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Cai International 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-2.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
20160630 10Q Q2









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

FORM 10-Q

  

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended June 30, 2016



or



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from          to



Commission file number: 001-33388



 





 

CAI International, Inc.

(Exact name of registrant as specified in its charter)





 

 



 

 

Delaware

 

94-3109229

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Steuart Tower, 1 Market Plaza, Suite 900

 

 

San Francisco, California

 

94105

(Address of principal executive offices)

 

(Zip Code)



 

415-788-0100

(Registrant’s telephone number, including area code)



 None

(Former name, former address and former fiscal year, if changed since last report)

 

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      No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No   

 

1


 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 



 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No   

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 



 

 

Common

 

July 31, 2016

Common Stock, $.0001 par value per share

 

19,257,453  shares









 

2


 



 CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

   

   

   

 

Page No.

Part I — Financial Information

   

   

   

Item 1.

Financial Statements (Unaudited)

   

   

   

   

Consolidated Balance Sheets at June 30, 2016 and December 31, 2015

   

   

   



Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015



 

 

   

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015

   

   

   

   

Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015

   

   

   

   

Notes to Unaudited Consolidated Financial Statements

10 

   

   

   

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23 

   

   

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32 

   

   

   

Item 4.

Controls and Procedures

32 

   

   

Part II — Other Information

33 

   

   

   

Item 1.

Legal Proceedings

33 

   

   

   

Item 1A.

Risk Factors

33 

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33 

   

   

   

Item 3.

Defaults Upon Senior Securities

33 

   

   

   

Item 4.

Mine Safety Disclosures

33 

   

   

   

Item 5.

Other Information

33 

   

   

   

Item 6.

Exhibits

33 

   

   

Signatures

34 



3


 



SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business, operations, growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (SEC) on March 3, 2016 and our other reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our other filings with the SEC.



4


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS



 CAI INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

(UNAUDITED)





 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2016

 

2015

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

$

15,723 

 

$

17,447 

Cash held by variable interest entities

 

15,903 

 

 

35,106 

Accounts receivable, net of allowance for doubtful accounts of $966 and

 

 

 

 

 

and $548 at June 30, 2016 and December 31, 2015, respectively

 

69,013 

 

 

55,284 

Current portion of direct finance leases

 

24,449 

 

 

21,158 

Prepaid expenses and other current assets

 

2,377 

 

 

2,155 

Total current assets

 

127,465 

 

 

131,150 

Restricted cash

 

6,702 

 

 

7,212 

Rental equipment, net of accumulated depreciation of $385,571 and

 

 

 

 

 

$349,810 at June 30, 2016 and December 31, 2015, respectively

 

1,795,851 

 

 

1,748,211 

Net investment in direct finance leases

 

78,066 

 

 

82,210 

Goodwill

 

15,482 

 

 

2,905 

Intangible assets, net of accumulated amortization of $1,512 and

 

 

 

 

 

$1,237 at June 30, 2016 and December 31, 2015, respectively

 

10,860 

 

 

1,223 

Furniture, fixtures and equipment, net of accumulated depreciation of $2,805 and

 

 

 

 

 

$2,027 at June 30, 2016 and December 31, 2015, respectively

 

701 

 

 

674 

Total assets (1)

$

2,035,127 

 

$

1,973,585 



 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

14,417 

 

$

11,962 

Accrued expenses and other current liabilities

 

10,135 

 

 

4,813 

Due to container investors

 

6,528 

 

 

5,801 

Unearned revenue

 

12,085 

 

 

11,990 

Current portion of debt

 

89,159 

 

 

169,596 

Rental equipment payable

 

21,159 

 

 

10,901 

Total current liabilities

 

153,483 

 

 

215,063 

Debt

 

1,360,574 

 

 

1,249,057 

Deferred income tax liability

 

51,627 

 

 

48,204 

Other long term liabilities

 

3,500 

 

 

 -

Total liabilities (2)

 

1,569,184 

 

 

1,512,324 



 

 

 

 

 

Stockholders' equity

 

 

 

 

 

Common stock: par value $.0001 per share; authorized 84,000,000 shares; issued and outstanding

 

 

 

 

 

19,317,984 and 20,132,706 shares at June 30, 2016 and December 31, 2015, respectively

 

 

 

Additional paid-in capital

 

142,295 

 

 

148,523 

Accumulated other comprehensive loss

 

(7,012)

 

 

(7,922)

Retained earnings

 

330,658 

 

 

319,735 

Total CAI stockholders' equity

 

465,943 

 

 

460,338 

Non-controlling interest

 

 -

 

 

923 

Total stockholders' equity

 

465,943 

 

 

461,261 

Total liabilities and stockholders' equity

$

2,035,127 

 

$

1,973,585 

5


 



(1)

Total assets at June 30, 2016 and December 31, 2015 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash,  $15,903  and $35,106; Net investment in direct finance leases, $5,475 and $1,915; and Rental equipment, net of accumulated depreciation, $65,682 and $85,101, respectively.



