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 November 30, 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 January 9, 1996, was 4,988,348.
1 of 21
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - November 30, 1995
and May 31, 1995 3
Consolidated Statements of Income - Three and Six Months
Ended November 30, 1995 and 1994 4
Consolidated Statements of Cash Flows - Six
Months Ended November 30, 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 5. Other Information 17-18
Item 6. Exhibits and Reports on Form 8-K 18
Exhibit Index 19
Signature 21
2 of 21
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
November 30, May 31,
1995 1995
------------ --------
Cash and cash equivalents $ 4,983 $ 923
Accounts receivable, net of allowance for
doubtful accounts of $313 and $308, respectively 987 563
MBank receivable - 10,800
Equipment held for sale or re-lease 156 66
Residual values and other receivables arising from
equipment under lease sold to private investors 3,595 5,608
Net investment in direct finance leases 21,842 19,319
Leased equipment, net 27,826 19,987
Investments in affiliated limited partnerships 9,492 10,316
Other 1,836 2,970
Deferred income taxes 1,800 1,800
Notes receivable arising from sale-leaseback
transactions 14,861 21,037
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 48,816 65,283
-------- --------
$136,194 $158,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ 1,755 $ 1,531
Warehouse Facility 15,143 12,156
Accounts payable and other liabilities 13,895 13,446
Term Loan 8,667 10,833
Obligations under capital leases arising
from sale-leaseback transactions 14,865 21,024
Discounted lease rentals 59,490 77,192
-------- --------
113,815 136,182
-------- --------
Stockholders' equity:
Common stock 32 63
Additional paid-in capital 17,011 16,961
Retained earnings 5,634 5,517
Treasury stock (298) (51)
-------- --------
Total stockholders' equity 22,379 22,490
-------- --------
$136,194 $158,672
======== =========
The accompanying notes are an integral part of
these consolidated financial statements.
3 of 21
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
Three Months Ended Six Months Ended
------------------------------- ------------------------------
November 30, November 30, November 30, November 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
Revenue:
Equipment sales to affiliated
limited partnerships $ 12,119 $ 7,531 $ 29,566 $ 16,238
Other equipment sales 16,498 10,895 25,065 14,112
Leasing 2,542 1,625 4,784 3,723
Interest 1,805 2,961 3,880 6,325
Other 754 1,384 1,633 2,767
---------- ---------- ---------- ----------
Total revenue 33,718 24,396 64,928 43,165
---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 27,648 17,532 52,449 28,035
Leasing 1,288 821 2,625 1,748
Operating and other expenses 2,090 2,379 3,808 5,243
Provision for losses 25 25 50 225
Termination of Stockholders'
Agreement (Note 3) - - 325 -
Interest:
Non-recourse debt 2,009 3,260 4,305 6,976
Recourse debt 558 261 1,171 549
---------- ---------- ---------- ----------
Total costs and expenses 33,618 24,278 64,733 42,776
---------- ---------- ---------- ----------
Net income before income taxes 100 118 195 389
Income tax expense 40 47 78 155
---------- ---------- ---------- ----------
Net income $ 60 $ 71 $ 117 $ 234
========== ========== ========== ==========
Earnings per common and dilutive
common equivalent share $ 0.01 $ 0.01 $ 0.02 $ 0.04
========== ========== ========== ==========
Weighted average number of common
and dilutive common equivalent
shares outstanding used in
computing earnings per share 5,382,000 5,372,000 5,324,000 5,391,000
========== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
-------------------------------
November 30, November 30,
1995 1994
------------ ------------
Net cash provided by operating activities $ 21,657 $ 9,672
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing (17,681) (5,536)
Investment in leased office facility and capital expenditures (174) (38)
Net receipts from affiliated public income funds ("PIFs") 677 1,097
Sale of a portion of the investment in Corporate Express, Inc. - 677
-------- --------
Net cash used for investing activities (17,178) (3,800)
-------- --------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 1,405 1,215
Principal payments on discounted lease rentals (2,641) (3,722)
Proceeds from sales of common stock 19 212
Repurchases of common stock (247) -
Net borrowings (payments) on recourse debt 1,045 (3,159)
-------- --------
Net cash used for financing activities (419) (5,454)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,060 418
Cash and cash equivalents at beginning of period 923 2,072
-------- --------
Cash and cash equivalents at end of period $ 4,983 $ 2,490
======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,070 $ 538
Non-recourse interest paid 403 640
Income taxes paid 1,567 319
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from
equipment sales transactions - 3,123
Assumption of discounted lease rentals in lease acquisitions - 3,347
Increase in residual values and other receivables relating to
equipment sale transactions 897 558
Cancellation of discounted lease rentals related to bankrupt lessee - 518
The accompanying notes are an integral part of
these consolidated financial statements.
