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, 1995
[ ] 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 27, 1995, was 10,179,747.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - February 28, 1995
and May 31, 1994 3
Consolidated Statements of Operations - Three and Nine Months
Ended February 28, 1995 and 1994 4
Consolidated Statements of Cash Flows - Nine
Months Ended February 28, 1995 and 1994 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Exhibit Index 18
Signature 20
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
February 28, May 31,
1995 1994
------------ ---------
Cash $ 1,955 $ 2,072
Accounts receivable, net of allowance for
doubtful accounts of $270 and $343, respectively 1,257 1,375
Income tax refunds receivable - 250
Equipment held for sale or re-lease 5,101 5,242
Residual values and other receivables arising
from equipment under lease sold to private
investors 3,639 5,098
Net investment in direct finance leases 14,755 18,106
Leased equipment, net 17,893 15,615
Investments in affiliated limited partnerships 10,468 12,178
Other 5,461 5,779
Notes receivable arising from sale-leaseback
transactions 23,979 32,417
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 72,034 111,593
--------- ---------
$ 156,542 $ 209,725
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ 1,298 $ 49
Warehouse Facility 7,838 -
Accounts payable and other liabilities 4,532 8,187
Term Loan 11,917 18,718
Deferred income taxes 16 830
Obligations under capital leases arising
from sale-leaseback transactions 23,952 32,337
Discounted lease rentals 85,380 128,505
--------- ---------
134,933 188,626
--------- ---------
Stockholders' equity:
Common stock 63 60
Additional paid-in capital 16,907 16,689
Retained earnings 4,690 4,401
Treasury stock (51) (51)
--------- ---------
Total stockholders' equity 21,609 21,099
--------- ---------
$ 156,542 $ 209,725
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
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,
1995 1994 1995 1994
------------ ------------ ------------ ------------
Revenue:
Equipment sales to
affiliated limited
partnerships $ 14,698 $ 5,578 $ 30,936 $ 55,102
Other equipment sales 9,071 8,889 23,184 34,149
Leasing 1,867 2,804 5,590 10,642
Interest 2,671 3,949 8,996 11,468
Other 1,164 1,077 3,930 3,178
-------- -------- -------- --------
Total revenue 29,471 22,297 72,636 114,539
-------- -------- -------- --------
Costs and expenses:
Equipment sales 22,372 12,570 50,407 83,078
Leasing 965 1,216 2,713 4,212
Operating and other
expenses 2,275 3,100 7,518 9,371
Provision for losses 425 100 650 1,160
Interest:
Non-recourse debt 2,927 4,577 9,903 14,207
Recourse debt 417 422 966 1,441
-------- -------- -------- --------
Total costs and expenses 29,381 21,985 72,157 113,469
-------- -------- -------- --------
Net income before income
taxes 90 312 479 1,070
Income tax expense 36 125 191 428
-------- -------- -------- --------
Net income $ 54 $ 187 $ 288 $ 642
======== ======== ======== ========
Earnings per common and
common equivalent share $ .01 $ 0.02 $ .03 $ 0.06
======== ======== ======== ========
Weighted average number of
common and dilutive common
equivalent shares
outstanding used in
computing earnings
per share 10,660,000 10,851,000 10,832,000 10,978,000
========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
----------------------------
February 28, February 28,
1995 1994
------------ ------------
(Note 3)
Net cash provided by operating activities $ 13,679 $ 28,654
--------- ---------
Cash flows from investing activities:
Equipment purchased for leasing (12,627) (1,886)
Net receipts from affiliated public income
funds ("PIFs") 1,123 1,494
Sale of the investment in Corporate
Express, Inc. 677 -
--------- ---------
Net cash used for investing activities (10,827) (392)
--------- ---------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 1,215 2,478
Principal payments on discounted lease rentals (6,691) (19,147)
Proceeds from sales of common stock 221 8
Net (payments) draws on recourse debt 2,286 (12,809)
--------- ---------
Net cash used for financing activities (2,969) (29,470)
--------- ---------
Net decrease in cash (117) (1,208)
Cash at beginning of period 2,072 (3,210)
--------- ---------
Cash at end of period $ 1,955 $ 2,002
========= =========
Supplemental schedule of cash flow information:
Recourse interest paid $ 937 $ 1,340
Non-recourse interest paid 876 2,537
Income taxes paid 1,254 181
Income tax refunds received 898 1,614
Supplemental schedule of non-cash investing
and financing activities:
Discounted lease rentals assigned to lenders
arising from equipment sales transactions 3,123 29,081
Assumption of discounted lease rentals in
lease acquisitions 5,550 15,675
Increase in other receivables relating to
equipment sale transactions 609 7,605
Defeasance of discounted lease rentals
related to bankrupt lessee 518 -
Cancellation of option agreement
Decrease on accounts payable and other
liabilities 1,197 -
Decrease in other receivables relating to
equipment sale transactions 573 -
The accompanying notes are an integral part
of these consolidated financial statements.