(2)

Total liabilities at June 30, 2016 and December 31, 2015 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $24,882 and $60,382; Debt, $65,073  and $59,445, respectively. 



See accompanying notes to unaudited consolidated financial statements. 

6


 

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(UNAUDITED)

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2016

 

2015

 

2016

 

2015

Revenue

 

 

 

 

 

 

 

 

 

 

 

Container lease income

$

51,160 

 

$

55,326 

 

$

102,074 

 

$

109,646 

Rail lease income

 

7,591 

 

 

3,753 

 

 

14,848 

 

 

6,668 

Logistics revenue

 

12,382 

 

 

 -

 

 

20,546 

 

 

 -

Management fee revenue

 

509 

 

 

287 

 

 

1,140 

 

 

1,544 

Total revenue

 

71,642 

 

 

59,366 

 

 

138,608 

 

 

117,858 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

24,494 

 

 

22,029 

 

 

47,528 

 

 

43,252 

Storage, handling and other expenses

 

9,323 

 

 

6,994 

 

 

18,374 

 

 

13,759 

Logistics transportation costs

 

10,140 

 

 

 -

 

 

17,082 

 

 

 -

Loss (gain) on sale of used rental equipment

 

3,894 

 

 

192 

 

 

4,627 

 

 

(165)

Administrative expenses

 

8,933 

 

 

7,017 

 

 

17,683 

 

 

14,228 

Total operating expenses

 

56,784 

 

 

36,232 

 

 

105,294 

 

 

71,074 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

14,858 

 

 

23,134 

 

 

33,314 

 

 

46,784 



 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

10,545 

 

 

9,047 

 

 

20,538 

 

 

17,825 

Other expense

 

192 

 

 

100 

 

 

322 

 

 

59 

Other expense

 

10,737 

 

 

9,147 

 

 

20,860 

 

 

17,884 



 

 

 

 

 

 

 

 

 

 

 

Net income before income taxes and non-controlling interest

 

4,121 

 

 

13,987 

 

 

12,454 

 

 

28,900 

Income tax expense

 

361 

 

 

1,057 

 

 

1,494 

 

 

2,399 



 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,760 

 

 

12,930 

 

 

10,960 

 

 

26,501 

Net income attributable to non-controlling interest

 

 

 

41 

 

 

37 

 

 

70 

Net income attributable to CAI common stockholders

$

3,757 

 

$

12,889 

 

$

10,923 

 

$

26,431 



 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CAI common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.19 

 

$

0.61 

 

$

0.56 

 

$

1.26 

Diluted

$

0.19 

 

$

0.60 

 

$

0.56 

 

$

1.24 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

19,372 

 

 

21,095 

 

 

19,577 

 

 

21,000 

Diluted

 

19,449 

 

 

21,398 

 

 

19,646 

 

 

21,346 



See accompanying notes to unaudited consolidated financial statements.

7


 

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Net income

$

3,760 

 

$

12,930 

 

$

10,960 

 

$

26,501 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(12)

 

 

458 

 

 

910 

 

 

(1,961)

Comprehensive income

 

3,748 

 

 

13,388 

 

 

11,870 

 

 

24,540 

Comprehensive income attributable to non-controlling interest

 

 

 

41 

 

 

37 

 

 

70 

Comprehensive income attributable to CAI common stockholders

$

3,745 

 

$

13,347 

 

$

11,833 

 

$

24,470 



See accompanying notes to unaudited consolidated financial statements.

8


 

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)





 

 

 

 

 



 

 

 

 

 



Six Months Ended June 30,



2016

 

2015

Cash flows from operating activities

 

 

 

 

 

Net income

$

10,960 

 

$

26,501 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

47,686 

 

 

43,466 

Amortization of debt issuance costs

 

1,453 

 

 

1,338 

Amortization of intangible assets

 

274 

 

 

129 

Stock-based compensation expense

 

908 

 

 

969 

Unrealized loss on foreign exchange

 

113 

 

 

170 

Loss (gain) on sale of used rental equipment

 

4,627 

 

 

(165)

Loss on disposal of subsidiary

 

146 

 

 

 -

Deferred income taxes

 

1,241 

 

 

429 

Bad debt expense

 

162 

 

 

193 

Changes in other operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(8,376)

 

 

2,096 

Prepaid expenses and other assets

 

31 

 

 

(2,273)

Accounts payable, accrued expenses and other current liabilities

 

483 

 

 

(2,675)