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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, 1995 (the "1995
Form 10-K"), previously filed with the Securities and Exchange Commission.
The balance sheet at May 31, 1995 has been derived from the audited
financial statements included in the Company's 1995 Form 10-K.
Certain reclassifications have been made to prior periods' financial
statements to conform to the current periods' presentation.
2. MBank Proceeds
--------------
On August 23, 1995, the Company received $10.8 million in settlement of its
claims in connection with the MBank Litigation (which is discussed in detail
in Footnote 15 to Notes to Consolidated Financial Statements to the 1995
Form 10-K). In accordance with the terms of the settlement, on August 28,
1995, the Company delivered $2.2 million to Bank One Texas, N.A. ("Bank
One"), in repayment of the monies received from Bank One in 1992 (along with
interest thereon), as required by that certain Purchase Agreement, dated as
of December 30, 1991, by and among the Company and Bank One. On September 8,
1995, Bank One, which is pursuing its lawsuit to obtain title to the MBank
Equipment (see Part II, Item 1. LEGAL PROCEEDINGS, (a) MBANK LITIGATION),
rejected the tender and returned the $2.2 million to the Company (while
purporting to reserve all rights to make a claim to such funds in the
future). On September 12, 1995, the Company deposited the $2.2 million
returned by Bank One in an interest-bearing escrow account with Norwest
Bank, N.A., pending resolution of Bank One's ongoing claims to the MBank
Equipment. The Company used the balance of the settlement proceeds, i.e.,
$8.6 million, to paydown its short-term, recourse Working Capital Facility
and Warehouse Facility.
6 of 21
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Termination of Stockholders' Agreement
--------------------------------------
Effective as of August 31, 1995, Mr. Durliat, a stockholder of the Company,
Mr. Jacobs, a stockholder and director of the Company, and the Company,
constituting all of the remaining parties to the Stockholders' Agreement
(see Exhibits 10.5(a), 10.5(b) and 10.42 referenced in the 1995 Form 10-K)
agreed to terminate the Stockholders' Agreement. In connection therewith,
the Company notified Messrs. Durliat and Jacobs that it intended to cease
making premium payments for the key-man life insurance maintained by the
Company to fund its obligation to repurchase Mr. Durliat's and Mr. Jacobs'
Company common stock upon the occurrence of certain events and, in
accordance with the terms of the Stockholders' Agreement, Mr. Durliat and
Mr. Jacobs exercised their options to acquire such insurance policies for
fifty percent (50%) of their net cash surrender values. In November 1995,
Mr. Durliat paid to the Company $218,933.41 for the insurance policies
maintained by the Company on Mr. Durliat's life, and Mr. Jacobs paid to the
Company $128,164.00 for the insurance policies maintained by the Company on
Mr. Jacob's life. During fiscal year 1995, the Company paid premiums of
$51,212 and $37,323, respectively, with respect to the life insurance
policies covering Mr. Durliat and Mr. Jacobs.
4. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include highly liquid investments with a maturity
of three months or less.
5. Reverse Split
-------------
On November 2, 1995, after obtaining the necessary Board of Director and
stockholder approvals, the Company amended its Certificate of Incorporation
to effect a reverse split of its common stock pursuant to which each share
of common stock issued and outstanding immediately prior to the effective
date of the reverse split was automatically reclassified as, and changed
into, one-half (1/2) share of common stock. The reverse split did NOT change
(1) the par value of the common stock (which remains $.008 per share after
the reverse split), (2) the authorized number of shares of common stock
(which remains at 15,000,000 shares after the reverse split) or (3) the
voting rights of the common stock (which remain at one vote per share of
common stock after the reverse split). Fractional shares of common stock
created in the reverse split were redeemed for cash pursuant to the formula
set forth in the Certificate of Amendment to the Certificate of
Incorporation of the Company.
