SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 28, 1994 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. Commission file number 0-15525 CAPITAL ASSOCIATES, INC. (Exact name of registrant as specified in its charter) Delaware 84-1055327 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 7175 West Jefferson Avenue, Lakewood, Colorado 80235 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 303/980-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's $.008 par value common stock at March 23, 1994, was 9,725,618. CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION NUMBER Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - February 28, 1994 and May 31, 1993 3 Consolidated Statements of Operations - Three and Nine Months Ended February 28, 1994 and 1993 4 Consolidated Statements of Cash Flows - Nine Months Ended February 28, 1994 and 1993 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Exhibit Index 17 Signature 19 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except par value) ASSETS February 28, May 31, 1994 1993 (Note 1) Cash and cash equivalents, including restricted funds of $753 and $1,697, respectively $ 2,002 $ 3,210 Accounts receivable, net of allowance for doubtful accounts of $604 and $593, respectively 759 1,715 Income tax refunds receivable 255 1,870 Equipment held for sale or re-lease 5,049 461 Residual values and other receivables arising from equipment under lease sold to private investors 5,373 5,071 Notes receivable arising from sale-leaseback transactions 35,069 42,674 Net investment in direct finance leases 26,564 51,649 Leased equipment, net 22,172 39,174 Investments in affiliated limited partnerships 12,958 15,200 Other 6,330 6,084 Discounted lease rentals assigned to lenders arising from equipment sales 110,557 113,527 $ 227,088 $280,635 LIABILITIES AND STOCKHOLDERS' EQUITY Revolving Credit Facility $ 594 $ 21 Accounts payable and other liabilities 9,548 10,414 Term Loan 24,454 37,836 Deferred income taxes 1,553 1,500 Obligations under capital leases arising from sale-leaseback transactions 34,967 42,496 Discounted lease rentals 135,020 168,065 206,136 260,332 Stockholders' equity: Common stock 59 59 Additional paid-in capital 16,612 16,604 Retained earnings 4,332 3,691 Treasury stock (51) (51) Total stockholders' equity 20,952 20,303 $ 227,088 $ 280,635 See accompanying notes CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except earnings per share) Three Months Ended Nine Months Ended February 28, February 28, February 28, February 28, 1994 1993 1994 1993 Revenue: Equipment sales to affiliated limited partnerships $ 5,578 $ 8,868 $ 55,102 $ 41,085 Other equipment sales 8,889 7,591 34,149 25,266 Leasing 2,804 5,716 10,642 20,854 Interest 3,949 3,700 11,468 12,103 Other 1,077 788 3,178 2,476 Total revenue 22,297 26,663 114,539 101,784 Costs and expenses: Equipment sales 12,570 14,020 83,078 57,899 Leasing 1,216 2,473 4,212 10,042 Operating and other expenses 3,100 3,279 9,371 10,329 Interest: Non-recourse debt 4,577 5,307 14,207 17,223 Recourse debt 422 716 1,441 2,646 Provision for losses 100 285 1,160 1,785 Total costs and expenses 21,985 26,080 113,469 99,924 Income before income taxes 312 583 1,070 1,860 Income tax expense 125 233 428 744 Net income $ 187 $ 350 $ 642 $ 1,116 Earnings per common and common equivalent share $ 0.02 $ 0.03 $ 0.06 $ 0.11 Weighted average number of common and common equivalent shares outstanding 10,851,000 10,427,000 10,978,000 9,818,000 See accompanying notes CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended February 28, February 28, 1994 1993 Net cash provided by operating activities $ 4,941 $ 13,808 Cash flows from investing activities: Recovery of investment in direct finance leases 11,073 15,688 Equipment purchased for leasing (1,886) (9,457) Net receipts from affiliated limited partnerships 1,494 1,997 Proceeds from sales of equipment held for investment 7,230 633 Proceeds from sales of lease rentals 5,410 - Net cash provided by investing activities 23,321 17,861 Cash flows from financing activities: Proceeds from discounting of lease rentals 2,478 6,731 Principal payments on discounted lease rentals (19,147) (26,434) Proceeds from sales of common stock 8 14 Net payments on recourse debt (12,809) (15,478) Net cash used in financing activities (29,470) (35,167) Net decrease in cash (1,208) (3,498) Cash at beginning of period (3,210) 7,026 Cash at end of period $ 2,002 $ 3,528 Supplemental schedule of cash flow information: Recourse interest paid $ 1,340 $ 2,996 Non-recourse interest paid 2,537 4,862 Income taxes paid 181 1,470 Income tax refunds received 1,614 - Supplemental schedule of non-cash investing and financing activities: Discounted lease rentals assigned to lenders arising from equipment sales transactions 29,081 11,191 Assumption of discounted lease rentals in lease acquisitions 15,675 20,405 Residual values and other receivables arising