine all of DFS' advances to Dealer or on Dealer's behalf, whether under this Agreement or any Other Agreements, and whether provided by one or more of DFS' branch offices, together with all finance charges, fees and expenses related thereto, to make one debt owed by Dealer. 3. ACCOUNTS RECEIVABLE FACILITY - ADDITIONAL PROVISIONS ---------------------------------------------------- 3.1 SCHEDULES. Dealer will, no less than weekly or as otherwise agreed to, furnish DFS with a schedule of Accounts ("Schedule") which will: (a) describe all Accounts created or acquired by Dealer since the last Schedule furnished DFS; (b) inform DFS of any rejection of goods by any obligor, delays in delivery of goods, non-performance of contracts and of any assertion of any claim, offset or counterclaim by any obligor; and (c) inform DFS of any adverse information relating to the financial condition of any obligor. 3.2 AVAILABLE CREDIT. On receipt of each Schedule, DFS will credit Dealer with such amount as DFS may deem advisable up to eighty-five percent ( 85 %) of the net amount of the eligible Accounts listed in such Schedule. DFS will loan Dealer such amounts so credited or a part thereof as requested provided that at no time will such outstanding loans exceed Dealer's maximum Accounts Receivable Facility from time to time established by DFS. No loans need be made by DFS if the Dealer is in Default. 3.3 INELIGIBLE ACCOUNTS. DFS will have the sole right to determine eligibility of Accounts and, without limiting DFS' discretion in that regard, the following Accounts will be deemed ineligible: (a) Accounts created from the sale of goods and services on non-standard terms and/or that allow for payment to be made more than thirty (30) days from the date of sale; (b) Accounts unpaid more than ninety (90) days from date of invoice; (c) all Accounts of any obligor with fifty percent (50%) or more of the outstanding balance unpaid for more than ninety (90) days from the date of invoice; (d) Accounts for which the obligor is an officer, director, shareholder, partner, member, owner, employee, agent, parent, subsidiary, affiliate of, or is related to Dealer or has common shareholders, officers, directors, owners, partners or members; (e) consignment sales; (f) Accounts for which the payment is or may be conditional; (g) Accounts for which the obligor is not a commercial or institutional entity or is not a resident of the United States or Canada; (h) Accounts with respect to which any warranty or representation provided in SUBSECTION 3.4 is not true and correct; (i) Accounts which represent goods or services purchased for a personal, family or household purpose; (j) Accounts which represent goods used for demonstration purposes or loaned by the Dealer to another party; (k) Accounts which are progress payment, barter, or contra accounts; and (l) any and all other Accounts which DFS deems to be ineligible. If DFS determines that any Account is or becomes an ineligible Account, immediately upon notice thereof from DFS, Dealer will pay to DFS an amount equal to the monies loaned by DFS for such ineligible Account. 3.4 WARRANTIES AND REPRESENTATIONS. For each Account which Dealer lists on any Schedule, Dealer warrants and represents to DFS that at all times: (a) such Account is genuine; (b) such Account is not evidenced by a judgment or promissory note or similar instrument or agreement; (c) it represents an undisputed bona fide transaction completed in accordance with the terms of the invoices and purchase orders relating thereto; (d) the goods sold or services rendered which resulted in the creation of such Account have been delivered or rendered to and accepted by the obligor; (e) the amounts shown on the Schedules, Dealer's books and records and all invoices and statements delivered to DFS with respect thereto are owing to Dealer and are not contingent; (f) no payments have been or will be made thereon except payments turned over to DFS; (g) there are no offsets, counterclaims or disputes existing or asserted with respect thereto and Dealer has not made any agreement with any obligor for any deduction or discount of the sum payable thereunder except regular discounts allowed by Dealer in the ordinary course of its business for prompt payment; (h) there are no facts or events which in any way impair the validity or enforceability thereof or reduce the amount payable thereunder from the amount shown on the Schedules, Dealer's books and records and the invoices and statements delivered to DFS with respect thereto; (i) all persons acting on behalf of obligors thereon have the authority to bind the obligor; (j) the goods sold or transferred giving rise AR000010 8/97 3 thereto are not subject to any lien, claim, encumbrance or security interest which is superior to that of DFS; and (k) there are no proceedings or actions known to Dealer which are threatened or pending against any obligor thereon which might result in any material adverse change in such obligor's financial condition. 3.5 NOTES. Loans made pursuant to this Agreement need not be evidenced by promissory notes unless otherwise required by DFS in DFS' sole discretion. 3.6 CERTAIN CHARGES. Dealer will: (a) reimburse DFS for all charges made by banks, including charges for collection of checks and other items of payment, and (b) pay DFS' fees for transfers of funds to or from the Dealer; provided however, that Dealer will not pay for Wire Transfer fees. DFS may, from time to time, announce its fees for transfers of funds to or from the Dealer, including the issuance of Electronic Transfers. 3.7 COLLECTIONS. Unless otherwise directed by DFS, to expedite collection of Accounts for the benefit of DFS, Dealer shall notify all of its obligors to make payment of the Accounts to one or more lock-boxes under the sole control of DFS. The lock-box, and all accounts into which the proceeds of any such lock-box(es) are deposited, shall be established at banks selected by the Dealer and satisfactory to DFS in its sole discretion. Dealer shall issue to any such banks an irrevocable letter of instruction, in form and substance acceptable to DFS, directing such banks to deposit all payments or other remittances received in the lock-box to such account or accounts as DFS shall direct, for application against the outstanding balance of the Obligations. All funds deposited in the lock-box or any such account immediately shall become the property of DFS, and any disbursements of the proceeds in the lock-box or any such account will only be made to DFS. Dealer shall obtain the agreement of such banks to waive any offset rights against the funds so deposited. DFS assumes no responsibility for such lock-box arrangement, including, without limitation, any claim of accord and satisfaction or release with respect to deposits which any banks accept thereunder. All remittances which Dealer receives in payment of any Accounts, and the proceeds of any of the other Collateral, shall be: (i) kept separate and apart from Dealer's own funds so that they are capable of identification as DFS' property; (ii) held by Dealer as trustee of an express trust for DFS' benefit; and (iii) shall be immediately deposited in such accounts designated by DFS. All proceeds received or collected by DFS with respect to Accounts, and reserves and other property of Dealer in possession of DFS at any time or times hereafter, may be held by DFS without interest to Dealer until all Obligations are paid in full or applied by DFS on account of the Obligations. DFS may release to Dealer such portions of such reserves and proceeds as DFS may determine. Upon the occurrence and during the continuance of a Default, DFS may notify the obligors that the Accounts have been assigned to DFS, collect the Accounts directly in its own name and charge the collection costs and expenses, including attorneys' fees, to Dealer. DFS has no duty to protect, insure, collect or realize upon the Accounts to preserve rights in them. 3.8 COLLECTION DAYS. All payments and all amounts received on any Account will be credited by DFS to Dealer's account (subject to final collection thereof) after allowing three (3) business days for collection of checks or other instruments. 3.9 POWER OF ATTORNEY. Dealer irrevocably appoints DFS (and any person designated by it) as Dealer's true and lawful Attorney with full power to at any time, in the discretion of DFS (whether or not Default has occurred) to: (a) endorse the name of Dealer upon any of the items of payment or proceeds and deposit the same in the account of DFS for application to the Obligations; (b) sign the name of Dealer to verify the accuracy of the Accounts; (c) sign the name of Dealer on any document or instrument that DFS shall deem necessary or appropriate to perfect and maintain perfected the security interests in the Collateral under this Agreement and the Other Agreements; and (d) initiate and settle any insurance claim and endorse Dealer's name on any check, instrument or other item of payment. In the event of a Default, Dealer irrevocably appoints DFS (and any person designated by it) as Dealer's true and lawful Attorney with full power to at any time, in the discretion of DFS to: (i) demand payment, enforce payment and otherwise exercise all of Dealer's rights, and remedies with respect to the collection of any Accounts; (ii) settle, adjust, compromise, extend or renew any Accounts; (iii) settle, adjust or AR000010 8/97 4 compromise any legal proceedings brought to collect any Accounts; (iv) sell or assign any Accounts upon such terms, for such amounts and at such time or times as DFS may deem advisable; (v) discharge and release any Accounts; (vi) prepare, file and sign Dealer's name on any Proof of Claim in Bankruptcy or similar document against any obligor; (vii) endorse the name of Dealer upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to any Account or goods pertaining thereto; and (viii) take control in any manner of any item of payments or proceeds and for such purpose to notify the Postal Authorities to change the address for delivery of mail addressed to Dealer to such address as DFS may designate. The power of attorney is for value and coupled with an interest and is irrevocable so long as any Obligations remain outstanding and by DFS exercising such right, DFS shall not waive any right against Dealer until the Obligations are paid in full. 3.10 CONTINUING REQUIREMENTS. Advances hereunder will be made by DFS, at Dealer's direction, by paper check, electronic transfer by Automated Clearing House ("ACH"), Fed Wire Funds Transfer ("Fed Wire") or such other electronic means as DFS may announce from time to time (ACH, Fed Wire and such other electronic transfer are collectively referred to as "Electronic Transfers"). If Dealer does not request advances be made in a specific method of transfer, DFS may determine from time to time in its sole discretion what method of transfer to use. Dealer will: (a) if from time to time required by DFS, immediately upon their creation, deliver to DFS copies of all invoices, delivery evidences and other such documents relating to each Account; (b) not permit or agree to any extension, compromise or settlement or make any change to any Account; (c) affix appropriate endorsements or assignments upon all such items of payment and proceeds so that the same may be properly deposited by DFS to DFS' account; (d) immediately notify DFS in writing which Accounts may be deemed ineligible as defined in SUBSECTION 3.3; (e) mark all chattel paper and instruments now owned or hereafter acquired by it to show that the same are subject to DFS' security interest and immediately thereafter deliver such chattel paper and instruments to DFS with appropriate endorsements and assignments to DFS; (f) within ten (10) days after the end of each month, provide DFS with a detailed aging of its Accounts for each month, together with the names and addresses of all obligors. 