NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



(1 )     The Company and Nature of Operations

Organization

CAI International, Inc. , together with 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 February 2016, the Company purchased Challenger Overseas LLC (Challenger), a Non-Vessel Operating Common Carrier (NVOCC) , for approximately $10.8 million. 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 $1 2.0 million. 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 CAI International, Inc. , 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 normal, recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2017 and December 31, 201 6 , the Company’s results of operations   for the three months ended March 31, 2017 and   2016 , and the Company’s cash flows for the three months ended March 31, 2017 and 2016 .  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 201 7 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) h ave 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, 201 6 , included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 1 3 , 201 7 .

(2)  Accounting Policies and Recent Accounting Pronouncements

Accounting Policies

Container rental equipment is recorded at original cost and depreciated to an estimated residual value on a straight-line basis over its estimated useful life. The estimated useful lives and residual values of the Company’s container equipment are based on historical disposal experience and the Company’s expectations for future used container sale prices. Depreciation estimates are reviewed on a regular basis to determine whether sustained changes have taken place in the useful lives of equipment or assigned residual values, which would suggest that a change in depreciation estimates is warranted.

After the Company conducted its regular depreciation policy review for 2016 , it concluded that a change in the estimated residual value for 40-foot high cube dry van containers from $1,650 to $1,400 per container , effective July 1, 2016 , was appropriate .   The change increased the Company’s d epreciation expense by $ 2.3 million , decreased net income by $ 2 .2 million , and decreased diluted earnings per share by $ 0.1 1   for the three months ended March 31, 2017 .

The Company continuously monitors disposal prices across its entire portfolio for indications of a sustained market downturn. The Company will adjust its residual value estimates as and when conditions warrant.



Except as described below in “ Recent Accounting Pronouncement s ”  t here were no changes to the Company’s accounting policies during the three months ended March 31, 2017 . See Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 13, 2017, for a description of the Company’s significant accounting policies. 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Recent Accounting Pronouncements

In March 2016, the F inancial A ccounting S tandards B oard (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) . The new standard simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. The new guidance also allows an entity to make a policy election to account for forfeitures as they occur.   The Company adopted ASU 2016-09 effective January   1, 2017 . Accordingly, excess tax benefits or deficiencies from stock-based compensation are now reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they were previously recognized in equity. As a result of the adoption of ASU 2016-09, the Company recognized $ 1.0 million in deferred tax assets associated with excess tax benefits not previously recognized in deferred taxes as a cumulative-effect adjustment to retained earnings a s of January 1, 2017 .   Adoption of the new standard did not have a material impact on our provision for income taxes for the three months ended March 31, 2017. The Company elected to apply the change in presentation to the statements of cash flows prospectively and elected to account for forfeitures as they occur , rather than estimate expected forfeitures, which did not have a material impact on the Company’ s consolidated financial statements .  



( 3 )  Insurance Receivable and Impairment

In August 2016, Hanjin Shipping Co., Ltd. (Hanjin) filed for bankruptcy protection from its creditors. Based on the recovery of Hanjin containers to date and prior experience, the Company believes that most of its containers will be recovered. As of March 31, 2017, the Company has recovered approximately 84% of the containers that were on lease to Hanjin. The Company maintains insurance to cover the value of containers that are unlikely to be recovered from its customers, the cost to recover containers and up to 180 days of lost lease rental income , subject to a deductible of $2.0 million .  

During the year ended December 31, 2016 ,   the Company recorded an impairment of $3.2 million representing the book value of   containers   the Company estimated would not be recovered from Hanjin. As of December 31, 2016, an insurance receivable of $ 3.8 million was recorded for $ 1.2   million of estimated un recoverable containers in excess of the insurance deductible, which was recorded in depreciation expense, and $ 2.6   million of recovery costs , which was recorded as a reduction to storage, handling and other   expenses for the year ended December 31, 2016 .   An additional insurance receivable of $ 4.1 million was recorded for $2.2 million of lost lease rental income, recognized as container lease income and $1.9 million of recovery costs, recorded as a reduction to storage, handling and other expenses, during the three months ended March 31, 2017. As of March 31, 2017, the insurance receivable related to this customer was $7.9 million.