Due to container investors

 

727 

 

 

(4,193)

Unearned revenue

 

88 

 

 

3,216 

Net cash provided by operating activities

 

60,523 

 

 

69,201 

Cash flows from investing activities

 

 

 

 

 

Purchase of rental equipment

 

(130,239)

 

 

(236,878)

Acquisitions, net of cash acquired

 

(15,729)

 

 

 -

Net proceeds from sale of used rental equipment

 

29,944 

 

 

28,133 

Disposal of subsidiary, net of cash disposed of

 

(460)

 

 

 -

Purchase of furniture, fixtures and equipment

 

(49)

 

 

(49)

Receipt of principal payments from direct financing leases

 

11,778 

 

 

10,504 

Net cash used in investing activities

 

(104,755)

 

 

(198,290)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt

 

291,990 

 

 

236,831 

Principal payments on debt

 

(261,413)

 

 

(104,714)

Debt issuance costs

 

(941)

 

 

(1,662)

Decrease in restricted cash

 

510 

 

 

509 

Repurchase of stock

 

(7,117)

 

 

 -

Exercise of stock options

 

 -

 

 

4,645 

Excess tax benefit from share-based compensation awards

 

 -

 

 

1,006 

Net cash provided by financing activities

 

23,029 

 

 

136,615 

Effect on cash of foreign currency translation

 

276 

 

 

(217)

Net (decrease) increase in cash

 

(20,927)

 

 

7,309 

Cash at beginning of the period

 

52,553 

 

 

53,821 

Cash at end of the period

$

31,626 

 

$

61,130 



 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

$

487 

 

$

1,887 

Interest

 

18,900 

 

 

16,296 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

Transfer of rental equipment to direct finance lease

$

10,917 

 

$

18,191 



See accompanying notes to unaudited consolidated financial statements.

9


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



(1)The Company and Nature of Operations

Organization

CAI International, Inc. and its subsidiaries (collectively, CAI or the Company) is a transportation finance and logistics company. The Company purchases equipment, primarily intermodal shipping containers and railcars, which it leases to its customers. The Company also manages equipment for third-party investors. In operating its fleet, the Company leases, re-leases and disposes of equipment and contracts for the repair, repositioning and storage of equipment. The Company also provides domestic and international logistics services.

In July 2015, the Company purchased ClearPointt Logistics LLC (ClearPointt), an intermodal logistics company focused on the domestic intermodal market, for approximately $4.1 million. ClearPointt is headquartered in Everett, Washington. 

In February 2016, the Company purchased Challenger Overseas LLC (Challenger), a Non-Vessel Operating Common Carrier (NVOCC), for approximately $10.8 million (see Note 4). Challenger is headquartered in Eatontown, New Jersey.

In June 2016, the Company purchased Hybrid Logistics, Inc. and its affiliate, General Transportation Services, Inc. (collectively, Hybrid), asset light truck brokers, for approximately $11.9 million (see Note 4). Hybrid is headquartered in Portland, Oregon.

The Company’s common stock is traded on the New York Stock Exchange under the symbol “CAI.” The Company’s corporate headquarters are located in San Francisco, California.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and its previously 80%-owned subsidiary, CAIJ, Inc. (CAIJ), up to its date of disposal in April 2016. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of June 30, 2016 and December 31, 2015, the Company’s results of operations for the three and six months ended June 30, 2016 and 2015, and the Company’s cash flows for the six months ended June 30, 2016 and 2015. The results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2016 or in any future period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 3, 2016.

 

(2)Accounting Policies and Recent Accounting Pronouncements

(a)Accounting Policies

There were no changes to the Company’s accounting policies during the six months ended June 30, 2016. See Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 3, 2016, for a description of the Company’s significant accounting policies. 

(b)Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU No. 2014-09). This new standard will replace all current U.S. GAAP guidance on this topic and eliminates industry-specific guidance. Leasing revenue recognition is specifically excluded from this ASU, and therefore, the new standard will only apply to management fee revenue, sales of equipment portfolios, sales of used equipment and the provision of logistics services. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. Adoption of the guidance is not expected to have a material impact on the Company’s consolidated financial statements.  

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendment to the Consolidation Analysis (ASU No. 2015-02). The new guidance changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity (VIE) characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. The guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU No. 2015-02 effective January 1, 2016, and adoption had no impact on the Company’s consolidated financial statements.