3.11 RELEASE. Dealer releases DFS from all claims and causes of action which Dealer may now or hereafter have for any loss or damage to it claimed to be caused by or arising from: (a) any failure of DFS to protect, enforce or collect, in whole or in part, any Account; (b) DFS' notification to any obligors thereon of DFS' security interest in any of the Accounts; (c) DFS' directing any obligor to pay any sum owing to Dealer directly to DFS; and (d) any other act or omission to act on the part of DFS, its officers, agents or employees, except for willful misconduct. DFS will have no obligation to preserve rights to Accounts against prior parties. Dealer waives all rights of offset and counterclaims Dealer may have against DFS. 3.12 REVIEW. Dealer grants DFS an irrevocable license to enter Dealer's business locations during normal business hours with 24 hour notice( no notice will be required hereunder if a Default has occurred) to Dealer to: (a) account for and inspect all Collateral; (b) verify Dealer's compliance with this Agreement; and (c) review, examine, and make copies of Dealer's books, records, files and business procedures and practices. Dealer further agrees to pay DFS a review fee of Seven Hundred Fifty DOLLARS ($ 750.00 ) for any such review, inspection or examination made by DFS. DFS may, without notice to Dealer and at any time or times hereafter, verify the validity, amount or any other matter relating to any Account by mail, telephone, or other means, in the name of Dealer or DFS. 4. SECURITY - COLLATERAL --------------------- 4.1 GRANT OF SECURITY INTEREST. To secure payment of all of Dealer's current and future Obligations and to secure Dealer's performance of all of the provisions under this Agreement and the Other Agreements, Dealer grants DFS a security interest in all of Dealer's inventory, accounts, contract rights, chattel paper, security agreements, instruments, deposit accounts, reserves, documents, and general intangibles; and all judgments, claims, insurance policies, and payments owed or made to Dealer thereon; all whether now owned or AR000010 8/97 5 hereafter acquired, all attachments, accessories, accessions, returns, repossessions, exchanges, substitutions and replacements thereto, and all proceeds thereof. All such assets are collectively referred to herein as the "Collateral." All of such terms for which meanings are provided in the Uniform Commercial Code of the applicable state are used herein with such meanings. Dealer covenants with DFS that DFS may realize upon all or part of any Collateral in any order it desires and any realization by any means upon any Collateral will not bar realization upon any other collateral. Dealer's liability under this Agreement is direct and unconditional and will not be affected by the release or nonperfection of any security interest granted hereunder. All Collateral financed by DFS, and all proceeds thereof, will be held in trust by Dealer for DFS, with such proceeds being payable in accordance with this Agreement. 5. WARRANTIES AND REPRESENTATIONS ------------------------------ 5.1 AFFIRMATIVE WARRANTIES AND REPRESENTATIONS. Except as otherwise specifically provided in the Other Agreements, Dealer warrants and represents to DFS that: (a) Dealer has good title to all Collateral; (b) DFS' security interest in the Accounts will at all times constitute a perfected, first security interest in such Accounts and will not become subordinate to the security interest, lien, encumbrance or claim of any Entity; (c) Dealer will execute all documents DFS requests to perfect and maintain DFS' security interest in the Collateral and to fully consummate the transactions contemplated under this Agreement and the Other Agreements; (d) Dealer will at all times be duly organized, existing, in good standing, qualified and licensed to do business in each state, county, or parish, in which the nature of its business or property so requires; (e) Dealer has the right and is duly authorized to enter into this Agreement; (f) Dealer's execution of this Agreement does not constitute a breach of any agreement to which Dealer is now or hereafter becomes bound; (g) there are and will be no actions or proceedings pending or threatened against Dealer which might result in any material adverse change in Dealer's financial or business condition or which might in any way adversely affect any of Dealer's assets; (h) Dealer will maintain the Collateral in good condition and repair; (i) Dealer has duly filed and will duly file all tax returns required by law; (j) Dealer has paid and will pay when due all taxes, levies, assessments and governmental charges of any nature; (k) Dealer will maintain a system of accounting in accordance with generally accepted accounting principles and account records which contain such information in a format as may be requested by DFS; (l) Dealer will keep and maintain all of its books and records pertaining to the Accounts at its principal place of business designated in this Agreement; (m) Dealer will promptly supply DFS with such information concerning it or any Guarantor as DFS hereafter may reasonably request; (n) Dealer will give DFS thirty (30) days prior written notice of any change in Dealer's identity, name, form of business organization, ownership, management, principal place of business, Collateral locations or other business locations; and before moving any books and records to any other location; (o) Dealer will observe and perform all matters required by any lease, license, concession or franchise forming part of the Collateral in order to maintain all the rights of DFS thereunder; (p) Dealer will advise DFS of the commencement of material legal proceedings against Dealer or any Guarantor; (q) Dealer will comply with all applicable laws and will conduct its business in a manner which preserves and protects the Collateral and the earnings and incomes thereof; and (r) Dealer will keep the Collateral insured for its full insurable value under an "all risk" property insurance policy with a company acceptable to DFS, naming DFS as a lender loss-payee and containing standard lender's loss payable and termination provisions. Dealer will provide DFS with written evidence of such property insurance coverage and lender's loss-payee endorsement. 5.2 NEGATIVE COVENANTS. Dealer will not at any time (without DFS' prior written consent): (a) grant to or in favor of any Entity a security interest in or permit to exist a lien, claim or encumbrance in the Accounts which is superior to the interest of DFS; (b) other than in the ordinary course of its business, sell, lease or otherwise dispose of or transfer any of its assets; (c) merge or consolidate with another Entity; (d) acquire the assets or ownership interest of any other Entity; (e) enter into any transaction not in the ordinary course of business; (f) guarantee or indemnify or otherwise become in any way liable with respect to the obligations of any Entity, except AR000010 8/97 6 by endorsement of instruments or items of payment for deposit to the general account of Dealer or which are transmitted or turned over to DFS on account of the Obligations except for any Guaranty of the obligations of the Dealer's parent to the provider(s) of Dealer's parent's working capital credit facility; (g) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Dealer's capital stock; (h) make any change in Dealer's capital structure or in any of its business objectives or operations which might in any way adversely affect the ability of Dealer to repay the Obligations; (i) make any distribution of Dealer's assets not in the ordinary course of business; (j) incur any debts outside of the ordinary course of business except renewals or extensions of existing debts and interest thereon; and (k) make any loans, advances, contributions or payments of money or in goods to any affiliated entity or to any officer, director, stockholder, member or partner of Dealer or of any such entity (except for compensation for personal services actually rendered, or dividends to the Dealer's parent). 5.3 FINANCIAL STATEMENTS. Dealer will deliver to DFS: (a) within ninety (90) days after the end of each of Dealer's fiscal years, a reasonably detailed balance sheet as of the last day of such fiscal year and a reasonably detailed income statement covering Dealer's operations for such fiscal year, in a form satisfactory to DFS; (b) within forty-five (45) days after the end of each of Dealer's fiscal quarters, a reasonably detailed balance sheet as of the last day of such quarter and an income statement covering Dealer's operations for such quarter in a form satisfactory to DFS; (c) within ten (10) days after request therefor by DFS, any other report requested by DFS relating to the Collateral or the financial condition of Dealer. Dealer warrants and represents to DFS that all financial statements and information relating to Dealer or any Guarantor which have been or may hereafter be delivered by Dealer or any Guarantor to DFS are true and correct and have been and will be prepared in accordance with generally accepted accounting principles consistently applied and, with respect to such previously delivered statements or information, there has been no material adverse change in the financial or business condition of Dealer or any Guarantor since the submission to DFS, either as of the date of delivery, or, if different, the date specified therein, and Dealer acknowledges DFS' reliance thereon. 6. DEFAULT ------- 6.1 DEFINITION. Dealer will be in default under this Agreement if: (a) Dealer breaches any terms, warranties or representations contained herein or in any Other Agreements and such breach is not cured within three (3) days of Dealer's receipt of written notice of such breach; (b) any Guarantor of Dealer's debts to DFS breaches any terms, warranties or representations contained in any guaranty or Other Agreements and such breach is not cured within three (3) days of Dealer's receipt of written notice of such breach; (c) any representation, statement, report, or certificate made or delivered by Dealer or any Guarantor to DFS is not accurate when made and such breach is not cured within three (3) days of Dealer's receipt of written notice of such breach; (d) Dealer fails to pay any of the Obligations when due and payable; (e) Dealer abandons any Collateral and such breach is not cured within three (3) days of Dealer's receipt of written notice of such breach; (f) Dealer or any Guarantor is or becomes in default in the payment of any debt owed to any third party in excess of $50,000.00 and such breach is not cured within three (3) days of Dealer's receipt of written notice of such breach; (g) a money judgment issues against Dealer or any Guarantor in excess of $50,000.00 and such breach is not cured within three (3) days of Dealer's receipt of written notice of such breach;; (h) an attachment, sale or seizure issues or is executed against any assets of Dealer or of any Guarantor; (i) Dealer or any Guarantor shall cease existence as a corporation, partnership, limited liability company or trust, as applicable; (j) Dealer or any Guarantor ceases or suspends business; (k) Dealer, any Guarantor or any member while Dealer's business is operated as a limited liability company, as applicable, makes a general assignment for the benefit of creditors; (l) Dealer, any Guarantor or any member while Dealer's business is operated as a limited liability company, as applicable, becomes insolvent or voluntarily or involuntarily becomes subject to the Federal Bankruptcy Code, any state insolvency law or any similar law; (m) any receiver is appointed for any assets of Dealer, any Guarantor AR000010 8/97 7 or any member while Dealer's business is operated as a limited liability company, as applicable; (n) any guaranty of Dealer's debt to DFS is terminated;(o) Dealer or any Guarantor misrepresents Dealer's or such Guarantor's financial condition or organizational structure. 