CAPITAL ASSOCIATES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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, 1994 (the
"1994 Form 10-K"), previously filed with the Securities and Exchange
Commission.
The balance sheet at May 31, 1994 has been derived from the audited
financial statements included in the Company's 1994 Form 10-K.
2. Debt Facilities
The Company closed its new recourse operating debt facility (the "Debt
Facility") on December 2, 1994. On March 7, 1995, two additional lenders
joined the lending group. The lender group currently consists of Norwest
Bank Colorado, National Association (the "Agent"), Norwest Equipment
Finance, Inc. (the "Collateral Agent"), First Interstate Bank of Denver,
N.A., The Daiwa Bank, Ltd. and The First National Bank of Boston (the
"Lenders"). The Borrower under the Debt Facility is Capital Associates
International, Inc., a wholly-owned subsidiary of the Company ("CAII").
The Debt Facility consists of three facilities, a term loan facility (the
"Term Loan"), a revolving working capital facility (the "WCF") and a
revolving warehousing facility (the "WF"). The principal terms of the
three facilities are as follows (in thousands):
Term Loan WCF WF
----------------- ----------------- -----------------
Maturity Date November 30, 1997 November 30, 1995 November 30, 1995
Maximum amount $ 13,000 $ 5,000 lesser of $ 32,000
or borrowing base
Borrowings at
February 28, 1995 11,917 1,298 7,838
-------- -------- --------
Availability at
February 28, 1995 N/A $ 3,702 $ 24,162
======== ======== ========
Interest rate at
February 28, 1995 Prime* Prime* plus .75% Prime* plus .50%
plus .75%**
* Norwest Prime at February 28, 1995 was 9%.
** As required by the Debt Facility, CAII has acquired, at its own cost
(of $59,500), a 36-month interest rate cap contract at 10.5% with
respect to 50% of the principal balance of the Term Loan.
Principal reductions under the Term Loan are scheduled to occur as follows
(in thousands):
Three months ending May 31, 1995 $ 1,084
Fiscal year ending May 31, 1996 4,333
Fiscal year ending May 31, 1997 4,333
Fiscal year 1998 through November 30, 1997 2,167
--------
$ 11,917
========
The Debt Facility (1) is collateralized by all of CAII's assets and (2) is
senior, in order of priority, to all of CAII's indebtedness, subject to
certain limited exceptions. The Company and certain of the Company's and
CAII's subsidiaries have pledged all of their assets, with limited
exceptions, to collateralize their guarantees. The Debt Facility restricts
CAII's ability to pay dividends or loan or advance funds to the Company.
As of February 28, 1995, there were no defaults existing under the Debt
Facility.
For further information concerning the terms of the Debt Facility, please
refer to the Company's Form 10-Q for the fiscal quarter ended November 30,
1994.
3. Consolidated Statements of Cash Flow
Consistent with the reclassification described in the Company's first
quarter fiscal 1995 report on Form 10-Q, the principal portion of receipts
of direct financing leases and proceeds from sales of equipment have been
classified as "Cash flows from operating activities". Previously, such
amounts were reported as "Cash flows from investing activities".
The effect of the reclassification on previously issued financial statements
is as follows:
Nine months ended
February 28, 1994
--------------------------
Previously Reclassified
Reported Amounts
---------- ------------
Net cash provided by operating activities $ 4,941 $ 28,654
Net cash provided by (used for) investing
activities 23,321 (392)
Net cash used for financing activities (29,470) (29,470)
--------- ---------
Net decrease in cash and cash equivalents $ (1,208) $ (1,208)
========= =========
4. Bankrupt Lessee
During the third quarter fiscal 1995, a lessee, that had previously filed
for bankruptcy protection under Chapter 11 of the Bankruptcy Code, informed
the Company that it would reject its leases and return the related equipment
to the Company. The aggregate net book value of equipment under four leases
with this lessee was $486,000 at February 28, 1995. It is expected that
remarketing proceeds and the value of the Company's administrative claims
against the lessee will be less than the net book value of the equipment.