from equipment under lease sold to private investors 2,019 - Notes receivable relating to equipment sale transactions 7,605 6,855 Obligations under capital leases arising from sale-leaseback transactions 7,529 6,761 See accompanying notes CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, please refer to the financial statements of Capital Associates, Inc. (the "Company"), and the related notes, included within the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (the "1993 Form 10-K"), previously filed with the Securities and Exchange Commission. The balance sheet at May 31, 1993 has been derived from the audited financial statements included in the Company's 1993 Form 10-K. The consolidated balance sheet as of May 31, 1993 and the consolidated statements of operations for the three and nine months ended February 28, 1993 have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes", as discussed further in Note 3 to Notes to Consolidated Interim Financial Statements. Certain reclassifications have been made to prior periods' financial statements to conform to the current period's presentation. 2. Credit Facility The Company's recourse operating credit facility ("Credit Facility") consists of two facilities, a revolving credit facility (the "Revolving Credit Facility") and a term facility (the "Term Loan"). The availability under the Revolving Credit Facility is equal to (1) the lesser of $10.75 million or (2) the Borrowing Base amount, reduced by the outstanding indebtedness under the Revolving Credit Facility. As of February 28, 1994, the Borrowing Base amount was approximately $6.0 million, and the outstanding indebtedness under the Revolving Credit Facility was $.6 million, leaving approximately $5.4 million of availability under the Revolving Credit Facility to fund the Company's working capital needs. The outstanding principal balance of the Term Loan as of February 28, 1994 was $24,454,000. Principal reductions under the Term Loan are scheduled to occur as follows (in thousands): Three months ended May 31, 1994 $ 3,955 Twelve months ended May 31, 1995 16,446 Balance remaining at May 31, 1995 (the scheduled termination date of the Credit Facility) 4,053 $ 24,454 As of the time these financial statements were prepared, there were no Defaults or Events of Default existing under the Credit Facility. The Revolving Credit Facility bears interest at the Mellon Bank, N.A. Prime Rate plus 1%, payable monthly, in arrears. On February 28, 1994, Mellon's Prime Rate was 6.0%. The Term Loan bears interest at a fixed rate of 6.0%, payable monthly, in arrears. 3. Income Taxes Effective June 1, 1993, the Company adopted SFAS 109. SFAS 109 requires the recognition of deferred tax liabilities and assets for the future income tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company elected to adopt SFAS No. 109 by restating fiscal years 1993 and 1992 financial statements. The effects of the restatement on net income and related per share amounts for the three and nine months ended February 28, 1993 are as follows: Three Months Ended Nine Months Ended February 28, 1993 February 28, 1993 As previously reported: Net income $ 278,000 $ 805,000 Net income per common share .03 .08 As restated: Net income $ 350,000 $ 1,116,000 Net income per common share .03 .11 Change in net $ 72,000 $ 311,000 income due to adoption of SFAS 109 Income taxes are provided on net income at the appropriate federal and state statutory rates. The effective overall tax rate for fiscal year 1993 was 40%. The Company files state income tax returns in 50 states. Statutory state income tax rates vary between 0% and 12%. The changing mix of business among states impacts the Company's aggregate effective state income tax rate. The Company estimates that its effective tax rate will remain at 40% for fiscal year 1994. 4. Equipment Held for Sale or Re-lease Equipment held for sale or re-lease, recorded at the lower of cost or market value expected to be realized through sale or re-lease, consists of equipment previously leased to end users which has been returned to the Company following lease expiration. The February 28, 1994 carrying value consists primarily of one jet aircraft. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Results of Operations Presented below are schedules (prepared solely to facilitate the discussion of results of operations that follows) showing condensed income statement categories and analyses of changes in those condensed categories derived from the Consolidated Statements of Operations. Condensed Consolidated Condensed Consolidated Statements of Operations The effect on Statements of Operations The effect on for the Three Months net income of for the Nine Months net income of Ended February 28, changes between Ended February 28, changes between 1994 1993 periods 1994 1993 periods (in thousands) Equipment sales margin $ 1,897 $ 2,439 $ (542) $ 6,173 $ 8,452 $ (2,279) Leasing margin (net of interest expense on discounted lease rentals) 960 1,636 (676) 3,691 5,692 (2,001) Other income 1,077 788 289 3,178 2,476 702 Operating and other expenses (3,100) (3,279) 179 (9,371) (10,329) 958 Provision for losses (100) (285) 185 (1,160) (1,785) 625 Interest expense on recourse debt (422) (716) 294 (1,441) (2,646) 1,205 Income taxes (125) (233) 108 (428) (744) 316 Net income $ 187 $ 350 $ (163) $ 642 $ 1,116 $ (474) Equipment Sales Equipment sales revenue (and related equipment sales margin) consists of the following (in thousands): Three Months Ended February 28, Increase 1994 1993 (Decrease) Revenue Margin Revenue Margin Revenue Margin Transactions during initial lease term: Equipment under lease sold to PIFs $ 5,578 $ 76 $ 8,868 $ 182 Equipment under lease sold to private investors 6,435 164 3,699 468 12,013 240 12,567 650 $ (554) $ (410) Transactions subsequent to initial lease termination: Sales of off-lease equipment 1,230 682 2,386 555 Sales-type leases 359 110 456 185 Excess collections (cash collections in excess of the associated residual value from equipment under lease sold to private investors) 865 865 1,050 1,049 2,454 1,657 3,892 1,789 (1,438) (132) $14,467 1,897 $16,459 2,439 $(1,992) $ (542) Provision for losses (100) (285) Realizations of value in excess of provision for losses $ 1,797 $2,154 Nine Months Ended February 28, Increase 1994 1993 (Decrease) Revenue Margin Revenue Margin Revenue Margin (in thousands) Transactions during initial lease term: Equipment under lease sold to PIFs $ 55,102 $ 1,346 $ 41,085 $ 1,048 Equipment under lease sold to private investors 27,387 903 8,932 648 82,489 2,249 50,017 1,696 $ 32,472 $ 553 Transactions subsequent to initial lease termination: Sales of off-lease equipment 3,771 1,624 9,264 2,321 Sales-type leases 1,334 643 3,795 1,160 Excess collections (cash collections in excess of the associated residual value arising from equipment under lease sold to private investors) 1,657 1,657 3,275 3,275 6,762 3,924 16,334 6,756 (9,572) (2,832) $89,251 6,173 $66,351 8,452 $22,900 ($2,279) Provision for losses 1,160 1,785 Realizations of value in excess of provision for losses $ 5,013 $6,667 As discussed below, to maintain profitable results of operations, the Company is selling more leased equipment during its initial lease term (shown in the preceding table as an increase in sales revenue of leases during the initial lease term of $32,472,000 for the nine months ended February 28, 1994) to offset the decrease in sales margins from transactions subsequent to initial lease termination (shown in the preceding table as a decrease of $9,572,000 in revenue from Transactions subsequent to initial lease termination for the nine months ended February 28, 1994). In the ordinary course of business, the Company will (i) sell new lease originations to its PIFs (to the extent the PIFs have funds available for such purpose) or private investors, and (ii) sell seasoned lease transactions (previously originated leases held in the Company's portfolio) to private investors when the profit is desirable or to reduce perceived residual exposure. The Company expects to continue to sell leased equipment during the initial lease term to maintain profitable results of operations during fiscal 1994. To the extent such sales involve seasoned lease transactions, it will increase the effect of portfolio run-off. The table below demonstrates that the decline in the Company's lease portfolio during the nine months ended February 28, 1994 is attributable primarily to equipment sales: Discounted lease Direct finance rentals, net of leases, operating discounted lease leases, net and rentals assigned Net investment equipment held to lenders arising in leased for sale or re-lease from equipment sales equipment As of May 31, 1993 $ 91,284 $ (54,538) $ 36,746 Net change arising from Syndication and PIF sales activities (17,893) 11,510 (6,383) Sale of lease rentals(1) (3,899) 2,933 (966) Provision for losses (1,160) - (1,160) Non-recourse debt balloon pay-off (see page 12) - 2,300 2,300 Change as a result of portfolio run-off (14,546) 13,332 (1,214) As of February 28, 1994 $ 53,786 $ (24,463) $ 29,323 (1) The Company recorded a gain of $305,000 on the sale of the underlying lease rentals for the nine months ended February 28, 1994. A significant portion of the Company's net assets consists of aircraft. To reduce the concentration of aircraft in its portfolio, during the first fiscal quarter 1994 the Company sold three aircraft under lease. The following table summarizes the Company's investment in aircraft as of February 28, 1994 and May 31, 1993 (in thousands): February 28, May 31, 1994 1993 Leased equipment, net of accumulated depreciation $ 12,658 $ 23,836 Equipment held for sale or re-lease 4,820 - Associated non-recourse debt (5,198) (12,425) 12,280 11,411 Residual values and other receivables arising from equipment under