6.2 RIGHTS OF DFS. In the event of a Default: (a) DFS may at any time at DFS' election, without notice or demand to Dealer, do any one or more of the following: declare all or any of the Obligations immediately due and payable, together with all costs and expenses of DFS' collection activity, including, without limitation, all reasonable attorneys' fees; exercise any or all rights under applicable law (including, without limitation, the right to possess, transfer and dispose of the Collateral); and/or cease extending any additional credit to Dealer (DFS' right to cease extending credit shall not be construed to limit the discretionary nature of this credit facility). (b) Dealer will segregate and keep the Collateral in trust for DFS, and in good order and repair, and will not sell, rent, lease, consign, otherwise dispose of or use any Collateral, nor further encumber any Collateral. (c) Upon DFS' oral or written demand, Dealer will immediately deliver the Collateral to DFS, in good order and repair, at a place specified by DFS, together with all related documents; or DFS may, in DFS' sole discretion and without notice or demand to Dealer, take immediate possession of the Collateral together with all related documents. (d) DFS may, without notice, apply a default finance charge to Dealer's outstanding principal indebtedness equal to the default rate specified in Dealer's financing program with DFS, if any, or if there is none so specified, at the lesser of 3% per annum above the rate in effect immediately prior to the Default, or the highest lawful contract rate of interest permitted under applicable law. (e) DFS may, without notice to Dealer and at any time or times enforce payment and collect, by legal proceedings or otherwise, Accounts in the name of Dealer or DFS; and take control of any cash or non-cash items of payment or proceeds of Accounts and of any rejected, returned, repossessed or stopped in transit goods relating to Accounts. DFS may at its sole election and without demand enter, with or without process of law, any premises where Collateral might be and, without charge or liability to DFS therefor do one or more of the following: (i) take possession of the Collateral and use or store it in said premises or remove it to such other place or places as DFS may deem convenient; (ii) take possession of all or part of such premises and the Collateral and place a custodian in the exclusive control thereof until completion of enforcement of DFS' security interest in the Collateral or until DFS' removal of the Collateral and, (iii) remain on such premises and use the same, together with Dealer's materials, supplies, books and records, for the purpose of performing all acts necessary and incidental to the collection or liquidation of such Collateral. All of DFS' rights and remedies are cumulative. DFS' failure to exercise any of DFS' rights or remedies hereunder will not waive any of DFS' rights or remedies as to any past, current or future Default. 6.3 SALE OF COLLATERAL. Dealer agrees that if DFS conducts a private sale of any Collateral by requesting bids from 10 or more dealers or distributors in that type of Collateral, any sale by DFS of such Collateral in bulk or in parcels within 120 days of: (a) DFS' taking possession and control of such Collateral; or (b) when DFS is otherwise authorized to sell such Collateral; whichever occurs last, to the bidder submitting the highest cash bid therefor, is a commercially reasonable sale of such Collateral under the Uniform Commercial Code. Dealer agrees that the purchase of any Collateral by a vendor, as provided in any agreement between DFS and the vendor, is a commercially reasonable disposition and private sale of such Collateral under the Uniform Commercial Code, and no request for bids shall be required. Dealer further agrees that 7 or more days prior written notice will be commercially reasonable notice of any public or private sale (including any sale to a vendor). Dealer irrevocably waives any requirement that DFS retain possession and not dispose of any Collateral until after an arbitration hearing, arbitration award, confirmation, trial or final judgment. If DFS disposes of any such AR000010 8/97 8 Collateral other than as herein contemplated, the commercial reasonableness of such disposition will be determined in accordance with the laws of the state governing this Agreement. 7. MISCELLANEOUS ------------- 7.1 TERMINATION. This Agreement will continue in full force and effect and be non-cancellable by Dealer (except that it may be terminated by DFS upon thirty (30) days written notice to Dealer or in the exercise of its rights and remedies upon Default by Dealer) for a period of one (1) year from the first day of the first month following the date hereof and for successive one (1) year periods thereafter, subject to termination as to future transactions at the end of any such period on at least sixty (60) days prior written notice by Dealer to DFS. If such notice of termination is given by Dealer to DFS, such notice will be ineffective unless Dealer pays to DFS all Obligations on or before the termination date. Any termination of this Agreement by Dealer or DFS will have the effect of accelerating the maturity of all Obligations not then otherwise due. 7.1.1 TERMINATION PRIVILEGE. Despite anything to the contrary in SECTION 7.1 of this Agreement, this Agreement may be terminated by Dealer at any time upon sixty (60) days prior written notice and payment to DFS of the following sum (in addition to payment of all Obligations, whether or not by their terms then due) which sum represents liquidated damages for the loss of the bargain and not as a penalty, and the same is hereby acknowledged by Dealer: (1) the product of (a) one half of one percent (.50%) multiplied by (b) the highest Average Contract Balance for the last 10 months (or entire term of this Agreement if less than 12 months) prior to the effective date of termination, multiplied by (2) the number of months remaining in the original or renewal term; granted, however that such liquidated damages will only be payable in the event termination occurs during the first ten (1O) month term of this Agreement. This sum will also be paid by Dealer if the Agreement is terminated on account of Dealer's Default. 7.1.2 EFFECT OF TERMINATION. Dealer will not be relieved from any Obligations to DFS arising out of DFS' advances or commitments made before the effective termination date of this Agreement. DFS will retain all of its rights, interests and remedies hereunder until Dealer has paid all of Dealer's Obligations to DFS. All waivers set forth within this Agreement will survive any termination of this Agreement. 7.2 COLLECTION. Checks and other instruments delivered to DFS on account of the Obligations will constitute conditional payment until such items are actually paid to DFS. 7.3 DEMAND, ETC. Dealer irrevocably waives notice of: DFS' acceptance of this Agreement, presentment, demand, protest, nonpayment, nonperformance, and dishonor. Dealer and DFS irrevocably waive all rights to claim any punitive and/or exemplary damages. Dealer waives all notices of default and non-payment at maturity of any or all of the Accounts. 7.4 REIMBURSEMENT. Dealer will assume and reimburse DFS upon demand for all expenses incurred by DFS in connection with the preparation of this Agreement and the Other Agreements (including fees and costs of outside counsel) and all filing and recording fees and taxes payable in connection with the filing or recording of all documents under this Agreement and the Other Agreements; provided, however, that such reimbursement by Dealer hereunder will not exceed the sum of ONE THOUSAND DOLLARS ($1,000.00). 7.5 ADDITIONAL OBLIGATIONS. DFS, without waiving or releasing any Obligation or Default, may perform any Obligations that Dealer fails or refuses to perform. All sums paid by DFS on account of the foregoing and any expenses, including reasonable attorneys' fees, will be a part of the Obligations, payable on demand and secured by the Collateral. 7.6 NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBTS ARE NOT ENFORCEABLE. TO PROTECT DEALER AND DFS FROM MISUNDERSTANDING OR DISAPPOINTMENT, ALL AGREEMENTS COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING AND THE OTHER AGREEMENTS, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR AS THE PARTIES MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. DFS may, from time to time, announce in writing to Dealer AR000010 8/97 9 its policies and procedures regarding its administration of this facility, including, without limitation, DFS' fees for the transfer of funds to or from Dealer, including Electronic Transfers; any subsequent use by Dealer of this facility following any such announcement shall constitute Dealer's acceptance of such revised policies and procedures. Time is of the essence regarding Dealer's performance of its obligations to DFS notwithstanding any course of dealing or custom on DFS' part to grant extensions of time. DFS will have the right to refrain from or postpone enforcement of this Agreement or any Other Agreements between DFS and Dealer without prejudice and the failure to strictly enforce these agreements will not be construed as having created a course of dealing between DFS and Dealer contrary to the specific terms of the agreements or as having modified, released or waived the same. The express terms of this Agreement will not be modified by any course of dealing, usage of trade, or custom of trade which may deviate from the terms hereof. 7.7 SEVERABILITY. If any provision of this Agreement or the Other Agreements or the application thereof is held invalid or unenforceable, the remainder of this Agreement and the Other Agreements will not be impaired or affected and will remain binding and enforceable. 7.8 SUPPLEMENT. If Dealer and DFS have heretofore executed Other Agreements in connection with all or any part of the Collateral, this Agreement shall supplement each and every Other Agreement previously executed by and between Dealer and DFS, and in that event this Agreement shall neither be deemed a novation nor a termination of any such previously executed Other Agreement nor shall execution of this Agreement be deemed a satisfaction of any obligation secured by such previously executed Other Agreement. In the event of any conflict between the terms of this Agreement and any previously executed Business Financing Agreement between DFS and Dealer, the terms of this Agreement shall control. 7.9 SECTION TITLES. The Section titles used in this Agreement are for convenience only and do not define or limit the contents of any Section. 7.10 BINDING EFFECT. Dealer cannot assign its interest in this Agreement or any Other Agreements without DFS' prior written consent, although DFS may assign or participate DFS' interest, in whole or in part, without Dealer's consent. This Agreement and the Other Agreements will protect and bind DFS' and Dealer's respective heirs, representatives, successors and assigns. 7.11 NOTICES. Except as otherwise stated herein, all notices, arbitration claims, responses, requests and documents will be sufficiently given or served if mailed or delivered: (a) to Dealer at Dealer's principal place of business specified above; and (b) to DFS at 655 Maryville Centre Drive, St. Louis, Missouri 63141-5832, Attention: General Counsel, or such other address as the parties may hereafter specify in writing. 