10


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU No. 2015-03).  The new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU No. 2015-03 effective January 1, 2016. Adoption of the guidance resulted in the reclassification of unamortized debt issuance costs of $12.6 million and $13.0 million as of June 30, 2016 and December 31, 2015, respectively, from prepaid expenses and other current assets to a reduction of debt on the Company’s consolidated balance sheets.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU No. 2015-17). The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption permitted. The new guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. The Company early adopted ASU No. 2015-07 effective December 31, 2015 on a prospective basis. No prior periods were retrospectively adjusted, and adoption did not have an impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU No. 2016-02). The new standard will replace all current U.S. GAAP guidance on this topic. The new guidance will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases, with the exception of leases that meet the definition of a short-term lease. Lessor accounting will remain similar to the current model. The guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition and is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU No. 2016-09), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The guidance is effective beginning in the first quarter of 2017, with early adoption permitted. We are currently evaluating the impact that the new guidance will have on the Company’s consolidated financial statements and related disclosures.



(3)Consolidation of Variable Interest Entities as a Non-Controlling Interest

The Company regularly performs a review of its container fund arrangements with investors to determine whether or not it has a variable interest in the fund and if the fund is a variable interest entity (VIE). If it is determined that the Company does not have a variable interest in the fund, further analysis is not required and the Company does not consolidate the fund. If it is determined that the Company does have a variable interest in the fund and the fund is a VIE, a  further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under ASC Topic 810:

·

It has power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and

·

It has the obligation to absorb losses of the VIE that could be potentially significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

If in the Company’s judgment both of the above criteria are met, the VIE’s financial statements are included in the Company’s consolidated financial statements as required under ASC Topic 810, Consolidation.  

The Company currently enters into two types of container fund arrangements with investors which are reviewed under ASC Topic 810, Consolidation. These arrangements include container funds that the Company manages for investors and container funds that have entered into financing arrangements with investors. Several of the funds that the Company manages and funds under financing arrangements are Japanese container funds that were established under separate investment agreements allowed under Japanese commercial laws (see Note 13). Each of the funds is financed by unrelated Japanese third party investors.

Managed Container Funds

The fees earned by the Company for arranging, managing and establishing container funds are commensurate with the level of effort required to provide those services, and are at or above the same level of seniority as other operating liabilities of the funds that are in the normal course of business. As such, the Company does not have a variable interest in the managed containers funds, and does not consolidate those funds. The Company recognizes gain on sale of containers to the unconsolidated funds as sales in the ordinary course of business. No container portfolios were sold to the Japanese funds in the three and six months ended June 30, 2016 and 2015.

11


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Collateralized Financing Obligations

As of June 30, 2016, the Company has transferred containers with a total net book value of $182.6  million at the time of transfer to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors. In accordance with ASC Topic 840, Sale-Leaseback Transactions, the Company concluded these were financing transactions under which sale-leaseback accounting was not applicable.

The terms of the transactions with container funds under financing arrangements include options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance and, as a result, the Company has a variable interest in the funds. The funds are considered VIEs under ASC Topic 810, Consolidation because, as lessee of the funds, the Company has the power to direct the activities that most significantly impact each entity’s economic performance including the leasing and managing of containers owned by the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these VIEs and included the VIEs’ assets and liabilities as of June 30, 2016 and December 31, 2015, and the results of the VIEs’ operations and cash flows for the three and six months ended June 30, 2016 and 2015 in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $71.2  million as of June 30, 2016. The container equipment, together with $15.9 million of cash held by the investor funds, has been included on the Company’s consolidated balance sheets with the offsetting liability related to the funds presented in the debt section of the Company’s consolidated balance sheets as collateralized financing obligations of $83.7 million and term loans held by VIE of $6.3 million. See Note 8(e) and 8(f) for additional information. No gain or loss was recognized by the Company on the initial consolidation of the VIEs. Containers sold to the Japanese investor funds during the three months ended June 30, 2016 and 2015 had book values of $6.2 million and $8.0 million, respectively. Containers sold to the Japanese investor funds during the six months ended June 30, 2016 and 2015 had book values of $16.9 million and $14.8 million, respectively.



(4)Acquisitions

During the six months ended June 30, 2016, the Company completed the acquisitions of Challenger and Hybrid, for total consideration of $22.7  million, $6.0 million of which is based on their future performance. Expected future payments of $3.5 million and $2.5 million are recorded in Other long-term liabilities and Accrued expenses and Other current liabilities, respectively, in the Company’s consolidated balance sheet at June 30, 2016. The acquisitions were not material to the Company’s consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma results of operations related to these business acquisitions during the six months ended June 30, 2016 have not been presented. The Company has included the financial results of these business acquisitions in its consolidated financial statements from their respective date of acquisition.