A substantial portion of the provision for loss for the third quarter fiscal
1995 relates to this lessee.
5. MBank Litigation
On March 17, 1995, the Registrant issued the press release attached as
Exhibit 99 to its Form 8-K filed on March 22, 1995, which is incorporated
herein by reference. The press release announced that the Federal District
Court in Dallas held in the Registrant's favor in the MBank litigation. The
press release briefly describes the litigation and the events that gave rise
to it. The press release also announced that (1) the Registrant is entitled
to recover damages from the cash collateral currently held under the
supervision of the court, (2) the court did not fix the amount of the
Registrant's damages in its decision, (3) the Registrant is making this
calculation, (4) while the final calculation is not yet available, the
Registrant estimates that its damages (including interest and attorneys'
fees) will exceed $9 million and (5) the Registrant will finalize its damage
calculation as quickly as possible and seek payment of such damages
immediately thereafter. The press release stated that the Registrant cannot
predict when it will receive such payment or whether the FDIC will appeal
the court's decision.
The court did not resolve all of the ancillary claims asserted by the
parties to the MBank litigation. The parties are currently in negotiations
concerning these claims and a final settlement of all of the claims (decided
and undecided) asserted in the MBank litigation. For further information
concerning the claims asserted in the MBank litigation, please refer to
Footnote 15 to Notes to Consolidated Financial Statements and Item 3, Legal
Proceedings, of the Company's Form 10-K filed for the fiscal year ended
May 31, 1994 (the "1994 Form 10-K").
6. Commitments
During the third quarter fiscal 1995, the owner of an option on certain
mining equipment (which the Company had sold to such owner in a prior fiscal
year for a note receivable previously included in Residual Values and Other
Receivables Arising From Equipment Under Lease Sold to Private Investors
in its balance sheet) and the grantor of the option agreed to cancel the
option and related note financing in exchange for (1) a cash payment from
the Company to the owner of $180,000 and (2) all of the parties agreeing to
enter into a mutual release. The elimination from the Company's account of
such option resulted in a gain of $444,000, principally representing
reversal of prior period amortization charged to operations. For more
information concerning the option, refer to Footnote 16 to Notes to
Consolidated Financial Statements of the Company's 1994 Form 10-K.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
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 Statements of Operations
for the Three Months for the Nine Months
ended February 28, ended February 28,
------------------------ Effect on ------------------------ Effect on
1995 1994 net income 1995 1994 net income
-------- --------- ---------- -------- ---------- ----------
(in thousands)
Equipment sales margin $ 1,397 $ 1,897 $ (500) $ 3,713 $ 6,173 $ (2,460)
Provision for losses (425) (100) (325) (650) (1,160) 510
-------- -------- ------- -------- -------- --------
Equipment sales margin in
excess of provision for
losses 972 1,797 (825) 3,063 5,013 (1,950)
Leasing margin (net of
interest expense on
discounted lease rentals) 646 960 (314) 1,970 3,691 (1,721)
Other income 1,164 1,077 87 3,930 3,178 752
Operating and other expenses (2,275) (3,100) 825 (7,518) (9,371) 1,853
Interest expense on recourse debt (417) (422) 5 (966) (1,441) 475
Income taxes (36) (125) 89 (191) (428) 237
-------- -------- ------- -------- -------- --------
Net income $ 54 $ 187 $ (133) $ 288 $ 642 $ (354)
======== ======== ======= ======== ======== ========
Equipment Sales
Equipment sales revenue (and related equipment sales margin) consists of
the following (in thousands):
Three Months Ended February 28,
--------------------------------------------- Increase
1995 1994 (Decrease)
--------------------- --------------------- ---------------------
Revenue Margin Revenue Margin Revenue Margin
-------- ------- -------- ------- -------- -------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 14,698 $ 350 $ 5,578 $ 76
Equipment under lease sold to
private investors 7,447 78 6,435 164
-------- ------- -------- -------
22,145 428 12,013 240 $ 10,132 $ 188
-------- ------- -------- ------- -------- -------
Transactions subsequent to initial lease
termination ("Remarketing Sales"):
Sales of off-lease equipment 1,029 478 1,230 682
Sales-type leases 449 345 359 110
Excess collections (cash collections
in excess of the associated residual
value from equipment under lease
sold to private investors) 146 146 865 865
-------- ------- -------- -------
1,624 969 2,454 1,657 (830) (688)
Provision for losses - (425) - (100) - (325)
-------- ------- -------- ------- -------- -------
Remarketing sales results in excess of
provision for losses 1,624 544 2,454 1,557 (830) (1,013)
-------- ------- -------- ------- -------- -------
Total equipment sales $ 23,769 $ 972 $ 14,467 $ 1,797 $ 9,302 $ (825)
======== ======= ======== ======= ======== =======
Nine Months Ended February 28,
----------------------------------- Increase
1995 1994 (Decrease)
--------------------- --------------------- ---------------------
Revenue Margin Revenue Margin Revenue Margin
-------- ------- -------- ------- -------- -------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 30,936 $ 778 $ 55,102 $ 1,346
Equipment under lease sold to
private investors 19,169 336 27,387 903
-------- ------- -------- -------
50,105 1,114 82,489 2,249 $(32,384) $(1,135)
-------- ------- -------- ------- -------- -------
Transactions subsequent to initial lease
termination ("Remarketing Sales"):
Sales of off-lease equipment 2,108 1,061 3,771 1,624
Sales-type leases 1,051 682 1,334 643
Excess collections (cash collections
in excess of the associated residual
value from equipment under lease sold
to private investors) 856 856 1,657 1,657
-------- -------- -------- -------
4,015 2,599 6,762 3,924 (2,747) (1,325)
Provision for losses - (650) - (1,160) - 510
-------- -------- -------- ------- -------- -------
Remarketing sales results in excess of
provision for losses 4,015 1,949 6,762 2,764 (2,747) (815)
-------- -------- -------- ------- -------- -------
Total equipment sales $ 54,120 $ 3,063 $ 89,251 $ 5,013 $(35,131) $(1,950)
======== ======== ======== ======= ======== =======
Equipment Sales to PIFs and to Private Investors
Equipment sales to PIFs significantly decreased during the nine months
ended February 28, 1995, as compared to the similar period in fiscal 1994,
principally because fewer leases were identified and closed that satisfied
the PIF's underwriting standards. Although, the current fiscal quarter's
sales were substantially in excess of the sales in the comparable quarter
in fiscal 1994, the first two quarters of fiscal 1994 were the largest
quarters with respect to equipment sales to the PIFs during fiscal 1994,
and were substantially greater than the historical average for quarterly
sales to PIFs.
Equipment sales to private investors for the first nine months fiscal 1994
included sales of approximately $13.8 million of "seasoned" leases (i.e.,
previously originated leases held in the Company's portfolio). As the
Company's lease portfolio has declined in size (sometimes referred to
herein as "portfolio run-off"), fewer seasoned leases have been available
for sale (the Company has sold approximately $5.0 million of seasoned
leases to private investors during the first nine months fiscal 1995).
During the first nine months fiscal 1995, equipment sales to private
investors consisted primarily of new leases originated for sale to private
investors; however, not enough leases were originated during this period to
offset the decline in the sale of seasoned leases during the same period.
Remarketing Sales and Provision for Losses
The remarketing of equipment for an amount greater than its book value is
reported as equipment sales margin or as leasing margin. 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)
is recorded as provision for losses. As shown in the table above, the
realizations from sales exceeded the provision for losses for the first
nine months fiscal 1995, even without considering realizations from
remarketing activities recorded as leasing margin as discussed below.
This circumstance of realizing in excess of the aggregate carrying value on
the Company's portfolio has occurred for the last eleven quarters.
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 has declined in size, fewer leases have matured and less
equipment has been available for remarketing each quarter. As a result,
remarketing revenue declined during the first nine months fiscal 1995
compared to the comparable period in fiscal 1994. In the absence of
significant additions to the lease portfolio, management believes that
remarketing revenue and margin will continue to decline in future quarters.
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.
See Footnote 4 to Notes to Consolidated Financial Statements for a
discussion of the provision for losses recorded in the third quarter fiscal
1995.
During the first nine months fiscal 1994, a greater than expected amount of
equipment under lease that the Company expected to be released was,
instead, terminated and returned to the Company. The amounts recovered
(and expected to be recovered) from the sale of such equipment were less
than the previously estimated residual value, and accordingly, an
appropriate provision for loss was recorded during the first nine months
fiscal 1994. The Company also recorded during the first nine months fiscal
1994 a provision for loss of $180,000 for the jet aircraft discussed under
Non-earning Assets below.
Leasing Margin and Equipment Under Lease Portfolio
Leasing margin consists of the following (in thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ -----------------
1995 1994 1995 1994
-------- -------- -------- --------
Leasing revenue $ 1,867 $ 2,804 $ 5,590 $ 10,642
Leasing costs and expenses (965) (1,216) (2,713) (4,212)
Net interest expense on related
discounted lease rentals (256) (628) (907) (2,739)
------- -------- -------- --------
Leasing margin $ 646 $ 960 $ 1,970 $ 3,691
======= ======== ======== ========
Leasing margin ratio 35% 34% 35% 35%
== == == ==
Leasing margin has declined as a result of portfolio run-off and is
expected to decline further until the Company has added to its lease
portfolio. See the discussion under "Business Plan" below.
The changes in the Company's equipment under lease during the nine months
ended February 28, 1995 consisted of the following:
Discounted lease
Direct finance rentals, net of
leases, operating discounted lease
leases, net and rentals assigned Net investment
equipment held to lenders arising in lease
for sale or re-lease from equipment sales portfolio
-------------------- -------------------- --------------
As of May 31, 1994 $ 38,963 $ (16,912) $ 22,051
Leases added to the Company's lease
portfolio 9,106 (4,001) 5,105
Leases added to the Company's lease
portfolio (and expected to be sold in 1995) 5,444 - 5,444
Leases sold to private investors (4,946) 2,410 (2,536)
Provision for losses (650) - (650)
Change as a result of portfolio run-off (10,168) 5,157 (5,011)
--------- --------- ---------
As of February 28, 1995 $ 37,749 $ (13,346) $ 24,403
========= ========= =========
A jet aircraft having a net book value of approximately $5 million is
included in Equipment Held for Sale or Re-Lease. In March 1995, the
Company entered into a direct finance lease with an end-user of this
aircraft. See "Non-earning Assets" below for a discussion.
Other Income
Other Income consists of the following (in thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ -----------------
1995 1994 1995 1994
-------- -------- -------- --------
Fees and distributions from the
Company-sponsored PIFs $ 730 $ 837 $ 2,291 $ 2,431
Sale of the investment in
Corporate Express, Inc. stock - - 671 -
Cancellation of Option Agreement
(see Footnote 6) 444 - 444 -
Interest on income tax refunds - - 178 431
Other, principally recovery of
sales andproperty tax amounts
previously expensed (10) 240 346 316
------- ------- -------- -------
$ 1,164 $ 1,077 $ 3,930 $ 3,178
======= ======= ======== =======
Other than fees and distributions from the company-sponsored PIFs, the
Company does not expect to realize material amounts in the future with
respect to the Other Income items listed above.
Operating and Other Expenses
Operating and other expenses decreased $1.9 million (20%) for the first
nine months fiscal 1995 as compared to the comparable period in fiscal
1994. The decrease principally reflects a reduction in salaries and wages,
accomplished, in part, through a reduction-in-force of 29 full-time
employees during June 1994. As of February 28, 1995, the Company had 90
full-time employees, compared to 115 full-time employees at February 28,
1994.
The Company has (i) continued to enhance its lease origination capabilities
(a larger percentage of its personnel are responsible for lease
originations) and (ii) increased its lease origination volume during each
of the first three quarters of fiscal 1995. As a result of these
circumstances, the Company studied and evaluated its initial direct costs
("IDC") and, as a result of such study and evaluation, increased its IDC
rate to 1.25% of equipment acquisition cost from .75%. The effect of this
change in estimate was a reduction in Operating and Other Expenses of
$70,000 during the third quarter fiscal 1995.
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) is due to
portfolio run-off.