7.12 RECEIPT OF AGREEMENT. Dealer acknowledges that it has received a true and complete copy of this Agreement. Dealer acknowledges that it has read and understood this Agreement. Notwithstanding anything herein to the contrary: (a) DFS may rely on any facsimile copy, electronic data transmission or electronic data storage of any Schedule, statement, financial statements or other reports, and (b) such facsimile copy, electronic data transmission or electronic data storage will be deemed an original, and the best evidence thereof for all purposes, including, without limitation, under this Agreement or any Other Agreements, and for all evidentiary purposes before any arbitrator, court or other adjudicatory authority. 7.13 INFORMATION. DFS may provide to any third party any credit, financial or other information on Dealer that DFS may from time to time possess. DFS may obtain from any third party any credit, financial or other information regarding Dealer that such third party may from time to time possess. 8. BINDING ARBITRATION ------------------- 8.1 ARBITRABLE CLAIMS. Except as otherwise specified below, all actions, disputes, claims and controversies under common law, statutory law or in equity of any type or nature whatsoever (including, without limitation, all torts, whether regarding negligence, breach of fiduciary duty, restraint of trade, fraud, conversion, duress, interference, wrongful replevin, wrongful sequestration, fraud in the inducement, usury or any other tort, all contract actions, whether regarding express or implied terms, such as implied covenants of good faith, fair dealing, and the commercial reasonableness of any AR000010 8/97 10 Collateral disposition, or any other contract claim, all claims of deceptive trade practices or lender liability, and all claims questioning the reasonableness or lawfulness of any act), whether arising before or after the date of this Agreement, and whether directly or indirectly relating to: (a) this Agreement or any Other Agreements and/or any amendments and addenda hereto or thereto, or the breach, invalidity or termination hereof or thereof; (b) any previous or subsequent agreement between DFS and Dealer; (c) any act committed by DFS or by any parent company, subsidiary or affiliated company of DFS (the "DFS Companies"), or by any employee, agent, officer or director of an DFS Company whether or not arising within the scope and course of employment or other contractual representation of the DFS Companies provided that such act arises under a relationship, transaction or dealing between DFS and Dealer; and/or (d) any other relationship, transaction or dealing between DFS and Dealer (collectively the "Disputes"), will be subject to and resolved by binding arbitration. 8.2 ADMINISTRATIVE BODY. All arbitration hereunder will be conducted in accordance with the Commercial Arbitration Rules of The American Arbitration Association ("AAA"). If the AAA is dissolved, disbanded or becomes subject to any state or federal bankruptcy or insolvency proceeding, the parties will remain subject to binding arbitration which will be conducted by a mutually agreeable arbitral forum. The parties agree that all arbitrator(s) selected will be attorneys with at least five (5) years secured transactions experience. The arbitrator(s) will decide if any inconsistency exists between the rules of any applicable arbitral forum and the arbitration provisions contained herein. If such inconsistency exists, the arbitration provisions contained herein will control and supersede such rules. The site of all arbitration proceedings will be in the Division of the Federal Judicial District in which AAA maintains a regional office that is closest to Dealer. 8.3 DISCOVERY. Discovery permitted in any arbitration proceeding commenced hereunder is limited as follows. No later than thirty (30) days after the filing of a claim for arbitration, the parties will exchange detailed statements setting forth the facts supporting the claim(s) and all defenses to be raised during the arbitration, and a list of all exhibits and witnesses. No later than twenty-one (21) days prior to the arbitration hearing, the parties will exchange a final list of all exhibits and all witnesses, including any designation of any expert witness(es) together with a summary of their testimony; a copy of all documents and a detailed description of any property to be introduced at the hearing. Under no circumstances will the use of interrogatories, requests for admission, requests for the production of documents or the taking of depositions be permitted. However, in the event of the designation of any expert witness(es), the following will occur: (a) all information and documents relied upon by the expert witness(es) will be delivered to the opposing party, (b) the opposing party will be permitted to depose the expert witness(es), (c) the opposing party will be permitted to designate rebuttal expert witness(es), and (d) the arbitration hearing will be continued to the earliest possible date that enables the foregoing limited discovery to be accomplished. 8.4 EXEMPLARY OR PUNITIVE DAMAGES. The Arbitrator(s) will not have the authority to award exemplary or punitive damages. 8.5 CONFIDENTIALITY OF AWARDS. All arbitration proceedings, including testimony or evidence at hearings, will be kept confidential, although any award or order rendered by the arbitrator(s) pursuant to the terms of this Agreement may be entered as a judgment or order in any state or federal court and may be confirmed within the federal judicial district which includes the residence of the party against whom such award or order was entered. This Agreement concerns transactions involving commerce among the several states. The Federal Arbitration Act, Title 9 U.S.C. Sections 1 et seq., as amended ("FAA") will govern all arbitration(s) and confirmation proceedings hereunder. 8.6 PREJUDGMENT AND PROVISIONAL REMEDIES. Nothing herein will be construed to prevent DFS' or Dealer's use of bankruptcy, receivership, injunction, repossession, replevin, claim and delivery, sequestration, seizure, attachment, foreclosure, dation and/or any other prejudgment or provisional action or remedy relating to any Collateral for any current or future debt owed by either party to the other. Any such action or remedy will not waive DFS' or Dealer's right to compel arbitration of any Dispute. AR000010 8/97 11 8.7 ATTORNEYS' FEES. If either Dealer or DFS brings any other action for judicial relief with respect to any Dispute (other than those set forth in SECTION 8.6), the party bringing such action will be liable for and immediately pay all of the other party's costs and expenses (including attorneys' fees) incurred to stay or dismiss such action and remove or refer such Dispute to arbitration. If either Dealer or DFS brings or appeals an action to vacate or modify an arbitration award and such party does not prevail, such party will pay all costs and expenses, including attorneys' fees, incurred by the other party in defending such action. Additionally, if Dealer sues DFS or institutes any arbitration claim or counterclaim against DFS in which DFS is the prevailing party, Dealer will pay all costs and expenses (including attorneys' fees) incurred by DFS in the course of defending such action or proceeding. 8.8 LIMITATIONS. Any arbitration proceeding must be instituted: (a) with respect to any Dispute for the collection of any debt owed by either party to the other, within two (2) years after the date the last payment was received by the instituting party; and (b) with respect to any other Dispute, within two (2) years after the date the incident giving rise thereto occurred, whether or not any damage was sustained or capable of ascertainment or either party knew of such incident. Failure to institute an arbitration proceeding within such period will constitute an absolute bar and waiver to the institution of any proceeding, whether arbitration or a court proceeding, with respect to such Dispute. 8.9 SURVIVAL AFTER TERMINATION. The agreement to arbitrate will survive the termination of this Agreement. 9. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT IS FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE WITHOUT A JURY. DEALER AND DFS WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING. 10. Governing Law. Dealer acknowledges and agrees that this and all Other Agreements between Dealer and DFS have been substantially negotiated, and will be substantially performed, in the state of Colorado. Accordingly, Dealer agrees that all Disputes will be governed by, and construed in accordance with, the laws of such state, except to the extent inconsistent with the provisions of the FAA which shall control and govern all arbitration proceedings hereunder. IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of the date first set forth hereinabove. THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE WAIVER PROVISIONS. Capital Associates Technology Group, Inc. A Utah Corporation f/k/a DBL, Inc. ----------------------------------------- Dealer's Name DEUTSCHE FINANCIAL SERVICES CORPORATION By: /s/John Rowntree By: /s/Anthony M. DiPaolo ------------------------------ ------------------------------------ Print Name: John Rowntree Print Name: Anthony M. DiPaolo ------------------------------ ------------------------------------ Title: Credit Manager Title: SVP, CFO and Treasurer ------------------------------ ------------------------------------ By: ------------------------------------ Print Name: ------------------------------------ Title: ------------------------------------ ATTEST: /s/Philip J. Teigen ------------------------------------ Secretary Print Name: Philip J. Teigen ------------------------------------ AR000010 8/97 12 SECRETARY'S CERTIFICATE OF RESOLUTION I certify that I am the Secretary or Assistant Secretary of the corporation named below, and that the following completely and accurately sets forth certain resolutions of the Board of Directors of the corporation adopted at a special meeting thereof held on due notice (and with shareholder approval, if required by law), at which meeting there was present a quorum authorized to transact the business described below, and that the proceedings of the meeting were in accordance with the certificate of incorporation, charter and by-laws of the corporation, and that they have not been revoked, annulled or amended in any manner whatsoever. Upon motion duly made and seconded, the following resolution was unanimously adopted after full discussion: "RESOLVED, That the several officers, directors, and agents of this corporation, or any one or more of them, are hereby authorized and empowered on behalf of this corporation: to obtain financing from Deutsche Financial Services Corporation ("DFS") in such amounts and on such terms as such officers, directors or agents deem proper; to enter into financing, security, pledge and other agreements with DFS relating to the terms upon which such financing may be obtained and security and/or other credit support is to be furnished by this corporation therefor; from time to time to supplement or amend any such agreements; execute and deliver any and all assignments and schedules; and from time to time to pledge, assign, mortgage, grant security interests, and otherwise transfer, to DFS as collateral security for any obligations of this corporation to DFS, whenever and however arising, any assets of this corporation, whether now owned or hereafter acquired; the Board of Directors hereby ratifying, approving and confirming all that any of said officers, directors or agents have done or may do with respect to the foregoing." I do further certify that the following are the names and specimen signatures of the officers and agents of said corporation so empowered and authorized, namely: President: Brent W. Richardson /s/Brent W. Richardson ------------------------- ----------------------------- (Print Name) (Signature) Vice-President: James D. Walker /s/James D. Walker ------------------------- ----------------------------- (Print Name) (Signature) Secretary: Philip J. Teigen /s/Philip J. Teigen ------------------------- ----------------------------- (Print Name) (Signature) SVP, CFO & Treasurer: Anthony M. DiPaolo /s/Anthony M. DiPaolo ------------------------- ----------------------------- (Print Name) (Signature) Assistant Treasurer: John F. Sandoval /s/John F. Sandoval ------------------------- ----------------------------- (Print Name) (Signature) IN WITNESS WHEREOF, I have executed and affixed the seal of the corporation on the date stated below. Dated: April 21, 1998 /s/Philip J. Teigen ----------------------------- (Assistant) Secretary Philip J. Teigen Capital Associates Technology Group, Inc. ----------------------------- (SEAL) Corporate Name AR000010 8/97 13 ADDENDUM TO BUSINESS FINANCING AGREEMENT AND AGREEMENT FOR WHOLESALE FINANCING This Addendum is made to (i) that certain Business Financing Agreement executed on the 21st day of April, 1998, between CAPITAL ASSOCIATES TECHNOLOGY GROUP, INC. ("Dealer") and DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS"), as amended ("BFA") and (ii) that certain Agreement for Wholesale Financing between Dealer and DFS dated July 15, 1991, as amended ("AWF"). FOR VALUE RECEIVED, DFS and Dealer agree as follows: 1. Section 3.2 of the BFA is hereby amended to read as follows, and, to the extent applicable, the following provision shall also amend the AWF (capitalized terms shall have the same meaning as defined in the BFA unless otherwise indicated): "3.2 AVAILABLE CREDIT; PAYDOWN. On receipt of each Schedule, DFS will credit Dealer with such amount as DFS may deem advisable up to the remainder of (a) eighty-five percent (85%) of the net amount of eligible Accounts listed in such Schedule, minus (b) an amount equal to one hundred percent (100%) of Dealer's outstanding indebtedness under Dealer's Agreement for Wholesale Financing (the 'AWF') with DFS as in effect from time to time (the 'Reserve Amount') (the remainder of (a) minus (b) is referred to herein as the 'Available Credit'). In addition, in the event Dealer's outstanding loans under Dealer's accounts receivable credit facility as set forth in SECTION 2.1 of this Agreement at any time exceed Dealer's Available Credit, Dealer will immediately pay to DFS an amount not less than the difference between (i) Dealer's outstanding loans under Dealer's accounts receivable credit facility as set forth in SECTION 2.1 of this Agreement, and (ii) Dealer's Available Credit. Furthermore, as an amendment to the AWF, in the event Dealer's Reserve Amount exceeds at any time (a) eighty-five percent (85%) of the net amount of Dealer's eligible Accounts, minus (b) Dealer's outstanding loans under Dealer's accounts receivable credit facility as set forth in; SECTION 2.1 of this Agreement, Dealer will immediately pay to DFS, as a reduction of Dealer's total current outstanding indebtedness to DFS under the AWF, the difference between (i) Dealer's Reserve Amount, and (ii) (a) eighty-five percent (85%) of the net amount of Dealer's eligible Accounts minus (b) Dealer's outstanding loans under Dealer's accounts receivable credit facility as set forth in SECTION 2.1 of this Agreement. DFS will loan Dealer, on request, such amount so credited or a part thereof as requested provided that at no time will such outstanding loans exceed Dealer's maximum accounts receivable credit facility as set forth in SECTION 2.1 of this Agreement. No loans need be made by DFS if the Dealer is in Default." 2. The following paragraph is hereby incorporated into the BFA as if fully and originally set forth therein: FACILITY FEE. Dealer agrees to pay DFS an annual facility fee in connection with the Accounts Receivable Facility, payable in advance, upon the execution of this Agreement, and on each anniversary thereof through the term of this Agreement, each in an amount equal to one hundred twenty-five one-thousandths of one percent (0.125%) of the Accounts Receivable Facility (or such greater amount as shall from time to time represent the sum of the maximum credit available under this Agreement.) Once received by DFS, an annual facility fee shall not be refundable by DFS for any reason; provided, however, that in the event DFS terminates this Agreement on other than the anniversary date and Dealer is not then in Default then DFS shall refund to Dealer a portion of the facility fee equal to the number of whole months remaining in the current annual term (or renewal term) of this Agreement multiplied by an amount equal to one twelfth (1/12) of the facility fee paid by Dealer for that term." 3. The following paragraph is incorporated into the AWF and BFA as if fully and originally set forth therein: "Dealer will at all times maintain: (a) a Tangible Net Worth and Subordinated Debt in the combined amount of not less than Nine Hundred Thousand Dollars ($900,000.00); (b) a ratio of Debt minus Subordinated Debt to Tangible Net Worth and Subordinated Debt of not more than five and seventy-five one-hundredths to one (5.75:1); and (c) a ratio of Current Tangible Assets to current liabilities of not less than one and twenty one-hundredths to one (1.20:1). For purposes of this paragraph: (i) 'Tangible Net Worth' means the book value of Dealer's assets less liabilities, excluding from such assets all Intangibles; (ii) 'Intangibles' means and includes general intangibles (as that term is defined in the Uniform Commercial Code); accounts receivable and advances due from officers, directors, employees, stockholders and affiliates; leasehold improvements net of depreciation; licenses; good will; prepaid expenses; escrow deposits; covenants not to compete; the excess of cost over book value of acquired assets; franchise fees; organizational costs; finance reserves held for recourse obligations; capitalized research and development costs; and such other similar items as DFS may from time to time determine in DFS' sole discretion; (iii) 'Debt' means all of Dealer's liabilities and indebtedness for borrowed money of any kind and nature whatsoever, whether direct or indirect, absolute or contingent, and including obligations under capitalized leases, guaranties or with respect to which Dealer has pledged assets to secure performance, whether or not direct recourse liability has been assumed by Dealer; (iv) 'Subordinated Debt' means all of Dealer's Debt which is subordinated to the payment of Dealer's liabilities to DFS by an agreement in form and substance satisfactory to DFS; and (v) 'Current Tangible Assets' means Dealer's current assets less, to the extent otherwise included therein, all Intangibles. The foregoing terms will be determined in accordance with generally accepted accounting principles consistently applied, and on a non-consolidated basis." 4. Paragraph 8 of the AWF is hereby restated in its entirety to appear as it did in the original AWF without giving effect to any Amendment thereto. All other terms and provisions of the BFA and AWF, to the extent consistent with the foregoing, are hereby ratified and will remain unchanged and in full force and effect. IN WITNESS WHEREOF, Dealer and DFS have both read this Addendum to the Business Financing Agreement and Agreement for Wholesale Financing, understand all the terms and provisions hereof and agree to be bound thereby and subject thereto as of this day of April 21, 1998. CAPITAL ASSOCIATES INTERNATIONAL, INC. ATTEST: By: /s/Anthony M. DiPaolo --------------------------------- Anthony M. DiPaolo /s/Philip J. Teigen Title: Sr.V.P. - CFO and Treasurer - ------------------------------- ------------------------------- Secretary Philip J. Teigen DEUTSCHE FINANCIAL SERVICES CORPORATION By: /s/John Rowntree ---------------------------------- Title: Credit Manager ---------------------------------- GUARANTY TO: DEUTSCHE FINANCIAL SERVICES CORPORATION In consideration of financing provided or to be provided by you to CAPITAL ASSOCIATES TECHNOLOGY GROUP, INC. ("Dealer"), and for other good and valuable consideration received, we jointly, severally, unconditionally and absolutely guaranty to you, from property held separately, jointly or in community, the immediate payment when due of all current and future liabilities owed by Dealer to you, whether such liabilities are direct, indirect or owed by Dealer to a third party and acquired by you ("Liabilities"). We will pay you on demand the full amount of all sums owed by Dealer to you, together with all costs and expenses (including, without limitation, reasonable attorneys' fees). We also indemnify and hold you harmless from and against all (a) losses, costs and expenses you incur and/or are liable for (including, without limitation, reasonable attorneys' fees) and (b) claims, actions and demands made by Dealer or any third party against you, which in any way relate to any relationship or transaction between you and Dealer. Our guaranty will not be released, discharged or affected by, and we hereby irrevocably consent to, any: (a) change in the manner, place, interest rate, finance or other charges, or terms of payment or performance in any current or future agreement between you and Dealer, the release, settlement or compromise of or with any party liable for the payment or performance thereof or the substitution, release, non-perfection, impairment, sale or other disposition of any collateral thereunder; (b) change in Dealer's financial condition; (c) interruption of relations between Dealer and you or us; (d) claim or action by Dealer against you; and/or (e) increases or decreases in any credit you may provide to Dealer. We will pay you even if you have not: (i) notified Dealer that it is in default of the Liabilities, and/or that you intend to accelerate or have accelerated the payment of all or any part of the Liabilities, or (ii) exercised any of your rights or remedies against Dealer, any other person or any current or future collateral. This Guaranty is assignable by you and will inure to the benefit of your assignee. If Dealer hereafter undergoes any change in its ownership, identity or organizational structure, this Guaranty will extend to all current and future obligations which such new or changed legal entity owes to you. We irrevocably waive: notice of your acceptance of this Guaranty, presentment, demand, protest, nonpayment, nonperformance, notice of breach or default, notice of intent to accelerate and notice of acceleration of any indebtedness of Dealer, any right of contribution from other guarantors, dishonor, the amount of indebtedness of Dealer outstanding at any time, the number and amount of advances made by you to Dealer in reliance on this Guaranty and any claim or action against Dealer; all other demands and notices required by law; all rights of offset and counterclaims against you or Dealer; all defenses to the enforceability of this Guaranty (including, without limitation, fraudulent inducement). We further waive all defenses based on suretyship or impairment of collateral, and defenses which the Dealer may assert on the underlying debt, including but not limited to, failure of consideration, breach of warranty, fraud, payment, statute of frauds, bankruptcy, lack of legal capacity, statute of limitations, lender liability, deceptive trade practices, accord and satisfaction and usury. We also waive all rights to claim, arbitrate for or sue for any punitive or exemplary damages. In addition, we hereby irrevocably subordinate to you any and all of our present and future rights and remedies: (a) of subrogation against Dealer to any of your rights or remedies against Dealer, (b) of contribution, reimbursement, indemnification and restoration from Dealer; and (c) to assert any