The following table summarizes the allocation of the total consideration transferred (in thousands):







 

 

 

 

 

Cash

 

 

 

$

1,186 

Accounts receivable

 

 

 

 

5,839 

Property and equipment

 

 

 

 

145 

Goodwill

 

 

 

 

12,577 

Intangible assets

 

 

 

 

9,912 

Other assets

 

 

 

 

284 

Total assets

 

 

 

 

29,943 



 

 

 

 

 

Accounts payable

 

 

 

 

4,437 

Deferred tax liability

 

 

 

 

2,184 

Other liabilities

 

 

 

 

605 

Total liabilities

 

 

 

 

7,226 



 

 

 

 

 

Purchase price

 

 

 

$

22,717 



12


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Adjustments to record the assets acquired and liabilities assumed at fair value include the recognition of $9.9 million of intangible assets as follows:









 

 

 

 

 



Amount

 

Estimated Life

Tradenames

$

1,188 

 

 

5 years

Customer relationships

 

8,724 

 

 

8 years





(5)Rental Equipment

The following table provides a summary of the Company’s rental equipment (in thousands):







 

 

 

 

 



June 30,

 

December 31,



2016

 

2015

Dry containers

$

1,376,706 

 

$

1,392,825 

Refrigerated containers

 

325,063 

 

 

308,374 

Other specialized equipment

 

149,927 

 

 

152,310 

Railcars

 

329,726 

 

 

244,512 



 

2,181,422 

 

 

2,098,021 

Accumulated depreciation

 

(385,571)

 

 

(349,810)

Rental equipment, net of accumulated depreciation

$

1,795,851 

 

$

1,748,211 









(6)Net Investment in Direct Finance Leases 

The following table represents the components of the Company’s net investment in direct finance leases (in thousands):

 



 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2016

 

2015

Gross finance lease receivables (1)

$

124,402 

 

$

124,747 

Unearned income (2)

 

(21,887)

 

 

(21,379)

Net investment in direct finance leases

$

102,515 

 

$

103,368 



(1)

At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivables are reduced as customer payments are received.  There was no unguaranteed residual value at June 30, 2016 and December 31, 2015 included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of June 30, 2016 and December 31, 2015.



(2)

The difference between the gross finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of June 30, 2016 and December 31, 2015.



In order to estimate the allowance for losses contained in gross finance lease receivables, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, the aging of customer receivables and general economic conditions.

The categories of gross finance lease receivables based on the Company's internal customer credit ratings can be described as follows:

Tier 1— These customers are typically large international shipping lines that have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management, which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to moderate.

13


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Tier 2— These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.

Tier 3— Customers in this category exhibit volatility in payments on a regular basis.

Based on the above categories, the Company's gross finance lease receivables were as follows (in thousands):

 



 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2016

 

2015

Tier 1

$

80,367 

 

$

86,981 

Tier 2

 

44,035 

 

 

37,766 

Tier 3

 

 -

 

 

 -



$

124,402 

 

$

124,747 



Contractual maturities of the Company's gross finance lease receivables subsequent to and as of June 30, 2016 for the years ending June 30 were as follows (in thousands):





 

 

 

 

 



 

 

 

 

 

2017

 

 

 

$

32,048 

2018

 

 

 

 

38,283 

2019

 

 

 

 

20,538 

2020

 

 

 

 

12,606 

2021

 

 

 

 

10,089 

2022 and thereafter

 

 

 

 

10,838 



 

 

 

$

124,402 









(7)Intangible Assets

The Company amortizes intangible assets on a straight line basis over their estimated useful lives as follows:





 

Trademarks and tradenames

                 1-10 years

Customer relationships

8 years



Total amortization expense was  $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively, and $0.3 million and $0.1  million for the six months ended June 30, 2016 and 2015, respectively.

Intangible assets as of June 30, 2016 and December 31, 2015 were as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

June 30, 2016

 

 

 

 

 

 

 

 

Trademarks and tradenames

$

3,028 

 

$

(1,355)

 

$

1,673 

Customer relationships

 

9,344 

 

 

(157)

 

 

9,187 



$

12,372 

 

$

(1,512)

 

$

10,860 

December 31, 2015

 

 

 

 

 

 

 

 

Trademarks and tradenames

$

1,840 

 

$

(1,218)

 

$

622 

Customer relationships

 

620 

 

 

(19)

 

 

601 



$

2,460 

 

$

(1,237)

 

$

1,223 

     





14


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



As of June 30, 2016,  estimated future amortization expenses are as follows (in thousands):







 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

$

1,546 

2018

 

 

 

 

 

 

 

1,519 

2019

 

 

 

 

 

 

 

1,519 

2020

 

 

 

 

 

 

 

1,519 

2021

 

 

 

 

 

 

 

1,405 

2022 and thereafter

 

 

 

 

 

 

 

3,352 



 

 

 

 

 

 

$

10,860 











(8Debt

Details of the Company’s debt as of June 30, 2016 and December 31, 2015 were as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