lease sold to private investors 1,045 1,008 Net investment in aircraft $ 13,325 $ 12,419 Approximately $5.6 million (net of non-recourse debt of $4.2 million) of the Company's current $13.3 million of net investment in aircraft is represented by two jet aircraft. Leases on these aircraft expire December 31, 1996. The Company has entered into a commitment to sell the two aircraft subject to obtaining an appraisal satisfactory to the buyer. The commitment provides for the sale of one aircraft in May 1994, and the sale of the other aircraft in August 1994. The sales price of each aircraft approximates their net book value as of the date of sale. During the third fiscal quarter 1994, the lease expired on a jet aircraft having a net book value of $5 million. The aircraft was returned to the Company and is included in Equipment Held for Sale or Re-Lease. The Company's investment in such aircraft was subject to non-recourse "balloon" debt of approximately $2.3 million which was payable in full upon expiration of the lease and, accordingly, the Company funded such payment using the availability under the Revolving Credit Facility during the fiscal third quarter 1994. The aircraft is presently undergoing maintenance and refurbishment. Upon completion, the Company intends to remarket the aircraft through re-lease or sale to other third party users. Equipment Sales to PIFs Equipment sales to PIFs increased during the nine months ended February 28, 1994, as compared to the similar period in fiscal 1993, principally because more leases that satisfied the Company's Underwriting Standards were identified, in part as a result of the opening of new sales offices. Under applicable regulatory guidelines, the Company is entitled to receive various fees and distributions in connection with its activities related to its sponsored PIFs. One such fee, an acquisition fee payable upon sale of equipment under lease to a PIF, is, in general, subject to a regulatory maximum amount over the term of a PIF. Acquisition fees earned by the Company from equipment sales to one of its PIFs reached the regulatory maximum during fiscal year 1992 and, during first fiscal quarter 1994, the maximum was reached for another PIF. These circumstances will have an impact on reported equipment sales margins in future periods, but are not expected to impact total PIF-related income (after costs of equipment sales) in future periods because other allowable fees and distributions are expected to increase during such periods. Equipment Sales to Private Investors The Company re-opened its private investor sales department during the second fiscal quarter 1993 and has hired two experienced private equity salespersons, and as a result, equipment sales to private investors increased during both the third fiscal quarter 1994 and the nine months ended February 28, 1994, as compared to the similar periods in fiscal year 1993. The development of a customer base of private investors is a principal operating goal for the Company. Remarketing Sales Margins from remarketing sales (i.e., sales occurring after the initial lease term) are affected by the amount of equipment leases that matures in a particular quarter. In general, as the size of the Company's lease portfolio declines, fewer leases mature and less equipment is available for remarketing each quarter. As a result, remarketing revenue has declined during both the third fiscal quarter and nine months ended February 28, 1994 compared to the comparable periods in fiscal 1993. The Company's ability to remarket additional amounts of equipment and realize a greater amount of remarketing revenue in future periods is dependent on adding additional leases to its portfolio. Accordingly, the Company is pursuing financing opportunities to obtain funds to add to its own portfolio, such as lease securitization and other financing possibilities. See the discussion of financing possibilities under "Business Plan" below. Provision for Losses Residual values are established equal to the estimated value to be received from the equipment following termination of the lease. In estimating such values, the Company considers all relevant facts regarding the equipment and the lessee, including, for example, the likelihood that the lessee will re-lease the equipment. The Company performs ongoing quarterly assessments of its assets to identify other than temporary losses in value. Provision for losses result from the realization of less than the carrying value of equipment (which is typically not known until remarketing subsequent to the initial lease termination has occurred). The remarketing of equipment for an amount greater than its book value is reported as equipment sales margin or as leasing margin. As shown on pages 8 and 9 of 19, the realizations from sales were at a value in excess of the provision for losses, even without considering realizations from remarketing activities recorded