other claim or action against Dealer directly or indirectly relating to this Guaranty, such subordinations to last until you have been paid in full for all Liabilities. All of our waivers and subordinations herein will survive any termination of this Guaranty. We have made an independent investigation of the financial condition of Dealer and give this Guaranty based on that investigation and not upon any US000700 3/96 1 representation made by you. We have access to current and future Dealer financial information which enables us to remain continuously informed of Dealer's financial condition. We represent and warrant to you that we have received and will receive substantial direct or indirect benefit by making this Guaranty and incurring the Liabilities. We will provide you with financial statements on us each year within ninety (90) days after the end of Dealer's fiscal year end. We warrant and represent to you that all financial statements and information relating to us or Dealer which have been or may hereafter be delivered by us or Dealer to you are true and correct and have been and will be prepared in accordance with generally accepted accounting principles consistently applied and, with respect to previously delivered statements and information, there has been no material adverse change in the financial or business condition of us or Dealer since the submission to you, either as of the date of delivery, or if different, the date specified therein, and we acknowledge your reliance thereon. This Guaranty will survive any federal and/or state bankruptcy or insolvency action involving Dealer. We are solvent and our execution of this Guaranty will not make us insolvent. If you are required in any action involving Dealer to return or rescind any payment made to or value received by you from or for the account of Dealer, this Guaranty will remain in full force and effect and will be automatically reinstated without any further action by you and notwithstanding any termination of this Guaranty or your release of us. Any delay or failure by you, or your successors or assigns, in exercising any of your rights or remedies hereunder will not waive any such rights or remedies. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT US AND YOU FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. Notwithstanding anything herein to the contrary: (a) you may rely on any facsimile copy, electronic data transmission or electronic data storage of this Guaranty, any agreement between you and Dealer, any Statement of Transaction, billing statement, invoice from a vendor, financial statements or other report, and (b) such facsimile copy, electronic data transmission or electronic data storage will be deemed an original, and the best evidence thereof for all purposes, including, without limitation, under this Guaranty or any other agreement between you and us, and for all evidentiary purposes before any arbitrator, court or other adjudicatory authority. We may terminate this Guaranty by a written notice to you, the termination to be effective sixty (60) days after you receive and acknowledge it, but the termination will not terminate our obligations hereunder for Liabilities arising prior to the effective termination date. We have read and understood all terms and provisions of this Guaranty. We acknowledge receipt of a true copy of this Guaranty and of all agreements between you and Dealer. The meanings of all terms herein are equally applicable to both the singular and plural forms of such terms. BINDING ARBITRATION. Except as otherwise specified below, all actions, disputes, claims and controversies under common law, statutory law or in equity of any type or nature whatsoever (including, without limitation, all torts, whether regarding negligence, breach of fiduciary duty, restraint of trade, fraud, conversion, duress, interference, wrongful replevin, wrongful sequestration, fraud in the inducement, usury or any other tort, all contract actions, whether regarding express or implied terms, such as implied covenants of good faith, fair dealing, and the commercial reasonableness of any collateral disposition, or any other contract claim, all claims of deceptive trade practices or lender liability, and all claims questioning the reasonableness or lawfulness of any act), whether arising before or after the date of this Guaranty, and whether directly or indirectly relating to: (a) this Guaranty and/or any amendments and addenda hereto, or the breach, invalidity or termination hereof; (b) any previous or subsequent agreement between you and us; (c) any act committed by you or by any parent company, subsidiary or affiliated company of you (the "DFS Companies"), or by an employee, agent, officer or director of a DFS Company, whether or not arising within the scope and course of employment or other contractual representation of the DFS Companies provided that such act arises under a relationship, transaction or dealing between you US000700 3/96 2 and Dealer or you and us; and/or (d) any other relationship, transaction, dealing or agreement between you and Dealer or you and us (collectively the "Disputes"), will be subject to and resolved by binding arbitration. All arbitration hereunder will be conducted in accordance with The Commercial Arbitration Rules of The American Arbitration Association ("AAA"). If the AAA is dissolved, disbanded or becomes subject to any state or federal bankruptcy or insolvency proceeding, the parties will remain subject to binding arbitration which will be conducted by a mutually agreeable arbitral forum. The parties agree that all arbitrator(s) selected will be attorneys with at least five (5) years secured transactions experience. The arbitrator(s) will decide if any inconsistency exists between the rules of any applicable arbitral forum and the arbitration provisions contained herein. If such inconsistency exists, the arbitration provisions contained herein will control and supersede such rules. The site of all arbitrations will be in the Division of the Federal Judicial District in which AAA maintains a regional office that is closest to Dealer. Discovery permitted in any arbitration proceeding commenced hereunder is limited as follows: No later than thirty (30) days after the filing of a claim for arbitration, the parties will exchange detailed statements setting forth the facts supporting the claim(s) and all defenses to be raised during the arbitration, and a list of all exhibits and witnesses. No later than twenty-one (21) days prior to the arbitration hearing, the parties will exchange a final list of all exhibits and all witnesses, including any designation of any expert witness(es) together with a summary of their testimony; a copy of all documents and a detailed description of any property to be introduced at the hearing. Under no circumstances will the use of interrogatories, requests for admission, requests for the production of documents or the taking of depositions be permitted. However, in the event of the designation of any expert witness(es), the following will occur: (a) all information and documents relied upon by the expert witness(es) will be delivered to the opposing party, (b) the opposing party will be permitted to depose the expert witness(es), (c) the opposing party will be permitted to designate rebuttal expert witness(es), and (d) the arbitration hearing will be continued to the earliest possible date that enables the foregoing limited discovery to be accomplished. The Arbitrator(s) will not have the authority to award exemplary or punitive damages. All arbitration proceedings, including testimony or evidence at hearings, will be kept confidential, although any award or order rendered by the arbitrator(s) pursuant to the terms of this Guaranty may be entered as a judgment or order in any state or federal court and may be entered as a judgment or order within the federal judicial district which includes the residence of the party against whom such award or order was entered. This Guaranty concerns transactions involving commerce among the several states. The Federal Arbitration Act ("FAA") will govern all arbitration(s) and confirmation proceedings hereunder. Nothing herein will be construed to prevent your or our use of bankruptcy, receivership, injunction, repossession, replevin, claim and delivery, sequestration, seizure, attachment, foreclosure, cation and/or any other prejudgment or provisional action or remedy relating to any collateral for any current or future debt owed by either party to the other. Any such action or remedy will not waive your or our right to compel arbitration of any Dispute. If either we or you bring any other action for judicial relief with respect to any Dispute (other than those set forth in the immediately preceding paragraph), the party bringing such action will be liable for and immediately pay all of the other party's costs and expenses (including attorneys' fees) incurred to stay or dismiss such action and remove or refer such Dispute to arbitration. If either we or you bring or appeal an action to vacate or modify US000700 3/96 3 an arbitration award and such party does not prevail, such party will pay all costs and expenses, including attorneys' fees, incurred by the other party in defending such action. Additionally, if we sue you or institute any arbitration claim or counterclaim against you in which you are the prevailing party, we will pay all costs and expenses (including attorneys' fees) incurred by you in the course of defending such action or proceeding. Any arbitration proceeding must be instituted: (a) with respect to any Dispute for the collection of any debt owed by either party to the other, within two (2) years after the date the last payment was received by the instituting party; and (b) with respect to any other Dispute, within two (2) years after the date the incident giving rise thereto occurred, whether or not any damage was sustained or capable of ascertainment or either party knew of such incident. Failure to institute an arbitration proceeding within such period will constitute an absolute bar and waiver to the institution of any proceeding with respect to such Dispute. Except as otherwise stated herein, all notices, arbitration claims, responses, requests and documents will be sufficiently given or served if mailed or delivered: (i) to us at our address below; (ii) to you at 655 Maryville Centre Drive, St. Louis, Missouri 63141-5832, Attention: General Counsel; or such other address as the parties may specify from time to time in writing. The agreement to arbitrate will survive the termination of this Guaranty. IF THIS GUARANTY IS FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE WITHOUT A JURY. WE WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING. We acknowledge and agree that this Guaranty and all agreements between Dealer and you have been substantially negotiated, and will be performed, in the state of Colorado. Accordingly, we agree that all Disputes will be governed by, and construed in accordance with, the laws of such state, except to the extent inconsistent with the provisions of the FAA which will control and govern all arbitration proceedings hereunder. THIS GUARANTY CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGES WAIVER PROVISIONS. Date: April 21, 1998 -------------------------------- CORPORATE GUARANTOR: Capital Associates International, Inc. (Name of Corporate Guarantor) By: /s/Anthony M. DiPaolo ---------------------------------- [Print Name: Anthony M. DiPaolo ] ---------------------------------- Title: Sr.V.P.- CFO and Treasurer ---------------------------------- By: /s/Philip J. Teigen ---------------------------------- [Print Name: Philip J. Teigen ] ---------------------------------- Title: Secretary ---------------------------------- Address of Guarantor(s): 7175 West Jefferson Avenue, Suite 4000 --------------------------------------- Lakewood, Colorado 80235 --------------------------------------- --------------------------------------- US000700 3/96 4 SECRETARY'S CERTIFICATE I hereby certify that I am the Secretary or Assistant Secretary of Capital Associates International, Inc. ("Guarantor") and that execution of the above Guaranty was ratified, approved and confirmed by the Shareholders at a meeting, if necessary, and pursuant to a resolution of the Board of Directors of Guarantor at a meeting of the Board of Directors duly called, and which is currently in effect, which resolution was duly presented, seconded and adopted and reads as follows: "BE IT RESOLVED that any officer of this corporation is hereby authorized to execute a guaranty of the obligations of CAPITAL ASSOCIATES TECHNOLOGY GROUP, INC. ("Dealer") to Deutsche Financial Services Corporation on behalf of the corporation, which instrument may contain such terms as the above named persons may see fit including, but not limited to a waiver of notice of the acceptance of the guaranty; presentment; demand; protest; notices of nonpayment, nonperformance, dishonor, the amount of indebtedness of Dealer outstanding at any time, any legal proceedings against Dealer, and any other demands and notices required by law; and any right of contribution from other guarantors." IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal on this 21st day of April, l998. (SEAL) Secretary: /s/Philip J. Teigen --------------------------- Philip J. Teigen US000700 3/96 5 ADDENDUM TO GUARANTY This Addendum is made to that certain Guaranty entered into by and between CAPITAL ASSOCIATES INTERNATIONAL, INC. ("Guarantor") and DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS") on April 21, 1998, as amended ("Guaranty). FOR VALUE RECEIVED, DFS and Guarantor agree that the following paragraph is incorporated into the Guaranty as if fully and originally set forth therein: "Guarantor will at all times maintain a Tangible Net Worth and Subordinated Debt in the combined amount of not less than Twelve Million Dollars ($12,000,000.00). For purposes of this paragraph: (i) 'Tangible Net Worth' means the book value of Guarantor's assets less liabilities, excluding from such assets all Intangibles; (ii) 'Intangibles' means and includes general intangibles (as that term is defined in the Uniform Commercial Code); accounts receivable and advances due from officers, directors, employees, stockholders and affiliates; leasehold improvements net of depreciation; licenses; good will; prepaid expenses; escrow deposits; covenants not to compete; the excess of cost over book value of acquired assets; franchise fees; organizational costs; finance reserves held for recourse obligations; capitalized research and development costs; and such other similar items as DFS may from time to time determine in DFS' sole discretion; (iii) 'Debt' means all of Guarantor's liabilities and indebtedness for borrowed money of any kind and nature whatsoever, whether direct or indirect, absolute or contingent, and including obligations under capitalized leases, guaranties, or with respect to which Guarantor has pledged assets to secure performance, whether or not direct recourse liability has been assumed by Guarantor; and (iv) 'Subordinated Debt' means all of Guarantor's Debt which is subordinated to the payment of Guarantor's liabilities to DFS by an agreement in form and substance satisfactory to DFS. The foregoing terms shall be determined in accordance with generally accepted accounting principles consistently applied, and, if applicable, on a consolidated basis." All other terms and provisions of the Guaranty, to the extent not inconsistent with the foregoing, are ratified and remain unchanged and in full force and effect. 1 IN WITNESS WHEREOF, Guarantor and DFS have executed this Addendum on this 21st day of April 1998. CAPITAL ASSOCIATES INTERNATIONAL, INC. ATTEST: By: /s/Anthony M. DiPaolo ----------------------------------- /s/Philip J. Teigen Title: Sr.V.P. - CFO and Treasurer - --------------------------------- ------------------------------- Secretary Anthony M. DiPaolo DEUTSCHE FINANCIAL SERVICES CORPORATION By: /s/John Rowntree ----------------------------------- Titl Credit Manager ----------------------------------- 2 EX-10.63 5 4Q98CAI.001 EXHIBIT 10.63 Second Amendment to Loan And Security Agreement ----------------------------------------------- This Second Amendment to Loan and Security Agreement ("Amendment") entered into as of May 29, 1998, by and among Capital Associates, Inc. and Capital Associates International, Inc. (each a Borrower and collectively "Borrowers"), First Union National Bank, successor by merger to CoreStates Bank, N.A., a national banking corporation, in its capacity as agent ("Agent") and as lender and Issuing Bank and each of the lenders listed on the signature pages hereof and Schedule A attached to the Loan Agreement, in their capacity as lenders (singly, each is a "Lender" and collectively, all are "Lenders"). Background ---------- A. On or about November 26, 1997, Borrowers, Agent and Lenders entered into a certain Loan and Security Agreement, as amended by that certain First Amendment to Loan and Security Agreement dated as of April 7, 1998 (collectively, the "Loan Agreement"), pursuant to which Lenders agreed to make advances to Borrowers up to a maximum aggregate amount of $60,000,000, evidenced by Borrowers' delivery of certain Notes to Lenders. B. The Acquisition Term Loan (as defined in the Loan Agreement) has not been advanced to Borrowers due to a change in circumstances which has resulted in the inability of Borrowers to satisfy certain conditions precedent to the making of such Acquisition Term Loan. C. Borrowers have requested that Lenders and Agent amend the Loan Agreement to increase the Term Loan by the anticipated amount of the Acquisition Term Loan pursuant to the terms hereof and Agent and Lenders have agreed to do so subject to the terms hereof. D. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. Now, Therefore, with the foregoing background incorporated by reference, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Amendment To Loan Agreement: a. Due to a change in circumstances which has resulted in certain conditions precedent to the making of the Acquisition Term Loan not being able to be satisfied, Borrowers have requested, and Agent and Lenders have consented, that the amount of the Term Loan be increased by $1,200,000 (the anticipated amount of the Acquisition Term Loan) and that the repayment terms of the Term Loan be modified to reflect a revised amortization. Upon effectiveness of this Amendment, each Lender shall advance to Borrowers an amount equal to its Pro Rata Percentage of the $1,200,000 increase in the Term Loan such that the aggregate principal balance, as of the effective date of this Amendment, of the Term Loan shall be $3,825,000. The Term Loan shall be repaid in successive quarterly installments in accordance with the terms of the Amended and Restated Term Note (as defined below). Each quarterly payment under the Term Loan shall be due and payable on the last Business Day of each fiscal quarter, commencing on the last Business Day of May, 1998. The Term Loan shall be repaid in full on the earlier of the Maturity Date or the last Business Day of November, 1999 and shall be secured by all of the Collateral. Borrowers shall execute and deliver their promissory note to each Lender for the total principal amount of such Lender's Pro Rata Percentage of the Term Loan (collectively as may be amended, modified or replaced from time to time, the "Amended and Restated Term Loan Notes"). The Amended and Restated Term Loan Notes shall evidence Borrowers' joint and several, absolute and unconditional obligation to repay such Lender for its Pro Rata Percentage of the Term Loan made by such Lender under the Credit Facility, with interest as herein and therein provided. The Term Loan shall be deemed evidenced by the Amended and Restated Term Loan Notes, which are deemed incorporated herein by reference and made a part hereof. b. All references in the Loan Documents to "Acquisition Term Note(s)" and "Acquisition Term Loan" shall be deemed to refer, unless context indicates otherwise, to the "Amended and Restated Term Loan Note(s)" and the "Term Loan" respectively. Accordingly, without limitation, Section 2.7(d)(ii) of the Loan Agreement shall remain in full force and effect, provided however, that all payments owing under such subsection shall be applied to the Term Loan. c. All references in the Loan Documents to "Term Loan Note(s)" shall be deemed to refer to "Amended and Restated Term Note(s)." d. Connecting Point has changed its name and is now known as Capital Associates Technology Group, Inc. Therefore, all references in the Loan Documents to Connecting Point shall be deemed to also refer to Capital Associates Technology Group, Inc. For the purpose of this Amendment, Capital Associates Technology Group, Inc. may also be referred to as "CATG ". e. Section 1.1 of the Loan Agreement is hereby amended by deleting the definition of "Sureties" in its entirety and replacing it with the following: SURETIES - Collectively, CAI Equipment Leasing II Corp., CAI Equipment Leasing III Corp., CAI Equipment Leasing IV Corp., CAI Partners Management Company, Capital Equipment Corporation, CAI Equipment Leasing V Corp., CAI Equipment Leasing VI Corp., CAI Leasing Canada, Ltd., CAI-Mexico, Whitewood Equipment Corporation f/k/a Whitewood Credit Corporation, CAI Securities Corporation and CAI Lease Securitization I Corp., and Capital Associates Technology Group, Inc. 2 f. Section 7.1 of the Loan Agreement is hereby amended by inserting a new Subsection 7.1(c) as follows: 7.1(c) Notwithstanding anything to the contrary contained herein, under no circumstances shall either Borrower or any Surety enter into any merger, consolidation, reorganization or recapitalization with Capital Associates Technology Group, Inc." g. Section 7.2 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: 7.2 LIENS AND ENCUMBRANCES: Neither Borrower nor any Surety shall: (i) execute a negative pledge agreement with any Person covering any of the Collateral, or (ii) cause or permit or agree or consent to cause or permit in the future (upon the happening of a contingency or otherwise) the Collateral, whether now owned or hereafter acquired, to be subject to a Lien or be subject to any claim except for Permitted Liens. As used herein, "Permitted Liens" means (A) Liens securing taxes, assessments or governmental charges or levies or the claims or demands of mate rialmen, mechanics, carriers, warehousemen, landlords, and other like persons, provided the payment thereof is not at the time required by Section 6.1, (B) Liens on Securitization Certificates securing only the corresponding Securitization Residual Financing, (C) such Liens as are described on Exhibit 7.2 attached hereto and made a part hereof, and (D) Liens granted in favor of Deutsche Financial Services Corporation with respect to certain assets of Capital Associates Technology Group, Inc." h. Section 7.3 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: 7.3 NEGATIVE PLEDGE: Neither Borrower shall pledge, grant or permit any Lien to exist on the common stock of its Subsidiaries except with respect to the Liens granted hereunder to Agent for the benefit of Lenders and with respect to subordinated Liens on the stock of Capital Associates Technology Group, Inc. granted to Connecting Point Sellers. i. Section 7.5 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: 7.5 GUARANTEES: Except with respect to the obligations of Borrowers described on Exhibit 5.10 and with respect to Borrowers' subordinated guaranty of the Deutsche Financial Services Corporation credit facility established for the benefit of Capital Associates Technology Group, Inc. 3 and, excepting the endorsement in the ordinary course of business of negotiable instruments for deposit or collection, neither Borrower shall become or be liable, directly or indirectly, primary or secondary, matured or contingent, in any manner, whether as guarantor, surety, accommodation maker, or otherwise, for the existing or future indebtedness of any kind of any Person. j. Section 7.6(b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: (b) Neither Borrower shall borrow money from, or incur indebtedness to, any Person other than in the form of Nonrecourse Debt or pursuant to a Securitization Residual Financing or pursuant to an anticipated public subordinated debt offering in a maximum amount not to exceed Twenty- Four Million ($24,000,000.00) Dollars through Legg Mason Wood Walker, Inc. pursuant to terms and conditions satisfactory to Agent and Lenders in their sole discretion. 