7 of 21
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Change in Control of Registrant
-------------------------------
On November 10, 1995, MCC Financial ("MCC") acquired voting control of
Capital Associates, Inc. (the "Company") through a private stock transaction
and the delivery of proxies for shares of common stock subject to purchase
in the future pursuant to agreements (the "Stock Purchase Agreements")
executed by and between MCC and Gary M. Jacobs and Jack M. Durliat, two of
the Company's largest shareholders. Pursuant to these Stock Purchase
Agreements, MCC acquired 65,120 shares of common stock (reported
post-reverse split) for a purchase price of $3.30 per share or an aggregate
amount of $214,896. In addition, MCC acquired the right to purchase an
additional 1,245,000 shares of common stock (reported on a post-split basis)
in the future for an aggregate purchase price of approximately $4.5 million.
See Part II, Item 6, EXHIBITS AND REPORTS ON FORM 8-K (b) and Exhibit 99
attached to the Form 8-K filed on November 22, 1995, for more information
concerning the change in control of the Company and the terms of the
November 10, 1995 transaction.
On January 9 and 10, 1996, MCC completed the purchase of 550,000 shares of
common stock (reported post-reverse split) for a purchase price of $3.30 per
share or an aggregate amount of $1,815,000. See Part II, Other Information,
Item 6, EXHIBITS AND REPORTS ON FORM 8-K (b) and Exhibit 99 attached to the
Form 8-K filed on January 16, 1996, for more information concerning purchase
by MCC of the additional 550,000 shares of common stock from Messrs. Durliat
and Jacobs.
8 of 21
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 Income.
Condensed Consolidated Condensed Consolidated
Statements of Operations Statements of Operations
for the Three Months for the Six Months
ended November 30, ended November 30,
------------------------ Effect on ------------------------ Effect on
1995 1994 net income 1995 1994 net income
-------- -------- ---------- -------- -------- ----------
(in thousands)
Equipment sales margin $ 969 $ 894 $ 75 $ 2,182 $ 2,315 $ (133)
Leasing margin (net of interest
expense on discounted lease rentals) 1,050 505 545 1,734 1,324 410
Other income 754 1,384 (630) 1,633 2,767 (1,134)
Operating and other expenses (2,090) (2,379) 289 (3,808) (5,243) 1,435
Provision for losses (25) (25) - (50) (225) 175
Termination of Stockholders' Agreement - - - (325) - (325)
Interest expense on recourse debt (558) (261) (297) (1,171) (549) (622)
Income taxes (40) (47) 7 (78) (155) 77
-------- ------- ------- -------- -------- --------
Net income $ 60 $ 71 $ (11) $ 117 $ 234 $ (117)
======== ======= ======= ======== ======== ========
Equipment Sales
---------------
Equipment sales revenue (and related equipment sales margin) consists of
the following (in thousands):
Three Months Ended November 30,
---------------------------------------------- Increase
1995 1994 (Decrease)
-------------------- -------------------- --------------------
Revenue Margin Revenue Margin Revenue Margin
------- ------ ------- ------ ------- ------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 12,119 $ 207 $ 7,531 $ 206 $ 4,588 $ 1
Equipment under lease sold to
private investors 15,954 443 9,924 70 6,030 373
-------- ------ -------- ------ -------- ------
28,073 650 17,455 276 10,618 374
-------- ------ -------- ------ -------- ------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 387 166 673 327 (286) (161)
Sales-type leases 56 52 124 117 (68) (65)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 101 101 174 174 (73) (73)
-------- ------ -------- ------ -------- ------
544 319 971 618 (427) (299)
Provision for losses - (25) - (25) - -
-------- ------ -------- ------ -------- ------
Realization of value in excess of
provision for losses 544 294 971 593 (427) (299)
-------- ------ -------- ------ -------- ------
Total equipment sales $ 28,617 $ 944 $ 18,426 $ 869 $ 10,191 $ 75
======== ====== ======== ====== ======== ======
9 of 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Equipment Sales, continued
---------------
Six Months Ended November 30,
---------------------------------------------- Increase
1995 1994 (Decrease)
-------------------- -------------------- --------------------
Revenue Margin Revenue Margin Revenue Margin
------- ------ ------- ------ ------- ------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 29,566 $ 557 $ 16,238 $ 427 $ 13,328 $ 130
Equipment under lease sold to
private investors 23,645 764 11,722 256 11,923 508
-------- ------- -------- ------- -------- ------
53,211 1,321 27,960 683 $ 25,251 $ 638
-------- ------- -------- ------- -------- ------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 840 449 1,078 585 (238) (136)
Sales-type leases 279 111 602 337 (323) (226)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 301 301 710 710 (409) (409)
-------- ------- -------- ------- -------- ------
1,420 861 2,390 1,632 (970) (771)
Provision for losses - (50) - (225) - 175
-------- ------- -------- ------- -------- ------
Realization of value in excess of
provision for losses 1,420 811 2,390 1,407 (970) (596)
-------- ------- -------- ------- -------- ------
Total equipment sales $ 54,631 $ 2,132 $ 30,350 $ 2,090 $ 24,281 $ 42
======== ======= ======== ======= ======== ======
Equipment Sales to PIFs and to Private Investors
------------------------------------------------
Equipment sales to PIFs and equipment sales to private investors increased
during the three and six months ended November 30, 1995, as compared to the
comparable periods in fiscal 1995, principally because more leases were
identified and closed due to the increased productivity of the field lease
originations team. The increased volume of the field lease originators is
primarily due to the Company's efforts to improve its marketing activities
including focusing on customer relationships. In this regard, lease
originations from one customer relationship accounted for approximately
one-third of the total lease originations volume for the first six months
of fiscal 1996. Total lease origination volume for the six months ended
November 30, 1995 increased 65% over total lease originations volume for
the comparable period in 1995.
10 of 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Provision for Losses
-----------------------------------------------------
The remarketing of equipment for an amount greater than its book value is
reported as equipment sales margin (if the equipment is sold) or as leasing
margin (if the equipment is re-leased). The realization of less than the
carrying value of equipment (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 three and six months ended
November 30, 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 fourteen 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 nature of the Company's leasing activities is
that it has credit exposure and residual value exposure and, accordingly,
in the ordinary course of business, it will incur losses from those
exposures. The Company performs ongoing quarterly assessments of its assets
to identify other than temporary losses in value.
Margins from remarketing sales (i.e., sales occurring after the initial
lease term) are affected by the amount of equipment leases that mature in a
particular quarter. In general, because the Company did not significantly
add to its lease portfolio during the four years prior to May 31, 1995,
fewer leases have matured and less equipment has been available for
remarketing each quarter since May 31, 1995. For this reason, remarketing
revenue declined during the three and six months ended November 30, 1995,
as compared to the comparable periods in fiscal 1995. Remarketing revenue
and margin are expected to decline further in future quarters as maturing
leases continue to decrease. 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.
However, adding leases to the Company's portfolio will not immediately
increase the pool of maturing leases because new leases typically are not
remarketed until after the initial term (which averages approximately four
years).
11 of 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
LEASING MARGIN AND EQUIPMENT UNDER LEASE
Leasing margin consists of the following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ --------------------
1995 1994 1995 1994
------ ------ ------ ------
Leasing revenue $ 2,542 $ 1,625 $ 4,784 $ 3,723
Leasing costs and expenses (1,288) (821) (2,625) (1,748)
Net interest expense on related
discounted lease rentals (204) (299) (425) (651)
-------- ------- -------- --------
Leasing margin $ 1,050 $ 505 $ 1,734 $ 1,324
======== ======= ======== ========
Leasing margin ratio 41% 31% 36% 36%
== == == ==
The increase in leasing revenue, leasing costs and expenses and leasing
margin during the three and six months ended November 30, 1995, as compared
to the comparable periods in fiscal 1995, was primarily due to growth in
the Company's lease portfolio. These revenue and expense amounts are
expected to increase further as the Company continues to grow its lease
portfolio. Net interest expense on discounted lease rentals (funded with
non-recourse debt) did not grow proportionately because the Company is
using its recourse debt facility to finance (i) leases held for its own
account and (2) leases held pending sale to the PIFs and third-party
investors.
The changes in the Company's equipment under lease during the six months
ended November 30, 1995 consisted of the following (in thousands):
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, 1995 $ 39,372 $ (11,909) $ 27,463
Leases added to the Company's lease
portfolio (a portion of which will be sold
during the remainder of fiscal year 1996) 20,844 (1,405) 19,439
Leases sold to PIFs and private investors (4,857) - (4,857)
Related provision for losses (50) - (50)
Change as a result of portfolio run-off (5,485) 2,640 (2,845)
--------- --------- --------
As of November 30, 1995 $ 49,824 $ (10,674) $ 39,150
========= ========= ========
12 of 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
OTHER INCOME
Other Income consists of the following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ --------------------
1995 1994 1995 1994
------ ------ ------ ------
Fees and distributions from the
Company-sponsored PIFs $ 677 $ 784 $ 1,356 $ 1,562
Sale of the investment in Corporate
Express, Inc. stock - 411 - 671
Interest on income tax refunds - - - 178
Interest on MBank receivable - - 141 -
Other, principally recovery of sales and
property tax amounts previously expensed 77 189 136 356
----- ------ ------- -------
$ 754 $ 1,384 $ 1,633 $ 2,767
===== ======= ======= =======
OPERATING AND OTHER EXPENSES
Operating and Other Expenses decreased $1.4 million (27%) for the first six
months ended November 30, 1995 as compared to the comparable period in
fiscal 1995. The decrease included the following more significant
reductions:
* $650,000 of capitalized initial direct costs related to lease
origination volume.
* $250,000 of insurance costs.
* $200,000 difference between estimated incentive compensation and actual
payments as modified by the Company's Board of Directors.
* $150,000 of eliminated restructuring costs associated with the
Company's prior debt facility.
* $150,000 of legal fees primarily related to the MBank litigation.
As of November 30, 1995, the Company had 96 full-time employees, compared
to 91 full-time employees at November 30, 1994. The growth is due to
increases in the number of revenue producing lease origination, private
equity syndication and PIF wholesaler personnel.
13 of 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
TERMINATION OF STOCKHOLDERS' AGREEMENT EXPENSE
See Note 3 to Notes to Consolidated Financial Statements for more
information concerning (1) the termination of the Stockholders' Agreement,
(2) the termination of the Company's obligation to continue to make premium
payments on certain key-man life insurance policies and (3) the payments
the Company received from the two stockholders to whom the policies were
assigned.
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 non-recourse interest
expense (net of the associated interest revenue) is due to portfolio
run-off.
Recourse interest expense increased during the first six months of fiscal
1996, as compared to the first six months of fiscal 1995. As discussed
above, the Company is financing more lease originations with its recourse
lines of credit.
INCOME TAXES
Income tax expense is provided on income at the appropriate federal and
state statutory rates applicable to such earnings. The aggregate statutory
tax rate is 40%.
As discussed in Note 6 to Notes to Consolidated Financial Statements, a
transaction was completed in which the Company's largest shareholder
obtained more than fifty percent of the ownership and voting rights of the
Company ("a change in control"). Upon completion of a change in control,
depending upon the terms and conditions of such transaction, under federal
income tax rules, the amount of ITC carryforwards and AMT carryforwards
that could be utilized to reduce income tax liability in any year may be
significantly limited. However, the Company had previously established a
valuation allowance for deferred taxes due to uncertainty that the full
amount of the ITC carryforward would be utilized prior to expiration. The
change in control and any resulting limitation on the ITC carryforward is
not expected to reduce the recoverability of the amount of the deferred
income tax assets, net of the valuation allowance.
II. Liquidity and Capital Resources
-------------------------------
The Company's activities are principally funded by its Working Capital
Facility and Warehouse Facility, rents, proceeds from sales of on-lease
equipment (to its PIFs and private investors), nonrecourse debt, fees and
distributions from its PIFs, sales and re-leases of equipment after the
expiration of the initial lease terms and other cash receipts.
14 of 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
II. Liquidity and Capital Resources, continued
-------------------------------
On August 23, 1995, the Company received $10.8 million in settlement of its
claims in the MBank Litigation. On September 12, 1995, the Company
deposited $2.2 million of the settlement proceeds in an interest-bearing
escrow account with Norwest Bank, N.A., pending resolution of Bank One's
ongoing claims to the MBank Equipment. The Company used the balance of the
settlement proceeds, i.e., $8.6 million, to paydown its short-term,
recourse Working Capital Facility and Warehouse Facility. For more
information concerning this matter, see Note 2 to Notes to Consolidated
Financial Statements. After application of the MBank settlement proceeds,
as of November 30, 1995, the outstanding balance and the availability under
(1) the Working Capital Facility were $1.8 and $3.2 million, respectively,
and (2) the Warehouse Facility were $15.1 million and $16.9 million,
respectively. Management believes that the Company has adequate financial
resources to fund its operations during the remainder of fiscal year 1996.
The Company's Credit Agreement matures on January 31, 1996. The Company has
received acknowledgment that the Credit Agreement will be extended without
material changes through November 30, 1996. The Company expects the renewal
to be signed prior to January 31, 1996.
During the first six months of fiscal 1996, lease originations of $67
million were financed through $26.4 million of sales to the PIFs, $19.9
million of sales to private investors, and the remainder of approximately
$20.7 million, which leases are held for the Company's account, through the
use of the Company's cash, accounts payable and the Warehouse Facility.
During July 1995, the Company and certain of its sponsored PIFs entered
into an agreement with a lender to debt finance up to $50 million of lease
receivables as part of a lease securitization program. As with nonrecourse
debt financings of lease rentals, securitized financings are also
collateralized by the leased equipment and related rentals, and the Company
has no recourse liability to the lender for repayment of the debt. The
Company selected this securitized debt vehicle because of attractive
interest rates. Aggregate closings to date were $14.4 million for the
Company and its PIFs.
Currently the Company is offering units of CPYF-III for sale to the public.
During the first fiscal six months 1996, the Company sold $11.5 million of
Class A units of CPYF-III (bringing total sales of Class A units of
CPYF-III to $35.2 million). During the remainder of fiscal year 1996, the
Company has up to $14.8 million of Class A units in CPYF-III available for
sale, which will represent a source of liquidity and acquisition fee income
for the Company. During the fourth fiscal quarter 1996, CPYF-III will cease
offering units for sale to the public. The Company intends to offer a
succeeding program upon the closing of the offering of units of CPYF-III
for sale to the public.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
III. Business Plan
-------------
The Company believes that it has the necessary funding capability for
fiscal year 1996 to (1) continue to increase the size of its own lease
portfolio, and (2) originate/acquire additional leases for sales to PIFs
and private equity investors. However, while growing the Company's lease
origination function and adding new leases to the Company's portfolio will
positively affect the Company's results of operations over time, such
actions will not positively affect the Company's results of operations in
the near term because (a) it will take a period of time before new lease
transactions can be closed, (b) new operating lease transactions "throw
off" lower returns (for financial reporting purposes) during their early
term and (c) the Company will incur additional costs in increasing its
marketing capabilities. During this period of growth, the Company may
realize small operating losses or reduced operating profits as a result of
these circumstances.
In addition to factors related to growing the portfolio discussed above,
operating results are subject to fluctuations resulting from several other
factors, including variations in the relative percentages of the Company's
leases entered into during the period which are classified as DFLs, OLs, or
sold for fee income. The Company will adjust these percentages from time to
time, when and as the Company determines that it would be in its best
interests, taking into account profit opportunities, portfolio
concentration and residual risk.
Finally, the Company's operating results may be affected by its cost, and
the availability of additional sources, of capital. The cost of funds for
many of the Company's competitors is lower than the Company's cost of
funds. The Company continues to explore all possible sources of additional,
lower cost capital, including obtaining additional capital from sales of a
greater number of leases to private equity purchasers, factoring lease
receivables, securitizing lease receivables and structuring other forms of
creative lease/debt financing.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) MBANK LITIGATION. See Note 15 to Notes to Consolidated Financial
Statements included in the 1995 Form 10-K for a discussion of the
claims asserted against the Company by Bank One, N.A., in its first
amended complaint ("Bank One's Amended Complaint"). Bank One's Amended
Complaint does not assert any money damage claims against the Company.
The Company has filed a motion with the United States District Court
for the Northern District of Texas, Dallas Division (the "District
Court"), which has agreed to retain jurisdiction over the claims in the
MBank Litigation that were not resolved in the Settlement Agreement,
asking the District Court to dismiss the claims asserted against the
Company in Bank One's Amended Complaint. Bank One, The Prudential
Insurance Company, Texas Commerce Bank, N.A., and Federal Deposit
Insurance Company have filed summary judgment motions against each
other concerning ownership of the Equipment (the "Other Party Claims").