as leasing margin (see discussion below). Leasing Margin Leasing margin consists of the following (in thousands): Three Months Ended Nine Months Ended February 28, February 28, 1994 1993 1994 1993 Leasing revenue $ 2,804 $ 5,716 $ 10,641 $ 20,854 Leasing costs and expenses (1,216) (2,473) (4,212) (10,042) Net interest expense on associated discounted lease rentals (628) (1,607) (2,738) (5,120) Leasing margin $ 960 $ 1,636 $ 3,691 $ 5,692 Leasing margin ratio 34% 29% 35% 27% Leasing margin has declined and is expected to decline further as a result of portfolio run-off. See the discussion under "Business Plan" below. The leasing margin ratio has increased as a result of remarketing activities, which include the rental proceeds from renewing, extending or re-leasing equipment before and after the end of the initial lease term. Other Income During the first fiscal quarter 1994, the Company received a $2 million income tax refund, consisting of $1.6 million that was previously recorded as "Income tax refunds receivable", and an additional $.4 million of interest that was recorded in first fiscal quarter 1994 as "Other income". Other income for the third fiscal quarter 1994 included $.3 million related to a sales tax audit recovered from lessees in excess of amounts previously considered recoverable. Operating and Other Expenses Operating and other expenses decreased $.2 million (6%) and $1 million (9%) for the three and nine months ended February 28, 1994, as compared to the comparable periods in fiscal year 1993. The decrease principally reflects a reduction in salaries and wages. As of February 28, 1994, the Company had 115 full-time employees compared to 149 full-time employees at November 30, 1992 and 117 full-time employees at February 28, 1993. As the portfolio has run-off, the Company has decreased the size of its back office staff while adding revenue producing lease origination and private equity syndication personnel. The Company had opened eleven field sales offices as of February 28, 1994. Interest Income and Expense Interest revenue arises when equipment financed with non-recourse debt is sold to investors. The Consolidated Statements of Operations reflect an equal amount of interest expense. The decline in interest expense on non-recourse debt, (net of the associated interest revenue), was due to portfolio run-off. The decrease in interest expense on recourse debt reflects the decline in the outstanding balance of the Credit Facility. Income Taxes Effective June 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". See Note 3 to Notes to Consolidated Interim Financial Statements. II. Liquidity and Capital Resources The Company's activities are principally funded by the Revolving Credit Facility, rents, proceeds from sales of on-lease equipment, non-recourse debt, fees and distributions from its PIFs, and sales or re-leases of equipment during and after the expiration of the initial lease terms. Cash held by the PIFs available for purchase of equipment from the Company is: As of February 28, 1994 1993 Available cash $ 11,937 $ 19,637 Cash committed for equipment purchases 9,419 8,062 Uncommitted cash $ 2,518 $ 11,575 Currently, one PIF, Capital Preferred Yield Fund-II, ("CPYF-II") is actively selling units to the public. Four other PIFs have ceased offering units, however, they generate cash for purchase of equipment from operating activities. The Company anticipates that $9 million of additional cash available for purchase of equipment will be generated by the four PIFs during third fiscal quarter 1994. During the fourth fiscal quarter 1994, CPYF-II will cease offering units for sale to the public. The Company has substantially completed the registration of up to $50 million of units in a new PIF, Capital Preferred Yield Fund-III, ("CPYF-III"), for sale to the public. The Company anticipates commencing the offering of unit sales in CPYF-III following the termination of the offering for sale to the public of units in CPYF-II. Management believes the Company's ability to generate cash from operations is sufficient to fund operations, particularly when operations are viewed as including investing and financing activities. In this context, it should be noted that the Company reduced its aggregate outstanding indebtedness under its Credit Facility by $12.8 million since May 31, 1993 and improved its recourse debt-to-equity ratio as follows: As of February 28, May 31, 1994 1993 Recourse debt outstanding under the Credit Facility $ 25,048 $ 37,857 Stockholder equity $ 20,952 $ 20,303 Recourse debt/stockholder's equity 1.20 to 1 1.86 to 1 III. Business Plan As discussed in the 1993 Form 10-K, during fiscal year 1991, the Company agreed with its Lenders to begin repaying its Credit Facility. Accordingly, during the last four months of fiscal year 1991, fiscal years 1992 and 1993 and during the nine months ended February 28, 1994, the Company used substantially all of its cash flow after payment of operating expenses to pay down its Credit Facility. As a result of making these repayments, the Company did not have the funds necessary to significantly add to its leasing portfolio. Because a leasing portfolio declines in size as it matures, the Company's leasing portfolio and related revenue have declined since 1991. The Revolving Credit Facility provides a limited amount of funds to the Company to invest in new leases. However, this level of funds is not sufficient to maintain the current portfolio and, accordingly, the current level of remarketing profits may not be achievable in the future. Therefore, maintaining the current level of profitability is dependent principally upon equipment sales margins from new lease originations and seasoned lease transactions (see the discussion on page 9 of 19) and/or development of new sources of revenue related to the Company's core business. The Company's current business plan is designed to maintain profitable operations. The amount of longer-term future profits, if any, will largely depend on the amount of new capital available to the Company. Such capital may be in a variety of forms including new recourse debt, additional equity (which could include a sale of the Company, possibly coupled with an infusion of new funds into the Company from the purchaser), securitized financing vehicles or equity provided from private purchases of equipment originated by the Company or strategic alliances/combinations with other leasing companies. The Company is actively pursuing financing possibilities. No assurance can be given, however, that the Company will be successful in operating profitably, developing new sources of revenue or in obtaining access to new financing. CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings With respect to the pending CIS Corporation ("CIS") litigation in connection with its Chapter 11 bankruptcy proceeding, in January, 1994, the Trustee of the CIS bankruptcy estate filed an amended complaint seeking to recover $1,121,074.88 for rent, taxes and other amounts due from CAII under subleases on which CIS is sublessor and CAII is sublessee, in addition to the $145,000 preference claim which was asserted in the original complaint filed in October, 1991. CAII filed an answer and counterclaims on March 11, 1994 asserting that CIS owes CAII $1,227,609.59 in unpaid rent and other charges. Of this amount, CAII is asserting that approximately $850,000 is entitled to administrative expense priority. In addition, CAII responded to the Trustee's discovery requests. CAII is pursuing its claims against CIS and vigorously defending against the claims asserted by the Trustee. Although management believes that the ultimate outcome of these claims should not have a material adverse impact on the Company's financial position and that any amounts ultimately owed by CAII to CIS should be completely, or at least substantially, offset by amounts owed by CIS to CAII, it is not possible to predict the ultimate outcome of this litigation at this time. There have been no material developments (other than those discussed above regarding the CIS litigation) during third fiscal quarter 1994 with respect to the legal proceedings described in the Company's fiscal 1993 Form 10-K. Item 6. Exhibits and Reports on Form 8-K a. Included as exhibits are the items listed in the Exhibit Index. The Company will furnish to its shareholders a copy of any of the exhibits listed therein upon payment of $.25 per page to cover the costs to the Company of furnishing the exhibits. b. There were no reports on Form 8-K filed during the three months ended February 28, 1994. Item No. Exhibit Index 11A Computation of Primary Earnings Per Share. A computation of fully diluted earnings per share is not presented as it is the same as the computation of primary earnings per share. Exhibit 11A CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE Three Months Ended Nine Months Ended February 28, February 28, February 28, February 28, 1994 1993 1994 1993 Shares outstanding at beginning of period 9,654,000 9,273,000 9,654,000 8,948,000 Shares issued during the period (weighted average) 61,000 346,000 54,000 330,000 Dilutive shares contingently issuable upon exercise of options (weighted average) 2,265,000 2,295,000 2,287,000 1,492,000 Less shares assumed to have been purchased for treasury with assumed proceeds from exercise of stock options (weighted average) (1,129,000) (1,487,000) (1,017,000) (952,000) Total shares, primary 10,851,000 10,427,000 10,978,000 9,818,000 Net income $ 187,000 $ 350,000 $ 642,000 $1,116,000 Net income per share, primary $ 0.02 $ 0.03 $ 0.06 $ 0.11 CAPITAL ASSOCIATES INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITAL ASSOCIATES, INC. Registrant Date: March 28, 1994 By: /s/Anthony M. DiPaolo Anthony M. DiPaolo, Senior Vice-President and Controller (Principal Accounting Officer)