2. Before each Lender shall advance to Borrowers an amount equal to its Pro Rata Percentage of the $1,200,000 increase in the Term Loan, Borrowers will deliver to Agent the following (dated and signed) in form and substance satisfactory to Agent and its counsel: a. A surety agreement pursuant to which CATG agrees to guaranty, as surety, all of the Obligations under the Loan Agreement ("CATG Surety Agreement"); b. A security agreement pursuant to which CATG shall grant to Agent for the benefit of Lenders and Issuing Bank, a security interest in all its then-owned and thereafter acquired assets which Lien shall be a first Lien except with respect to a first Lien granted in favor of Deutsche Financial Services Corporation with respect to certain assets ("CATG Security Agreement"). The Lien shall secure all of CATG's obligations under the CATG Surety Agreement and the CATG Security Agreement shall also contain, inter alia, an agreement that no other party (other than Deutsche Financial Services Corporation) shall be granted a Lien on any of CATG's assets; c. A subordination agreement in favor of Agent for the benefit of Lenders from the Connecting Point Sellers subordinating their interest in CATG stock to the first Lien granted in favor of Agent for the benefit of Lenders; d. A subordination agreement from Deutsche Financial Services Corporation with respect to the guaranty by Borrowers, or either of them, of the indebtedness owed by CATG to Deutsche Financial Services Corporation; e. An Amended and Restated Term Note in favor of each Lender properly executed; 4 f. Certified copies of (A) Resolution of CATG's Board of Directors authorizing execution and delivery of the CATG Surety Agreement and the CATG Security Agreement and the performance by it of all transactions contemplated thereby, (B) CATG's Bylaws and Articles of Incorporation, and (C) an Incumbency Certificate of CATG; g. Good Standing Certificate of CATG issued by the Secretary of State or other appropriate official of CATG's jurisdiction of incorporation and each jurisdiction where the conduct of CATG's business activities or the ownership of its Properties necessitates qualification; h. The favorable written opinion of Borrowers' counsel in connection with the CATG acquisition opining that the acquisition has been consummated and the enforceability and authorization of the Loan Documents to which it is a party; i. The fully executed Acquisition Agreement with all completed schedules; j. An Officer's Certificate from the Borrowers certifying compliance with the terms and conditions of the Loan Agreement, that no material adverse change has occurred since November 26, 1997, that no Event of Default or Unmatured Event of Default has occurred under the Loan Agreement and that all of the representations and warranties contained in the Loan Agreement remain true and correct in all material respects; k. Evidence that CATG has insurance coverage as is otherwise required for Borrowers as set forth in Section 6.2 of the Loan Agreement and a certificate naming Agent, for the benefit of Lenders, as Lender Loss Payee; l. UCC, state and federal tax lien and judgment searches against CATG and any and all necessary UCC-3 Termination Statements corresponding to existing filings against CATG; m. A collateral assignment of rights and representations under the Acquisition Agreement; n. A certified copy of the subordinated promissory note issued in favor of the Connecting Point Sellers, as sellers under the Acquisition Agreement and the Subordination Agreement from the Connecting Point Sellers; and o. Evidence that the transactions contemplated by Acquisition Agreement have been consummated. 5 3. Each Surety, parties to a certain Surety Agreement dated as of November 27, 1997 in favor of Agent for the benefit of the Lenders, by execution hereof in their capacity as Sureties, hereby consent to the amendments set forth in this Amendment, and acknowledge that the Surety Agreement remains in full force and effect and that each remain, jointly and severally liable for Obligations of Borrowers to Lenders. 4 a. Borrowers represent and warrant that as of the date hereof no Event of Default or Unmatured Event of Default has occurred or is existing under the Loan Documents. b. The execution and delivery by each Borrower of this Amendment and performance by it of the transactions herein contemplated (i) are and will be within its powers, (ii) have been authorized by all necessary corporate action, and (iii) are not and will not be in contravention of any order of any court or other agency of government, of law or any other indenture, agreement or undertaking to which such Borrower is a party or by which the Property of such Borrower is bound, or be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or undertaking or result in the imposition of any lien, charge or encumbrance of any nature on any of the properties of such Borrower. c. This Amendment, each Amended and Restated Term Note and each other agreement, instrument or document executed and/or delivered in connection herewith, shall be valid, binding and enforceable in accordance with its respective terms. 5. This Amendment shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 6. Except as expressly provided herein, all terms and conditions of the Loan Documents remain in full force and effect, unless such terms or conditions are no longer applicable by their terms. To the extent the provisions of this Amendment are expressly inconsistent with the provisions of the Loan Documents, the provisions of this Amendment shall control. 7. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute one and the same respective agreement. =============================== 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the day and year first above written. BORROWERS: Capital Associates, Inc. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Secretary Fed. Tax ID No. 84-1055327 Capital Associates International, Inc. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Secretary Fed. Tax ID No. 84-0724694 AGENT: First Union National Bank, Successor by Merger to CoreStates Bank, N.A. By: /s/Hugh W. Connelly ------------------------------------- Title: Vice President 7 LENDERS: First Union National Bank, Successor by Merger to CoreStates Bank, N.A., as Lender and Issuing Bank By: /s/Hugh W. Connelly ------------------------------------- Title: Vice President Norwest Bank Colorado, N.A. By: /s/Carol A. Ward ------------------------------------- Title: Vice President BankBoston, N.A. By: /s/Dierdre M. Holland ------------------------------------- Title: Vice President European American Bank By: /s/Christopher M. Czaja ------------------------------------- Title: Vice President U.S. Bank National Association, f/k/a Colorado National Bank By: /s/Ralph P. Atkinson ------------------------------------- Title: Vice President 8 SURETIES: CAI Equipment Leasing II Corp. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 84-1133179 CAI Equipment Leasing III Corp. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 84-1184608 CAI Equipment Leasing IV Corp. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 84-1248788 CAI Equipment Leasing V Corp. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 84-1348277 9 CAI Partners Management Company By: /s/Anthony M. DiPaolo ------------------------------------ Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1066243 Capital Equipment Corporation By: /s/Anthony M. DiPaolo ------------------------------------ Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-0913965 CAI Equipment Leasing VI Corp. By: /s/Anthony M. DiPaolo ------------------------------------ Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1435874 CAI Lease Securitization I Corp. By: /s/Anthony M. DiPaolo ------------------------------------ Title: President Attest: /s/Philip J. Teigen ------------------------------------ (Corporate Seal) Fed. Tax ID No.: 84-1250490 10 CAI Leasing Canada, Ltd. By: /s/Anthony M. DiPaolo ------------------------------------- Title: President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 84-1150068 Capital Associates International de Mexico S. de R.L. de C.V. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: N/A Whitewood Equipment Corporation, f/k/a Whitewood Credit Corporation By: /s/Anthony M. DiPaolo ------------------------------------- Title: President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 84-1032253 CAI Securities Corporation By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 68-0002657 11 Capital Associates Technology Group, Inc. By: /s/Anthony M. DiPaolo ------------------------------------- Title: Senior Vice President Attest: /s/Philip J. Teigen ------------------------------------- (Corporate Seal) Fed. Tax ID No.: 87-0395770 12 EX-21 6 4Q98CAI.001 Exhibit 21 LIST OF SUBSIDIARIES OF CAPITAL ASSOCIATES, INC. NAME PLACE OF INCORPORATION - ---- ---------------------- Capital Associates International, Inc. Colorado CAI Equipment Leasing I Corporation Colorado CAI Equipment Leasing II Corporation Colorado CAI Equipment Leasing III Corporation Colorado CAI Equipment Leasing IV Corporation Colorado CAI Equipment Leasing V Corporation Colorado CAI Equipment Leasing VI Corporation Colorado CAI Leasing Canada, Limited Alberta, Canada CAI Partners Management Company Colorado CAI Securities Corporation California CAI - UBK Equipment Corporation Colorado Capital Equipment Corporation Colorado Whitewood Credit Corporation Colorado CAI Lease Securitization-I Corporation Delaware Capital Associates International de Mexico s. de R.L. de C.V. Mexico Capital Associates Technology Group, Inc. Utah CAI-RBE Equipment Corp. Colorado EX-23 7 4Q98CAI.001 Exhibit 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- THE BOARD OF DIRECTORS CAPITAL ASSOCIATES, INC.: We consent to incorporation by reference in the registration statements on Form S-8 (No. 33-59570 and No. 33- 68514) and Form S-3 (No. 33-65059) of Capital Associates, Inc. of our reports dated July 14, 1998, relating to the consolidated balance sheets of Capital Associates, Inc. and subsidiaries as of May 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three- year period ended May 31, 1998, and the related schedule, which reports appear in the May 31, 1998 Annual Report on Form 10-K of Capital Associates, Inc. KPMG Peat Marwick LLP /s/KPMG Peat Marwick LLP ------------------------- Denver, Colorado July 22, 1998 EX-27 8 4Q98CAI.001
5 The schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of income and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS MAY-31-1998 MAY-31-1998 17,684 0 5,745 90 1,141 0 104,825 0 214,993 0 0 0 0 32 25,237 214,993 248,258 281,074 240,702 279,554 11,830 705 8,980 1,520 0 1,520 0 0 0 1,520 .30 .28
-----END PRIVACY-ENHANCED MESSAGE-----