(4 )  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 FASB ASC Topic 810:

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 FASB ASC Topic 810, Consolidation .  

The Company currently enters into two types of container fund arrangements with investors which are reviewed under FASB 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 Japan ese commercial laws (see Note 14 ). 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 incurred 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   months ended March 31, 2017 and 2016 .  

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Collateralized Financing Obligations

As of March 31, 2017 , the Company has transferred containers , with a total net book value o f   $ 201.9 million at the time of transfer , to Japanese investor funds while concurrently entering into lease agreements for the same containers, un der which the Company leases the containers back from the Japanese investors. In accordance with FASB 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 FASB 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 March 31, 2017 , and December 31, 201 6 , and the results of the VIEs’ operations and cash flows for the three months ended March 31, 2017 and 2016 , in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $64.6 million as of March 31, 2017 . The container equipment, together with $ 20.4 million of cash held by the investor funds that can only be used to settle the liabilities of the VIEs , has been included on the Company’s consolidated balance sheets with the related liability presented in the debt section of the Company’s consolidated balance sheets as collateralized financing obligations of $84.8 million and term loans held by VIE of $4.7 million. See Note 9 (e) and 9 (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 March 31, 2016 , had a   book value of $10.7 million. No containers were sold to Japanese investor funds during the three months ended March 31, 2017.



( 5 )  Acquisition s

In 2016, the Company completed the acquisitions of C hallenger and Hybrid, for total consideration of $22. 8   million, $6.0 million of which was contingent and based on their future performance. The aggregate allocation of the combined purchase price included $1.2 million of cash ,   $9.9 million of identifiable intangible assets, $12.9 million of residual goodwill, and $1.2 million of net liabilities assumed .

T he contingent consideration liability was $2.2 million as of March 31, 2017 and December 31, 2016.   E xpected future payments of $ 1.7 million and $ 0. 5 million   were recorded in Other long-term liabilities and Accrued expenses and Other current liabilities, respectively, in the Company’s consolidated balance sheet s at March 31, 2017 and December 31, 2016 .  

Management believes that the contingent consideration liability of $2.2 million approximates its fair value as of March 31, 2017, based on the fair value of expected future payments estimated based on forecasted future performance. The fair value of these liabilities would be categorized as Level 3 in the fair value hierarchy.





(6 )  Rental Equipment

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













CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(7 )  Net Investment in Direct Finance Leases  

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







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.

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):



CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Contractual maturities of the Company's gross finance lease receivables subsequent to and as of March 31, 2017 for the years ending March 31 were as follows (in thousands):

















( 8 )  Intangible Assets

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





The Company’s i ntangible assets as of March 31, 2017 and December 31, 2016 were as follows (in thousands):









Total amortization expense was $0. 7 million and $0.1 million for the three months ended March 31, 2017 and 2016 , respectively, and was included in administrative expenses in the consolidated statements of income .

As of March 31, 2017 ,   estimated future amortization expenses are as follows (in thousands):

















CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



( 9 )  Debt

Details of the Company’s debt as of March 31, 2017 and December 31, 201 6 were as follows (dollars in thousands):





(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 March 31, 2017 , 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 $25.0 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 $30.0 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 t he 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 March 31, 2017 , the Company was in compliance with the terms of the revolving credit facility.

As of March 31, 2017 , the Company had $ 250.9 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 March 31, 2017 , the borrowing availability under the revolving credit facility was $ 72.2 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 $ 731.1 million as of March 31, 2017 , the underlying leases and the Company’s interest in any money received under such contracts.

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(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 for CAI Rail 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 March 31, 2017 , 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 t he revolving credit agreement.  Interest rates are based on LIBOR for Eurodollar loans and Base Rate for Base Rate loans.

As of March 31, 2017 , CAI Rail had $2 59 .5 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 March 31, 2017 , the borrowing availability under the revolving credit facility was $ 3.2 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 March 31, 2017 , 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 o f   $ 300.4 million as of March 31, 2017 , and is guaranteed by the Company.

(iii) On September 23, 2016, the Company and CAI International GmbH (CAI GmbH) , a wholly-owned subsidiary of the Company, entered into a Revolving Credit Agreement with a financial institution to finance the acquisition of rental equipment. As of March 31, 2017 , the maximum credit commitment under the revolving credit facility was € 25.0 million. Borrowings under this revolving credit facility bear interest at a variable rate. Interest rates are based on EURIBOR.

As of March 31, 2017, CAI GmbH had € 19.3   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 March 31, 2017 , the borrowing availability under the revolving credit facility was € 6.7  m illion, 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 GmbH’s revolving credit facility contains various financial and other covenants. As of March 31, 2017 ,   CAI GmbH was in compliance with the terms of the revolving credit facility. CAI GmbH ’s revolving credit facility, including any amounts drawn on the facility, is secured by all of the assets of CAI GmbH , which had a net book value o f   € 16.5   million as of March 31, 2017 , 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 March 31, 2017 , the loan had a balance o f   $ 23.3 millio n.

(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 whol ly-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 9 (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 March 31, 2017 , the term loan had a balance o f   $ 127.5  m illion.

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(iii) On April 11, 2012, the Company entered into a term loan agreement with a consortium of banks. The agreement, as amended, provide d 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.

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 March 31, 2017 , the loan had a balance of $ 94.8 mi llion.

(i v ) On December 22, 2015, the Company entered into a $20.0 million five -year term loan agreement for CAI Rail with a financial institution. 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 March 31, 2017 , the loan had a balance o f   $ 18.6  m illion.

(v ) On August 30, 2016, CAI Rail entered into a term loan agreement of up to $100.0 million with a consortium of banks for the acquisition of railcars, subject to certain borrowing conditions, which is secured by certain railcars and other assets of CAI Rail. The loan agreement is an amortizing facility with a term of five years. Borrowings under the loan bear interest at a fixed rate as specified in the applicable term note entered into at the time a draw is made under the loan agreement. Principal and interest on the borrowings are payable monthly during the five-year term of the note. At closing of the loan agreement, CAI Rail made a draw of $50.0 million on the facility at a fixed interest rate of 3.6% per annum. Any unpaid principal and interest is due on August 30, 2021 . As of March 31, 2017 , the loan had a balance of $ 48.4 million.

The Company’s term loans are secured by rental equipment owned by the Company, which had a net book value of $ 372. 2 million as of March 31, 2017 .

(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 March 31, 2017 , the Notes had a balance o f   $ 68.1 million.

The Company’s senior secured notes are secured by rental equipment owned by the Company, which had a net book value of $ 91.7 million as of March 31, 2017 .

(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 (Seri es 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 March 31, 2017 , the Series 2012-1 Asset-Backed Notes had a balance of $ 95.5 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 9 (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 $ 137.4 million as of March 31, 2017 .

The Company’s asset-backed notes are secured by certain rental equipment owned by the Company, which had a net book value of $ 307.4 million as of March 31, 2017 .

The agreements under each of the asset-backed notes described above require the Company to maintain a restricted cash account to cover p ayment of the obligations. As of March 31, 2017 , the restricted cash account had a balance of $ 5.9  m illion.

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(e) Collateralized Financing Obligations

As of March 31, 2017 , the Company had collateralized financing obligations of $ 84.8 million (see Note 4 ). The obligations had an average interest rate of 1.1 % as of March 31, 2017 with maturity dates between September 201 7 and September 2019 . The debt is secured by a pool of containers covered under the financing arrangements.

(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 4 ) 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 agreem ent. As of March 31, 2017 , the term loans held by the Japanese investor fund totaled $ 4.7   million and had an average interest rate of 2.7% .

The C ompany’s term loans held by VIE are secured by rental equipment owned by the Japanese investor fund, which had a net book value of $ 11.5   m illion as of March 31, 2017 .

The agreements relating to all of the Company’s debt contain various financial and other covenants. As of March 31, 2017 , the Company was in compliance with all of its debt covenants.



( 10 )  Stock–Based Compensation Plan

Stock Options

The Company grants stock options from time to time to certain employees and independent directors pursuant t o its 2007 Equity Incentive Plan , as amended,   (Plan) . 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 three months ended March 31, 2017 and 2016 :





The aggregate i ntrinsic value of stock options   exercised during the three months ended March 31, 2017 was   $ 0.4  m illion. The aggregate intrinsic value of all options outstanding as of March 31, 2017  w as $ 4.0 mi llion based on the closing price of the Company’s common stock of $ 15.74 per s hare on March 31, 2017 , the last trading day of the quarter.

The Company recorded stock-based compensation expense of $0.3 million and $0. 4 million for the three months ended March 31, 2017 and 2016 ,   respectively . As of March 31, 2017 , the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was appro ximately $ 3 . 3 million , which is to be recognized over the remaining weighted average vesting period of approximately 3.0 years.

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The fair value of stock options granted to the Company’s employees and independent directors in 2017 was estimated using the Black-Scholes-Merton pricing model using the following weighted average assumptions . No stock options were granted in the three months ended March 31, 2016:







The expected option term is calculated using the simplified method in accordance with SEC guidance. The expected volatility was derived from the average volatility of the Company’s stock over a period approximating the expected term of the options. The risk-free rate is based on the daily U.S. Treasury yield curve with a term approximating the expected term of the options. No forfeiture rate was estimated on all options granted during the three months ended March 31, 2017 , as the Company accounts for forfeitures as they occur (see Note 2) .



Restricted Stock

The Company grants restricted stock from time to time to certain employees pursuant to the Plan. The restricted stock is valued based on the closing price of the Company’s stock on the date of grant and has a vesting period of four years. The following table summarizes the activity of restricted stock under the Plan:





The Company recognized $0.1  m illion of stock -based compensation expense relating to restricted stock for both the three months ended March 31, 2017 and 2016 . As of March 31, 2017 , unamortized stock -based compen sation expense relating to restricted stock was $ 1.1 million , which will be recognized over the remaining average vesting period of 3.0 yea r s.

Stock-based compensation expense is recorded as a component of administrative expense s in the Company’s consolidated statements of income with a corresponding credit to additional paid-in capital in the Company’s consolidated balance sheets.



(11 )  Income Taxes

The consolidated income tax expense for the three months ended March 31, 2017 and 2016 , was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 201 7 and 201 6 , respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to foreign income taxes, state income taxes and the effect of certain permanent differences.

The Company’s estimated full year effective tax rate, before certain non-recurring discrete items, was 6 . 0 % at March 31, 2017 , compared to 13.6 % at March 31, 2016 . The lower estimated full year effective tax rate at March 31, 2017 was due to an   increase in the proportion of pretax income generated in lower tax jurisdictions .  

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The Company accounts for uncertain tax positions based on an evaluation as to whether it is more likely than not that a position will be sustained on audit, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the appropriate tax authorities have full knowledge of all relevant information concerning the tax position. Once it has been determined that a tax position is more likely than not to be sustained on its technical merits, the tax benefit recognized is based on the largest amount that is greater than 50% likely of being realized upon ultimate settlement. As of March 31, 2017 , the Company had unrecognized tax benefits of $0.2 million, which if recognized, would reduce the Company’s effective tax rate. Total accrued interest relating to unrecognized tax benefits was less than $0.1 million as of March 31, 2017 . The Company does not believe the total amount of unrecognized tax benefits as of March 31, 2017 will change for th e remainder of 201 7 .  