June 30, 2016

 

December 31, 2015

 

 



 

Outstanding

 

Average

 

Outstanding

 

Average

 

 

Reference

 

Current

 

Long-term

 

Interest

 

Current

 

Long-term

 

Interest

 

Maturity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)(i)

Revolving credit facility

$

 -

 

$

535,000 

 

2.2%

 

$

8,500 

 

$

488,000 

 

1.8%

 

March 2020

(a)(ii)

Revolving credit facility - Rail

 

 -

 

 

222,000 

 

2.0%

 

 

34,500 

 

 

126,000 

 

1.9%

 

October 2020

(b)(i)

Term loan

 

1,800 

 

 

22,800 

 

2.6%

 

 

1,800 

 

 

23,700 

 

2.3%

 

April 2018

(b)(ii)

Term loan

 

9,000 

 

 

125,250 

 

2.2%

 

 

9,000 

 

 

129,750 

 

2.2%

 

October 2019

(b)(iii)

Term loan

 

7,000 

 

 

93,000 

 

2.4%

 

 

9,940 

 

 

99,440 

 

1.9%

 

June 2021

(b)(iv)

Term loan

 

1,139 

 

 

18,307 

 

3.4%

 

 

1,119 

 

 

18,881 

 

3.4%

 

December 2020

(c)

Senior secured notes

 

6,110 

 

 

68,050 

 

4.9%

 

 

7,175 

 

 

71,105 

 

4.9%

 

September 2022

(d)

Asset backed notes

 

40,000 

 

 

222,875 

 

3.4%

 

 

40,000 

 

 

242,875 

 

3.4%

 

March 2028

(e)

Collateralized financing obligations

 

23,053 

 

 

60,618 

 

1.0%

 

 

58,553 

 

 

53,697 

 

0.7%

 

June 2019

(f)

Term loans held by VIE

 

1,829 

 

 

4,455 

 

2.6%

 

 

1,829 

 

 

5,748 

 

2.6%

 

June 2019



 

 

89,931 

 

 

1,372,355 

 

 

 

 

172,416 

 

 

1,259,196 

 

 

 

 



Debt issuance costs

 

(772)

 

 

(11,781)

 

 

 

 

(2,820)

 

 

(10,139)

 

 

 

 



Total Debt

$

89,159 

 

$

1,360,574 

 

 

 

$

169,596 

 

$

1,249,057 

 

 

 

 



(a)Revolving Credit Facilities

Revolving credit facilities consist of the following:

(i) On March 15, 2013, the Company entered into the Third Amended and Restated Revolving Credit Agreement, as amended, with a consortium of banks to finance the acquisition of container rental equipment and for general working capital purposes. On January 30, 2015, the Company entered into an amendment to the Third Amended and Restated Revolving Credit Agreement, pursuant to which the revolving credit facility was amended to extend the maturity date to March 15, 2020, reduce the interest rate, increase the commitment level from $760.0 million to $775.0 million, and revise certain of the covenants and restrictions to provide the Company with additional flexibility.

As of June 30, 2016, the maximum commitment under the revolving credit facility was $775.0 million. The revolving credit facility may be increased up to a maximum of $960.0 million, in accordance with the terms of the agreement, so long as no default or event of default exists either before or immediately after giving effect to the increase. There is a commitment fee on the unused amount of the total commitment, payable quarterly in arrears. The revolving credit facility provides that swing line loans (short-term borrowings of up to $10.0 million in the aggregate that are payable within 10 business days or at maturity date, whichever comes earlier) and standby letters of credit (up to $15.0 million in the aggregate) will be available to the Company. These credit commitments are part of, and not in addition to, the total commitment provided under the revolving credit facility. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the revolving credit agreement. Interest rates are based on LIBOR for Eurodollar loans and Base Rate for Base Rate loans. In addition to various financial and other covenants, the Company’s revolving credit facility also includes certain restrictions on the Company’s ability to incur other indebtedness or pay dividends to stockholders. As of June 30, 2016, the Company was in compliance with the terms of the revolving credit facility.

15


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of June 30, 2016, the Company had $239.9 million in availability under the revolving credit facility (net of $0.1 million in letters of credit) subject to its ability to meet the collateral requirements under the agreement governing the facility. Based on the borrowing base and collateral requirements at June 30, 2016, the borrowing availability under the revolving credit facility was $66.0 million, assuming no additional contribution of assets. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default.

The Company’s revolving credit facility, including any amounts drawn on the facility, is secured by substantially all of the assets of the Company (not otherwise used as security for its other credit facilities) including equipment owned by the Company, which had a net book value of $726.2 million as of June 30, 2016, the underlying leases and the Company’s interest in any money received under such contracts.