As of the date of this Quarterly Report, the District Court has not
ruled on (i) the Company's motion or (2) any of the Other Party Claims.
Also see Note 2 to Notes to Financial Statements for information
concerning how the Company applied the settlement proceeds.
(b) PAINEWEBBER CLASS ACTION. The Company is not aware of any material
developments with respect to this matter since the filing of the 1995
Form 10-K.
(c) OTHER. The Company is also involved in routine legal proceedings
incidental to the conduct of its business. Management believes that
none of these legal proceedings will have a material adverse effect on
the financial condition or operations of the Company.
Item 5. Other Information
-----------------
(a) NASDAQ NATIONAL MARKET SYSTEM LISTING. In December 1995, the Nasdaq
Stock Market, Inc. ("Nasdaq") affirmed the Company's eligibility for
continued listing on the Nasdaq National Market.
(b) STOCK REPURCHASE. The Company on August 28, 1995, approved and
announced a stock repurchase program. The Company has authority under
the stock repurchase program to repurchase up to 500,000 shares of
stock from time to time in the open market. As of the date of this
quarterly report, the Company has repurchased 129,350 shares of common
stock at an average price of $1.89 (reported on a post-split basis)
pursuant to the repurchase program.
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Item 5. Other Information, continued
-----------------
(c) REVERSE STOCK SPLIT. The Board of the Company approved a
one-for-two reverse split of the Company's common stock (the "Reverse
Split"). The Reverse Split was effective as of November 2, 1995. See
Note 5 to Notes to Consolidated Financial Statements for more
information concerning the reverse split.
(d) CHANGE OF CONTROL. See Part II, Item 6, EXHIBITS AND REPORTS ON
FORM 8-K (b) and Exhibit 99 attached to the Forms 8-K filed on November
22, 1995 and January 16, 1996, for information concerning the change in
control of the Company. See also Note 6 to Notes to Consolidated
Financial Statements for more information concerning the change of
control transaction.
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.
- Amendment to Certificate of Incorporation and Reverse Split
Information Statement.
- Termination Agreement
b. On November 22, 1995, a Form 8-K was filed disclosing a change in
control of the Company. On January 16, 1996, a second Form 8-K was
filed with respect to that transaction.
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Item No. Exhibit Index
- -------- -------------
4.2(a) Certificate of Incorporation as filed on October 17, 1986, incorporated
by reference to 4.2(a) of the December 15, 1995 Form S-3.
4.2(b) Certificate of Amendment to Certificate of Incorporation, as filed on
March 3, 1987, incorporated by reference to 4.2(a) of the December 15,
1995 Form S-3.
4.2(c) Certificate of Amendment of Certificate of Incorporation, as filed on
November 2, 1995, incorporated by reference to 4.2(a) of the December
15, 1995 Form S-3.
10.50 Termination Agreement effective as of August 31, 1995 by and among Jack
Durliat, Gary M. Jacobs and CAI and CAII.
11A Computation of Primary Earnings Per Share. A computation of fully
diluted earnings per share is not presented as dilution is less than
3%.
27 Financial Data Schedule
99 Information Statement filed on Form DEF 14C on October 13, 1995.
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Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Ended Six Months Ended
------------------------------ ------------------------------
November 30, November 30, November 30, November 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
Shares outstanding at beginning of period 5,113,000 5,031,000 5,091,000 4,880,000
Repurchases of common stock (129,000) - (129,000) -
Shares issued during the period
(weighted average) 3,000 2,000 23,000 151,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 1,003,000 943,000 954,000 983,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (608,000) (604,000) (615,000) (623,000)
---------- ---------- ----------- -----------
Total shares, primary 5,382,000 5,372,000 5,324,000 5,391,000
========== ========== =========== ===========
Net income $ 60,000 $ 71,000 $ 117,000 $ 234,000
========== ========== =========== ===========
Income per common and common
equivalent share, primary $ 0.01 $ 0.01 $ 0.02 $ 0.04
========== ========== ================ ===========
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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: January 16, 1996 By: /s/John E. Christensen
----------------------
John E. Christensen,
Senior Vice-President and
Chief Financial Officer
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