(12 )  Fair Value of Financial Instruments  

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company’s asset-backed notes of $ 23 2.9 million and collateralized financing obligations of $ 84.8 million as of March 31, 2017 were estimated to have a fair value of approximately $ 222.9 million and $ 83.9 million , respectively, based on the fair value of estimated future payments calculated using prevailing interest rates. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy. Management believes that the balances of the Company’s revolving credit facilities of $ 770.6 million, term loans totaling $ 312.5 million, senior secured notes of $68.1 million, term loans held by VIE of $ 4.7 million and net inves tment in direct finance leases of $ 97.2 approximate their fair values as of March 31, 2017 . The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy.



(13)  Commitments and Contingencies  

In addition to its debt obligations described in Note 9 above, the Company had commitments to purchase approximately $ 177.4 million of rental equipment as of March 31, 2017 ; $ 123.4 million in the twelve months ending March 31 , 2018 and $ 54.0 million in the twelve months ending March 31 , 2019. The Company also utilizes certain office facilities and equipment under long-term non-cancellable operating lease agreements with total future minimum lease payments of approximately $ 1.9 million as of March 31, 2017 .

In April 2017, the Company amended its new railcar delivery schedule to defer delivery of approximately $24.0 million of its remaining $95.0 million 2017 commitments to now be delivered in 2018, with delivery of most of the remaining $71.0 million being deferred to the third and fourth quarter of 2017 .



( 14 )  Related Party Transactions

The Company has transferred legal ownership of certain containers to Japanese container funds that were established by Japan Investment Adviser Co., Ltd. (JIA) and CAIJ , Inc. (CAIJ) .   Prior to April 2016, CAIJ was an 80% -owned subsidiary of CAI with the remaining 20% owned by JIA .   Prior to the transfer of containers from the Company, the container funds received contributions from unrelated Japanese investors, under separate Japanese investment agreements allowed under Japanese commercial laws. The contributions were used to purchase container equipment from the Company. Under the terms of the agreements, the CAI-related Japanese entities manage the activities of certain Japanese entities but may outsource the whole or part of each operation to a third party. Pursuant to its services agreements with investors, the Japanese container funds outsourced the general management of their operations to CAIJ. The Japanese container funds also entered into equipment management service agreements and financing arrangements whereby the Company manage d   the leasing activity of containers owned by the Japanese container funds.

As described in Note 4 , the Japanese managed container funds and financing arrangements are considered VIEs. However, with the exception of the financing arrangements described in Note 4 , the Company does not consider its interest in the managed Japanese container funds to be a variable interest. As such, the Company did not consolidate the assets and liabilities, results of operations or cash flows of these funds in its consolidated financial statements.  

As described in Note 4 , the Company has included in its consolidated financial statements, the assets and liabilities, results of operations, and cash flows of the financing arrangements, in accordance with FASB ASC Topic 810, Consolidation .  



(15 )  Segment and Geographic Information

The Company organizes itself by the nature of the services it provides which includes equipment leasing, equipment management and logistics.

The container leasing segment is aggregated with equipment management and derives its revenue from the ownership and leasing of containers and fees earned for managing container portfolios on behalf of third party investors . The rail leasing segment derives its revenue from the ownership and leasing of railcars. The logistics segment derives its revenue from the provision of logistics services. There are no inter-segment revenues.

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



With the exception of administrative expenses, operating expenses are directly attributable to each segment. Administrative expenses that are not directly attributable to a segment are allocated to container or rail leasing based on the net book value of equipment in each segment.

The following tables show condensed segment information for the three months ended March 31, 2017 and 2016 , reconciled to the Company’s net income before income taxes and non-controlling interest as shown in its consolidated statements of income for such periods (in thousands):