(ii) On October 22, 2015, the Company and CAI Rail Inc. (CAI Rail), a wholly-owned subsidiary of the Company, entered into the Second Amended and Restated Revolving Credit Agreement with a consortium of banks, pursuant to which the prior revolving credit facility was amended to extend the maturity date to October 22, 2020, reduce the interest rate, increase the commitment level from $250.0 million to $500.0 million, which may be increased up to a maximum of $700.0 million subject to certain conditions, and revise certain of the covenants and restrictions under the prior facility to provide the Company with additional flexibility. As of June 30, 2016, the maximum credit commitment under the revolving credit facility was $500.0 million.

Borrowings under this revolving credit facility bear interest at a variable rate. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the revolving credit agreement.  Interest rates are based on LIBOR for Eurodollar loans and Base Rate for Base Rate loans.

As of June 30, 2016, CAI Rail had  $278.0 million in availability under the revolving credit facility, subject to its ability to meet the collateral requirements under the agreement governing the facility. Based on the borrowing base and collateral requirements at June 30, 2016, the borrowing availability under the revolving credit facility was $5.8 million, assuming no additional contribution of assets. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default.

The agreement governing CAI Rail’s revolving credit facility contains various financial and other covenants. As of June 30, 2016, CAI Rail was in compliance with the terms of the revolving credit facility. CAI Rail’s revolving credit facility, including any amounts drawn on the facility, is secured by all of the assets of CAI Rail, which had a net book value of $284.8 million as of June 30, 2016, and is guaranteed by the Company.

(b)Term Loans

Term loans consist of the following:

(i)  On March 22, 2013, the Company entered into a $30.0 million five-year term loan agreement with Development Bank of Japan (DBJ). The loan is payable in 19 quarterly installments of $0.5 million starting July 31, 2013 and a final payment of $21.5 million on April 30, 2018. The loan bears interest at a variable rate based on LIBOR. As of June 30, 2016, the loan had a balance of $24.6  million.

(ii)  On December 20, 2010, the Company entered into a term loan agreement with a consortium of banks. Under this loan agreement, the Company was eligible to borrow up to $300.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of the Company’s wholly-owned foreign subsidiaries. The loan agreement is an amortizing facility with a term of six years. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the term loan agreement. The loan bears a variable interest rate based on LIBOR for Eurodollar loans, and Base Rate for base rate loans.  

On March 28, 2013, the term loan was amended which reduced the principal balance of the loan from $249.4 million to $125.0 million through payment of $124.4 million from the proceeds of the $229.0 million fixed-rate asset-backed notes issued by the Company’s indirect wholly-owned subsidiary, CAL Funding II Limited (see Note 8(d) below).

On October 1, 2014, the Company entered into an amended and restated term loan agreement, pursuant to which the prior loan agreement was refinanced. The amended and restated term loan agreement, which contains similar terms to the prior loan agreement, was amended to, among other things: (a) reduce borrowing rates from LIBOR plus 2.25% to LIBOR plus 1.6% (per annum) for Eurodollar loans, (b) increase the loan commitment from $115.0 million to $150.0 million, (c) extend the maturity date to October 1, 2019, and (d) revise certain of the covenants and restrictions under the prior loan agreement to provide the Company with additional flexibility. As of June 30, 2016, the term loan had a balance of $134.3  million.

(iii) On April 11, 2012, the Company entered into a term loan agreement with a consortium of banks. The agreement, as amended, provided for a five-year term loan of up to $142.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of the Company.

16


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



On June 30, 2016, the Company entered into an amended and restated term loan agreement, pursuant to which the prior loan agreement was refinanced. The amended and restated term loan agreement, which contains similar terms to the prior loan agreement, was amended to, among other things: (a) provide the Company with the ability to increase the commitments under the facility to a maximum of $100.0 million, subject to certain conditions, (2) extend the maturity date to June 30, 2021, and (c) revise certain of the covenants and restrictions under the prior agreement to provide the Company with additional flexibility. The term loan’s outstanding principal is amortized quarterly, with quarterly payments equal to 1.75% multiplied by the original outstanding principal. The amended and restated term loan agreement bears a variable interest rate based on LIBOR for Eurodollar loans, and Base Rate for base rate loans. As of June 30, 2016, the loan had a balance of $100.0 million.

(iv) On December 22, 2015, the Company and CAI Rail entered into a $20.0 million five-year term loan agreement with Siemens Financial Services, Inc.. The term loan’s outstanding principal bears interest at a fixed rate of 3.4% per annum and is amortized quarterly. Any unpaid principal and interest is due and payable on December 22, 2020. The proceeds from the term loan were primarily used to repay outstanding amounts under CAI Rail’s revolving credit facility. As of June 30, 2016, the loan had a balance of $19.4  million.