Although the Company repaid $6.8 million of its Term Loan from May 31, 1994
through February 28, 1995, the Company increased its recourse borrowings
under the WCF and WF by $9.1 million to finance lease originations during
the third quarter fiscal 1995, resulting in similar recourse interest
expense for comparable quarters.
Non-earning Assets
A significant portion of the Company's stockholders' equity of
approximately $22 million is represented by two material non-earning
assets: (1) a jet aircraft with a carrying value of approximately $5
million (as discussed on page 12 of 20, in March 1995, the Company entered
into a direct financing lease with an end-user of this aircraft) and
(2) amounts receivable under the MBank contracts which may be in excess of
$9 million (and having a carrying value of approximately $4 million), as
discussed in Footnote 5 to Notes to the Financial Statements. The
Company's results of operations would be improved if funds from conversion
of the above assets were invested in a lease portfolio.
Income Taxes
As a result of the existence of net operating loss carryforwards, the
Company had no regular Federal Income Tax liability for the nine months
ended February 28, 1995. The decline in deferred income taxes on the
balance sheet resulted from payments of Alternative Minimum Taxes ("AMT").
The Company believes that it is possible it will utilize all of its
remaining net operating loss ("NOL") carryforwards during the fourth
quarter fiscal 1995 as a result of reversals of taxable temporary
differences (between asset bases recorded for financial reporting and
Federal income tax purposes). The principal item of uncertainty is
recovery of any MBank award, as discussed in Footnote 5 to Notes to the
Financial Statements. At May 31, 1995, the Company may have no significant
net deferred income tax assets or liabilities, except for investment tax
credit ("ITC") carryforwards and AMT credit carryforwards of approximately
$5 million and $4 million, respectively, against which has been previously
recorded a valuation allowance of approximately $8 million. That valuation
allowance represents management's previous estimate of the portion of the
ITC carryforwards which could expire prior to utilization. Management's
estimate is based, in part, upon the Company's level of profitability since
June 1, 1993. However, as discussed previously, two events have recently
occurred which may impact profitability of the Company in the future:
* During the third quarter fiscal 1995, the Company refinanced its
previous recourse operating debt facility with its new Debt Facility.
The new Debt Facility provides the Company with up to $37 million to
fund new lease originations and grow its lease portfolio (to offset
portfolio run-off).
* The Company's two material non-earning assets may be converted to
earning assets. As discussed on page 12 of 20, in March 1995, the
Company entered into a direct finance lease with an end-user of this
aircraft.
Funding available under the Debt Facility, proceeds from the sale of the
aircraft and/or proceeds from the MBank litigation may be utilized to
increase the size of the Company's lease portfolio and originate/acquire
leases for sale to private equity investors (provided suitable leasing
transactions are identified and closed), ultimately resulting in increased
leasing revenue and related profits. ITCs are available to offset a
portion of the tax liability related to such additional lease profits. The
deferred tax asset associated with ITC has been fully reserved for
financial reporting purposes. The utilization of ITC, and the benefit
associated with realization of this reserved tax asset, would be reported
as income for financial reporting purposes.
II. Liquidity and Capital Resources
The Company's activities are principally funded by the WCF and WF, rents,
proceeds from sales of on-lease equipment (to its PIFs and third party
investors), non-recourse debt, fees and distributions from its PIFs and
sales of on lease equipment to its PIFs or third-party investors and/or
re-leases of equipment during and after the expiration of the initial lease
terms and other cash receipts.
Currently, only one PIF, Capital Preferred Yield Fund-III, ("CPYF-III") is
selling units to the public. Through February 28, 1995 CPYF III had sold
$17.4 million of Class A limited partner units. Four of the Company's
PIFs, including CPYF-III, are in their reinvestment stage and are using a
portion of their available cash to purchase additional equipment from the
Company. Two of the Company's PIFs are in their liquidation stage and are
no longer purchasing equipment.
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 addition, during the
three months ended February 28, 1995 the Company increased its Debt
Facility by $20 million.
The Company's recourse debt-to-equity ratio is as follows:
February 28, 1995 May 31, 1994
----------------- ------------
Recourse debt outstanding
under the Debt Facility $ 21,053 $ 18,767
Stockholders' equity $ 21,609 $ 21,099
Recourse debt/stockholders' equity .97 to 1 .89 to 1
The Company has used a portion of its Debt Facility to originate new leases
and intends to continue to increase the size of its portfolio in the
future. As the portfolio grows, management expects the recourse
debt/stockholders equity ratio to increase.
III. Revised Business Plan
Management has identified the following trends in results of operations:
* although the Company has reported a profit of $.03 per share for the
first three quarters (its ninth, tenth, and eleventh consecutive
profitable quarters), the profit resulted largely from "other income"
items;
* although the Company had been continually enhancing its lease
origination capabilities by adding lease originators, the level of lease
originations were substantially below their 1995 expectations;
The Company has identified several factors which could adversely impact
profitability in the future:
* because of the flattening of the yield curve for debt securities during
calendar year 1994 and into calendar year 1995, lease rates are not
rising in line with the Company's cost of funds;
* even if lease originations increase significantly, growth in the
Company's profits will be slow because as a portfolio grows, under
generally accepted accounting principles, operating leases produce
negative leasing margin after interest expense during the early term of
such leases;
* the cost of funds for many of the Company's competitors is lower than
the Company's cost of funds; and
* certain of the Company's competitors also price transactions with tax
benefits not available to the Company.
As discussed in the second quarter fiscal 1995 MD&A, management has
identified a course of action to address the above factors. Originations
by quarter during fiscal 1995 have been as follows:
First quarter $ 17.3 million
Second quarter 24.6 million
Third quarter 29.8 million
For the prior three years, the Company could not originate a significant
amount of leases for its own account because it did not have the financing
to fund and hold such originations. Now, the Company believes that it has
the necessary funding capability under its WF and WCF to (1) continue to
increase the size of its own lease portfolio, (2) originate/acquire
additional leases for sales to PIFs and private equity investors and
(3) ultimately increase revenue and related profits. The Company is
seeking to hire qualified field lease originators to originate new leases
for the Company's own portfolio and for sale to third parties. However,
assuming that the Company is successful in hiring such persons, (a) it will
take a period of time before new lease transactions can be closed, (b) new
operating lease transactions "throw off" losses (for financial reporting
purposes) during their early years and (c) the Company will incur
substantial hiring and deal costs in increasing the size of its field
originations force and adding new leases to its portfolio. During this
period, the Company may realize small operating losses or reduced operating
profits as a result of these circumstances.
The amount of longer-term, future profits from these efforts will depend,
at least in part, on the amount of capital available to the Company and the
cost of that capital relative to the cost of capital of the Company's
competitors. The Company will continue to seek out new sources of lower
cost capital. The Company also will consider, among other things,
(1) attracting new equity capital (which could include a sale of all or a
part the Company, possibly coupled with an infusion of new funds into the
Company from the purchaser), (2) structuring securitized financing
vehicles, and/or (3) entering into strategic alliances/combinations with
other leasing/financial services companies. No assurances can be given,
however, that the steps being taken by the Company will (A) improve the
Company's profitability or even maintain profitability, or (B) provide the
Company with, or access to, additional sources of capital.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
a. See Note 5 to Consolidated Financial Statements for a
discussion of the current status of the MBank Litigation.
b. The Company is involved in various legal proceedings ordinary,
routine and incidental to its business. In the opinion of
senior management, none of these proceedings, individually or
in the aggregate, should, if determined adversely to the
Company, have an adverse effect on the Company or its
operations.
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, 1995. On March 22, 1995 a Form 8-K was
filed disclosing developments related to the MBank litigation
discussed under Item 1 above.
Item No. Exhibit Index
10.48 Form of Credit and Security Agreement, dated as of November 30, 1994,
by and among CAII, Norwest Bank Colorado, National Association
("Norwest"), Norwest Equipment Finance, Inc., and First Interstate Bank
of Denver, N.A. ("First Interstate") (the "New Lenders").
10.49 Settlement Agreement and Release of Liens and Claims, dated as of
December 2, 1994, by and among the Company, CAII, each of the Company's
and CAII's wholly-owned subsidiaries, Mellon Bank, N.A., as Agent, and
the Lenders.
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.
EX-27 Financial Data Schedule
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: April 4, 1995 By:/s/John E. Christensen
---------------------------
John E. Christensen,
Senior Vice President and
Chief Financial Officer