The Company’s term loans are secured by rental equipment owned by the Company, which had a net book value of $339.0 million as of June 30, 2016.

(c)Senior Secured Notes

On September 13, 2012, Container Applications Limited (CAL), a wholly-owned subsidiary of the Company, entered into a Note Purchase Agreement with certain institutional investors, pursuant to which CAL issued $103.0 million of its 4.90% Senior Secured Notes due September 13, 2022 (the Notes) to the investors. The Notes are guaranteed by the Company and secured by certain assets of CAL and the Company.

The Notes bear interest at 4.9% per annum, due and payable semiannually on March 13 and September 13 of each year, commencing on March 13, 2013. In addition, CAL is required to make certain principal payments on March 13 and September 13 of each year, commencing on March 13, 2013. Any unpaid principal and interest is due and payable on September 13, 2022. The Note Purchase Agreement provides that CAL may prepay at any time all or any part of the Notes in an amount not less than 10% of the aggregate principal amount of the Notes then outstanding. As of June 30, 2016, the Notes had a balance of  $74.2 million.

The Notes are secured by certain rental equipment owned by the Company, which had a net book value of $97.8 million as of June 30, 2016.

(d)Asset-Backed Notes

On October 18, 2012, CAL Funding II Limited (CAL II), a wholly-owned indirect subsidiary of CAI, issued $171.0 million of 3.47% fixed rate asset-backed notes (Series 2012-1 Asset-Backed Notes).  Principal and interest on the Series 2012-1 Asset-Backed Notes is payable monthly commencing on November 26, 2012, and the Series 2012-1 Asset-Backed Notes mature in October 2027.  The proceeds from the Series 2012-1 Asset-Backed Notes were used to repay part of the Company’s borrowings under its senior revolving credit facility. As of June 30, 2016, the Series 2012-1 Asset-Backed Notes had a balance of  $108.3  million.

On March 28, 2013, CAL II issued $229.0 million of 3.35% fixed rate asset-backed notes (Series 2013-1 Asset-Backed Notes). Principal and interest on the Series 2013-1 Asset-Backed Notes is payable monthly commencing on April 25, 2013, and the Series 2013-1 Asset-Backed Notes mature in March 2028. The proceeds from the Series 2013-1 Asset-Backed Notes were used partly to reduce the balance of the Company’s term loan as described in Note 8  (b)(ii) above, and to partially pay down the Company’s senior revolving credit facility. The Series 2013-1 Asset-Backed Notes had a balance of $154.6  million as of June 30, 2016.

The Company’s asset-backed notes are secured by certain rental equipment owned by the Company, which had a net book value of $341.6 million as of June 30, 2016.

The agreements under each of the asset-backed notes described above require the Company to maintain a restricted cash account to cover payment of the obligations. As of June 30, 2016, the restricted cash account had a balance of $6.7  million.

(e)Collateralized Financing Obligations

As of June 30, 2016, the Company had collateralized financing obligations of $83.7 million (see Note 3). The obligations had an average interest rate of 1.0% as of June 30, 2016 with maturity dates between November 2016 and June 2019. The debt is secured by a pool of containers covered under the financing arrangements.

17


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(f)Term Loans Held by VIE

On June 25, 2014, one of the Japanese investor funds that is consolidated by the Company as a VIE (see Note 3) entered into a term loan agreement with a bank. Under the terms of the agreement, the Japanese investor fund entered into two loans; a five-year, amortizing loan of $9.2 million at a fixed interest rate of 2.7%, and a five-year, non-amortizing loan of $1.6 million at a variable interest rate based on LIBOR. The debt is secured by assets of the Japanese investor fund, and is subject to certain borrowing conditions set out in the loan agreement. As of June 30, 2016, the term loans held by the Japanese investor fund totaled $6.3 million and had an average interest rate of 2.6%.

The Company’s term loans held by VIE are secured by rental equipment owned by the Japanese investor fund, which had a net book value of $15.1  million as of June 30, 2016.

The agreements relating to all of the Company’s debt contain various financial and other covenants. As of June 30, 2016, the Company was in compliance with all of its debt covenants.



(9)Stock–Based Compensation Plan

Stock Options

The Company grants stock options to certain employees and independent directors pursuant to its 2007 Equity Incentive Plan (Plan), as amended, which was originally adopted on April 23, 2007. Under the Plan, a maximum of 2,671,980 share awards may be granted.

Stock options granted to employees have a vesting period of four years from grant date, with 25% vesting after one year, and 1/48th vesting each month thereafter until fully vested. Stock options granted to independent directors vest in one year. All of the stock options have a contractual term of ten years.

The following table summarizes the Company’s stock option activities for the six months ended June 30, 2016 and 2015: